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Chapter 02

Financial Statements, Taxes, and Cash Flow

Multiple Choice Questions

1. Which one of the following is the financial statement that shows the accounting
value of a firm's equity as of a particular date?

A. income statement

B. creditor's statement

C. balance sheet

D. statement of cash flows

E. dividend statement

2. Net working capital is defined as:

A. total liabilities minus shareholders' equity.

B. current liabilities minus shareholders' equity.

C. fixed assets minus long-term liabilities.

D. total assets minus total liabilities.

E. current assets minus current liabilities.

3. The common set of standards and procedures by which audited financial
statements are prepared is known as the:

A. matching principle.

B. cash flow identity.

C. Generally Accepted Accounting Principles.

D. Financial Accounting Reporting Principles.

E. Standard Accounting Value Guidelines.

4. Which one of the following is the financial statement that summarizes a firm's

revenue and expenses over a period of time?

A. income statement

B. balance sheet

C. statement of cash flows

D. tax reconciliation statement

E. market value report

5. Noncash items refer to:

A. accrued expenses.

B. inventory items purchased using credit.

C. the ownership of intangible assets such as patents.

D. expenses which do not directly affect cash flows.

E. sales which are made using store credit.

6. The percentage of the next dollar you earn that must be paid in taxes is referred to

as the tax rate.

A. mean

B. residual

C. total

D. average

E. marginal

7. The tax rate is equal to total taxes divided by total taxable income.

A. deductible

B. residual

C. total

D. average

E. marginal
8. The cash flow of a firm which is available for distribution to the firm's creditors and
stockholders is called the:

A. operating cash flow.

B. net capital spending.

C. net working capital.

D. cash flow from assets.

E. cash flow to stockholders.

9. Which term relates to the cash flow which results from a firm's ongoing, normal

business activities?

A. operating cash flow

B. capital spending

C. net working capital

D. cash flow from assets

E. cash flow to creditors

10. Cash flow from assets is also known as the firm's:

A. capital structure.

B. equity structure.

C. hidden cash flow.

D. free cash flow.

E. historical cash flow.

11. The cash flow related to interest payments less any net new borrowing is called

the:

A. operating cash flow.

B. capital spending cash flow.

C. net working capital.

D. cash flow from assets.

E. cash flow to creditors.

12. Cash flow to stockholders is defined as:

A. the total amount of interest and dividends paid during the past year.

B. the change in total equity over the past year.

C. cash flow from assets plus the cash flow to creditors.

D. operating cash flow minus the cash flow to creditors.

E. dividend payments less net new equity raised.

13. Which one of the following is classified as an intangible fixed asset?

A. accounts receivable

B. production equipment

C. building

D. trademark

E. inventory

14. Which of the following are current assets?

I. patent

II. inventory

III. accounts payable

IV. cash

A. I and III only

B. II and IV only

C. I, II, and IV only

D. I, II and IV only

E. II, III, and IV only

15. Which one of the following is included in a firm's market value but yet is excluded
from the firm's accounting value?

A. real estate investment

B. good reputation of the company

C. equipment owned by the firm

D. money due from a customer

E. an item held by the firm for future sale

16. Which of the following are included in current liabilities?

I. note payable to a supplier in eight months

II. amount due from a customer next month

III. account payable to a supplier that is due next week

IV. loan payable to the bank in fourteen months

A. I and III only

B. II and III only

C. I, II, and III only

D. I, III, and IV only

E. I, II, III, and IV

17. Which one of the following will increase the value of a firm's net working capital?

A. using cash to pay a supplier

B. depreciating an asset

C. collecting an accounts receivable

D. purchasing inventory on credit

E. selling inventory at a profit

18. Which one of the following statements concerning net working capital is correct?

A. Net working capital increases when inventory is purchased with cash.

B. Net working capital must be a positive value.

C. Total assets must increase if net working capital increases.

D. A decrease in the cash balance may or may not decrease net working capital.

E. Net working capital is the amount of cash a firm currently has available for

spending.
19. Which one of the following statements concerning net working capital is correct?

A. The lower the value of net working capital the greater the ability of a firm to

meet its current obligations.

B. An increase in net working capital must also increase current assets.

C. Net working capital increases when inventory is sold for cash at a profit.

D. Firms with equal amounts of net working capital are also equally liquid.

E. Net working capital is a part of the operating cash flow.

20. Which one of the following accounts is the most liquid?

A. inventory

B. building

C. accounts receivable

D. equipment

E. land

21. Which one of the following represents the most liquid asset?

A. $100 account receivable that is discounted and collected for $96 today

B. $100 of inventory which is sold today on credit for $103

C. $100 of inventory which is discounted and sold for $97 cash today

D. $100 of inventory that is sold today for $100 cash

E. $100 accounts receivable that will be collected in full next week

22. Which one of the following statements related to liquidity is correct?

A. Liquid assets tend to earn a high rate of return.

B. Liquid assets are valuable to a firm.

C. Liquid assets are defined as assets that can be sold quickly regardless of the
price obtained.

D. Inventory is more liquid than accounts receivable because inventory is tangible.

E. Any asset that can be sold within the next year is considered liquid.

23. Shareholders' equity:

A. increases in value anytime total assets increases.

B. is equal to total assets plus total liabilities.

C. decreases whenever new shares of stock are issued.

D. includes long-term debt, preferred stock, and common stock.

E. represents the residual value of a firm.

24. The higher the degree of financial leverage employed by a firm, the:

A. higher the probability that the firm will encounter financial distress.

B. lower the amount of debt incurred.

C. less debt a firm has per dollar of total assets.

D. higher the number of outstanding shares of stock.

E. lower the balance in accounts payable.

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25. The book value of a firm is:

A. equivalent to the firm's market value provided that the firm has some fixed

assets.

B. based on historical cost.

C. generally greater than the market value when fixed assets are included.

D. more of a financial than an accounting valuation.

E. adjusted to the market value whenever the market value exceeds the stated
book value.

26. Which of the following is (are) included in the market value of a firm but are

excluded from the firm's book value?

I. value of management skills

II. value of a copyright

III. value of the firm's reputation

IV. value of employee's experience

A. I only

B. II only

C. III and IV only

D. I, II, and III only

E. I, III, and IV only

27. You recently purchased a grocery store. At the time of the purchase, the store's
market value equaled its book value. The purchase included the building, the

fixtures, and the inventory. Which one of the following is most apt to cause the
market value of this store to be lower than the book value?

A. a sudden and unexpected increase in inflation

B. the replacement of old inventory items with more desirable products

C. improvements to the surrounding area by other store owners

D. construction of a new restricted access highway located between the store and
the surrounding residential areas

E. addition of a stop light at the main entrance to the store's parking lot

28. Which one of the following is true according to Generally Accepted Accounting

Principles?

A. Depreciation may or may not be recorded at management's discretion.

B. Income is recorded based on the matching principle.

C. Costs are recorded based on the realization principle.

D. Depreciation is recorded based on the recognition principle.

E. Costs of goods sold are recorded based on the matching principle.

29. Which one of these is most apt to be a fixed cost?

A. raw materials

B. manufacturing wages

C. management bonuses

D. office salaries

E. shipping and freight

30. Which one of the following costs is most apt to be a fixed cost?

A. production labor cost

B. depreciation

C. raw materials

D. utilities

E. sales commissions
31. Which of the following are expenses for accounting purposes but are not
operating cash flows for financial purposes?

I. interest expense

II. taxes

III. costs of goods sold

IV. depreciation

A. IV only

B. II and IV only

C. I and III only

D. I and IV only

E. I, II, and IV only

32. Which one of the following statements related to an income statement is correct?
Assume accrual accounting is used.

A. The addition to retained earnings is equal to net income plus dividends paid.

B. Credit sales are recorded on the income statement when the cash from the sale
is collected.

C. The labor costs for producing a product are expensed when the product is sold.

D. Interest is a non-cash expense.

E. Depreciation increases the marginal tax rate.

33. Which one of the following statements related to taxes is correct?

A. The marginal tax rate must be equal to or lower than the average tax rate for a

firm.

B. The tax for a firm is computed by multiplying the firm's current marginal tax rate

times the taxable income.

C. Additional income is taxed at a firm's average tax rate.

D. Given the corporate tax structure in 2012, the highest marginal tax rate is equal
to the highest average tax rate.

E. The marginal tax rate for a firm can be either higher than or the same as the

average tax rate.

34. As of 2012, which one of the following statements concerning corporate income

taxes is correct?

A. The largest corporations have an average tax rate of 39 percent.

B. The lowest marginal rate is 25 percent.

C. A firm's tax is computed on an incremental basis.

D. A firm's marginal tax rate will generally be lower than its average tax rate once
the firm's income exceeds $50,000.

E. When analyzing a new project, the average tax rate should be used.
35. Depreciation:

A. reduces both taxes and net income.

B. increases the net fixed assets as shown on the balance sheet.

C. reduces both the net fixed assets and the costs of a firm.

D. is a noncash expense which increases the net income.

E. decreases net fixed assets, net income, and operating cash flows.

36. Which one of the following statements related to an income statement is correct?

A. Interest expense increases the amount of tax due.

B. Depreciation does not affect taxes since it is a non-cash expense.

C. Net income is distributed to dividends and paid-in surplus.

D. Taxes reduce both net income and operating cash flow.

E. Interest expense is included in operating cash flow.

37. Which one of the following statements is correct concerning a corporation with
taxable income of $125,000?

A. Net income minus dividends paid will equal the ending retained earnings for the

year.

B. An increase in depreciation will increase the operating cash flow.

C. Net income divided by the number of shares outstanding will equal the

dividends per share.

D. Interest paid will be included in both net income and operating cash flow.

E. An increase in the tax rate will increase both net income and operating cash
flow.

38. Which one of the following will increase the cash flow from assets, all else equal?

A. decrease in cash flow to stockholders

B. decrease in operating cash flow

C. increase in the change in net working capital

D. decrease in cash flow to creditors

E. decrease in net capital spending

39. For a tax-paying firm, an increase in will cause the cash flow from assets to
increase.

A. depreciation

B. net capital spending

C. change in net working capital

D. taxes

E. production costs

40. Which one of the following must be true if a firm had a negative cash flow from

assets?

A. The firm borrowed money.

B. The firm acquired new fixed assets.

C. The firm had a net loss for the period.

D. The firm utilized outside funding.

E. Newly issued shares of stock were sold.

41. An increase in the depreciation expense will do which of the following?

I. increase net income

II. decrease net income

III. increase the cash flow from assets

IV. decrease the cash flow from assets

A. I only

B. II only

C. I and III only

D. II and III only

E. II and IV only

42. Which one of the following is NOT included in cash flow from assets?

A. accounts payable

B. inventory

C. sales

D. interest expense

E. cash account
43. Net capital spending:

A. is equal to ending net fixed assets minus beginning net fixed assets.

B. is equal to zero if the decrease in the net fixed assets is equal to the

depreciation expense.
C. reflects the net changes in total assets over a stated period of time.

D. is equivalent to the cash flow from assets minus the operating cash flow minus

the change in net working capital.

E. is equal to the net change in the current accounts.

44. Which one of the following statements related to the cash flow to creditors is
correct?

A. If the cash flow to creditors is positive then the firm must have borrowed more

money than it repaid.

B. If the cash flow to creditors is negative then the firm must have a negative cash
flow from assets.

C. A positive cash flow to creditors represents a net cash outflow from the firm.

D. A positive cash flow to creditors means that a firm has increased its long-term
debt.

E. If the cash flow to creditors is zero, then a firm has no long-term debt.
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45. A positive cash flow to stockholders indicates which one of the following with
certainty?

A. The dividends paid exceeded the net new equity raised.

B. The amount of the sale of common stock exceeded the amount of dividends

paid.

C. No dividends were distributed but new shares of stock were sold.

D. Both the cash flow to assets and the cash flow to creditors must be negative.

E. Both the cash flow to assets and the cash flow to creditors must be positive.

46. A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables,

$210 in accounts payable, and $70 in cash. What is the amount of the current
assets?

A. $710

B. $780

C. $990

D. $2,430

E. $2,640
47. A firm has net working capital of $640. Long-term debt is $4,180, total assets are
$6,230, and fixed assets are $3,910. What is the amount of the total liabilities?

A. $2,050

B. $2,690

C. $4,130

D. $5,590

E. $5,860

48. A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of

$8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of

the shareholders' equity?

A. $6,900

B. $15,300

C. $18,700

D. $23,700

E. $35,500
49. Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of
$2,900, and short-term debt of $1,400. What is the amount of net working capital?

A. -$100

B. $300

C. $600

D. $1,700

E. $1,800

50. Bonner Collision has shareholders' equity of $141,800. The firm owes a total of

$126,000 of which 60 percent is payable within the next year. The firm net fixed

assets of $161,900. What is the amount of the net working capital?

A. $25,300

B. $30,300

C. $75,600

D. $86,300

E. $111,500
51. Four years ago, Velvet Purses purchased a mailing machine at a cost of $176,000.
This equipment is currently valued at $64,500 on today's balance sheet but could

actually be sold for $58,900. This is the only fixed asset the firm owns. Net working
capital is $57,200 and long-term debt is $111,300. What is the book value of

shareholders' equity?

A. $4,800

B. $7,700

C. $10,400

D. $222,600

E. $233,000
52. Jake owns The Corner Market which he is trying to sell so that he can retire and
travel. The Corner Market owns the building in which it is located. This building
was built at a cost of $647,000 and is currently appraised at $819,000. The counters

and fixtures originally cost $148,000 and are currently valued at $65,000. The
inventory is valued on the balance sheet at $319,000 and has a retail market value

equal to 1.2 times its cost. Jake expects the store to collect 98 percent of the

$21,700 in accounts receivable. The firm has $26,800 in cash and has total debt of

$414,700. What is the market value of this firm?

A. $857,634

B. $900,166

C. $919,000

D. $1,314,866

E. $1,333,700

53. Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year.

Common stock increased by $1,200 and retained earnings decreased by $310.

What is the net income for the year?

A. -$210

B. $990

C. $1,610

D. $1,910

E. $2,190
54. Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is
$26,000 and depreciation is $42,000. The tax rate is 35 percent. What is the net

income?

A. $42,750

B. $44,450

C. $82,550

D. $86,450

E. $124,550

55. Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The
addition to retained earnings is $418 and net new equity is $500. The tax rate is 35

percent. Sales are $15,900 and depreciation is $680. What are the earnings before
interest and taxes?

A. $589.46

B. $1,269.46

C. $1,331.54

D. $1,951.54

E. $1,949.46
56. Given the tax rates as shown, what is the average tax rate for a firm with taxable
income of $311,360?

A. 28.25 percent

B. 31.09 percent

C. 33.62 percent

D. 35.48 percent

E. 39.00 percent
57. The tax rates are as shown. Nevada Mining currently has taxable income of
$97,800. How much additional tax will the firm owe if taxable income increases by

$21,000?

A. $8,080

B. $8,130

C. $8,155

D. $8,170

E. $8,190

58. Winston Industries had sales of $843,800 and costs of $609,900. The firm paid

$38,200 in interest and $18,000 in dividends. It also increased retained earnings by

$62,138 for the year. The depreciation was $76,400. What is the average tax rate?

A. 32.83 percent

B. 33.33 percent

C. 38.17 percent

D. 43.39 percent

E. 48.87 percent
59. Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is
$42,700 and the tax rate is 34 percent. The firm does not have any interest

expense. What is the operating cash flow?

A. $129,152

B. $171,852

C. $179,924

D. $281,417

E. $309,076

60. Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed
assets of $209,411. During the year, assets with a combined book value of $6,943
were sold. Depreciation for the year was $42,822. What is the amount of net

capital spending?

A. $33,763

B. $40,706

C. $58,218

D. $65,161

E. $67,408
61. At the beginning of the year, a firm had current assets of $121,306 and current
liabilities of $124,509. At the end of the year, the current assets were $122,418 and

the current liabilities were $103,718. What is the change in net working capital?

A. -$19,679

B. -$11,503

C. -$9,387

D. $1,809

E. $21,903

62. At the beginning of the year, the long-term debt of a firm was $72,918 and total
debt was $138,407. At the end of the year, long-term debt was $68,219 and total

debt was $145,838. The interest paid was $6,430. What is the amount of the cash
flow to creditors?

A. -$18,348

B. -$1,001

C. $11,129

D. $13,861

E. $19,172
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Exploring the Variety of Random
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a mother might bestow upon a delicate child. He found it uninjured,
but, as it might have been smashed, he clung to it fondly, reluctant to
place it again in its treacherous case.
Naturally the downfall of Halberd had delighted the gamin and the
sailors following. These formed a cluster about the party, and their
numbers drew additional spectators rapidly. A number of seafaring
men shoved stoutly forward, their eyes glistening at sight of the
musical instrument.
“I say, give us something, then, on that there red boy!” demanded
one of the men, as healthy a looking rascal as ever drew breath.
“You look a bonny lad, come on—there’s a good un,” said another.
“Rattle her guts,” said a third. “We ain’t heard the like of a fiddle
since we came to this town of preachers.”
Adam looked quietly about him. He knew most of the fellows about
in the rude circle for rough English rovers who would love him if he
played, or knock him and his belongings playfully into the street if he
refused. He was not accustomed to churlishness; moreover, he felt
particularly in the mood for playing. The ruddy sunset, the warm
breath of the passing day, the very taste of American air, seemed
lusty and joyous, despite the rigid Puritanical spirit of the mirth-
denying people of the colony. He took up the bow, twanged the
strings, tightened two that had become laggard, and jumped into the
middle of a rollicking composition that seemed to bubble up out of
the body of the violin and tumble off into the crowd in a species of
mad delight.
Had the instrument been a spirit of wine, richly dark red as old
port, and rendered alive by the frolicking bow, it could not have
thrown off more merry snatches of melody’s mirth. It chuckled, it
caught its breath, like a fat old monk at his laughing, it broke out in
guffaws of hilarity, till not a soul in the audience could keep his feet
seemly beneath him.
The sailors danced, boldly, though clumsily. Their faces beamed
with innocent drunkenness, for drunk they were, with what seemed
like the fumes and taste of this wine of sound. They had been denied
it so long that it went to their heads at the first draught.
Across the street, issuing quietly and, he hoped, unobserved, from
a door that led into the tavern, a Puritan father now appeared, wiping
his mouth as a man has no occasion for doing unless he had
recently dipped his upper lip into a mug. He suddenly halted, at the
sound of music from over the way. He frowned at the now somewhat
dense assemblage of boys and citizens surrounding Adam Rust, and
worked up a mask of severity on his face from which it had been
temporarily absent. He opened his mouth, as if to speak, and then,
realizing that he might not be heard at this distance from them,
moved a rod toward his fellow-beings and took a stand in the street.
At this moment an ominous snap resounded above both the
playing and its accompaniment of scuffling feet and gruff explosions
of enjoyment and hearty appreciation. Instantly Adam ceased
playing. He had felt a string writhe beneath his fingers. The man in
the roadway grasped at the moment instantly, to raise his voice.
“Begone, disperse, you vagabonds!” he said. “What is the
meaning of this ungodly performance? Disperse, I say, you are
bedeviled by this shameless disciple of Satan!”
Adam, intent on his violin, which he found had not broken but had
merely slipped a string, heard this tirade, naturally, as did all the
others. A few boys sneaked immediately about the cluster of men
and sped away, as if from some terrible wrath to come.
“Who is yon sufferer for melancholy?” said Adam, looking
carelessly at the would-be interrupter. Then suddenly a gleam came
into his eye, as he recognized in the man one of the harsh hypocrites
who had been among the few zealots who had imprisoned him,
years before. “Halberd,” he added, “fetch the gentleman forward.
Methinks he fain would dance and make merry among us.”
His opening question had been hailed with snorts of amusement;
his proposal ignited all the roguishness in the crowd. Halberd,
nothing loth to add his quota to the general fun, strode forward at
once, way being made by the admiring throng, and he bowed
profoundly before the bridling admonisher in the street. Then without
warning, he scampered nimbly to the rear of the man of severity,
took him by the collar and the slack of his knickerbockers and
hustled him precipitately into the gathering.
Adam began to play at once. The spectators gathered about the
astonished and indignant person of severity, thirsty for fun.
“You evidently wanted to dance, therefore by all means
commence,” said Adam.
“You are a veritable limb of Satan!” said the man. “You shall be
reported for this unseemly——”
“Halberd,” interrupted Adam, “the gentleman is as shy and timid as
your veriest girl. Could you not persuade him to dance?”
“I was born for persuasion,” said Halberd. Thereupon he drew
from his belt a pistol, most formidable, whether loaded or not, and
pushed its metal lips against the neck of the hedged-in Puritan,
whom he continued to restrain by the collar. “Make merry for this
goodly company by doing a few dainty steps,” he requested.
The crowd pushed in closer and roared with delight. Some one
among them knocked the reluctant dancer’s knees forward. He
almost fell down.
“He’s beginning!” cried Adam, and he went for his fiddle with the
bow as if he were fencing with a dozen pirates.
“Dance!” commanded Halberd, “dance!”
Terpsichore’s victim was not a man of sand. Drops of perspiration
oozed out on his forehead. A look of abject fear drove the mask of
severity from his face. He jumped up and down ridiculously, his
knees knocking together for his castanets.
“Faster!” cried Adam, fiddling like a madman.
“Faster!” echoed Halberd, with his pistol-muzzle nosing in the
dancer’s ribs.
The man jumped higher, but not faster; he was too weakened by
cowardice. The sailors joined in. They could not keep their feet on
the ground. The contagion spread. Pike and Halberd joined the
hopping. The offending admonisher looked about at them in a frenzy
of despair, afraid of who might be witnessing his exhibition. He was a
sorry dancer, for he was so eager to please that he flopped his arms
deliriously, as if to convince his beholders of his willingness to make
himself as entertaining as possible. When he suddenly collapsed
and fell down, Adam ceased playing. The crowd settled on the
pavement and applauded.
“For shame, good friend,” said Adam, solemnly, “now that I
observe your garb, I am shocked and amazed at your conduct.
Friends, let us go to the tavern and report this gentleman’s unseemly
behavior. In payment for the fiddling, you may fetch my bales of
goods and merchandise.” He waved to his shabby baggage and led
the way to the Crow and Arrow, which had long before disgorged
nearly all of its company, and its landlord, to add to the audience in
the street.
Flinging up his only piece of gold, the young rover ordered
refreshment for all who crowded into the tavern, and while they were
drinking, he dragged the beef-eaters, with all the “bales of
merchandise,” away to the meager apartments provided above stairs
in the sorry hostelry.
In the darkness of the hall, he ran heavily against some one who
was just on the point of quitting a room. The innocent person was
bowled endways.
“Confound your impudence!” said the voice of a man. “Why don’t
you look where you are going?”
“I couldn’t see for fools in the way,” retorted Adam. “I am no king,
requiring you to fall before me.”
“I can’t see your face, but I can see that you are an arrant knave,”
said the other hotly. “You never could have had a proper drubbing, or
you would be less reckless of your speech!”
“I have always been pitted to fight with bragging rascals of about
your size and ability with a weapon, else I might have been
drubbed,” Adam flung back, laying his hand on his sword as he
spoke. “It shames my steel to think of engaging a ten-pin!”
“By all tokens, sir, you are blind, as well as idiotic, to walk into
death so heedlessly. Be good enough to follow me into the yard.”
“Oh, fie on a death that flees and entreats me to follow,” was
Adam’s answer. “I rolled you once in this hall; I can do so again.
Halberd—Pike, candles to place at the head and feet of death!”
The beef-eaters, having reached the apartments appointed for
their use, had heard the disturbance in the hall, and expecting
trouble, had already lighted the candles. With three of these they
now came forth. The hall would have been light enough had it been
in communication with the outside world and the twilight, but as it
was, it was nearly dark.
“I grieve for your mother,” sneered the stranger, whose sword
could be heard backing out of its scabbard. “You must be young to
be so spendthrift of your life.”
“On the contrary, you will find what a miser I am, even as to the
drops of my blood,” said Adam. “No one ever yet accused the
Sachem——”
“The Sachem!” interrupted the other voice.
Halberd, who had sheltered the candle he bore with his hand, now
threw its light on the face of the man near by him.
“Shatter my hilt!” exclaimed young Rust, “Wainsworth!”
“Odds walruses!” said the man addressed as Wainsworth, “what a
pretty pair of fools we are. By gad, Adam, to think I wouldn’t know
you by your voice!”
Adam had leaped forward, while his sword was diving back into its
sheath. He caught Wainsworth by the hand and all but wrung it off.
“Bless your old soul,” he said, “why didn’t you say who you were?”
“I was kept busy listening to you telling me who and what I was,”
Wainsworth assured him, good-naturedly. “I never heard so much
truth in all my life.”
 “I never thought to be so incontinently found out myself,” Adam
confessed contritely. “But as long as I have found you, I feel as good
as if I had fought a good fight and wiped my blade. Indeed, Henry, I
am tremendously glad to see you. How did you get here? When did
you come? What a blundering fool I was!”
“Come in, come in to my castle,” said Wainsworth, turning back to
the apartment he had been quitting when knocked over. “Bring in
your friends. You shall all share in my dinner. I’m a ship, burdened
with news for cargo to be unloaded. Come in here; we’ll talk all
night.”
“But I am due at a dinner already, with my beef-eaters,” said Rust.
“I have been delayed past all reason now, but——”
“You weren’t delayed by our duel of words, I trust?”
“No, no, but I have kept our host waiting, nevertheless. I shall be
back before the night’s worn through, however, and then I am yours
till breath fails me.”
“Haste away then, Sachem Rust, for the sooner you are gone the
sooner I shall see you returned; and I shall consume myself with
impatience till I can tell you of the sweetest plight mortal man ever
got himself tangled in. I’ve got to tell you, for no one else on earth
would answer. Begone, then. Good-by, and hasten back.”
Adam bade him au revoir, for he felt that already William Phipps
must be thinking him sadly remiss and ungracious.
Preparations as to evening dress were soon completed. They
consisted in a brisk wash of face and hands for the trio, not one of
the party being endowed with a second suit of clothing. Thus they
were upon the road, walking soberly, though diligently, toward the
Captain’s residence, before the twilight had begun to fade.
 CHAPTER III.

’TWIXT CUP AND LIP.

With appetites still further whetted by their various diversions, the

comrades were hardly made happier when Adam found that once
more the many years’ growth of Boston town confused him. It was
something of a walk to the Phipps’ domicile from the Crow and Arrow
the best one could do. With devious windings added, it became the
next thing to provoking.
“Aha, at last I know where we are,” said Adam, finally. “These
streets are as bad as London’s. But ten minutes more and we shall
be at the board.”
“If this is not so,” said Halberd, gravely, with a memory of seeing
Adam part with the last money which they possessed, “it would be a
kindness to let us lie down and perish here.”
“This is a most unlikely-looking street,” added Pike, dolefully.
“What do you know of Boston streets?” inquired Adam, who had a
doubt or two of the place himself. “Good beef-eaters, if you weary,
wait here for a moment, till I can run a little along this road, to see
where it leads. If it is right I will presently whistle; if wrong I can the
sooner return.”
The beef-eaters with one accord sat down upon a block of stone,
while their leader strode hastily up a passage which was in reality an
alley, at the rear of a number of residences. With a hope that he
would soon emerge into a street which he thought should be in the
neighborhood, Adam almost ran. Thus he disappeared about a turn
of the lane.
He had gone less than twenty rods when he found himself
approaching a small assemblage of boys, who were yelling, in
suppressed voices, and gathering stones which they were throwing
with wild aim into a corner, where the coming darkness had already
formed a center of shadows. Rust was well among these young
scamps before they were aware of his presence. One urchin had by
this secured a long stick with which he advanced, the others making
room to let him through, to poke and jab at something which the lads
had evidently driven to bay where it could not escape. Yet so afraid
did the young rogues appear to be that this something would yet fly
upon them and do them great harm, that Adam walked at once
among them, touching one upon the shoulder.
“The witch!” screamed this lad, as if the devil himself had clutched
him. With yells of terror all the boys scudded swiftly away, for a
matter of twenty feet, and then turned about to look at Rust. Seeing
a man merely, they were reassured. It is a singular and doubtless a
fortunate matter that there was never such a thing conceived as a
male witch.
“What have you here?” said Adam, pleasantly.
“A witch’s cat!” cried one of the boldest youths, re-approaching.
“We drove it in the corner to stone it to death!”
Now Adam had a lingering fondness for cats, from a time not
many years past.
“A witch’s cat?” he repeated. “What nonsense! What harm can a
poor cat do to big healthy boys like you? There are no witches, you
young varlets.” He went into the corner and peered about eagerly, to
find the dumb victim of the mad superstition then subtly growing in
that Massachusetts colony.
“There was a witch and she ran away, screaming!” scolded back
the bold spokesman of the group of boys, now gaining courage to
edge nearer. “She ran away through this garden!” He pointed to a
rear yard, leading off the alley to a house not far distant.
“She made me cough up pins and needles,” asserted another
young liar, glibly. “And a monster black monkey with cock’s feet
followed her when she ran.”
“He’s a prince of the powers of air himself,” whispered another lad,
in awe-stricken tones.
Adam had found the cat, a middle-aged animal, frightened, hurt,
soiled, but intelligent, since it knew it was being protected at last. He
lifted it forth from its small retreat, finding it to be a heavy, black-and-
white specimen, too inoffensive to scratch and claw, even in its
terror.
“You young——” he started to say.
“Here she comes! Here she comes!” yelled one of the lads,
interrupting. “Two of them! Run for your lives!”
The self-scared young cowards, screaming like so many demons,
darted down the alley as fast as their legs would let them go. Adam
looked where one had pointed and beheld, indeed, two female
figures coming on a distracted run through the near-by yard, toward
him as he was standing with the cat in his arms.
Although the first veil of darkness was already drawn through the
air, Rust could see that they were two young women who were
coming. The one who led, he then noted, was a plain, but a sweet,
wholesome-looking girl, who was evidently much excited. He
stepped forward toward her, with the cat, divining it was the animal
she had come for, and so for the moment he neglected to glance at
the second young woman.
When he did look at her she was not far and he caught his breath
quickly. “Shatter my hilt!” was the thought that leaped into his brain,
“they do have young witches here after all!”
Advancing to the middle of the alley he made a profound bow, as
the foremost girl came pantingly from the garden gate. The girl,
seeing him now for the first time, halted abruptly.
 “Good evening,” said Adam, “may I have the honor of restoring
your pet? He is excellently well behaved and, I trust, not seriously
hurt.”
The girl walked timidly toward him. Her face flushed rosy red with
pleasure and confusion. Her companion, having been caught on a
rosebush, in the garden, was delayed and was stooping to
disentangle her skirt from the thorns.
“Oh, sir, you are very kind,” stammered the girl confronting Adam.
“I thought they would kill him. He isn’t mine, but I also hold him——”
The second young lady now came hastily out at the gate. Adam
had been too polite to look past number one, in search for the one
he thought so witching, but now his heart bounded to see her
coming. She ran precipitately at him, breaking in upon her
companion’s speech.
“Oh, Standing-Panther,” she cried, impetuously, “my own dear,
darling love, why did you ever come out to such a place?”
She plucked her pet from Adam’s arm in one swoop. Rust, at the
old name, which he had buried with memories that sorely harrowed
his soul, dropped his hat, which he had doffed, and raising his hand
to his cheek in wonder, stared at the girl before him with widened
eyes.
“At—at your service, Miss—Mistress Gar—Mistress Merrill,” he
stuttered.
Garde, a vision of beauty distraught, suddenly looked up in his
face. Frank amazement was depicted in her glorious eyes.
“I beg—your pardon,” stammered Adam, “I see you were speaking
to your cat, and not to me.”
“You!—Adam!—Mr.—Mr. Rust!” she exclaimed. A red-hot blush
surged upward, flooding her face, her neck and even her delicate
ears. “Not Little-Standing—Oh dear me! Why, Prudence, what did I
say? It—it isn’t really——” she stopped in confusion.
“Adam Rust, Kneeling Panther at your service,” supplied the rover.
He made a bow that was truly splendid, with a long sweep of his hat
and a touch of his knee on the pavement, that for sheer grace could
not have been equaled in Boston. “Miss—Mistress Merrill, you have
not quite forgotten that you commissioned me to bring you
something from Hispaniola?” he added.
“But you—but you have grown so,” said Garde, still as red as a
rose. “And to meet like this—that was such a long time ago. I—I
thank you for saving my cat. I—we—Prudence, you must thank Mr.
Rust.”
Prudence, on whom Adam had scarcely looked, since seeing
Garde, had been standing there looking at Rust with a sudden-born
love in her eyes that was almost adoration. She had developed, out
of the Puritanical spirit of the times, a control of her various emotions
that Garde would never possess. Therefore she had herself in hand
at a second’s notice.
“I have thanked Mr. Rust,” she answered, quietly.
Garde was stealing a look at Adam the second he turned in
politeness to Prudence.
“This was no service at all,” he said. “Pray expend no further
words upon it.”
“Oh, Adam, I am so glad——” burst from Garde’s lips impetuously,
but she checked her utterance the instant his glance came flashing
back to hers, and added. “I mean, Mr. Rust, I am so glad the cat
wasn’t hurt, and, Prudence, we must surely return to the house at
once.”
This was not at all what Garde had started to say, nor what she
wanted to say; but though it was the same Adam, quite to her heart’s
satisfaction, yet he was now a man, and a maidenly diffidence
shamed her riotous gladness, and—Prudence was present.
“But,” said Adam, fumbling in a pocket over the region of his heart,
“the trinket I brought you from Hispaniola?”
“Oh, marry, it has kept so well all these years,” said Garde
roguishly, “surely it must still keep till—surely anyway till daylight.
Really, sir, we must thank you again and return before it is actually
dark.” She gave him one look which, had he been a woman, he
would readily have interpreted, but being a man, somewhat of its
significance was lost upon him.
“But now I know I have kept it too long already,” he insisted, still
tugging at the stubborn pocket. “Surely——”
“It will be the riper for keeping a little longer,” said Garde, almost
impatient with him for not seeing that she wanted to receive it only
when they two were alone together. “We thank you once more, for
saving Little-Standing-Panther, and so—good night,”
“But when—what day?—to-morrow?” cried the eager rover. “When
may I give it?”
“Oh stupid!” said Garde to herself, almost vexed at his lack of
understanding and tact. Aloud she called back, “Did you say good
night? Prudence, say good night again to Mr. Rust.”
Prudence called good night once more, this making her third time,
and Adam was left there in the alley alone. He went to the gate and,
leaning over it, clutched two of its pickets in his hands, as once
before he had done to another gate, and stood there gazing ardently
into the gathering darkness.
At length, with a heavy sigh, of joy and impatience blended, he
strode a little down the lane. Then he strode back. So, up and down
he paraded, for fifteen minutes. At the end of this time he suddenly
bethought him of the beef-eaters and the dinner at William Phipp’s.
He then hastened, tardily enough, back the way he had originally
come.
Eager to find his companions, yet completely scatterbrained by the
meeting with Garde, the sight of her radiant beauty, and the chaos of
plans for seeing her again at daylight, which were teeming in his
head, he fairly fell over the outstretched feet of his faithful followers
before he saw them.
They were still sitting upon the block of stone. They had
interlocked their arms, for mutual support, and then had fallen fast
asleep, worn out with the long day and made weak by a longer fast.
 “Good old beef-eaters,” said Adam, affectionately, and gently
shaking them by the shoulders, he aroused them, got them on their
feet and guided them out of the alley. By great good fortune, he
came to a land-mark he remembered from his short sojourn in
Boston, years before. With this as a bearing, he made good time to
the Captain’s house. They met William Phipps at the gate, going
forth to hunt them up.
“We have sauntered along,” said Adam, carelessly, “for such air as
this is a tonic to the appetite.”
 CHAPTER IV.

THE OPENING OF A VISTA.

For a man who had taken so much tonic, Adam had but
indifferent relish for the savory and altogether comforting little dinner
which Goodwife Phipps had kept all warm and waiting for the coming
of her guests. His head was filled with love and with altercations
between hope that Garde had meant this and fears that she might
have meant that, and with conjuring up all her speeches and
glances, till he could hardly have told whether he was afoot or
horseback.
But if their leader neglected his opportunities, the beef-eaters
made good the reputation for three, as swordsmen with knife and
fork. Fortunately Goodwife Phipps had provided amply. But a fowl
became a glistening skeleton; a hot meat-pie was represented at last
by a dish that yawned like an empty chasm; a pyramid of Indian
maize became a scattered wreckage of cobs, and potatoes, bread
and pudding vanished into mere memories of what they once had
been.
Adam, although he said nothing, talked like an auctioneer, during
the meal, to divert what he could of the attention which his retinue
perforce attracted to their appetites. This innocent ruse was not lost
on the charming little wife of William Phipps. She was a sweet little
woman, plump, black-haired, brown-eyed and gifted by Nature with
much vivacity, in her wit and in her engaging manners. She was
older than her husband, having been the widow of one merchant
Hull, when she and the Captain wedded. They were a happy couple,
being indeed un-Puritanly joyous in their partnership. She had taken
a great liking to Adam, when Phipps first brought him home. Now
that he was a man, she liked him none the less, yet she saw that he
would always be a big, straightforward boy. She watched him now
with pleasure, listening to his quips and sallies of nonsense, and
nodding motherly at his evident concern for his two forlorn beef-
eaters, so obviously attached to him by ties of affection.
The dinner being at length come to an end, with great satisfaction
to all concerned, Adam counseled the expanded beef-eaters to fare
to the Crow and Arrow, lest in their absence anything befall to
prevent their occupancy of the selected apartments. As nothing was
to be had to drink where they were, the worthy two were glad to act
upon his suggestion. Accordingly Adam and his hosts were left to
themselves, whereupon they fell upon a banquet of narrative and
reminiscence forthwith.
“Now, Adam, tell us all about where you have been, and what you
have done, and all about everything,” said Mrs. Phipps, putting her
plump elbows on the table, which she had swiftly cleared of the
dinner wreckage. “Just begin at the day you left, with William, and
tell us all there is. But tell us first, have you fallen in love? Of course
you must have, but I do hope you will like one of our own girls best.”
“I fear you would have me begin at the last end first, after all,” said
Adam, thinking how recently he had fallen victim to Eros. “My tale is
brief and of no interest. William bade me cultivate the society of
gentlemen, when he sent me to England. Well, I had fencing and
fiddling of an Italian nobleman; I have fought with holy friars and
princes; I have sworn strange oaths with prelates and bishops; I
have danced with nuns and duchesses; I have ridden to hounds with
curs and Kings. If I have not learned drinking, gambling, love-
making, dueling, swearing and sundry other pretty accomplishments,
then beshrew me for a clod and call the court no place for schooling.
I am richer than I was, since I may look up at any moment and see
you both at a glance. By the same token I am happier. As to my
heart, I’ll take oath I left it in Boston. And there you have me.”
 “Oh, this sounds very naughty indeed,” said Mrs. Phipps.
“I never counseled you to apprentice yourself to the devil,” said
Phipps. “You were first to learn navigation, of some——”
“Oh, of that I neglected to speak,” interrupted the rover. “William,
you will never make an anchor out of sea foam, nor a solid ship’s
master out of me, else my first or my last preceptor would have
finished me off roundly.”
“Who was your latest chief?” the Captain inquired.
“Captain William Kidd,” said Adam, “a generous friend, a fearless
and skilful seaman, and as bold a fighting man as ever clutched a
hilt. I met him at Barcelona, shipped with him for Bristol, fell in with
my beef-eaters, got rid of my money and pushed my sword through
a pup—Lord Something-or-other——and was still in time to catch
Captain Kidd at Portsmouth for New York. But I can’t bark enough for
a sea-dog, as Kidd was good enough to tell me himself.”
William Phipps nodded and nodded. Outwardly he was calm
enough; inwardly he stewed with heat. Adam had but added fuel to
the fever of unrest and thirst for adventure with which he had been
born. He was not jealous of all that his protégé had accomplished
ahead of himself—indeed, he had furthered the lad’s advancement,
at the expense of his own sense of bereavement when he and Adam
parted,—but he was consumed with impatience to be hewing at the
great career for which he had from boyhood felt himself destined. A
light of determination burned in his eyes. He saw that the boy before
him had utterly outstripped him—the boy to whom he had imparted
all his own meager, self-acquired education. Not for a moment did he
regret that from Hispaniola he had sent the lad to England, with a
fellow-captain, nor would he for any price have stripped his protégé
of one single experience, but his mouth grew dry with the lust for
adventure that was glowing within him.
His wife saw these indications. She understood what was passing
in his mind. Before she had even sighed to herself, as a woman
must, who feels herself on the brink of a separation from one she
truly loves, she consented mentally to what she knew he would
presently suggest. What she was thus prepared for, came sooner
than she had expected it might.
“Adam,” said Phipps, somewhat huskily, “I have been waiting for
something—I never knew what—to come along and start me off after
the fortune I have promised to get for the wife.”
“You are fortune enough for me, dear,” Mrs. Phipps interposed, in
spite of herself. “I should be satisfied to live like this forever.”
“I know,” said the Captain, “but I promised you should have a fair
brick house in the Green Lane, to the north, and I mean that you
shall have it. Adam, you are the something I have been waiting for,
but what with my worrying, over thinking you probably dead, I have
never realized the truth till this night.”
“And what may it be my privilege to do?” said Adam.
“Go with me to recover a fortune, sunk in a wreck. She rests on a
reef in the Bahamas, in a few fathoms of water. She was laded with
gold and went down with every ounce. I’ve got the maps, and now
that I’ve got you, bless your heart, we can sail in a week!”
“And how have you learned of this sunken treasure?” said Adam,
who for some reason appeared not at all boyishly eager to set off on
this new adventure. “Has somebody given you this tale and the
maps as the price for a well-built brig?”
“I had the information from a Spaniard, who died at my ship-yard,”
said Phipps. “He was the sole survivor of the wrecked vessel. I gave
him work. He was grateful. Death seized him suddenly, but before
the end came, he told me his tale, he said, as a measure of
gratitude, directing me to feel in his pockets for the maps, which I
did. I have waited for what I now am certain was your return.”
“Well,” said Adam, thoughtfully, twisting the ends of his small
mustache, “you couldn’t easily have paid me a greater compliment, I
am sure; but, my dear friend, you place me in an awkward position.”
“Awkward position? What awkward position?” said Phipps. “Here
you are a good swordsman, a man of some knowledge, and the
companion I would select of all the men I know.” Here Adam bowed
solemnly. “Now what is to hinder us from making this venture
together? What do you mean by this awkward position business?”
“I mean,” said the rover, “that I seem to serve no better purpose,
the moment I return to Boston, than to separate you two good
people. Now I am sensitive about a thing like that. I don’t like to be
the cause of such a separation.”
“What nonsense, you——” started the Captain.
“I prepared my mind for William’s adventure, long ago,” interrupted
Mrs. Phipps. “If he doesn’t go with you, he will go with some one
else. And as long as he is bent on going in the end, I should feel so
much better, Adam, if you were with him.”
Adam bowed to them both, again. He was glad to do this, as he
was, in point of fact, somewhat confused as to what to say.
“There, you young rascal,” said Phipps, “that knocks away your
shores and you are launched before you know it.”
“But,” suggested Adam, with an air of great solicitude for his
friend’s interests, “do you really think any wild-goose chase of this
description could be as solid and certain and wholesome as the ship-
building business? Would I be justified in encouraging you, Captain
Phipps, to leave your established business for such a wild——”
“Wild?” interposed Phipps. “You—you—now look here, what do
you mean—you, by your own accounts, the wildest young scamp
afloat? Wild? As if anything could be too wild for you. There is
something at the bottom of all this. Now out with it!”
“Why, William!” said Goodwife Phipps, “where are your eyes?
Why, Adam must have a sweetheart in Boston!”
Rust flushed hotly. His eyes would not, for all his pulling at them,
refrain from dancing. He conjured up an immediate fit of coughing,
and therefore held a handkerchief before his face.
Phipps looked at him suspiciously. “Is that what ails you?” he
demanded. “Is that why you are so hot to remain here in Boston?”