FIN 3123 Test 1 Smartbook
When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts?
Accounts receivable
Which of the following can be accomplished with financial planning?
Avoiding surprises Exploring options
True or false: Enterprise value equals total market value of the stock plus the book value of the liabilities plus cash.
False
What does a current ratio of 1.2 mean?
The firm has $1.20 in current assets for every $1 in current liabilities.
Residual value is the amount left over after paying
accounts payable bondholders other debt holders
An increase in a firm's total asset turnover will ______ the sustainable growth rate.
increase
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
increase
Changes in capital spending can be negative when the acquisition of fixed assets is ______ the sale of fixed assets.
less than
The degree of financial ________ the firm chooses determines the amount of borrowing of the firm.
leverage
The accounting equation shows that stockholders' equity equals assets ______ liabilities.
minus
The price-sales ratio is calculated as the price per ________ divided by the sales per ___________ .
share share
At the most fundamental level, firms generate _____ and spend it.
cash
The cash ratio is found by dividing ______ by current liabilities.
cash
The interval measure is useful for start-up companies because it indicates how long a company can operate until _____.
it needs another round of financing
Financial planning is a(n) _____ process.
iterative
Fill in the blank question. The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and ______ value ratios.
market
In a financial plan using the percentage of sales approach, why is it assumed that assets increase with sales?
Additional working capital and fixed assets are needed to support growth
True or false: All other things staying the same, the lower the rate of growth in sales or assets, the greater will be the need for external financing.
False
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.
False
True or false: Given external financing needs in a financial plan, the firm must borrow both long- and short-term funds.
False
Which one of the following is one way in which financial managers use a common-size balance sheet?
To track changes in a firm's capital structure
The smaller investment proposals of each operational unit are added up, and the sum is treated as one big project, which is called ____________
aggregation
Noncash items do not affect _____.
cash flow
The more debt a firm has, the greater its:
degree of financial leverage
Accounting profit ____ cash flow.
differs from
EBITDA multiple is equal to the enterprise value (divided/multiplied) by EBITDA.
divided
The __________ payout ratio is equal to the cash ___________ divided by the net income.
dividend dividends
The amount of cash the firm pays out to shareholders is the firms:
dividend policy
A common-base year financial statement presents items relative to a certain base, which is the _____.
dollar amount of each item during a common base year
A times interest earned (TIE) ratio of 3.5 times means a firm has _____ that is(are) 3.5 times greater than the firm's interest expense.
earnings before interest and taxes
The main advantage of the percentage of sales approach to producing pro forma statements is _____.
ease and practicality
The primary benefit of financial planning is that it _____.
ensures internal consistency among the firm's various goals
The debt-equity ratio expresses the total debt divided by total equity, while the _______ multiplier expresses the total assets divided by the total equity.
equity
The formula for total is total liabilities and equity minus total debt.
equity
The matching principle of GAAP requires revenues be matched with _____.
expenses
The information needed to compute the profit margin can be found on the ____.
income statement
Net working capital equals current assets ______ current liabilities.
minus
Why is it important for accounting standards to become more comparable across countries?
Increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards.
Which of the following are current assets?
Inventory Accounts receivable
A long-term liability represents a(n) _____.
debt that is not due in the coming year
The total of cash flow to creditors and cash flow to stockholders is called _____.
cash flow from assets
A firm has a total debt ratio of 0.30 times. This means the firm has ___ in total debt for every $1 in total assets.
$0.30
Weston's financial planning model shows assets are projected to increase by $2.7 million while liabilities and equity increase by $1.5 million. What is the external financing need (EFN)? Multiple choice question.
$1.2 million
A pro forma balance sheet indicates that total assets will increase by $300,000. If a debt-equity ratio of 0.5 is maintained, then debt must increase by _____.
$100,000
Which of the following is the correct representation of the cash coverage ratio?
(EBIT+ Non-cash expenses)/Interest expense
Which of the following are common elements of a financial planning model?
-Sales forecast -Pro forma statements -Economic assumptions
Which of these computes days' sales in receivables?
365/Receivables turnover
A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales.
6.8
Galting Corporation is operating at 80% of capacity. This means that the current sales level is:
80% of the full capacity sales level
Which of the following are sources of cash? (Check all that apply.)
A decrease in accounts receivable An increase in notes payable
What does stockholders' equity represent?
A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
A customer has yet to pay the bill for products purchased on credit. The seller records this debt in which balance sheet account?
Accounts receivable
The text quotes conventional business wisdom as saying that financial plans don't work, but financial planning does. What does that mean?
Because financial plans are forecasts, they seldom happen as foreseen, but they allow managers to examine goals and prioritize.
In a financial plan, how is the amount of borrowing determined?
By management
Cal's Market has return on equity (ROE) of 15 percent. What does this mean?
Cal's generated $.15 in profit for every $1 of book value of equity.
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory
Based on ROE and the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?
Dividend policy Financial policy Profit margin
The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
DuPont
Depreciation is the accountant's estimate of the cost of ______ used up in the production process.
Equipment
True or false: A deteriorating time trend in a financial ratio is always a bad sign.
False
Which of these questions can be answered by reviewing a firm's balance sheet?
How much debt is used to finance the firm? What is the total amount of assets the firm owns?
In recent years, U.S. accounting standards have become more closely tied to _____.
IFRS
How are assets on a balance sheet listed?
In order of decreasing liquidity
Which of the following are fixed assets?
Land Buildings Plant
What is a primary concern for a bank lending funds to a business for the short term?
Liquidity
Which of these are generally considered to be short-run fixed costs?
Management Salaries, Property Taxes, and Rent payments for a warehouse Rent Bond interest
How is the price-earnings (PE) ratio computed?
Market price per share / Earnings price per share
What is the equation for enterprise value?
Market value of stock + book value of liabilities − cash
How is market-to-book ratio measured?
Market value per share/Book value per share
Which of the following are traditional financial ratio categories?
Market value ratios Profitability ratios Asset management ratios
______ costs include such things as raw materials, direct labor expense, and manufacturing overhead.
Product
Which of the following is a variable cost in the short run?
Raw materials used in production
Which one of the following equations defines the total asset turnover ratio?
Sales/Total Assets
Who is entitled to the residual value of a firm's cash flows?
Shareholders
________ financial statements provide for comparison of firms that differ in size.
Standardized
What does it mean when a company reports ROA of 12 percent?
The company generates $12 in net income for every $100 invested in assets.
What does an inventory turnover ratio of 5 mean?
The entire inventory was sold and replaced 5 times during the year.
True or false: Taxes can be a large cash outflow for a corporation.
True
The cash flow identity reflects the fact that:
a firm generates cash through its various activities. cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders. cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.
Assets can be described as items that _____.
a firm owns provide market value to the firm generate revenue
Profitability measures such as return on assets (ROA) and return on equity (ROE) are ___ rates of return.
accounting
Net income refers to money earned ______.
after interest and taxes
A company's ______ tax rate is its tax bill divided by its total taxable income, and its ______ tax rate is the tax rate it pays on the next dollar of income.
average; marginal
One advantage to well-executed financial planning is that the firm can _____.
avoid surprises
In finance, the value of a firm depends on its ability to generate ______.
cash flows
Cash flow to stockholders equals ____.
dividends paid minus net new equity raised
The amount of long-term borrowing is something set by management, and it _____.
does not necessarily relate directly to the level of sales
A lack of effective long-range planning is commonly cited as a reason for _____.
financial distress
James is an owner of J & Jo Company. If he wants to find out the cash flow of his bakery, he should look into the firm's _____.
financial statements
For a ______ asset, it would be purely a coincidence if the actual market value were equal to its book value.
fixed
Costs that do not change in the short run arise because of ______.
fixed commitments
All else equal, when the rate of growth in sales or assets in a financial plan is higher, external financing needs will be
greater
It is typically assumed that total assets (increase/decrease) with increased sales because additional working capital and fixed assets are needed to support growth.
increase
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.
liquidity
_______ refers to the speed and ease with which an asset can be converted to cash.
liquidity
Total capitalization equals total equity plus total:
long-term debt
Noncash items are expenses that directly affect _____ but do not directly affect ______.
net income; cash flow
Growth, by itself, is:
not an appropriate goal
Cash generated from a firm's normal business activities is called _____.
operating cash flow
By combining common-size and base year analysis, we eliminate the effect of the _____
overall growth
The _____ ratio is equal to 1 minus the dividend payout ratio
plowback
When a company has negative earnings for an extended period of time, analysts will often resort to the:
price-sales ratio
When using pro forma statements, the financial statements are the form we use to summarize the different events _____.
projected for the future
Fill in the blank question. When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and __________ and costs.
time
The inventory ____________ is calculated as the COGS divided by the inventory.
turnover
______ costs change as the output of the firm changes.
variable
Another name for short-term financial management is ___ management.
working capital
Assume Zoe Corporation's plant capacity will allow for sales of $250 million and last year's sales were $180 million. Zoe's current gross plant and equipment total is $340 million. You project sales growth of 20% in the upcoming year.What total should you forecast for Zoe's plant and equipment on your pro forma balance sheet?
$340 million With $216 million in sales (180 X 1.2), Zoe is not at plant capacity, so it will not need to increase its plant and equipment amount to accommodate its new level of sales.
Current assets are defined as assets that can be turned into cash within ______ months.
12
Which of the following is true about the difference between the income statement and cash inflows and outflows?
Cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period. Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period. Income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS.
True or false: The financial planning process will not change from firm to firm.
False
The use of financial leverage can:
Increase the chance of financial distress and business failure. Increase the potential reward for investors. Greatly magnify both gains and losses.
Which of the following are uses of cash?
Increases in inventory Decreases in accounts payable Increases in property, plant and equipment
A financial planning model can be used to test the feasibility of a planned growth rate because it incorporates which of the following?
The asset turnover rate The firm's use of financial leverage The firm's dividend policy
What does it mean if a company's capital intensity ratio is 2.4?
The firm requires $2.40 in assets to generate $1 in sales.
Which of the following are included in the fixed asset portion of a balance sheet?
Trademarks Buildings
True or false: Free cash flow is the total of cash flow that the firm can distribute to creditors and to stockholders.
True
When constructing a pro forma income statement, the first step is to supply:
a sales figure
A balance sheet reflects a firm's ______ value on a particular date. Multiple choice question.
accounting
ROA and ROE are common and useful measures, but it is important to remember that they are _______ rates of return.
accounting
Although _________ __________ are often poor reflections of reality, they are often the best information available.
accounting numbers
A supplier may look at the size of _____ to see how promptly the firm pays its bills. Multiple choice question.
accounts payable
In the long run, ________ are variable.
all costs
Which one of these will decrease a firm's sustainable rate of growth?
an increase in the dividend payout ratio
The sustainable growth rate can be used to _____.
assess planned growth
A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.
base year; base amount
The alternative sustainable growth rate formula, where growth is equal to ROE times b, should only be applied when using total equity from the (end/beginning) of period balance sheet.
beginning
The short run is a period when there are ______ costs.
both fixed and variable
The ratio of total assets to sales is known as the _____.
capital intensity ratio
What should you keep in mind when examining an income statement?
cash versus noncash items time and costs GAAP
When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:
common-size statements
The quick ratio is computed just like the _________ ratio, except that inventory is omitted.
current
The current ratio shows the relationship between ____.
current assets and current liabilities
The cash coverage ratio adds ______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.
depreciation
The ____ ratio equals the cash dividend divided by the net income.
dividend payout
A commonly cited reason for financial failure is a lack of _____.
effective long-range planning
Given an internal growth rate of 3 percent, a firm can _____.
grow by 3 percent or less without any additional external financing
A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.
higher
Capital budgeting refers to _____.
how a firm chooses which investment opportunities to take
A(n) ________ in net profit margin will increase ROE.
increase
All else equal, a decrease in a firm's sustainable rate of growth will result from a(n) (decrease/increase) in the dividend payout ratio.
increase
All else equal, a(n) (decrease/increase) in the total asset turnover will increase ROE, and therefore sustainable growth.
increase
An increase in the profit margin, all else equal, will (decrease/increase) ROE.
increase
If a firm increases its debt-equity ratio it will _____ its sustainable rate of growth.
increase
Which one of these will decrease a firm's sustainable rate of growth?
increase in the dividend payout ratio
The times interest earned ratio equals EBIT divided by ________-
interest
Cash flow to creditors is equal to _____.
interest paid less net new borrowing
The _______ growth rate tells us the maximum growth rate that can be achieved with no external financing of any kind.
internal
Assets are recorded at historical cost, not market value, because _____.
it is hard to keep up with the market value
The price-earnings (PE) ratio is a ______ ratio.
market value
The ___________ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service.
matching
The aggregation process determines the total _____.
needed investment
The difference between the total assets and total liabilities is shareholders' or _________equity
owners
A positive operating cash flow indicates that the firm is generating enough cash to ______.
pay operating costs
One of the main things financial ___________ accomplishes is to force managers to think about goals and establish priorities.
planning
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ____.
plus depreciation
Which of the following items are among the items used to compute the current ratio?
price-sales ratio accounts payable cash
Fill in the blank question. Some financial ratios are based on the market price per share of stock, which is information not contained in the financial statements. As a result, these measures can only be directly calculated for __________ traded companies.
publicly
Another name for the plowback ratio is the _________ ratio.
retention
The main advantage of the percentage of ___________ approach is that it is a quick and practical way of generating pro forma statements.
sales
The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with ____ and those that do not.
sales
The short run for a firm is the period of time during which ______.
some costs are fixed output can vary
If a firm maintains a constant debt-equity ratio and does not use any new external equity financing, the firm can grow at a rate no greater than its _____.
sustainable growth rate
Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator.
total equity
