Analyzing Financial Statements (Final Study Guide)
What is the amount of cash after external financing or actual change in cash if Greebes Inc. has cash from sales of $600,000 for the fiscal year 20x6 fiscal year; a cash balance of $160,000 at 12/31/20x5; and a cash balance of $360,000 at the end of 12/31/20x6? a- $200,000 b- $850,000 c- $920,000 d- $1,120,000
a- $200,000 (beginning cash of $160,000 - ending cash balance of $360,000) Chapter 10-UCA format compared with SCF
Which statement correctly describes a similarity between a personal financial statement (PFS) and a business financial statement (BFS)? a- Both PFS and BFS records current assets in order of liquidity b- Both PFS and BFS record all assets at current market values c- Both PFS and BFS separate liabilities into current and long-term d- Both PFS and BFS are based on the same generally accepted accounting principles
a- Both PFS and BFS record in order of liquidity (chapter 12- asset analysis)
Which income item on a personal tax return can give a business banker an idea of the average level of deposits during the year? a- Interest income based on current market rates b- Capital gains based on the cost basis of the asset c- Wages and salaries d- Dividend income based on current stock yields
a- Interest income based on current market rates (chapter 14-personal tax returns)
Which component is excluded from the personal tax returns submitted to the Internal Revenue Service? a- Schedule K-1 (form 1065) b- Form 1040 c- Schedule E d- Form 6252
a- Schedule K-1 (form 1065) chapter 14-key uses of personal tax returns and common forms
Which statement identifies a unique feature of a contingent claim or a contingent liability? a- A contingent liability involves an amount that is already a direct obligation b- A contingent claim goes beyond the face amount of a loan guarantee c- A contingent claim does not consider underlying collateral values supporting a loan d- A contingent liability affects a person's reported net worth
b-A contingent claim goes beyond the face amount of a loan guarantee (chapter 15-global cash flow computation)
What is the amount of cash from sales for the 20x6 fiscal year if Greebes Inc. has the following partial cash flow data for that fiscal year: Net Sales of $525,000; decrease in Accounts Receivable of $25,000; and increase in Accounts Payable of $10,000? a- $500,000 b- $525,000 c- $550,000 d- $560,000
c- $550,000 (net sales of $525,000 + decrease in accounts receivable of $25,000 = $550,000) chapter 9-cash from sales
Borrowers, investors, and lenders often differ on how they look at or evaluate loan repayment. Which perspective is most closely associated with a lender? a- Loans are evaluated based on collateral value and liquidity. b- Loans are evaluated based on the long-term profitability of the business. c- Loans are evaluated based on the availability of cash for repayment. d- Loans are evaluated based on the strength of the guarantor.
c- Loans are evaluated based on the availability of cash for repayment (chapter 9-why bankers focus on cash flows)
What is the ending balance of cash for the current years if Greebes Inc. has the following totals from its traditional statement of cash flows: Beginning Cash of $160,000 for the current year; Cash from Operations of $70,000; Cash from Investing Activities of negative $20,000, and Cash from Financing Activities of $150,000? a- $200,000 b- $220,000 c- $240,000 d- $360,000
d- $360,000 (beginning cash of $160,000 + cash from operations of $70,000 - cash from investing activities of $20,000 + cash from financing activities of $150,000) chapter 9-statement of cash flows, indirect method
Which listed event affects both the Operating Activities and Investing Activities sections of a traditional statement of cash flows that was prepared using the indirect method? a- Proceeds from sale of stock b- Repurchase of existing stock of company c- Repayment of debt d- Sale of fixed assets for a gain or loss
d- Sale of fixed assets for a gain or loss (The gain or loss appears in the operating activities section and the actual cash proceeds from the sale will appear in the investing activities section) chapter 9-cash flows from financing activities-indirect method
What is the individual's unsecured debt ratio if he has consistent monthly income of $15,000; annual unsecured debt service of $5,000; total assets of $550,000; secured debt of $426,000; and total liabilities of $444,000? a- 1.0% b- 2.8% c- 10% d- 95.9%
C- 10% total unsecured debt/annual income=unsecured debt ratio (unsecured debt = total liabilities - total secure debt) chapter 13-unsecured debt ratio
When comparing the cash budget and a pro forma income statement, which line item is a unique feature of the pro forma income statement? a- Depreciation for the budget year b- Current cash available c- Sales earned d- Expenses incurred
a- Depreciation for the budget year (chapter 11-cash budget and pro forma income statement)
Which term represents the actual dollar amount of global cash flow available to service additional debt? a- Excess global cash flow after debt service b- Excess net personal cash flow available for debt service c- Excess global annual debt service d- Excess business cash flow available for debt service
a- Excess global cash flow after debt service (chapter 15- calculating global cash flow)
A debt-to-income ratio allows a lender to compare current income to existing debt service. What else can be determined from the DTI of an individual? a- How much additional debt can be supported b- What income items are nonrecurring c- How debt amounts compare to net worth d- How marketable are assets
a- How much additional debt can be supported (chapter 13-debt to income ratio)
Which statement correctly identifies a justification for obtaining global cash flow? a- It is difficult to separate a small business and its owner on a financial basis in many lending situations b- Global cash flow is larger than business cash flow and will improve the likelihood of loan approval c- Small business financial statements and personal financial statements cannot be prepared separately d- Global cash flow will allow for loan requests from a small business and its owner to be combined and reduce the amount of analysis required
a- It is difficult to separate a small business and its owner on a financial basis in many lending situations (chapter 15-why is global cash flow needed)
Which net worth computation is of primary importance to a lender when a loan to a firm is being guaranteed by the owner of that firm? a- Outside net worth b- Stated net worth c- Adjusted net worth d- Global net worth
a- Outside net worth (chapter 13-outside net worth)
Which statement correctly states a difference between the direct method and the indirect method of the traditional statement of cash flows? a- The direct method reports a major item in the operating activities section called cash received from customers and the indirect method does not b- The direct method shows different totals for cash from operating activities than that derived using the indirect method c- The direct method reports a major item in the operating activities section called deprecation or amortization and the indirect method does not d- The direct method shows gains or losses on the sale of fixed assets as a separate line item in the operating activities section and the indirect method does not
a- The direct method reports a major item in the operating activities section called cash received from customers and the indirect method does not (chapter 9-statement of cash flows, direct method)
What statement is a correct conclusion about Greebes, Inc.'s financing needs for the 20x6 fiscal year if the firm had gross cash profit of $195,000; cash after debt amortization (CADA) of $100,000; and total long-term investments of $95,000? a- The firm had a financing surplus of $5,000 for the 20x6 fiscal year b- The firm had a financing surplus of $25,000 for the 20x6 fiscal year c- The firm had a financing surplus of $95,000 for the 20x6 fiscal year d- The firm had a financing requirement of $5,000 for the 20x6 fiscal year
a- The firm had a financing surplus of $5,000 for the 20x6 fiscal year (since the total ling-term investments were less than the CADA) chapter 10-UCA calculations using the direct method
Assuming a lender is operating with a 40% DTI guideline, what is the maximum additional monthly debt service that can be allowed if an individual has current assets of $700,000; total assets of $2,000,000; current liabilities of $75,000; total liabilities of $1,200,000; monthly gross income of $40,000; and monthly debt service of $5,000? a- $0 b- $11,000 c- $16,000 d- $21,000
b- $11,000 (monthly income x 40% - existing debt service = $40,000 x 40% - $5,000 = $16,000 - $5,000 = $11,000)
What is the individual's total net worth if she has marketable securities of $200,000; retirement assets of $350,000; total assets of $1,500,000; current liabilities of $87,500; and total liabilities of $1,100,000? a- $312,500 b- $400, 00 c- $800,000 d- $950,000
b- $400,000 total net worth=total assets $1,500,000 - total liabilities $1,100,000 (chapter 12-net worth)
What is the Cash After Debt Amortization (CADA) for 20x6 if Greebes Inc. has the following partial cash flow data for the 20x6 fiscal year; net Cash Income of $100,000; Current Maturity of Long-Term Debt (CMLTD) at the end of 20x5 of $40,000; and CMLTD at the end of 20x6 of $30,000? a- $30,000 b- $60,000 c- $70,000 d- $90,000
b- $60,000 (net cash income of $100,000 - the CMLTD of $40,000 from the prior year, not the current year) chapter 9-UCA calculations using the direct method
What is the individual's adjusted net worth (ANW) if the following items appear on her personal financial statement: Total Assets of $2,000,000; Total Liabilities of $650,000; Assets include a privately held business valued at $550,000 without an appraisal or valuation method disclosed; Amounts Due from the same business of $150,000; Cash of $40,000; Cash Surrender Value of Life Insurance of $20,000 that is not pledged; and Listed Securities of $100,000 that are traded on a major stock exchange and valued at current market price at date of the financial statements? a- $450,000 b- $650,000 c- $800,000 d- $1,350,000
b- $650,000 (adjusted net worth derived by $1,350,000 - $550,000 - $150,000) chapter 13-adjusted net worth
How much is projected accounts receivable for the current year if projected days accounts receivable is 45 days and project credit sales total $700,000? a- $15,555 b- $86,301 c- $315,000 d- $567,777
b- $86,301 (projected accounts receivable x projected credit sales / 365)
How much is Global Debt Service Coverage (GDSC) if Global Cash Flow Available for Debt Service is $25,000; Business Debt Service is $15,000; and Personal Debt Service is $10,000? a- 0.0x b- 1.0x c- 1.67x d- 2.5x
b- 1.0x [divide total personal & business debt $25,000 ($15,000 + $10,000) by cash flow available for debt service $25,000]
What is the individual's liquidity ratio if she has the following assets listed on her personal financial statements: cash of $7,000; marketable securities of $5,000; investment real estate of $500,000; cash surrender value of life insurance of $18,000; and other personal assets of $200,000? a- 1.6% b- 4.1% c- 16% d- 41%
b- 4.1% liquid assets/total assets (liquid assets= cash + marketable securities + cash surrender value of life insurance) chapter 13-liquidity ratios
For which business legal structure is the global cash flow analysis least beneficial? a- A large privately held C Corporation b- A large publicly traded C corporation c- A large S corporation d- A large partnership comprised of attorneys
b- A large publicly traded C corporation (chapter 15- global cash flow computation)
Under the UCA cash flow model, which term identifies the difference between cash from operating expenses and gross cash profit? a- Actual change in cash b- Cash operating profit c- Net cash income d- Net cash after operations (NCAO)
b- Cash operating profit (chapter 9- UCA format compared to SCF)
In situations where a person has a minority ownership in a business, what will a global cash flow analysis generally include? a- Full credit for the entire undistributed earnings of the business b- Credit only for distributions (net of contribution) from the business c- All of the debt service of the business, including any contingent liabilities of the business d- Only wages and salaries received by the person from the business
b- Credit only for distributions (net of contribution) from the business (chapter 15- global cash flow computation)
Which method of preparing the traditional statement of cash flows clearly shows cash received from customers for a given fiscal period? a- Indirect method b- Direct method c- Profitability method d- Accrual method
b- Direct method (chapter 9-statement of cash flows-indirect method)
Why is interest expense added back to the reported income from rental real estate when developing cash flow? a- Interest expense is a noncash expense b- It prevents double counting with debt service c- Interest expense is only partially deductible d- The interest payments go to an escrow account
b- It prevents double counting with debt service (chapter 14- personal cash flow)
Which listed event appears in the Financing Activities section of the traditional statement of cash flows? a- Dividend income from long-term investments securities b- Proceeds from issuance of long-term debt c- Profit from sale of equipment d- Cash from sale of receivables
b- Proceeds from issuance of long-term debt (Chapter 9-statement of cash flows-direct method)
Which statement correctly identifies a difference between the UCA cash flow model and the traditional cash flow model? a- The UCA cash flow model has more major categories than the traditional cash flow model. b- The UCA model does not include CMLTD from the prior year end in the computation of financing cash flow as does the traditional cash flow model. c- The traditional cash flow does not include Dividend Payments in the financing category as does the UCA cash flow model. d- The traditional cash flow does not include cash from sale of fixed assets as does the UCA cash flow model.
b- The UCA model does not include CMLTD from the prior year end in the computation of financing cash flow as does the traditional cash flow model. (chapter 9-UCA format compared to SCF)
Why is the concept of outside net worth important when assessing the financial strength of a business loan guarantor? a- Net worth is important as a source of collateral b- Value assigned to the borrowing business will likely be negligible in a problem loan situation c- Value assigned to the borrowing business is not likely to be inflated d- Lower net worth will improve the unsecured debt ratio
b- Value assigned to the borrowing business will likely be negligible in a problem loan situation (chapter 13- outside net worth)
What should the amount of a required short-term loan be if Greebes Inc.'s cash budget for 20x6 shows total cash receipts of $170,000; total cash paid out of $175,000; and a minimum cash balance requirement of $15,000? a- $10,000 b- $15,000 c- $20,000 d- $190,000
c- $20,000 sum of the net cash position of a negative $5,000 and the minimum cash of $15,000 (chapter 10-cash budget analysis)
What is the individual's net personal cash flow available for debt service if her personal tax return and financial statement report wages and salaries of $95,000; nontaxable interest income of $1,000; taxable interest income of $500; nonrecurring capital gain of $9,000, showing cash proceeds of $5,000; rental real estate net profit of $6,500; real estate interest expense of $3,500; and annual living expenses of $42,500? a- $60,500 b- $73,000 c- $64,000 d- $43,000
c- $64,000 net worth is difference between total assets (wages, nontaxable interest income, taxable interest income, rental RS net profit, RS interest expense) and total liabilities (chapter 14-net personal cash flow)
Which statement describes how to correctly derive the beginning cash for a 20x6 cash budget? a- Beginning cash is derived by averaging cash balances from at least the last three years b- Beginning cash is derived from the cash from financing section of the statement of cash flows c- Beginning cash is derived from the actual ending cash on the firm's balance sheet at the end of the 20x5 fiscal year d- Beginning cash is derived from the ending cash balance on the firm's balance sheet at 20x6
c- Beginning cash is derived from the actual ending cash on the firm's balance sheet at the end of the 20x5 fiscal year (chapter 10-cash budget analysis)
What should you expect to see on an individual's properly prepared personal financial statement (PFS) if she has $250,000 of equity in a privately held business? a- Current liabilities on her PFS must be at least $250,000 b- Marketable securities on her PFS must be at least $250,000 c- Non-readily marketable security must be at least $250,000 d- net worth cannot be more than $250,000
c- Non-readily marketable security must be at least $250,000 (Equity in a privately held business should be classified as non-readily marketable security on a personal financial statement) chapter 12-analyzing balance sheet
Which financial statement best identifies the cause, timing, and magnitude of a company's future peak borrowing needs and repayment capabilities on short-term debt? a- Pro Forma Statement of cash flows b- Pro Forma income statement c- Pro Forma cash budget d- Pro Forma cash account
c- Pro Forma cash budget (chapter 10-analyzing cash budgets)
What kind of financial statements is a business banker analyzing if, along with the dependability of the firm's performance, the banker is particularly focused on the statement's assumption and any internal or external factors that may affect them? a- Historical financial statements b- Internally prepared financial statements c- Pro Forma financial statements d- Audited financial statements
c- Pro Forma financial statements (chapter 11-considerations for constructing and reviewing projections)
Which listed financial statement shows cash inflow and outflow but not the peaks or low points of debt or cash during a given fiscal period? a- Cash budget b- Pro Forma income statement c- Pro Forma statement of cash flows d- Pro Forma balance sheet
c- Pro Forma statement of cash flows (chapter 9-overview of cash flow statements and reports)
For the sale of assets that generates capital gains or losses, what should a business banker determine when developing a personal cash flow? a- Whether added debt will require too much of current income. b- Accumulated depreciation taken on the asset. c- Proceeds net of any debt repaid. d- Marketability of assets.
c- Proceeds net of any debt repaid (and one of the items is the sale of assets that generate capital gains or losses-chapter 14-personal cash flow)
How is a consumer debt-to-income (DTI) ratio different from a business debt service coverage (DSC) ratio? a- A consumer DTI usually is based on net income after income taxes and living expenses while a business DSC is not. b- A business DSC usually is based on gross income prior to income taxes and operating expenses and a consumer DTI is not. c- Target levels for a business DSC usually are 1.25x or higher while target levels for a consumer DTI ratio generally are 40% or lower. d- A business DSC usually is developed using monthly income and monthly debt service while a consumer DTI is not.
c- Target levels for a business DSC usually are 1.25x or higher while target levels for a consumer DTI ratio are generally 40% or lower.
When analyzing personal expenditures, what question should a business banker address? a- Is reported income verifiable? b- Are loans to officers subordinated to other obligations? c- What are the terms of any debt payments? d- What income items are recurring?
c- What are the terms of any debt payments (chapter 12-analyzing personal expenditures)
Why are contingent liabilities important for a business banker to understand? a- They affect the amount of the individual's current net worth, regardless of size b- They affect marketability of assets c- They may impair an individual's ability to service debt if they are large as compared to income d- They are not dischargeable in bankruptcy
c-They may impair an individual's ability to service debt if they are large as compared to income (chapter 12- contingent liabilities)
Which statement is correct regarding the relation between gross wages and cash flow from business interest? a- Gross wages are always increased by cash flow from business interests b- Gross wages have no relationship to cash flow from business interests c- Gross wages are always decreased by cash flow from business interests d- Gross wages are decreased by cash flow from business interests if sole proprietorship income is negative even after adjusting for depreciation
d- Gross wages are decreased by cash flow from business interests if sole proprietorship income is negative even after adjusting for depreciation (chapter 14- personal cash flow available for debt service)
Which list correctly includes all the financial statements needed to prepare a traditional statement of cash flow for the current year? a- Balance sheets for the current year, balance sheet for the prior year b- Balance sheet for the current year, income statement for the current year c- Income statement for the current and prior years, balance sheet for the current year d- Income statement for the current year, balance sheets for the prior year, and balance sheet for the current year
d- Income statement for the current year, balance sheets for the prior year, and balance sheet for the current year (chapter 9-overview of cash flow statements and reports)
How do pro forma financial statements differ from historical financial statements? a- Pro forma financial statements will disclose revenues that have not yet been earned, while historical financial statements never disclose revenue that has not yet earned. b- Historical financial statements emphasize expected cash inflows and outflows, while pro forma financial statements emphasize actual cash inflows and outflows. c- Pro forma financial statements focus on past financial performance and position, while historical financial statements focus on future performance and position. d- Pro forma financial statements are based primarily on assumptions regarding the future while historical financial statements are not based primarily on assumptions.
d- Pro forma financial statements are based primarily on assumptions regarding the future while historical financial statements are not based primarily on assumptions. (chapter 11-pro forma financial statements)
Which tax return form or schedule is not submitted along with the personal tax return, but is important for a lender to obtain for determining cash flow? a- Form 4797 b- Form 4262 c- Schedule C d- Schedule K-1
d- Schedule K-1 (chapter 14- personal tax returns)
Which statement is a correct conclusion about Greebes Inc. ability to generate cash if the firm has a cash coverage ratio of 0.25x for 20x6? a- The firm was unable to generate enough cash from operations to pay for the principal portion only of its debt. b- The firm was able to generate enough cash from operations to pay for the interest portion only of its debt c- The firm was able to generate enough cash from operations to cover its operating expenses d- The firm was unable to generate enough cash from operations to pay for both the prior year's CMLTD and current year's interest expense.
d- The firm was unable to generate enough cash from operations to pay for both the prior year's CMLTD and current year's interest expense. (chapter 10-cash coverage ratio)
Which situation would benefit most from a cash budget? a- When a business banker is considering a long-term loan request from a large borrower b- When a business banker is considering a loan request from a a start-up company in the early months of its operations c- When a business banker is considering a long-term loan request d- When a business banker is considering a short-term loan request from a borrower with seasonal borrowing needs
d- When a business banker is considering a short-term loan request from a borrower with seasonal borrowing needs (chapter 10- uses of cash budgets)
Which item will have the same value on both the cash budget and the Pro Forma balance sheet for the same fiscal period? a- Cash received from customers b- Principal payment on debt c- Planned purchase of fixed assets d- Cash balance at the end of the fiscal period
d- cash balance at the end of the fiscal period (chapter 11-cash budget and pro forma financial statement)