Which of the Following Statements Is CORRECT

question 95

Multiple Choice

Which of the following statements is CORRECT?

• A) The current cash flow from existing assets is highly relevant to investors. However, since the value of the firm depends primarily upon its growth opportunities, accounting net income projections from those opportunities are the only relevant future flows with which investors are concerned.
• B) Two metrics that are used to measure a company's financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income.
• C) To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue.
• D) Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to discourage the use of debt financing by corporations.
• E) If Congress changed depreciation allowances so that companies had to report higher depreciation levels for tax purposes in 2013, this would lower their free cash flows for 2013.

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Definitions:

Income Statement

A financial statement that shows a company's revenues and expenses over a certain period, ultimately revealing net profit or loss.

Balance Sheet

A balance sheet that concisely represents a corporation's financial assets, liabilities, and the equity interests of its shareholders as of a definite date.

Credit

A mutual agreement in which a borrower receives something of value now and agrees to repay the lender at a later date with terms specified.

Owner's Equity

The residual interest in the assets of the entity after deducting liabilities, representing the ownership portion of a company's assets.