1. A business should maintain accurate depreciation records of capital assets to

a) track the value of its fixed (physical) assets.

b) reflect all production costs in the price of its goods and services.

c) accurately determine its income tax credits or liabilities.

d) All of these answers.

2. A capital (physical) asset’s annual accounting depreciation is

a) equal to its purchase price less its total depreciation.

b) equal to its current market value less its total depreciation.

c) equal to its market value at the beginning of a year minus its market value at the end of the year.

d) formula-based (straight line, declining balance, etc.)

e) None of these answers.

3. The Declining Balance (DB) depreciation method is always preferred to the Straight Line (SL) depreciation method because the DB method completely and more rapidly depreciates a fixed asset than the SL method.

a) True

b) False

4.

Which of the following statements is true?

a) Smaller depreciation charges lead to more taxable income, smaller tax liabilities and smaller after-tax cash flows.

b) Smaller depreciation charges lead to less taxable income, smaller tax liabilities and smaller after-tax cash flows.

c) Higher depreciation charges lead to less taxable income, larger tax liabilities and larger after-tax cash flows.

d) Higher depreciation charges lead to less taxable income, smaller tax liabilities and larger after-tax cash flows.

e) None of the above answers.

5. A major difference between the analysis of private sector projects and the analysis of public sector projects is that the analysis of

a) private sector projects includes all tangible and intangible impacts while the analysis of public sector projects is limited to tangible impacts.

b) private sector projects includes only tangible impacts as does the analysis of public sector projects.

c) private sector projects include only tangible impacts while the analysis of public sector projects includes both tangible and intangible impacts.

d) None of these answers.

6. The net income (i.e., income after tax from the “Income and Expense Statement”) of a business is equal to its

a) before-tax cash flow + income taxes paid + annual depreciation.

b) after-tax cash flow + income taxes paid.

c) before-tax cash flow + income taxes paid + annual depreciation.

d) after-tax cash flow - annual depreciation.

e) None of these answers.

7. A company’s annual income taxes are considered explicit cash flows while its annual depreciation charges are implicit cash flows.

a) True

b) False

8. At the end of a physical asset’s projected service life, its book and salvage values will always be equal with the Straight Line (SL) depreciation method but will most likely differ with the Declining Balance (DB) depreciation method.

a) True

b) False

9. When the service requirements for a capital asset extend beyond the defender’s remaining service life, it is usually assumed that the defender will be replaced by

a) a lower-cost asset

b) the challenger

c) an asset with an identical cost.

d) None of these answers.

10. The half-year rule was introduced by the Government of Canada in 1981 to

a) provide incentives to businesses for the purchase of more physical assets.

b) alleviate the income tax burden of businesses with significant income from operations

c) minimise the income tax advantage arising from the purchase of physical assets.

d) increase business operating profits.

QUESTIONS 11 TO 15

A firm is considering the purchase of a new computer for $300,000 fully installed. It is expected to have a salvage value of $100,000 after 3 years. Annual revenues from operations will be $500,000 each year and annual operating and maintenance costs

$100,000.

· Depreciate the computer using the DB method (d=20%).

· The before-tax interest rate is 10%.

· The after-tax interest rate is 5%.

· A 50% tax rate applies to net income from operations and to the recapturing of depreciation.

· The half-year rule applies.

The firm gets a $150,000 loan (at a 10% rate of interest) which is repaid as follows:

11. The dollar value of cell AA is a) 30,000

b) 54,000

c) 60,000

d) 48,000

e) None of the above answers

12. The dollar value of cell BB is a) 30,000

b) 54,000

c) 60,000

d) 48,000

e) None of the above answers

13. The dollar value of cell CC is a) 15,000

b) 11,250

c) 6,000

d) 5,000

e) None of the above answers

14. The dollar value of cell DD is a) 37,500

b) 52,500

c) 43,200

d) 60,000

e) None of these answers

15. The dollar value of cell EE is a) -300,000

b) -150,000

c) None of these answers

16. Ace Company’s current ratio (2 decimals, no rounding) on December 31, 2015 was

a) 0.57

b) 0.77

c) 1.12

d) 1.25

17. Ace Company’s quick-asset or acid-test ratio (2 decimals, no rounding) on December 31, 2015 was

a) 0.77

b) 0.27

c) 1.30

d) 1.85

18. Ace Company’s “equity ratio” (2 decimals, no rounding) on December 31, 2015 was

a) 0.14

b) 0.57

c) 0.69

d) 0.86

e) None of these answers

19. Ace company’s “profitability ratio” (1 decimal, no rounding) on December 31, 2015 was

a) 4.8%

b) 5.4%

c) 8.7%

d) 12.1%

e) None of these answers

20. Ace company’s “long-term debt ratio” (2 decimals, no rounding) on December 31, 2015 was

a) 0.14

b) 0.67

c) 0.69

d) 0.86

e) None of these answers

21. Ace Company’s after-tax cash flow for 2015 was a) $90,000

b) $45,500

c) $75,000

d) $135,000

e) None of these answers