FIN-3123 Exam 1 Concept Review

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

Which one of the following statements related to annuities and perpetuities is correct? Multiple Choice -An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. -A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. -Most loans are a form of a perpetuity. -The present value of a perpetuity cannot be computed but the future value can. -Perpetuities are finite but annuities are not.

-A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

Which one of the following is a current liability? Multiple Choice -Note payable to a supplier in 13 months -Amount due from a customer in two weeks -Account payable to a supplier that is due next week -Loan payable to the bank in 18 months -Amount due from a customer that is past due

-Account payable to a supplier that is due next week

Which one of the following accounts is the most liquid? Multiple Choice -Inventory -Building -Accounts Receivable -Equipment -Land

-Accounts Receivable

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio? Multiple Choice -Accounts payable -Cash -Inventory -Accounts receivable -Fixed assets

-Accounts receivable

Which one of the following is a current asset? Multiple Choice -Accounts payable -Trademark -Accounts receivable -Notes payable -Equipment

-Accounts receivable

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? Multiple Choice -Income statement -Creditor's statement -Balance sheet -Statement of cash flows -Dividend statement

-Balance sheet

Which one of the following will increase the cash flow from assets, all else equal? Multiple Choice -Decrease in cash flow to stockholders -Decrease in operating cash flow -Decrease in the change in net working capital -Decrease in cash flow to creditors -Increase in net capital spending

-Decrease in the change in net working capital

The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways? Multiple Choice -Decrease in the inventory turnover rate -Decrease in the net working capital turnover rate -Increase in the fixed asset turnover rate -Decrease in the day's sales in inventory -Decrease in the total asset turnover rate

-Decrease in the day's sales in inventory

Which one of these will increase the present value of a set amount to be received sometime in the future? Multiple Choice -Increase in the time until the amount is received -Increase in the discount rate -Decrease in the future value -Decrease in the interest rate -Decrease in both the future value and the number of time periods

-Decrease in the interest rate

Which one of the following accurately describes the three parts of the DuPont identity? Multiple Choice -Equity multiplier, profit margin, and total asset turnover -Debt-equity ratio, capital intensity ratio, and profit margin -Operating efficiency, equity multiplier, and profitability ratio -Return on assets, profit margin, and equity multiplier -Financial leverage, operating efficiency, and profitability ratio

-Equity multiplier, profit margin, and total asset turnover

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? Multiple Choice -Income statement -Balance sheet -Statement of cash flows -Tax reconciliation statement -Market value report

-Income statement

Which one of the following statements related to liquidity is correct? Multiple Choice -Liquid assets tend to earn a high rate of return. -Liquid assets are valuable to a firm. -Liquid assets are defined as assets that can be sold quickly regardless of the price obtained. -Inventory is more liquid than accounts receivable because inventory is tangible. -Any asset that can be sold is considered liquid.

-Liquid assets are valuable to a firm.

Which one of the following statements concerning net working capital is correct? Multiple Choice -Net working capital increases when inventory is purchased with cash. -Net working capital excludes inventory. -Total assets must increase if net working capital increases. -Net working capital may be a negative value. -Net working capital is the amount of cash a firm currently has available for spending.

-Net working capital may be a negative value.

Which one of the following is classified as a tangible fixed asset? Multiple Choice -Accounts receivable -Production equipment -Cash -Patent -Inventory

-Production equipment

Which one of the following ratios is a measure of a firm's liquidity? Multiple Choice -Cash coverage ratio -Profit margin -Debt-equity ratio -Quick ratio -NWC turnover

-Quick ratio

Which one of the following statements related to an income statement is correct? Multiple Choice -Interest expense increases the amount of tax due. -Depreciation does not affect taxes since it is a non-cash expense. -Net income is distributed to dividends and paid-in surplus. -Taxes reduce both net income and operating cash flow. -Interest expense is included in operating cash flow.

-Taxes reduce both net income and operating cash flow.

Which one of the following statements concerning interest rates is correct? Multiple Choice -Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. -The effective annual rate decreases as the number of compounding periods per year increases. -The effective annual rate equals the annual percentage rate when interest is compounded annually. -Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. -For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

-The effective annual rate equals the annual percentage rate when interest is compounded annually.

This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct? Multiple Choice -The interest you earn in Year 6 will equal the interest you earn in Year 10. -The interest amount you earn will double in value every year. -The total amount of interest you will earn will equal $1,000 × .06 × 40. -The present value of this investment is equal to $1,000. -The future value of this amount is equal to $1,000 × (1 + 40).06.

-The present value of this investment is equal to $1,000

Which one of the following statements correctly defines a time value of money relationship? Multiple Choice -Time and future values are inversely related, all else held constant. -Interest rates and time are positively related, all else held constant. -An increase in a positive discount rate increases the present value. -An increase in time increases the future value given a zero rate of interest.

-Time and present value are inversely related, all else held constant.

Which one of the following statements related to loan interest rates is correct? Multiple Choice -The annual percentage rate considers the compounding of interest. -When comparing loans you should compare the effective annual rates. -Lenders are most apt to quote the effective annual rate. -Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. -The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

-When comparing loans you should compare the effective annual rates.

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate. Multiple Choice -effective annual -annual percentage -periodic interest -compound interest -periodic interest

-annual percentage

Sam just opened a savings account paying 3.5 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this, Sam: Multiple Choice -will earn the same amount of interest each year for four years. -will earn simple interest on his savings every year for four years. -could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest. -has an account currently valued at $5,000. -could earn more interest on this account if the interest earnings were withdrawn annually.

-could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

Net working capital is defined as: Multiple Choice -total liabilities minus shareholders' equity. -current liabilities minus shareholders' equity. -fixed assets minus long-term liabilities. -total assets minus total liabilities. -current assets minus current liabilities.

-current assets minus current liabilities.

Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the: Multiple Choice -current yield. -effective rate. -compound rate. -simple rate. -discount rate.

-discount rate.

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate. Multiple Choice -stated -discounted annual -effective annual -periodic monthly -consolidated monthly

-effective annual

An ordinary annuity is best defined as: Multiple Choice -increasing payments paid for a definitive period of time. increasing payments paid forever. -equal payments paid at the end of regular intervals over a stated time period. -equal payments paid at the beginning of regular intervals for a limited time period. -equal payments that occur at set intervals for an unlimited period of time.

-equal payments paid at the end of regular intervals over a stated time period.

If a company produces a return on assets of 14 percent and also a return on equity of 14 percent, then the firm: Multiple Choice -may have short-term, but not long-term debt. -is using its assets as efficiently as possible. -has no net working capital. -has a debt-equity ratio of 1.0. -has an equity multiplier of 1.0.

-has an equity multiplier of 1.0.

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will: Multiple Choice -remain constant. -increase. -decrease. -equal $10,000. -be greater than $10,000.

-increase.

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of: Multiple Choice -total assets. -total equity. -net income. -taxable income. -sales.

-sales.

On a common-size balance sheet all accounts for the current year are expressed as a percentage of: Multiple Choice -sales for the period. -the base year sales. -total equity for the base year. -total assets for the current year. -total assets for the base year.

-total assets for the current year.

A perpetuity is defined as: Multiple Choice -a limited number of equal payments paid in even time increments. -payments of equal amounts that are paid irregularly but indefinitely. -varying amounts that are paid at even intervals forever. -unending equal payments paid at equal time intervals. -unending equal payments paid at either equal or unequal time intervals.

-unending equal payments paid at equal time intervals.

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: Multiple Choice -growth analysis. -discounting. -accumulating. -compounding. -reducing.

Discounting

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now? Multiple Choice -Future value -Correct -Present value -Principal amount -Discounted value -Invested principal

Future Value

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as: Multiple Choice -free interest. -bonus income. -Incorrect -simple interest. -interest on interest.

Intrest on Intrest

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the: Multiple Choice -single amount. -future value. -present value. -simple amount. -Compounded value.

Present Value

Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as: Multiple Choice -simplifying. -compounding. -Correct -aggregating. -accumulating. -discounting.

compounding