FIN 458 Test 1

All of the following are the building blocks for financial statement analysis except: a. Targeting growth opportunities that diversify exchange rates, risk exposure, and political uncertainty. b. Describing strategies that a firm pursues to differentiate itself from competitors in order to evaluate competitive advantages, sustainability of the firm's earnings, and its risks. c. Evaluating the financial statements, including the accounting concepts and methods that underlie them and the quality of the information they provide. d. Identification of the economic characteristics of the industries and the relation of those economic characteristics to the various financial statement ratios.

a

On a common size basis, which of the following assets is normally largest for a commercial bank? a. Accounts and Notes Receivable b. Inventory c. Property, Plant and Equipment d. Cash and Marketable Securities

a

When preparing the statement of cash flows using the indirect method, an increase in inventories would appear as a. a decrease in the operating activities section b. an increase in the operating activities section c. a use of cash in the investing activities section d. a source of cash in the investing activities section

a

Which of the following activities is an operating activity?a. Collections of accounts receivable. b. Investing in equity securities of other companies. c. Payment of dividends. d. Issuing common stock

a

Which of the following economic characteristics is consistent with a grocery store chain? a. Low barriers to entry. b. High levels of research and development. c. High profit margins. d. Low capital intensity

a

Which of the following would not appear as a liability on the balance sheet? a. A labor contract b. A note due to a bank c. Salary due employees at year-end d. Accounts payable

a

If a firm is growing and expanding its accounts receivable and inventories faster than its current operating liabilities its cash flow from operation will normally be a. greater than net income b. less than net income c. greater than the change in working capital from operations d. greater than the change in cash

b

In a statement of cash flows, interest received from sources other than a company's investments would be classified as cash inflows from a. lending activities. b. operating activities. 3-4 c. investing activities. d. financing activities.

b

Krenshaw Company reported total sales revenue of $80,000, total expenses of $72,000, and net income of $8,000 for the year ended December 31, 2009. During 2009, accounts receivable increased by $3,000, merchandise inventory decreased by $2,000, accounts payable increased by $1,000, and $5,000 in depreciation expense was recorded. Assuming no other adjustments to net income are needed, the net cash inflow from operating activities using the indirect method was a. $19,000 b. $13,000 c. $10,000 d. $11,000

b

Lagos Corp. recorded sales of $345,000 in 2010, in addition its accounts receivable and accounts payable balances at the beginning and end of 2010 were as follows: Jan. 1, 2010 Dec. 31, 2010 Accounts Receivable $65,000 $90,000 Accounts Payable $32,000 $28,000 How much cash did Lagos collect from customers in 2010? a. $345,000 b. $320,000 c. $324,000 d. $316,000

b

Net income is equal to: a. Assets minus Liabilities b. Revenues and Gains minus Expenses and Losses c. Shareholders' Equity minus Assets d. Revenues and Assets minus Expenses and Liabilities

b

On the statement of cash flows, depreciation would be classified as? a. A financing activity. b. An operating activity. c. An investing activity. d. A noncash activity.

b

One rationale for the statement of cash flows is to a. ensure that the cash account balances at year-end. b. reconcile differences between net income and cash receipts and disbursements. c. calculate the company's free cash flow. d. examine the cash effects of income from discontinued operations, extraordinary items and changes in accounting principles.

b

The expense incurred by issuing stock options should be a. classified as a financing activity. b. added back to net income in the operating activities section. c. subtracted from net income in the operating activities section. d. does not appear in the statement of cash flows.

b

The third step in financial statement analysis is to assess the quality of the firm's financial statements. Which of the following is a question an analyst should ask when performing this step? a. Are industry sales growing rapidly or slowly? b. Do earnings include revenues that appear mismatched with the business model employed by the firm? c. Does the industry include a large number of firms selling similar products? d. What is the company's degree of geographical diversification?

b

Tinker Company reported sales revenue of $500,000 and total expenses of $450,000 (including depreciation) for the year ended December 31, 2010. During 2010, accounts receivable decreased by $5,000, merchandise inventory increased by $4,000, accounts payable increased by $6,000, and depreciation expense of $10,000 was recorded. Assuming no other data is needed and using the indirect method, the net cash inflow from operating activities for 2010 was a. $60,000 b. $67,000 c. $44,000 d. $51,000

b

When preparing the statement of cash flows using the indirect method, an increase in accounts payable would appear as a. a decrease in the operating activities section b. an increase in the operating activities section c. a use of cash in the investing activities section d. a source of cash in the investing activities section

b

When preparing the statement of cash flows using the indirect method, the sale of marketable securities would appear as a. a use of cash in the investing activities section b. a source of cash in the investing activities section c. a use of cash in the financing activities section d. a source of cash in the financing activities section

b

Which SEC form may be the best place to start learning about the economics of an industry and the particular strategy a firm has selected for competing in the industry? a. Form 8-K b. Form 10-K c. Form MD&A d. Form FSAP

b

Which financial statement for a business would you look at to determine the company's earnings performance during an accounting period? a. Balance sheet. b. Income statement. c. Statement of cash flows. d. The Management Assessment

b

Which of the following economic characteristics is consistent with a grocery store chain? a. Minimal competition b. Extensive competition c. High net income to sales d. Differentiated product

b

Which of the following economic characteristics is consistent with a pharmaceutical company? a. Low barriers to entry. b. High levels of research and development. c. Low profit margins. d. Low business risk.

b

Which of the following is a cash flow from operating activities? a. Sale of long-term investments in common stock. b. Purchase of merchandise for resale. c. Payment of a note payable. d. Sale of a piece of land no longer used in operations.

b

Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method? a. Subtract amortization expense b. subtract gain on sale of subsidiary c. add an increase in accounts receivable d. add a decrease in accounts payable

b

Which of the following is the correct formula for calculating cash collections from customers? a. sales for the period plus accounts receivable at the beginning of the period b. sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the end of the period c. sales for the period plus accounts receivable at the end of the period d. sales for the period plus accounts receivable at the end of the period minus accounts receivable at the beginning of the period

b

Which of the following statements is false? a. Purchase of equipment is an investing cash outflow. b. Sale of equipment creates investing cash outflow equal to its selling price. c. Purchase of short-term investments is an investing cash outflow. d. Purchase of a patent is an investing cash outflow.

b

Which of the following would not be a cash flow from investing activities? a. Sale of a patent. b. Collection of interest revenue on a long-term note receivable. c. Collection of principal of a note receivable. d. Purchase of long-term investments.

b

Why is the operating activities section of the statement of cash flows often believed to be the most important part of the statement? a. Because it shows the dividends that have been paid to stockholders. b. Because it indicates a company's ability to generate cash from sales to meet current cash payments for goods or services. c. Because shows the net increase or decrease in cash during the period. d. Because it gives the most information about how operations have been financed.

b

. Outback Corp. recorded sales of $1,300,000 in 2010, in addition the company's accounts receivable balance grew from $120,000 at the beginning of 2010 to $165,000 at the end of 2010. How much cash did Outback collect from customers in 2010? a. $1,300,000 b. $1,345,000 c. $1,255,000 d. $1,135,000

c

. Toro Company recognized $655,000 of cost of goods sold in 2010, in addition its implementation of a just-in-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of 2010. How much cash did Toro spend for inventory in 2010? a. $655,000 b. $980,000 c. $560,000 d. $620,000

c

A cash inflow from financing activities includes: a. receipt of interest payments. 3-8 b. proceeds from selling equipment. c. proceeds from issuance of bonds payable. d. proceeds from selling investments in equity securities of another company.

c

An example of an item that is deducted from net income when preparing the operating activities section of the statement of cash using the indirect method is a. depreciation expense. b. compensation expense related to stock option plans. c. income from an investment accounted for using the equity method. d. unrealized losses on trading investments

c

As products move through the maturity phase, companies invest to ___________ productive capacity. a. increase b. decrease c. maintain d. Not enough information to answer this question.

c

Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method? a. A sale of equipment is an investing activity; the transaction will not affect the operating activities section. b. The gain is added back to net income in the operating activities section. c. The gain is subtracted from net income in the operating activities section. d. The entire sales price is subtracted from net income in the operating activities section.

c

Lui Company's 2010 income statement reported total sales revenue of $350,000. The 2009- 2010 comparative balance sheets showed that accounts receivable increased by $20,000. The 2010 "cash receipts from customers" would be a. $270,000 b. $250,000 c. $330,000 d. $40,000

c

Normally, cash flows from financing will start using cash during which phase of the product life cycle? a. Introduction b. Growth 3-3 c. Maturity d. Decline

c

Normally, cash flows from investing activities will start providing cash during which phase of the product life cycle? a. Introduction b. Growth c. Maturity d. Decline

c

Normally, cash flows from operations will peak during which phase of the product life cycle? a. Introduction b. Growth c. Maturity d. Decline

c

Norton Company reported total sales revenue of $55,000, total expenses of $45,000, and net income of $10,000 on its income statement for the year ended December 31, 2010. During 2010, accounts receivable increased by $4,000, merchandise inventory increased by $6,000, accounts payable decreased by $2,000, and depreciation of $18,000 was recorded. Therefore, based only on this information, the net cash flow from operating activities using the indirect method for 2010 was: a. $30,000 b. $10,000 c. $16,000 d. $19,000

c

On a common size basis, which of the following assets is normally largest for an electric utility? a. Accounts receivable b. Inventory c. Property, Plant and Equipment d. Cash and Marketable Securities

c

The accrual basis of accounting recognizes a. Revenue when cash is received from customers b. Expenses when paid c. Revenue when all or a substantial portion is performed d. Revenue when contracts are signed

c

The cash basis method of accounting can be best described as: a. The recording of transactions and adjustments so that debits equal credits. b. The method that equates assets with liabilities and owners' equity. c. The method that recognizes revenue when money is received and expenses when money is paid. d. The method that matches incurred expenses with related revenues when they are earned.

c

The tools for studying industry economics does not include: a. Value chain analysis b. Classification using Porter's five forces c. Classification of cash flows d. Economic attributes framework

c

The two categories of shareholders' equity usually found on the balance sheet of a corporation are a. Contributed capital and property, plant, and equipment. b. Retained earnings and notes payable. c. Common stock and retained earnings. d. Contributed capital and equity securities

c

Under the indirect method of preparing the statement of cash flows, add backs to net income include all of the following except: a. depreciation expense b. deferred tax expense c. gains on sale of equipment d. share-based compensation

c

When assessing buyer power using Porter's five forces, which of the following is not consistent with low buyer power? a. Brand loyalty b. Control of distribution channel c. Large number of suppliers d. Low price

c

When preparing the statement of cash flows using the indirect method, the payment of dividends would appear as a. a decrease in the operating activities section b. an increase in the operating activities section c. a use of cash in the financing activities section d. a source of cash in the financing activities section

c

Which forces typically represent horizontal competition in a value chain? a. Rivalry among existing firms and supplier power. b. Potential entry and buyer power. c. Substitutes and potential entry. d. Buyer power and supplier power.

c

Which of the following economic characteristics is consistent with a commercial bank? a. Low barriers to entry. b. High levels of research and development. c. Low profit margin on lending activities. d. Low profit margin on fee-based financial services, such as merger consulting.

c

Which of the following statements about the statement of cash flows is correct? a. A purchase of equipment is classified as a cash inflow from investing activities. b. Cash dividends paid are classified as cash flows from operating activities. c. Cash dividends received on stock investments are classified as cash flows from operating activities. d. A company with a net loss on the income statement will always have a net cash outflow from operating activities.

c

Which of the following transactions would not create a cash flow? a. Payment of a cash dividend. b. The company purchased some of its own stock from a stockholder. c. Amortization of patent for the period. d. Sale of equipment at book value (i.e. no gain or loss)

c

Which of the following would not inhibit new entrants into a market? a. Existing technological expertise. b. Large required capital investment. c. Lack of rivalry among current participants. d. Existing patented technology

c

Which statement is false regarding the preparation of the indirect method of the statement of cash flows? a. An increase in merchandise inventory is subtracted from net income. b. Depreciation expense is added to net income. c. An increase in accounts receivable is added to net income. d. An increase in accounts payable is added to net income.

c

All of the following are reasons that pharmaceutical companies have higher barriers for entry than grocery stores except: a. There is lengthy government testing and approval required. b. Research and development is a lengthy and uncertain process. c. Patent protection is needed for exclusive rights. d. The largest asset is typically capital intensive Property, Plant and Equipment.

d

Free cash flows to all debt and common equity shareholders represents the excess of cash flows from a. operating activities over cash flows for financing activities b. investing over cash flows for operating activities c. investing over cash flows for financing activities d. operating activities over cash flows for investing activities

d

The second step in financial statement analysis is to identify the company strategy. Which of the following is a question an analyst should ask when performing a strategy analysis? a. Are industry sales growing rapidly or slowly? b. Do earnings include revenues that appear mismatched with the business model employed by the firm? c. Does the industry include a large number of firms selling similar products? d. What is the company's degree of geographical diversification?

d

Which financial statement would you look at to determine whether a company will be able to pay for the goods when payment is due in 30 days? a. Statementof cash flows. b. Statement of stockholders' equity. c. Income statement. d. Balance sheet.

d

Which forces typically represent vertical competition in a value chain? a. Potential entry and substitutes. b. Buyer power and rivalry among existing firms c. Supplier power and potential entry. d. Buyer power and supplier power

d

Which of the following assets would appear on the balance sheet at an amount greatly below its fair market value? a. Inventory b. Marketable securities c. Equipment d. Brand name

d

Which of the following is a question an analyst would ask when assessing the quality of a firm's financial statements? a. Are the company's products designed to meet a specific market segment? b. Has the firm integrated forward into retailing to final consumers? c. Is the firm diversified across several geographical markets? d. Do earnings include nonrecurring gains or losses?

d

Which of the following is not one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows? a. non-cash items, such as depreciation and amortization b. changes in working capital accounts c. gains and losses related to the sale of plant, property and equipment d. sale or repurchase of capital stock

d

Which of the following is nota characteristic of an extraordinary item? a. Material in amount. b. Nonrecurring. c. Unusual given the nature of the firm's activities. d. Requires a cash outflow

d

Which of the following statements is true? a. A cash dividend is an operating cash outflow. b. Cash paid to repurchase treasury stock is an investing cash outflow. c. Cash paid to acquire stock in another company is a financing outflow. d. Purchase of a patent is an investing cash outflow.

d

he primary purpose of the balance sheet is to: a. Report the current value of the business. b. Measure the net income of a business up to a particular point in time c. Report the difference between cash inflows and cash outflows for the period. d. Report the financial position of the reporting entity at a particular point in time

d

. Adophus, Inc.'s 2010 income statement reported total revenues of $850,000 and total expenses (including $40,000 depreciation) of $720,000. The 2010 balance sheet reported the following: accounts receivable beginning balance of $50,000 and ending balance of $40,000; accounts payable beginning balance of $22,000 and ending balance of $28,000. Therefore, based only on this information and using the indirect method, the 2010 net cash inflow from operating activities was a. $126,000 b. $186,000 c. $166,000 d. $174,000

b

. Kraco Corporation reported 2010 net income of $450,000, including the effects of depreciation expense of $60,000, and amortization expense on a patent of $10,000. Also, cash of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflow from operating activities using the indirect method for 2010 was a. $570,000 b. $520,000 c. $470,000 d. $440,000

b

A company in the growth phase of its product life cycle will normally have the following pattern of cash flows a. Negative cash flows from operations, negative cash flows from investing and positive cash flows from financing. b. Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing. c. Positive cash flows from operations, positive cash flows from investing and positive cash flows from financing. d. Negative or positive cash flows from operations, negative cash flows from investing and negative cash flows from financing

b

A value chain for an industry sets forth a.The layers of management the needed to be successful b. Sequence of activities involved in the creation, manufacture, and distribution of its products. c. Sequence of activities involved in a firm's research and development activities. d. Whether the industry is horizontally or vertically integrated.

b

Firms with short operating cycles will experience less of a lag between the creation and delivery of their products and the collection of cash from customers because a. their cash flow from operations will be much greater than their working capital from operations. b. their cash flow from operations will not differ much from their working capital from operations. c. their cash flow from operations will be much less than their working capital from operations. d. there will be no relation between their cash flow from operations and working capital from operations.

b