Chapter 9 - Financial Planning and Analysis

Using the info below what is the Days Payables (DP)? Annual Revenue $158,000.00 Annual Cost of Goods Sold $92,400.00 Cash Flow from Operations $850.00 Ending Inventory $23,600.00 Ending Accounts Receivable $19,300.00 Ending Accounts Payable $16,950.00 a. 262.15 b. 93.23 c. 39.16 d. 66.96

66.96 (Days payable = accounts payable / cogs x 365) (16,950 / 92,400 x 365 = 66.96)

Why do service industry ratios differ from manufacturing industry ratios? a. Balance sheets have higher current assets, especially A/R b. Service firms have higher debt c. Supply costs are always low d. Asset turnover is more important than profit margin

a. Balance sheets have higher current assets, especially A/R

Which four ratios help determine the extent to which a company was leveraged a. Total liabilities to total assets b. Times interest earned c. Long-term debt to capital d. Debt to equity e. Debt to tangible net worth f. Fixed charge coverage

a. Total liabilities to total assets b. Times interest earned c. Long-term debt to capital d. Debt to equity e. Debt to tangible net worth

Which of the following is a ratio that is often used by commercial banks to measure a company's leverage and does not include the effect of assets that are difficult to value or are NOT easily converted to cash? a. Long-term debt to capital b. Debt to tangible net worth c. Total liabilities to total assets d. Cash flow to total debt

b. Debt to tangible net worth

Which should be considered relevant cash flows for a proposed capital investment? a. Cash flow that was incurred in the past (sunk cost) b. Deductible expenses and taxes that affect future cash flows c. Cash flows that will be earned with or without the capital investment d. Depreciation that can be claimed with one alternative but not the other

b. Deductible expenses and taxes that affect future cash flows d. Depreciation that can be claimed with one alternative but not the other

Which of the following are important uses of variance analysis in comparing actual cash flows with projected cash flows? I. Identifying unanticipated changes in inventory II. Enhancing short-term investment income III. Validating a capital budget IV. Identifying delays in accounts receivable collections a. I and II only b. I and IV only c. II and IV only d. I, II, III, and IV

b. I and IV only

How do treasury's plan assessments affect projected cash flow streams in budgeting? a. In calculating adequate funds and liquidity b. In determining impact on debt covenants and credit ratings c. In managing financing of long-term assets through debt and equity issues d. Treasury is not direct or indirectly responsible for budgeting

b. In determining impact on debt covenants and credit ratings

A company is experiencing the following long-term trend on a month-over-month basis: Sales are increasing by $100,000, a 15% increase. Accounts receivable are increasing by $5,000, a 1% increase. Accounts payable are increasing by $20,000, a 4% increase. Labor expenses are increasing by $40,000, a 3% increase. With all other income, expenses, long-term assets and liabilities remaining stable, this trend would MOST LIKELY prompt what action by the company? a. Financing working capital requirements b. Repaying short-term debt c. Reducing labor costs d. Factoring accounts receivable

b. Repaying short-term debt

All of the following are advantages of using traditional financial ratios for analysis EXCEPT: a. They can easily be computed from the information found in publicly available financial reports b. They usually reflect accounting rather than economic values c. They can be used to view historical trends and availability over time d. They allow comparisons to be made between like companies

b. They usually reflect accounting rather than economic values

Using the info below what is the Days Receivables (DR)? Annual Revenue $158,000.00 Annual Cost of Goods Sold $92,400.00 Cash Flow from Operations $850.00 Ending Inventory $23,600.00 Ending Accounts Receivable $19,300.00 Ending Accounts Payable $16,950.00 a. $2,988.08 b. $298.50 c. $44.59 d. $76.24

c. $44.59 (Days receivable = accounts receivable / revenue x 365) (= 19,300 / 158,000 x 365 = 44.59)

Using the info below what is the Days Inventory (DI)? Annual Revenue $158,000.00 Annual Cost of Goods Sold $92,400.00 Cash Flow from Operations $850.00 Ending Inventory $23,600.00 Ending Accounts Receivable $19,300.00 Ending Accounts Payable $16,950.00 a. 446.32 b. $1,429.07 c. 93.23 d. 508.20

c. 93.23 (Days inventory = ending inventory / cogs x 365) (= 23,600 / 92,400 x 365 = 93.23)

In evaluating alternative capital investments, a company should consider qualitative factors such as a. Projected cash flows b. Estimated economic returns c. Corporate strategy d. Estimated costs

c. Corporate strategy

What is the difference between operating leverage and financial leverage? a. Operating leverage is the result of total costs in operations b. Financial leverage magnifies the impact of changes in sales on EBIT c. Financial leverage results from fixed financing costs (interest) d. Operating leverage magnifies the results of changes in EBIT on net income

c. Financial leverage results from fixed financing costs (interest)

How do common-size statements enable direct financial comparisons of different-size firms? a. Expenses as a percentage of profits reveals who has the best expense controls b. Asset categories as a percentage of revenues can be compared c. Liability categories as a percentage of total assets can be compared d. Cash flow elements as a percentage of net income can be compared

c. Liability categories as a percentage of total assets can be compared

Company XYZ is a manufacturer of industrial equipment and has enjoyed a large percentage increase in profits from a small increase in revenues. Sales recently plummeted resulting in steep decline in profitability. Which of the following BEST describes the cost structure of the company? a. Low contribution margin b. High financial leverage c. Low variable costs d. High operating leverage

d. High operating leverage

Company ABC is a restaurant chain that has enjoyed a surge in customers dining with not much of a profitability increase in the last couple of years. Following a bad restaurant review, customer traffic deteriorated with not much change in profitability. Which of the following BEST describes the cost structure of the company? a. Low variable costs b. Economies of scale c. Low financial leverage d. Low operating leverage

d. Low operating leverage

In what scenario could a negative EVA be fine? a. New increases in the capital base are unlikely to generate additional earnings b. EVA is negative but only by a small amount on a regular basis over a long period of time c. Additional capital is invested in assets that earn a rate of return less than the cost of capital d. Rapid expansion of capital base is required to fund growth

d. Rapid expansion of capital base is required to fund growth