FIN 445 Test 2 Master
An outflow of cash would result from which of the following? The decrease in an asset account other than cash. The increase in an equity account. The decrease in a liability account. The increase in a liability account.
The decrease in a liability account.
An inflow of cash would result from which of the following? The increase in an asset account other than cash. The decrease in a liability account. The decrease in an equity account. The decrease in an asset account other than cash.
The decrease in an asset account other than cash.
How is it possible for a firm to be profitable and still go bankrupt? Earnings have increased more rapidly than sales. The firm has positive net income but has failed to generate cash from operations. Sales have not improved even though credit policies have been eased. Net income has been adjusted for inflation.
The firm has positive net income but has failed to generate cash from operations.
Which method of calculating cash flow from operations requires the adjustment of net income for deferrals, accruals, noncash, and nonoperating expenses? The indirect method. The direct method. inflow method. The outflow method.
The indirect method.
Which statement is true for gains and losses from capital asset sales? They are included in cash flows from financing activities. They are included in cash flows from investing activities. They are included in cash flows from operating activities. They do not affect cash and are excluded from the statement of cash flows.
They are included in cash flows from investing activities.
Which of the following measure solvency? Debt to assets Current liabilities to net worth Times interest earned All of the above A & C
Times interest earned
If a company has an ROE less than the industry average and ROA greater than the industry average, it has a lower then industry average amount of debt in its capital structure. True False
True
In the sustainable growth model, 1-PO measures how much of earnings the firm retains in the firm. True False
True
Profit margin measures the number of pennies of profit for each $ of revenue. True False
True
Using the indirect method, what is net cash flow from financing activities? $15,000 $17,000 ($14,000) ($15,000)
$15,000
Using the indirect method, what is net cash flow from investing activities? ($14,000) ($16,000) $21,000 $14,000
($14,000)
Using the indirect method, what is the change in cash? $2,000 ($2,000) $3,000 ($3,000)
($2,000)
Using the indirect method, what is net cash flow from operating activities? $5,000 $13,000 ($3,000) ($1,000)
($3,000)
If an undertrader wants to improve its financial condition, it could -Sell-off excess facilities in non-growing divisions -Increase its prices -A & C -Stimulate sales growth
-A & C
What is the likely impact on the effect ratios from an increase in the collection period? -If the receivables are financed with short-term debt, both the quantity and quality of liquidity would deteriorate -If the receivables are financed with cash, only the quality of liquidity would deteriorate -If the receivables are financed with long-term debt, only leverage would deteriorate -A & C
-A & C
When the inventory turnover ratio becomes low and the firm uses cash to finance any changes on the balance sheet, this will cause which of the following problems? -All of the above -Leverage will increase -Quality of liquidity will decrease -Quantity of liquidity will decrease -A and C
-A and C
What is a common-size balance sheet? -A statement that is common to an industry. -A statement that expresses each asset account on the balance sheet as a percentage of total assets and each liability account on the balance sheet as a percentage of total liabilities. -A statement that expresses each account on the balance sheet as a percentage of total assets. -A statement that expresses each account on the balance sheet as a percentage of net income.
-A statement that expresses each account on the balance sheet as a percentage of total assets.
Which of the following liabilities would be included in the current liabilities section on the balance sheet? -Current maturities of long-term debt, additional paid-in capital, pension obligations. -Accounts payable, short-term debt, unearned revenues. -Capital lease obligations, notes payable, common stock. -Accrued liabilities, deferred credits, retained earnings.
-Accounts payable, short-term debt, unearned revenues.
EBITDA DuPont Analysis attempts to reduce the effects of outside influences of -Taxes -Interest -Depreciation -All of the above
-All of the above
What does the retained earnings account measure? -Cash held by the company since its inception. -Payments made to shareholders in the form of cash or stock dividends. -Financial resources currently available to satisfy financial obligations. -All undistributed earnings.
-All undistributed earnings.
Which of the following are NOT inputs to the DuPont System ROE -ROA -Equity Multiplier -Profit Margin -Asset Growth
-Asset Growth
What is the balancing equation for the balance sheet? -Revenues - Expenses = Net income. -Assets = Liabilities + Stockholders' equity. -Assets + Liabilities = Stockholders' equity. -Assets + Stockholders' equity = Liabilities.
-Assets + Liabilities = Stockholders' equity.
Which of the following assets would be classified as current assets on the balance sheet? -Cash equivalents, inventory, prepaid expenses. -Cash, accounts payable, deferred income taxes. -Accounts receivable; prepaid expenses; property, plant and equipment. -Inventory, goodwill, unearned revenue.
-Cash equivalents, inventory, prepaid expenses.
What accounts are most likely to be found in the stockholders' equity section of the balance sheet? -Common stock, retained earnings, dividends payable -Common stock, additional paid-in capital, liabilities -Common stock, additional paid-in capital, retained earnings -Common stock, long-term debt, preferred stock
-Common stock, additional paid-in capital, retained earnings
How is goodwill evaluated? -Goodwill must be amortized over a 40-year period. -Goodwill should be written up each year. -Companies should determine whether goodwill has lost value, and if so, the loss in value should be written off as an impairment expense. -Goodwill is to be written off at the end of the tenth year.
-Companies should determine whether goodwill has lost value, and if so, the loss in value should be written off as an impairment expense.
If a firm increases its planned fixed asset purchases, its sustainable growth rate will. -Decrease -No Change -Increase
-Decrease
Which statement is false? -Deferred taxes arise when taxes actually paid are less than tax expense reported in the financial statements. -Deferred taxes are the product of temporary differences in the recognition of revenue and expense for taxable income relative to reported income. -Temporary differences causing the recognition of deferred taxes may arise from the methods used to account for items such as depreciation, installment sales, leases, and pensions. -Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes.
-Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes.
A company's receivables conversion period increased by 5 days and its payables deferral period increased by 5 days. Its cash conversion period will increase. -True -False
-False
A large ratio of inventory to working capital (relative to the industry average) generally suggests that the quality of liquidity is good. -True -False
-False
The Equity Multiplier measures cost control. -True -False
-False
The causal ratios tell us whether or not a firm has a problem. -True -False
-False
The quick ratio measures the quality of liquidity. -True -False
-False
What does the balance sheet summarize for a business enterprise? -Financial position at a point in time. -Operating results for a period. -Financing and investment activities for a period. -Profit or loss at a point in time.
-Financial position at a point in time.
A firm has a low or negative profit margin. Which of the following would be potential solutions? -If the firm has declining sales, the firm should purchase additional assets. -If the firm has declining sales, the firm should increase costs. -If the firm has declining sales, the firm should try to generate more sales. -If the firm has declining sales, the firm can raise prices.
-If the firm has declining sales, the firm should try to generate more sales.
A company's collection period increases. Any changes on the balance sheet are financed by short-term debt. Its receivables to working capital ratio will? -No Change -Increase -Decrease
-Increase
All else constant, if a company's payables period decreases, its cash conversion cycle will? -Decrease -No change -Increase
-Increase
All else constant, when daily cash operating expenses decrease, the defensive interval will? -Decrease -No change -Increase
-Increase
If a company begins to collect its receivables slower, its cash conversion period will likely ... -Decrease -No Change -Increase
-Increase
If a firm adds external equity financing, its sustainable growth rate will. -Decrease -Increase -No Change
-Increase
If sales increase, spontaneous assets will. -Decrease -No Change -Increase
-Increase
If sales increase, spontaneous liabilities will. -Decrease -Increase -No Change
-Increase
If the current ratio dropped from 2.5 to 2.0 and the quick ratio decreased from 1.5 to 1.0, what would have likely occurred? -Inventory increased relative to other current accounts -Inventory decreased relative to other current accounts -The company replaced long term debt with common stock -None of the above -Receivables decreased relative to other accounts
-Inventory increased relative to other current accounts
Why would a company switch to the LIFO method of inventory valuation? -By switching to LIFO, reported earnings will be higher. -A new tax law requires companies using LIFO for reporting purposes also to use LIFO for figuring taxable income. -LIFO produces the largest cost of goods sold expense in a period of inflation and thereby lowers taxable income and taxes. -A survey by Accounting Trends and Techniques revealed that the switch to LIFO is a current accounting "fad."
-LIFO produces the largest cost of goods sold expense in a period of inflation and thereby lowers taxable income and taxes.
What are three major cost flow assumptions used by U.S. companies in valuing inventory? -LIFO, FIFO, actual cost -LIFO, FIFO, average market -LIFO, FIFO, average cost -LIFO, FIFO, double-declining balance
-LIFO, FIFO, average cost
What type of firm generally has the highest proportion of fixed assets to total assets? -Wholesalers -Manufacturers -Retailers and wholesalers -Retailers
-Manufacturers
Which of the following would be classified as long-term debt? -Accounts payable, bonds, obligations under leases -Mortgages, current maturities of long-term debt, bonds -Mortgages, long-term notes payable, bonds due in 10 years -Accounts payable, long-term notes payable, long-term warranties
-Mortgages, long-term notes payable, bonds due in 10 years
Which of the following measures the extent to which a company's sales volume is supported by invested capital (equity)? -Fixed assets to net worth -Net sales to net worth -Net sales to inventory -Miscellaneous assets to net worth
-Net sales to net worth
Which of the following may indicate liquidity problems in high sales growth companies earlier than other liquidity ratios? -Net sales to working capital -Short-term debt to equity -Quick ratio -Current ratio
-Net sales to working capital
The inventory turnover ratio of a company decreased. Any needed financing came from the company's cash account. The current ratio will? -Increase -Decrease -No Change
-No Change
What do the quantity of liquidity ratios measure? -How long the company can survive on its present amount of liquidity. -The composition of liquidity -Proportionally how much liquidity is on the balance sheet. -The ability of the company to afford debt.
-Proportionally how much liquidity is on the balance sheet.
What type of firm generally has the highest proportion of inventory to total assets? Group of answer choices -Wholesalers -Manufacturers -Service-oriented firms -Retailers
-Retailers
Which of the following are NOT inputs to the sustainable growth model? -Change in fixed assets -Return on assets -Spontaneous assets -Profit margin
-Return on assets
Which of the following items could cause the recognition of accrued liabilities? -Salaries, interest expense, interest income -Sales, taxes, interest income -Sales, interest expense, rent -Salaries, rent, insurance
-Salaries, rent, insurance
Assuming a period of inflation, which statement is true? -The FIFO method understates cost of goods sold on the income statement. -The FIFO method understates balance sheet inventory. -The LIFO method overstates balance sheet inventory. -The LIFO method understates cost of goods sold on the income statement.
-The FIFO method understates cost of goods sold on the income statement.
What does the additional paid-in capital account represent? -The difference between the par and the stated value of common stock. -The amount by which the original sales price of stock exceeds the par value. -The market price of all common stock issued. -The price changes that result for stock trading subsequent to its original issue.
-The amount by which the original sales price of stock exceeds the par value.
What items should be calculated when analyzing the accounts receivable and allowance for doubtful accounts? -The growth rates of all assets and liabilities. -The growth rates of sales and inventories. -The common-size balance sheet. -The growth rates of sales, accounts receivable, and the allowance for doubtful accounts, as well as the percentage of the allowance account relative to the total or gross accounts receivable.
-The growth rates of sales, accounts receivable, and the allowance for doubtful accounts, as well as the percentage of the allowance account relative to the total or gross accounts receivable.
Why is the method of valuing inventory important? -The inventory valuation method chosen determines the value of inventory on the balance sheet and the cost of goods sold expense on the income statement, two items having considerable impact on the financial position of a company. -Inventories always account for more than 50% of total assets and therefore have a considerable impact on a company's financial position. -Companies desire to use the inventory valuation method that minimizes the cost of goods sold expense. -Inventory valuation is based on the actual flow of goods.
-The inventory valuation method chosen determines the value of inventory on the balance sheet and the cost of goods sold expense on the income statement, two items having considerable impact on the financial position of a company.
Which of the following measure solvency? -Debt to assets -Current liabilities to net worth -Times interest earned -All of the above -A & C
-Times interest earned
Asset turnover measures how well the company is using assets to generate sales. -True -False
-True
Profit margin measures the number of pennies of profit for each $ of revenue. -True -False
-True
Sometimes a company can offset its financial problem by doing other things well. This is called developing a compensating advantage. -True -False
-True
The only quick-fix for a company with a high fixed assets to net worth ratio is to raise external equity. -True -False
-True
Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities? Inventory. Prepaid expenses. Accounts receivable. All of the above.
All of the above.
Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities? The amount by which equity income recognized exceeds cash received. Depreciation expense for the period. The change in deferred taxes. All of the above.
All of the above.
Why has cash flow from operations become increasingly important as an analytical tool? Inflation has distorted the meaningfulness of net income. Firms may have uncollected accounts receivable and unsalable inventory on the books. High interest rates can put the cost of borrowing to cover short-term cash needs out of reach for many firms. All of the above.
All of the above.
Which of the following statements is false? An increase in accounts payable represents accounts not yet collected in cash. To obtain cash flow from operations, the reported net income must be adjusted. A negative cash flow can occur in a year in which net income is positive. An increase in accounts receivable represents accounts not yet collected in cash.
An increase in accounts payable represents accounts not yet collected in cash.
What are internal sources of cash? Cash inflows from investing activities. Cash inflows from operating activities. Cash inflows from financing activities. All of the above.
Cash inflows from operating activities.
Use the following table to answer the question: Company 1 should focus on cost control to raise ROA to the industry average. Company 2 should focus on cost control to raise ROA to the industry average. Company 2 should focus on leverage to raise ROA to the industry average. Company 1 should focus on asset utilization to raise ROA to the industry average.
Company 1 should focus on cost control to raise ROA to the industry average.
If a firm increases its payout rate, its sustainable growth rate will. Decrease Increase No Change
Decrease
Which of the following are the amount of additional long-term funds needed from external debt or equity sources? Sales growth External funds needed Payout ratio Profit margin
External funds needed
A company's receivables conversion period increased by 5 days and its payables deferral period increased by 5 days. Its cash conversion period will increase. True False
False
A large ratio of inventory to working capital (relative to the industry average) generally suggests that the quality of liquidity is good. True False
False
The Equity Multiplier measures cost control. True False
False
The quick ratio measures the quality of liquidity. True False
False
What type of accounts are notes payable and current maturities of long-term debt? Cash accounts. Operating accounts. Investing accounts. Financing accounts.
Financing accounts.
How would the repayment of debt principal be classified? Financing outflow. Operating inflow. Investing inflow. Operating outflow.
Financing outflow.
Which of the following statements is false? The statement of cash flows shows how cash has been generated and how it has been used for an accounting period. Firms only have financial difficulties when both the net income and cash flow from operations are negative. The statement of cash flows is prepared by calculating changes in all balance sheet accounts. Understanding how to prepare a statement of cash flows helps the analyst to better understand and analyze the cash flow statement.
Firms only have financial difficulties when both the net income and cash flow from operations are negative.
A company's fixed assets to net worth ratio increases, while its net worth remains constant. The company does not use cash to finance the increase in fixed assets. This suggests that its debt to equity ratio will? Decrease No Change Increase
Increase
All else constant, if a company's payables period decreases, its cash conversion cycle will? Decrease No change Increase
Increase
All else constant, when daily cash operating expenses decrease, the defensive interval will? Decrease No change Increase
Increase
If a company begins to collect its receivables slower, its cash conversion period will likely ... Decrease No Change Increase
Increase
If a company begins to collect its receivables slower, its collection period will? No Change Increase Decrease
Increase
If a firm adds external equity financing, its sustainable growth rate will. Increase No Change Decrease
Increase
If sales increase, spontaneous liabilities will. Increase No Change Decrease
Increase
If the current ratio dropped from 2.5 to 2.0 and the quick ratio decreased from 1.5 to 1.0, what would have likely occurred? Inventory increased relative to other current accounts Inventory decreased relative to other current accounts The company replaced long term debt with common stock None of the above Receivables decreased relative to other accounts
Inventory increased relative to other current accounts
How would the sale of a building be classified? Operating inflow. Financing inflow. Investing inflow. Operating outflow.
Investing inflow.
The change in retained earnings is affected by which of the following? Net income and payment of dividends. Net income and common stock. Net income and paid-in capital. Payment of dividends and common stock.
Net income and payment of dividends.
Which of the following may indicate liquidity problems in high sales growth companies earlier than other liquidity ratios? Net sales to working capital Short-term debt to equity Quick ratio Current ratio
Net sales to working capital
What type of accounts are accounts receivable and inventory? Cash accounts. Investing accounts. Financing accounts. Operating accounts.
Operating accounts.
How would revenue from sales of goods and services be classified? Investing inflow. Operating outflow. Financing outflow. Operating inflow.
Operating inflow.
How would payments for taxes be classified? Operating inflow. Financing inflow. Operating outflow. Investing inflow.
Operating outflow.
The statement of cash flows segregates cash inflows and outflows by: Financing and investing activities. Operating and financing activities. Operating and investing activities. Operating, financing, and investing activities.
Operating, financing, and investing activities.
What do the quantity of liquidity ratios measure? How long the company can survive on its present amount of liquidity. The composition of liquidity Proportionally how much liquidity is on the balance sheet. The ability of the company to afford debt.
Proportionally how much liquidity is on the balance sheet.
Which of the following are NOT inputs to the sustainable growth model? Spontaneous assets Profit margin Change in fixed assets Return on assets
Return on assets
Which of the following could lead to cash flow problems? Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers. Obsolete inventory, increasing notes payable, easing of credit by suppliers. Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers.
Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers
