Question

1. which of the following statements is TRUE about U.S. corporations?

1. Dividends belong to operating cash flow.
2. Dividends are tax deductible.
3. Depreciation is a financing cash flow item.
4. Depreciation is not a cash flow item.

2. which of the following statements is TRUE about U.S. corporations?

1. Interest expense has no direct or indirect relation with operating cash flow.
2. Interest expense belongs to financing cash flow.
3. Interest expense is not tax deductible.
4. Interest is paid to owners rather than creditors.

Answer 1

which of the following statements is TRUE about U.S. corporations?

1. Dividends belong to operating cash flow: No, dividends are part of financing cash flows as dividends are paid out to the shareholders who has funded the company. It's a cash flows from financing activities. Hence it's FALSE.
2. Dividends are tax deductible: No, dividends paid by the companies are not tax deductible. Dividends are not treated as an expense for reducing the tax liability. hence it's FALSE.
3. Depreciation is a financing cash flow item: No, it's not a cash flow item at all. It's FALSE>
4. Depreciation is not a cash flow item: TRUE, depreciation is a non cash item. It's not a cash flow item.

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2. which of the following statements is TRUE about U.S. corporations?

1. Interest expense has no direct or indirect relation with operating cash flow: FALSE, interest expense brings tax shield that lowers the tax liability. Thus interest expense has indirect role in operating cash flow.
2. Interest expense belongs to financing cash flow: TRUE. Interest expense is paid to lenders who have funded the company and hence it's a financing cash flow.
3. Interest expense is not tax deductible: FALSE. It's tax deductible.
4. Interest is paid to owners rather than creditors: FALSE, it's paid to the lenders, creditors or parties who the corporation is supposed to pay.