1. Which of the following is correct?
All capital budgeting methods produce the same decision andtheir use is based on the information available.
Payback period ignores the cash flows after the originalinvestment is recovered.
The accounting rate of return method considers the time value ofmoney.
The cost of capital is the company’s desired rate of return.
Which of the following capital budgeting methods uses accrualaccounting rather than net cash flows, as a basis forcalculations?
Payback method
Internal rate of return
Net present value
Accounting rate of return
Which of the following may be useful when comparing potentialinvestments of different sizes?
Accounting rate of return
Profitability index
Future value of net cash inflows
Payback method
The internal rate of return is:
the interest rate at which the net present value of theinvestment equals the cost of the investment.
the interest rate at which the net present value of theinvestment exceeds the company’s desired rate of return.
equal to the accounting rate of return.
none of the above
Which of the following capital budgeting methods ignores thetime value of money?
Accounting rate of return
Internal rate of return
Net present value
Profitability index
Eagle Corporation is considering the purchase of a new machine.The machine cost $550,000 and will generate an annual net cashinflow of $100,000. What is the payback period?
4 years and 6 months
5 years
5 years and 6 months
6 years and 1 month
7. CardinalCompany purchased a new machine for $125,000. The machine will lasteight years and will be depreciated using the straight-line method.The estimated residual value of the machine is zero and shouldgenerate a yearly cash inflow of $30,000. Ignoring taxes, what isthe accounting rate of return?
3.65%
11.50%
23.00%
24.00%
8. Which ofthe following decision rules is a correct statement?
If the net present value is positive, do not invest in thecapital asset.
If the internal rate of return is less than the required rate ofreturn, invest in the asset.
Investments with longer payback periods are more desirable, allelse being equal.
If the net present value is positive, invest in the capitalasset.
9. Which ofthe following is NOT a factor when considering the time value ofmoney?
The interest rate
The principal amount
The payback period
The number of periods
10. The final step inthe capital budgeting process is to:
identify potential capital investments.
engage in capital rationing, if necessary, to choose amongalternative investments.
utilize decision rules when screening out undesirableinvestments.
perform post-audits after making capital investments.
Which of the following statements is TRUE regarding a statementof cash flows?
A statement of cash flows measures the profitability of acompany using the cash basis of accounting.
Two different methods may be used to compute the net cash flowsfrom operating, investing, and financing activities.
Noncash investing and financing activities need to be disclosedunder “other activities.”
The statement of cash flows reports the changes in cash and cashequivalents.
Which of the following is a cash equivalent?
Accounts receivable
Certificates of deposit that mature in less than threemonths
Certificates of deposit that mature in one year or less
Prepaid expenses
Which of the following activities is an operating activity?
Payment on the principal portion of a bank loan
Collection of cash from issuing stock
Payment of interest on a bank loan
Payment of cash dividends
Which of the following activities would NOT be considered aninvesting activity?
Issuance of common stock
Purchase of used equipment
Sale of land
Sale of a long-term investment
Which of the following activities is a financing activity?
Purchase of land by issuing stock
Payment of cash dividends
Purchase of land for cash
Purchase of inventory for cash
On a statement of cash flows, the net increase in cash was$24,000. Cash provided from operations was $30,000. If the net cashoutflow from investing activities was $7,000, then what was the netcash flow from financing activities?
A net inflow of $1,000
A net outflow of $1,000
A net inflow of $13,000
A net outflow of $13,000
Using the following information for Stewart Auto, Inc.,calculate the net cash flow from operating activities using theindirect method.
Netincome $150,000
Depreciationexpense 10,000
Increase in accountsreceivable 4,000
Decrease ininventory 5,000
Increase in accountspayable 8,000
Loss on sale ofequipment 7,000
The net cash provided by operating activities is:
$142,000.
$144,000.
$160,000.
$176,000.
Which of the following statements is TRUE regarding the indirectmethod of preparing a statement of cash flows?
A decrease in inventory is subtracted from net income.
A loss on the sale of an investment is added to net income.
Depreciation expense is subtracted from net income.
An increase in wages payable is subtracted from net income.
Which of the following statements is TRUE regarding the directmethod of preparing a statement of cash flows?
Depreciation expense is added as a reconciling item.
It is easier and less costly to prepare than the indirectmethod.
A supplementary schedule reconciling net income to the cashbasis must also be provided.
All of the statements above are correct.
Which of the following is an example of noncash investing andfinancing activity that is disclosed in a supplementary scheduleaccompanying the statement of cash flows or in a footnote to thefinancial statements?
Selling goods on credit
Paying the amount due a creditor
Purchasing equipment in exchange for a long-term note
Gain on the sale of land
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