C214 Chapter Quizzes

False Explanation: In order to understand the health of a company, you must understand how the firm generates and expends cash. The impacts of accrual accounting are seen most in relation to net income.

(T/F) The Statement of Cash Flows is not useful when assessing the financial health of a firm due to the impact of accrual accounting.

Syndicate

A _________ is a group of investors that is temporarily formed to handle the issuance of new bonds.

Bond

A __________ is a debt instrument issued by corporations or governments.

Equity = Assets - Liabilities

A basic equation for the balance sheet is_______. - Equity = Assets - Liabilities - Assets = Liabilities - Equity - Liabilities = Equity + Assets - Assets = Equity - Liabilities

1.17 Explanation: = (100 + 250) / 300 = 350 / 300 * Both the current ratio and the quick ratio are considered liquidity ratios, measuring the ability of a business to meet its current debt obligations. The current ratio includes all current assets in its calculation, while the quick ratio only includes quick assets or liquid assets in its calculation. So, for this question, Quick Ratio does not include the inventory reported.

A company has cash of $100, accounts receivable of $250, inventory of $300, and accounts payable of $300. What is the quick ratio? - 1.00 - 1.17 - 0.33 - 2.17

Turnover: 8.33 ACP: 43.8 Explanation: Turnover: 750 / 90 = 8.33 ACP: 365 / 8.33 = 43.8

A company has cash sales of $200 and credit sales of $750. It's average accounts receivable is $90. What is the A/R turnover? What is the average collection period? - Turnover 10.56 ACP: 24.9 - Turnover: 10.56 ACP: 43.8 - Turnover: 8.33 ACP: 43.8 - Turnover: 8.33 ACP: .694

125 Explanation: Formula: New Retained Earnings = Old Retained Earnings + Net Income - Dividends 400 = 300 + x - 25 +25#########+25 425 = 300 + x -300#-300 125 = x The Net Income for the 12/31/2013 firm's reports is $125

A firm reported retained earnings of $300 in 12/31/2012. For 12/31/2013, the firm reports retained earnings of $400 and pays dividends of $25. What was their net income in 2013? - 400 - 300 - 125 - 100

$120 Explanation: Formula: New Retained Earnings = Old Retained Earnings + Net Income - Dividends 400 = 305 + x - 25 +25#########+25 425 = 305 + x -305#-305 120 = x The Net Income in 20x3 is $120.

A firm reported retained earnings of $305 in 20x2. For 20x3, the firm reports retained earnings of $400 and pays dividends of $25. What was net income in 20x3? - $95 - $120 - $145 - $195

The firm is sustainable in its current state Explanation: With the given data we cannot accurately determine whether the firm is a top performer, under investing, or has bad management decision making. The data show the firm is generating cash from operations. The negative CFI indicated investment in new assets (replacing old assets? Planning for future growth?). The negative CFF indicates that the firm is likely: 1) paying down debt or buying back stock, or 2) paying dividends. We need more detail to make a better assessment, but the most reasonable conclusion is that the firm is sustainable in its current state because its cash flow from operations is greater than its cash outflows for investing and financing.

A firm reports the following cash flow data: o CFO = $1mm o CFI = -$750k o CFF = -$100k Which of the following is most reasonable assessment given the data? - The firm is a top performer - The negative CFF indicates bad management decisions - The firm is sustainable in its current state - The firm is likely to be under-investing

Revenues of 500,000 and expenses of 300,000

A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid in 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under an accrual based accounting system, you will most likely report which of these? - Revenues of 500,000 and expenses of 300,000 - Revenues of 300,000 and expenses of 200,000 - Revenues of 300,000 and expenses of 300,000 - Revenues of 500,000 and expenses of 200,000

Ownership

A stock is a share of ______________ in a particular company. - Debt - Cash - Ownership

Suppliers due to purchases made on credit

Accounts payable represents money a firm owes to: - Suppliers due to purchases made on credit - Lenders under short-terms borrowing agreements - Employees - Other accounts

Revenues when the earnings process is complete and matches expenses to revenues recognized Explanation: Accrual accounting recognizes revenues when the earnings process is complete and then matches expenses to revenues recognized.

Accrual accounting recognizes: - Cash inflows as revenues and cash outflows as expenses - Revenues when the earnings process is complete and matches expenses to revenues recognized - Revenues when the earning process is complete and expenses when cash is paid - Revenues when cash is received and matches expenses to revenues recognized

IPO (Initial Public Offering)

An _________ is where a company goes public or sells shares to the public for the first time.

The change in accumulated depreciation

Assuming no asset disposals, depreciation expense is equal to: - Common equity - The change in accumulated depreciation - CFF - CFI - The change in retained earnings

$10 Explanation: CFF = change in notes payable + change in long-term debt - dividends (assuming no other relevant changes) CFF = 100 + 200 -Dividends. Change in RE = net income - dividends. -120 = 170 - dividends dividends = 290 CFF = 100 +200 - 290 = 10.

Balken, Inc. reports the following on their most recent financial statements: o Change in accounts payable: $50 o Change in notes payable: $100 o Change in long-term debt: $200 o Change in retained earnings: -$120 o Net income: $170 What is Balken's CFF for the period? - $130 - $10 - .... -$10 - $180

Lower than Big-Tokyo's Explanation: TAT and FLR are the same for the industry and Big-Tokyo. Hence, since Big-Tokyo has a higher ROE, Big-Tokyo must have a higher net margin than the industry.

Big-Tokyo Inc. has a financial leverage ratio of 2.00, total asset turnover of 1.50 and ROE of 18.00%. For Big-Tokyo's industry, the average ROE is 16.00% and the industry average total asset turnover (TAT) and financial leverage ratio (FLR) are the same as Big-Tokyo. The industry average net margin must be: - Lower than Big-Tokyo's - Cannot be determined with available data. - Equal to Big-Tokyo's - Higher than Big-Tokyo's

Hoogle's OIROI is higher than Mapple's but Hoogle is NOT more efficient. Explanation: Using the accrual accounting system to increase net income is known as earnings management. Since the firms are economically identical, Hoogle's use of accruals to increase net income and OIROI is just a ruse.

Consider two companies, Hoogle and Mapple. They are economically identical. However, for reporting purposes Hoogle uses the managerial discretion that is required with accrual accounting to increase net income relative to Mapple (assume any balance sheet effects are inconsequential). Which of the following is correct: - Mapple's OIROI is higher than Hoogle's but Mapple is NOT more efficient. - Hoogle's OIROI is higher than Mapple's but Hoogle is NOT more efficient. - Hoogle's OIROI is higher than Mapple's and Hoogle is more efficient. - Mapple's OIROI is higher than Hoogle's and Mapple is more efficient.

The most liquid to the least liquid Explanation: The current assets are listed from the most liquid item to the least liquid items. On a simplified balance sheet, the order is usually: 1) cash, 2) marketable securities, 3) accounts receivable, and 4) inventory.

Current assets are listed in order of: - The highest dollar value to the lowest dollar value - The most liquid to the least liquid - The least liquid to the most liquid - The lowest dollar value to the highest dollar value

Depreciation expense is non-cash expense on the income statement associated with the acquisition of long-lived assets Explanation: Depreciation is non-cash expense associated with the acquisition of long-lived assets. Suppose a firm spends $1000 for an asset that will last four years. Accrual accounting requires that the cost be allocated to the periods where benefit is received. The cash is expended when the asset is purchased, but the depreciation expense is recognized over the four years of use. Hence, depreciation is a non-cash expense. Note that depreciation creates a tax shield since it is subtracted before tax is calculated. Hence, depreciation is subtracted to calculate EBT and NI but must be added back to calculate CFO.

Depreciation expense is a significant source of difference between net income and CFO because: - Depreciation expense is non-cash expense but still represents an outflow of cash to the firm - Depreciation expense is non-cash expense on the income statement associated with the acquisition of long-lived assets - Depreciation expense is the actual cash inflow to the firm associated with investment tax benefits - Depreciation expense is the actual cash outflow from the firm associated with the decay in asset values

Operating Income

Earnings Before Interests and Taxes (EBIT) is also called: - Net Income - Gross Margin - Operating Income - Gross Profit

625,000 FCFF = EBIT (1-t) + Depn - Inc NWC - CapEx 1000* (1-0.40) + 30 + 10 - 15 1000* (0.6) + 30 + 10 - 15 600 + 30 + 10 - 15 640 - 15 = 625 625,000

Financial data for Intel is given below for 2014: o EBIT 1,000,000 o Depreciation 30,000 o Change in working capital (10,000) o Net capital expenditures 15,000 o Tax Rate 40% Compute the free cash flow for 2014. - 625,000 - 610,000 - 600,000 - 675,000

Represents cash flow after required investment Explanation: FCF allows for required reinvestment (i.e., FCF is after reinvestment cash). Conceptually, FCF is distributable cash.

Free Cash Flow (FCF) is different from Cash Flows from Operations (CFO) because FCF: - Does not allow for required reinvestment - Does not represent distributable cash - Represents cash flow after required investment - Represents all actual cash flowing into the firm

$100 Explanation: CFF = Change in N/P + Change in LTDebt + Change in CS - Dividends CFF = 100 + 300 + 0 - Dividends CFF = 400 - Dividends Dividends = NI - Change in Retained Earnings Dividends = 500 - 200 Dividends = 300 CFF = 400 - 300 CFF = 100

Given the following data, calculate CFF for 20x3. o Retained Earnings: (20x2) 3,400 ---> (20x3) 3,600 o Accounts Payable: (20x2) 2,100 ---> (20x3) 1,900 o Notes Payable: (20x2) 1,200 ---> (20x3) 1,300 o Common Stock: (20x2) 4,200 ---> (20x3) 4,500 o Accounts Receivable: (20x2) 3,200 ---> (20x3) 3,700 o Net Income: (20x2) 400 ---> (20x3) 500 o Long-Term Debt: (20x2) 4,500 ---> (20x3) 4,500 - ($100) - $100 - $200 - $0

Net income - Dividends

How do you calculate the change in retained earnings? - Net income - Dividends - EBIT - Change in cash - Dividends - EBIT divided by Total assets + Dividends - Ending retained earnings - Change in cash

1.25 Explanation: 150 / 120 = 1.25

If a company has current assets of $80 and fixed assets of $120, if sales are $150 and EBIT is $35, what is the fixed asset turnover? - 0.80 - 5.71 - 2.29 - 1.25

0.54 Explanation: Debt Ratio = Debt / Total Assets = 125 / (140 + 90) = 0.5435

If a company has current assets of $90 and fixed assets of $140, if it has debt of $125, what is its debt ratio? - 1.36 - 0.54 - 1.12 - 1.84

Higher

If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? - Lower - Higher - It does not matter - The same

60% Explanation: Okay - tiff explanation here. Take 2.50 as a fraction = 2/5. 2 divided by 5 is 40%. 100% - 40% = 60%

If a firm's financial leverage ratio is 2.50, what percentage of assets are financed by debt? - 50% - 60% - 70% - 40%

Increase the spread

If providing liquidity becomes more risky, then dealers will __________ the spread. - Narrow the spread - Increase the spread - Decrease the spread - None of these

You cannot tell without looking at other liquidity ratios Explanation: You cannot tell a company's liquidity compared to the industry just by looking at one ratio

If the current ratio of a company is higher than the industry, then: - The company has about the same liquidity as the industry - The company has lower liquidity than the industry - You cannot tell without looking at other liquidity ratios 0- The company has higher liquidity than the industry

Increase the spread

If the price of a particular stock begins to heavily fluctuate, then the specialist will __________ the spread. - Maintain the spread - Increase the spread - Reduce the spread - None of these choices

Accrual Accounting Explanation: Accrual accounting is superior for understanding the operations of a firm. The cash accounting system may lead you to an inaccurate view of the firm since the receipt and disbursement of cash is frequently not synchronized with operating variables.

If you want to understand a firm's operations, _________ accounting is a superior tool.

All the statements are correct Explanation: All are examples of external risks that may affect a company's performance.

In order to make ratio analysis a more effective tool, you should carefully consider: - Demographic trends - Bubbles and recessions - Technological changes - All the statements are correct

2.8 Explanation: Current Ratio Formula is: Current Ratio = Current Assets / Current Liabilities * A/R (assets & revenues) and Inventory are both Current Assets * A/P (Accounts Payable) Current Ratio = (600 + 800) / 500 = 1400 / 500 = 2.8

Intel provides the following data for 2014: o A/R 600 o Inventory 800 o Fixed assets 1,000 o A/P 500 o Long term debt 900 o Common stock 400 What is the current ratio? - 2.8 - 2.0 - 1.5 - 1.2

(15,000) Explanation: Depreciation is NOT counted when using Gross PPE. *Numbers in Parentheses - A number listed on the financial statements that in contained within parentheses is a NEGATIVE number. If there are no parentheses the number is positive.

Intel reported the following for 2014: o Gross equipment (1/1/14) 50,000 o Gross equipment (12/31/14) 65,000 o Net income 100,000 o Depreciation 20,000 What is the cash flow from investing activities for 2014? - 100,000 - 15,000 - (15,000) - 80,000

110,000 Explanation: Cash flow from operating activities = 100,000 (NI) + 20,000 (Depreciation) - 10,000 (Change in A/R) 100,000 + 20,000 - 10,000 120,000 - 10,000 = 110,000

Intel reported the following for 2014: o Net income 100,000 o Depreciation 20,000 o Change in A/R 10,000 What is the cash flow from operating activities? - 120,000 - 100,000 - 110,000 - (130,000)

700 outflow Explanation: End PP&E - Beginning PP&E + Current Year Depreciation (End PP&E) 4,500 - (Beginning PP&E) 4,600 + (Current Year Depreciation) 800 4,500 - 4,600 + 800 -100 + 800 = 700 increase/outflow

Last year a firm recorded net PP&E of $4,600 while this year the same firm recorded net PP&E of $4,500. If the depreciation expense for last year and this year are $500 and $800, respectively, what is the CFI of the company? (Assume no asset disposals) - 100 outflow - 900 outflow - 700 outflow - 100 inflow

increased

NYSE daily trading volume has ___________ over the last 50 years.

The original cost of the firm's assets held for use less accumulated depreciation Explanation: Net Fixed Assets is the cost of the firm's non-current assets less the total amount of depreciation claimed against the assets (aka accumulated depreciation).

Net Fixed Assets represents: - The value of the firm's assets held for use stated at original cost - The original cost of the firm's assets held for use less accumulated depreciation - The total amount of depreciation claimed against the firm's fixed assets - Market value of the firm's non-current assets

The portion of the firm's earning during the period that were not paid out as dividends. Explanation: The firm can only do two things with net income - pay dividends or retain in the firm. The retained earnings balance represents the cumulative total of earnings retained (i.e., not paid as dividends) over the entire history of the firm.

Retained Earnings represents: - The cumulative earnings retained by the stockholders over the entire history of the entity - The portion of the firm's earning during the period that were not paid out as dividends - The cumulative amount of the firm's earnings not distributed to shareholders - The earning that the firm holds as cash in case of emergency

liquidity

Some high frequency traders provide___________ to the rest of the market.

40% Explanation: We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So Financial leverage ratio = 2.5 = 100% / Y% = Assets/Equity; thus Y = 100 / 2.5 = 40%.

Suppose a firm has a financial leverage ratio of 2.50. What percentage of the firm's assets are financed by equity? - 60% - 50% - 70% - 40%

Since the profitability ratios of the firm declined, the analyst devotes additional effort to understanding revenues and costs Explanation: As the textbook states, ratios do not tell you about the company; rather, ratios helps you know what questions to ask.

Suppose an analyst is reviewing the profitability ratios for a firm. Which of the following statements represents the most valid insight for the analyst? - Since the profitability ratios of the firm declined, the analyst devotes additional effort to understanding revenues and costs - Since the profitability ratios of the firm declined, the firm is facing serious competitive pressures - Since the profitability ratios of the firm improved, the firm is obviously headed in the right direction - Since the profitability ratios of the firm improved, the firm is not subject to competitive pressures

The firm has too little inventory resulting in lost sales or stock-outs.

Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? - The firm has low sales volume - The firm has too little inventory resulting in lost sales or stock-outs - The firm has lower liquidity than the industry average - The firm has too much inventory thus impairing overall liquidity

The firm has too little inventory resulting in lost sales or stock-outs Explanation: If a firm has a higher inventory turnover this implies that it is more liquid and does NOT necessarily have too much inventory on hand because it is able to sell its inventory. The only likely answer then is that it may have too little inventory on hand.

Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? - The firm has too little inventory resulting in lost sales or stock-outs - The firm has too much inventory thus impairing overall liquidity - The firm has lower liquidity than the industry average - The firm has low sales volume

True

T/F A bond is similar to a loan.

False Explanation: Firms can sustain negative CFO in the short-run buy borrowing, etc. In the long run, the firm will run out of assets to sell and lenders will refuse to lend. A firm cannot sustain negative CFO forever.

T/F A firm can sustain negative CFO indefinitely by borrowing, selling equity, and/or by selling assets.

False Explanation: Retained earnings isn't a box of cash. To pay bills, the firm must have cash in the bank as represented by the cash account in current assets. The earnings retained by the firm have already been used to finance the firm's assets (recall: A = L + E). If a firm has a large retained earnings balance and small debt load (relative to assets), it may have significant borrowing capacity. But, borrowing capacity is not the same as a cash reserve. Retained earnings definitely is NOT a cash reserve.

T/F A firm can use retained earnings to pay bills if needed

False Explanation: The income statement may help you understand firm operations, but net income does not necessary show cash to the company.

T/F An income statement always provides an accurate measure of a firm's cash flows.

False Explanation: Assuming no asset disposals, CFI is the change in GrossPP&E. Equivalently, CFI is equal to the change in Net PP&E plus depreciation expense.

T/F Assuming no asset disposals, CFI is equal to the change in Net PP&E.

True Explanation: This is the definition of FCFF Remember, FCFF stands for Free Cash Flow to the Firm !

T/F FCFF can sustainably be distributed to the providers of capital.

False Explanation: CFI accounts are generally non-current assets (i.e., bottom of the asset side of the balance sheet).

T/F For visualization purposes, it is correct to think of balance sheet accounts relevant to CFI as being on the bottom of the financing side.

True Explanation: Increases in assets consume cash as do decreases in operating liabilities.

T/F Increases in operating assets and decreases in operating liabilities will decrease CFO.

False Explanation: Increases in operating ASSET accounts will decrease CFO, but increases in operating LIABILITY accounts (i.e., A/P) will increase CFO.

T/F Increases in operating balance sheet accounts will decrease CFO.

True Explanation: Notes payable represent a formal lending arrangement and carry an explicit or stated interest component

T/F Notes Payable carry an explicit interest cost

True Explanation: Ratios tell you what questions to ask about the company.

T/F Ratios help identify the areas of a firm that need investigation.

False

T/F Secondary markets are where securities are initially offered to the public.

True

T/F Stocks and bonds are two types of financial instruments.

False Explanation: Income tax expense (aka provision for taxes) is rarely the actual amount of tax paid during the period. The tax provision on the income statement is calculated as if the tax code is identical to financial accounting standards. In reality, the tax code differs in many ways from financial accounting. Hence, the actual tax liability can be higher or lower than the reported income tax expense

T/F Tax expense as shown on the income statement is the amount of cash the firm paid to the taxing authority during the period.

True Explanation: NOPAT (i.e. EBIT x [1-tax rate]) is determined before cash is divided into cash to debt holders (i.e., interest payments) and cash to equity holders. *NOPAT = Net Operating Profit After Tax

T/F The calculation of FCFF uses NOPAT instead of Net Income because FCFF is the cash available to both debt holders and equity holders.

True Explanation: Scrubbing the data is a preliminary step in ratio analysis. The process entails recasting the target/peer financial statements to align significant accounting choices, fiscal year-ends, etc.

T/F The process of making a target firm's data comparable to a peer group is known as scrubbing the data.

False Explanation: Most current asset and current liability accounts are operating accounts; hence, changes are included in the calculation of CFO. However, Operating assets do not include all current assets. Cash is the notable exception. Operating liabilities do not include notes payable (changes in notes payable are included in CFF). Note that there are other exceptions, but they are beyond the scope of this discussion.

T/F When calculating CFO, you generally include the changes in all current assets and current liabilities.

True

T/F Without financial markets, exchange would become more costly.

Auction Market

The New York Stock Exchange is an ___________ market.

EBIT, total assets

The OIROI (operating income return on investment) uses what elements on the income statement? - Net margin, total current assets - EBIT, total assets - Sales, total assets, equity - Operating income, EBIT, total liabilities

Financed either by other people's money or by the firm's owners' money. Explanation: All assets must be financed. The only two sources of financing are: 1) other people's money (liabilities) and 2) owner's money (owner's equity).

The basic balance sheet equation states that Assets are equal to Liabilities plus Owner's equity. This is because all assets are: - Used as collateral to borrow money - Subject to liquidation - Financed either by other people's money or by the firm's owners' money - Property of the providers of capital

Change in retained earnings = net income - dividends Explanation: The change in retained earnings = net income - dividends. Remember, there are only two things you can do with net income: 1) pay it out as dividends and 2) retain it within the firm.

The evolution of retained earnings is best described by: - Net income = revenues - (retained earning + dividends) - Dividends = retained earnings - net income - Change in retained earnings = net income - dividends - Change in net income = change in dividends + change in retained earnings

Analysts can create new ratios if needed

The flexibility aspect of ratios and ratio analysis refers to which of the following? - Ratios can be used to compare a firm to the industry's top performers - Ratios determine the financial flexibility of a company - Firms of different size can be compared on the same scale - Analysts can create new ratios if needed

Over a period of time Explanation: The income statement represents the result of operations over a period of time.

The income statement represents a snapshot of the firm 1) at one point in time or 2) over a period of time ?

Revenues are matched to the expenses incurred to generate the revenues. Explanation: Once revenues are recognized, the firm should also report the expenses incurred in generating the revenues.

The matching principle in accrual accounting requires that: - Revenues should be large enough to match expenses - Expenses are matched to the year in which they are incurred - Revenues are matched to the expenses incurred to generate the revenues - Revenues are matched to the year in which they are booked

revenues be recognized when the earnings process is complete and matches expenses to revenues recognized

The matching principle in accrual accounting requires that_________. - revenues should be large enough to match expenses - revenues be recognized when the earnings process is complete and matches expenses to revenues recognized - expenses are matched to the year in which they are incurred - revenues are matched to the year in which they are booked

The change in cash during the period

The sum of CFO + CFI + CFF is equal to: - The change in cash during the period - Cash on hand - Net Income - The ending cash balance

That most assets are stated at the original cost less depreciation Explanation: While there are some exceptions, most assets on the balance sheet are reported as the historical acquisition cost less any depreciation claimed against the assets.

The use of the historical cost principle on the balance sheet means: - Inflation must be impounded in the original cost of assets - Historical cost must be used to value the firm - The amounts on the balance sheet reflect revaluation using historical inflation rates - That most assets are stated at the original cost less depreciation

specialist (i.e., a market maker)

Trading on the NYSE is executed without a __________ .

145,000 Explanation: Increase in Mortgage - Decrease in Bonds - Dividends Paid (Increase in Mortgage) 300 - (Decrease in Bonds) 75 - (Dividends Paid) 80 300 - 75 - 80 = 145 145,000

What is the cash flow from financing? o Accounts payable 100,000 o Accrued expenses 50,000 o Increase in mortgage payable 300,000 o Decrease in bonds payable 75,000 o Dividends paid 80,000 - 505,000 - 225,000 - 145,000 - 230,0000

(125,000)

What is the cash flow from investing? o Increase in gross PP&E 125,000 o Beginning net PP&E 750,000 o Ending net PP&E 850,000 o Depreciation expense 25,000 - 150,000 - (75,000) - (125,000) - 850,000

505,000 Explanation: Net Income + Depreciation Expense - Change in Accounts Receivable + Change in Inventory + Change in Accounts Payable - Change in Accrued Expenses (NI) 450 + (Depreciation Expense) 110 - (Change in AR) 120 + (Change in Inventory) 90 + (Change in AP) 50 - (Change in Accrued Expenses) 75 450 + 110 - 120 + 90 + 50 - 75 560 - 120 + 90 + 50 - 75 440 + 90 + 50 - 75 530 + 50 - 75 580 - 75 = 505 = 505,000

What is the cash flow from operations given the following information? o Net income 450,000 o Change in accounts receivable 120,000 o Change in inventory - 90,000 o Change in PP&E 60,000 o Depreciation expense 110,000 o Change in accounts payable 50,000 o Change in accrued expenses - 75,000 o Change in common stock 300,000 - 375,000 - 410,000 - 505,000 - 570,000

Marketable Securities

When a firm purchases short-term U.S. Treasury securities, they are generally included on the balance sheet as: - Cash - Accounts Receivables - Inventories - Marketable Securities

Add an increase in accrued wages Explanation: An increase in an operating liability such as accounts payable or accrued wages represent an inflow to the firm.

When calculating CFO, which of the following is correct? - Subtract an increase in accounts payable - Subtract depreciation expense - Add an increase in cash - Add an increase in accrued wages

Cash decreases

When fixed assets increase what happens to cash? - Cash increases - Cash decreases - Assets decrease - Cash stays the same

Choosing a relevant comparison set Explanation: Choosing the comparison set is important, but is not part of scrubbing the data. Aligning year-end data and identifying/correcting accounting differences are both part of scrubbing the data.

When performing ratio analysis, scrubbing the data includes all of the following except: - Identifying accounting differences among competitors - Choosing a relevant comparison set - Alignment of ratios for companies with different fiscal year-ends

Inventory, cash, accounts receivable, short term investments

Which components are part of current assets? - Cash, accounts receivable, property plant & equipment - Long term debt, property plant & equipment, common stock - Accounts receivable, accounts payable, inventory - Inventory, cash, accounts receivable, short term investments

Cash accounts receivable, inventory, long term assets

Which components are part of total assets? - Cash accounts receivable, inventory, long term assets - Accounts payable, net income, equity - Cash, accounts receivable, short term debt - Accounts payable, long term assets, long term debt

Bonds, accounts payable, mortgage

Which components are part of total liabilities? - Bonds, accounts payable, mortgage - Long term debt, common stock, retained earnings - Accounts payable, accounts receivable, short term debt - Common stock, long term debt, short term investments

It explains the change in cash balance for one period of time.

Which is the purpose of the statement of cash flows? - It explains the change in cash balance for one period of time. - It explains the change in cash balance at one point in time. - Both (a) and (b) above - It serves as the replacement for the income statement and balance sheet

GAAP accounting standards allow for significant managerial discretion in reported financial statements Explanation: Within the confines of GAAP, managers still have significant discretion over reported results.

Which of the following best describes the problem associated with GAAP accounting standards when performing ratio analysis? - Most firms use cash accounting rather than GAAP accounting - GAAP accounting standards are too simplistic for most firms - GAAP accounting standards allow for significant managerial discretion in reported financial statements - Most firms use cash accounting rather than accrual accounting

Operating Income and EBIT are the same

Which of the following is generally true? - Gross Profit and Operating Income are the same - EBIT + Income Taxes = Net Income - Cost of Goods Sold + Operating Expenses = Net Income - Operating Income and EBIT are the same

An increase in inventory indicates a reduction in CFO Explanation: An increase in an operating liability (like A/P) will increase CFO. An increase in notes payable will increase CFF. An increase in cash is the result of operations, investment, and financing.

Which of the following is true with respect to CFO? - An increase in accounts payable indicates a reduction in CFO - An increase in cash indicates a reduction in CFO - A decrease in notes payable indicates a reduction in CFO - An increase in inventory indicates a reduction in CFO

An increase in accounts receivable and a decrease in accounts payable Explanation: Increase in inventory or accounts receivable and decreases in accounts payable will decrease CFO. Notes payable is a financing item.

Which of the following will decrease CFO? - An increase in accounts receivable and a decrease in accounts payable - An increase in inventory and an increase in accounts payable - A decrease in inventory and an increase in accounts payable - An increase in inventory and a decrease in notes payable

Interest Expense Explanation: Recall the income statement format: Revenues - cost of goods sold - operating expense = EBIT (Earnings Before INTEREST and Taxes; a frequent proxy for operating profit). Interest is NOT an operating expense as it is deducted after the calculation of EBIT.

Which of the following would not be considered an operating expense? - Interest expense - Non-direct labor expense - Depreciation expense - Rent Expense

Cash flows from liquidating activities

Which one of the following is NOT a part of the statement of cash flows? - Cash flows from liquidating activities - Cash flows from investing activities - Cash flows from operating activities - Cash flows from financing activities

Using GAAP rules to calculate standard ratios

Which one of the following is NOT an example of meaningful ratio analysis? - Analyzing the trend in ratios over time for a single firm. - Using ratios to assess goal achievement - Using GAAP rules to calculate standard ratios - Using ratios to compare a firm with high performing competitors

Percentage of net income paid out as dividends Explanation: The DuPont decomposes ROE into three factors: profitability (net margin; earnings as a percent of sales), assets usage efficiency (asset turnover; sales as a percent of assets), and leverage (financial leverage; portion of assets financed by equity). Dividend payout is not included in the DuPont decomposition of ROE.

Which one of the following is not an element of the DuPont decomposition? - Earnings as a percentage of sales - Portion of assets financed by equity? - Sales as a percentage of total assets - Percentage of net income paid out as dividends

Change in Retained Earnings Explanation: Change in retained earnings is accounted in CFO by adding net income and CFF by subtracting dividends paid.

Which one of the following items should NOT be included in the calculation of CFF? - Change in Common Stock - Dividends paid during the fiscal year - Change in Long-term Debt - Change in Retained Earnings

Operating Explanation: We discuss 4 ratios in the textbook: Liquidity, Asset Use Efficiency, Financing (Leverage), and Profitability.

Which one of the following ratios is NOT part of the common ratio categories? - Financing - Profitability - Operating - Liquidity

negotiated sale

Which type of bond placement - competitive sale or negotiated sale - requires a more thorough interview process? - competitive sale - negotiated sale

Add $100,000 to CFO Explanation: A decrease in an operating asset represent a cash inflow associated with CFO. The tax rate does not impact the question.

While looking at XYZ Corp's two most recent balance sheets, you notice inventory decreased by $100,000. The firm has a tax rate of 40%. To calculate Cash Flow from Operations, you will: - Add $100,000 to CFO - Subtract $60,000 from CFO - Subtract $100,000 from CFO - Add $60,000 to CFO

The other statements are reset at the end of the fiscal year

Why is the balance sheet known as a permanent statement? - The other statements are reset at the end of the fiscal year - The statement is printed out and archived - The statement is sent to the SEC - The statement persists in the minds of the shareholders

It indicates how efficient assets are at producing sales

Why would a company be interested in the TAT (total asset turnover) ratio? - It indicates how efficient assets are at producing sales - It indicates what the turnover of sales is to liabilities - It indicates how efficient assets are to liabilities and equity - It indicates how efficient assets are at producing income