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Fina 4300

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Which type of inventory would a bank be most willing to accept as security for a loan?

C boats owned by a boat dealer

The goal of managing working capital, such as inventory, should be to minimize the:

C. aggregate of carrying and shortage costs

The sources and uses of cash over a stated period of time are reflected in the...

Cash flow statement

What do current liabilities and current assets have in common?

Current liabilities and current assets are those items that will be satisfied and converted into cash, respectively, in one year or one operating cycle, whichever is longer.

Firms that continually invest in nontrivial amounts of marketable securities may be guilty of:

D. not maximizing shareholder returns

T/F: Companies that use IFRS may switch the order of presentation of assets and liabilities, listing noncurrent items before current items.

T/F: The income statement presents cash revenues, cash expenses, net income, and earnings per share for an accounting period.

T/F: Working capital refers to the investment in property, plant and equipment.

A company's price-to-earnings ratio is always equal to one minus its earnings yield.

FALSE

One advantage of ROE is that it is a risk-adjusted measure of performance.

False

c. A company's collection period should always be less than its payables period.

False - A payables period longer than the collection period would be nice because trade credit would finance accounts receivable. However, payables periods and collections periods are typically determined by industry practice and the relative bargaining power of the firms involved; depending on a company's circumstances, it may have to gracefully put up with a collection period longer than it payables period.

Gross Margin

Gross profit/sales

A times-interest-earned ratio of 3.5 indicates that the firm

Has EBIT equal to 3.5 times its interest expense.

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility

Market signaling Management incentives

T/F: Users of financial statements need to distinguish between earnings increasing due to core operations versus items such as tax rate deductions

Return on assets can be calculated as profit margin times asset turnover.

TRUE

Which of the following variables does NOT affect the value of a stock option?

The predicted future price of the underlying stock

The strike price

The price of a call option tends to be lower when which of the following is higher (all else equal)?

Debt-to-Equity ration

Total Liabilities/SE

Debt-to-Assets ratio

Total Liabilities/Total Assets

Issue costs of equity are high relative to those of debt.

True

Which format of the income statement should be used for analysis purpose? a. Multiple-step. b. Cash basis. c. Single-step. d. Accrual basis.

a. Multi step

What does an unqualified auditor's report indicate? a. Certain managers within the firm are unqualified and, as such, are not fairly or adequately representing the interests of the shareholders. b. The financial statements present fairly the financial position, the results of operations, and the changes in cash flows for the company. c. There are certain factors that might impair the firm's ability to continue as a going concern. d. The financial statements unfairly and inaccurately present the company's financial position for the accounting period.

How would revenue from sales of goods and services be classified? a. Investing inflow. b. Operating outflow. c. Financing outflow. d. Operating inflow.

What type of firm generally has the highest proportion of inventory to total assets? a. Wholesalers b. Manufacturers c. Service-oriented firms d. Retailers

Difference between net sales and cost of goods sold

gross profit

The _____ _____ is one way to common size the cash flow statement.

summary analysis

Please refer to the income statement for VGA Associates below. Assuming that cost of goods sold are variable and operating expenses are fixed, what was VGA Associates' breakeven sales volume in 2017?

$80,000

Wilcox's quick ratio is

0.85

Wilcox's quick ratio is:

0.85

Wilcox's total asset turnover ratio is

3.34

TRUE

After issue, the market price of a fixed-rate bond can differ substantially from its par value.

Under the allowance method, when a company determines that they will not be able to collect from a particular customer, they will debit:

Allowance for uncollectible accounts and credit accounts receivable

T or F: Two special items, discontinued operations and extraordinary items, must be disclosed separately on the income statement.

True

Which one of the following would generally reduce the carrying costs of inventory?

C. experiencing a decrease in the overall interest rate

Wilcox's cash flow adequacy ratio is

1.43

Please refer to the financial data for Link, Inc. above. The current ratio for Link at the end of 2017 is

2.76 (current assets/current liabilities)

2015 2014 Sales 1,200 1,000 COGS 850 700 Operating expenses 200 200 Income taxes 30 35 Jett Co.'s average tax rates for 2015 and 2014 are:

20% and 35%

Wilcox's return on equity is

29.59%

Wilcox's effective tax rate is:

35.56%

Which item is a noncash item that would be added to net income to convert it to cash flow from operating activities? A. Depreciation. B. Inventory. C. Accounts receivable. D. Accounts payable.

A. Depreciation.

When product demand is high, firms following a middle-of-the-road policy for long- versus short-term financing will:

A. borrow short term

As inventory and PPE assets on the balance sheet are consumed, they are reflected:

As an expense on the income statement

As inventory and property plant and equipment on the balance sheet are consumed, they are reflected:

As an expense on the income statement

What is the balancing equation for the balance sheet?

Assets = Liabilities + Stockholders' equity.

Which one of the following statements does NOT describe a problem with using ROE as a performance measure? A. ROE measures return on accounting book value, and this problem is not solved by using market value. B. ROE is a forward-looking, one-period measure, while business decisions span the past and present. C. ROE measures only return, while financial decisions involve balancing risk against return. D. None of these describe problems with ROE. E. All of these describe problems with ROE.

B. ROE is a forward-looking, one-period measure, while business decisions span the past and present.

Which group of people would be the most concerned about the ability of a firm to make interest and principal payments? a. Auditors. b. Customers. c. Creditors. d. Investors.

How is the cash conversion cycle calculated? A. Average collection period + days inventory held + Days payable outstanding. B. Average collection period - days inventory held - Days payable outstanding. C. Average collection period + days inventory held - Days payable outstanding. D. Average collection period - days inventory held + Days payable outstanding.

C. Average collection period + days inventory held - Days payable outstanding.

Which one of the following will increase the sustainable rate of growth a corporation can achieve? A. avoidance of external equity financing B. increase in corporate tax rates C. reduction in the retention ratio D. decrease in the dividend payout ratio E. decrease in sales given a positive profit margin

D. Decrease in the dividend payout ratio

Which of the following would increase cash from operating activities? A. Increasing accounts receivable. B. Decreasing accounts payable. C. Increasing inventories. D. Decreasing accounts receivable.

D. Decreasing accounts receivable.

On January 1, Fey Properties collected $7,200 for six months' rent in advance from a tenant renting an apartment. Fey Company prepares monthly financial statements. Which of the following describes the required adjusting entry on January 31?

Debit Unearned rent revenue for $1,200 and Credit Rent revenue for $1,200

Times Interest Earned

EBIT/Interest Expense

When is high leverage OK?

For predictable & stable businesses

How would cash collected on accounts receivable affect the balance sheet?

Increase assets and decrease assets

Which item would not be classified as an operating expense?

Interest expense

Which of the following statements regarding junk bonds is true?

Junk bonds have higher priority in bankruptcy than preferred stock.

The _____ assumption is the assumed unit of measurement when preparing financial statements.

Monetary unit

What are the two profit determination figures of a firm?

Net income and cash flow from operations

Define cost of goods sold %

Relationship between cost of goods sold and net sales

Three ratios that help the financial analyst assess short-term solvency are the current ratio, the quick ratio and the cash flow liquidity ratio.

TRUE

Tools used in a financial statement analysis should generally include common-size financial statements, key financial ratios, trend analysis, structural analysis,and comparison with industry competitors.

TRUE

The retention ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the asset turnover ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales.

The percentage of net income available to the firm to fund future growth

What is amortization?

The process used to allocate the cost of capital leases, leasehold improvements and intangible assets.

All else equal, a firm would prefer to have a higher gross margin.

True

The allowance for uncollectible accounts is classified as:

a contra-asset account

What are examples of operating expense reserves?

allowance for doubtful accounts, product warranty, restructuring, sales returns and environmental obligations

Allocation of costs of intangible assets

amortization

What are three profit measures calculated from the income statement? a. Gross profit margin, cost of goods sold percentage, EBIT b. Operating profit margin, net profit margin, repairs and maintenance to fixed assets c. Gross profit margin, operating profit margin, net profit margin d. None of the above.

Which of the following items is a discretionary expenditure? a. Union wages. b. Factory building to produce inventory. c. Advertising. d. Taxes.

What items are included in the notes to the financial statements? a. Detail about particular accounts. b. Summary of accounting policies. c. Changes in accounting policies, if any. d. All of the above.

Which of the following assets will not be depreciated over its service life? a. Furniture b. Equipment c. Buildings d. Land

Allocation of costs of acquiring and developing natural resources

depletion

The ______ shows the relationship between cash dividends and market price.

dividend yiled

Time Interest Earned

earnings before interest and tax/interest expenst

The cost of inventory that is still on hand is called:

inventory, a current asset that appears on the balance sheet

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets? Income statement Creditor's statement Balance sheet Cash flow statement Sources and uses statement

Balance sheet

Which of the following securities has a purely fixed claim against a firm's cash flows?

Bonds

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share?

Book Value per share = equity/shares outstanding. 1,750,000/5,000,000=$3.50

A balance sheet reports the value of a firm's assets, liabilities, and equity A. over an annual period. B. over any period of time. C. at any point in time. D. at the end of the year.

C. at any point in time.

Which one of these statements correctly applies to the carrying costs of cash balances?

C. cash balances incur an opportunity cost

Define sales return

Cancellation of a sale

A ________ lease affects both the balance sheet and the income statement

Capital

4.9 Million

Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter's fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital?

Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges?

Cash Flow adequacy and fixed charge coverage

Steve has estimated the cash inflows and outflows for his dental firm for next year. The report that he has prepared summarizing these cash flows is called a:

Cash budget

Many companies list an account titled ________ on the balance sheet even though no dollar amount will appear.

Commitments and contingencies

Acid Test

Current assets-Inventory/Current Liabilities (Sometimes called "quick ratio")

Total risk is measured by _____ and systematic risk is measured by ____. A. beta; alpha B. beta; standard deviation C. WACC; beta D. standard deviation; beta E. standard deviation; variance

D. Total risk - standard deviation Systematic risk - beta

The longer the firm's accounts payable period, the:

D. less the firm must invest in net working capital

Managers who "stretch their payables" are attempting to:

D. obtain a longer term for short- term financing

Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account?

$20 Million

ABC Company purchases five products for sale in the order and at the costs shown: Unit Cost per Unit 1 $10 2 $12 3 $15 4 $18 5 $13 Assume ABC sells two items and uses the FIFO method of inventory valuation. What amount would appear in ending inventory on the balance sheet?

$46

What would be the carried interest (at 20%) on a private equity portfolio with an initial value of $500 million that was subsequently liquidated for $750 million?

$50 Million

You plan to buy a new Mercedes four years from now. Today, a comparable car costs $82,500. You expect the price of the car to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?

$99,517.41 Future value = $82,500 × (1 + 0.048)^4 = $99,517.41

quick ratio

(cash + marketable securities + acct receivable)/current liabilities

Suppose you purchase a put option on XYZ stock when the stock price is $40. The option premium is $2, and the strike price is $39. What is your net profit on the put option if the stock price is $41 at maturity?

-$2

The profit margin for 2012 is:

-94%

At the end of 2016, Crane Industries, Inc.'s stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2017?

13.43%

Wilcox's days payable outstanding is

16 days

The current ratio at the end of 2012 is:

2.76 Current Ratio = Total current assets/Total current liabilities = 249,801/90,558 = 2.76

Wilcox's return on equity is:

29.59%

Annual reports include _____ years of income statements and stockholder's equity information

Average Collection Period

365/ accounts receivable turnover

You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize?

4.8% r = A/P = $2.40/$50 = 4.80%

4.9 million

Wilcox's cash flow margin is

5.23%

Wilcox's cash flow margin is:

5.23%

Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation's sustainable growth rate?

Wilcox's times interest earned ratio is:

6.63

What does a low asset turnover compared to the industry imply? a. The investment in assets may be too high. b. Sales are higher than average. c. The investment in assets is too low. d. Net income is low relative to the investment in assets.

Which of the following accounts could be categorized as either a current or noncurrent liability depending on date the debt is due? A. Notes payable and deferred taxes. B. Accounts payable and current portion of long-term debt. C. Deferred taxes and mortgages due in 30 years. D. Long-term warranties and accounts payable.

A. Notes payable and deferred taxes.

Which of the following liabilities would be included in the current liabilities section on the balance sheet?

Accounts payable, short-term debt, unearned revenues

Which balance sheet account shows the amount of accounts receivable that the business does not expect to collect:

Allowance for Uncollectible accounts

The net realizable value of accounts receivable is the actual amount of the account less an ________.

Allowance for doubtful accounts

How is the cash conversion cycle calculated?

Average collection period+days inventory held-days payable outstanding.

All of the following are steps of a financial statement analysis except: a. Establish objectives of the analysis. b. Prepare pro forma statements. c. Study the industry in which the firm operates. d. Develop knowledge of the firm and the quality of management.

Which group of people would be the most concerned about the operating areas that have contributed to the success of the firm and which have not? a. Customers. b. Management. c. Auditors. d. Creditors.

The ______ shows the relationship between cash dividends and market price.

Dividend Yield

Times Burden Covered

EBIT/Interest + Principal (after tax rate)

The _____ method of accounting for investors should be used when the investor can exercise significant influence over the investee's operating and financing policies.

Equity

Which of the items below would be included under "Other income and expense"?

Equity earnings, gains from sale of assets, interest income.

What are SGA expenses?

Expenses related to the sale of products/ services and management of the firm (salaries, rent, insurance, utilities, supplies, depreciation and advertising)

The cost of equity is usually reported on the income statement right below interest expense.

FALSE

Under the ______ method, ending inventory is based on the costs of the most recent purchases.

FIFO

In business valuation, a typical discount for lack of marketability is about 10 percent.

False

In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".

False

Leveraged buyouts are the only means to capture tax shields

False

You can construct a sources and uses statement for 2017 if you have a company's year-end balance sheets for 2017 and 2018.

False

Which of the following is NOT a typical reason for differences between profits and cash flow?

Goodwill

Which of the following are examples of diversifiable risk? I. An earthquake damages Oakland, California. II. The federal government imposes an additional $1,000 fee on all business entities. III. Employment taxes increase nationally. IV. Toymakers are required to improve their safety standards.

I and IV

True

If the cost of goods sold percentage increases or decreases, this does not necessarily mean that costs have increased or decreased.

______ charges are expenses recognized to record a decline in value of a long-term asset.

Impairment

FALSE

In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".

Which one of the following is a use of cash?

Increase in inventory

Under the simplifying assumptions of Modigliani and Miller, an increase in a firm's financial leverage will: A. increase the variability in earnings per share. B. reduce the operating risk of the firm. C. increase the value of the firm. D. decrease the value of the firm. E. None of the above

Increase the variability in earnings per share

Financial Leverage increases when...?

Increases in debt to finance the business

TRUE

Investment-grade bonds are usually defined as bonds with ratings of BBB- or higher.

The________method of inventory generally results in the matching of current costs with current revenues and therefore produces higher-quality earnings.

LIFO

______ ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and other fixed charges

Leverage

Return on Assets (ROA)

Net Income/Assets (Basic measure of the efficiency with which a company allocates and manages its resources) (Different from ROE in that it measures % of money provided by both Owner's & Creditors)

The Du Pont System shows which of the following series of relationships?

Net Profit margin x total asset turnover=Return on investment and Return on investment x financial leverage= Return on equity

How is earnings per common share calculated?

Net profit divided by the average number of common stock shares outstanding.

The gross margin for 2012 is:

None of the above

Which of the following are included in current assets?

Prepaid rent

FALSE

Private equity firms comprise a relatively insignificant portion of the American economy.

3 ROE Determinants

Profit Margin x Asset Turnover x Financial Leverage

A reduction in long-term debt is a use of cash.

TRUE

The forecast for retained earnings on the 2019 balance sheet can be determined as 2018 retained earnings plus projected 2019 after-tax earnings less projected 2019 dividends.

TRUE

Ptarmigan Travelers had sales of $420,000 in 2010 and $480,000 in 2011. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?

The collection period decreased.

______ ratios measure the liquidity of specific assets and the efficiency of managing assets.

activity

Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?

asset turnover

A balance sheet reports the value of a firm's assets, liabilities, and equity

at any point in time.

Which type of firm would most likely carry the most finished goods inventory? a. A manufacturing firm. b. A retail firm. c. A service firm. d. A wholesale firm.

According to Section 302 of the Sarbanes-Oxley Act, who must certify the accuracy of the financial statements of a public company? a. Public Company Accounting Oversight Board. b. SEC. c. External auditor. d. CEO and CFO.

Which of the following is an acceptable method to report total comprehensive income? a. On the face of the balance sheet. b. Total comprehensive income does not have to be reported. c. In the operating section of the cash flow statement. d. In the statement of stockholders' equity

Which of the following is an internal source of liquidity? a. Borrowing. b. Sales of stock. c. Gifts and donations. d. Sales of products or services

How should companies with more than one revenue source report revenue and cost of goods sold? a. Each revenue source should be reported separately, but all cost of goods sold should be added together and reported as a single amount. b. The revenues and cost of goods sold should be netted together and reported as a single line item. c. All revenue sources should be added together and shown as one line item and all cost of goods sold should be added together and shown as one line item. d. Each revenue line should be shown separately with a corresponding cost of goods sold line for each revenue source.

d. Each revenue line should be shown separately with a corresponding cost of goods sold line for each revenue source.

What are examples of revenues and costs not from operations recorded on the income statement?

dividends, interest income, interest expenses, gains (losses) from sale of fixed assets

Two other terms used interchangeably with income are ____ and profit

earnings

Two other terms used interchangeably with income are _____ and ______.

earnings, profit

Days Payable Outstanding

ending accounts payable/(cost of sales/number of days)

What are "big bath" charges?

enormous write offs taken by companies to clean up their balance sheets

The _________ ratio is a broader measure of coverage capability than the times interest earned ratio because it includes the fixed payments associated with leasing.

fixed charge coverage

Another term for gross profit is:

gross margin

Define the single step approach

groups all items of revenue together then deducts all categories of expenses together

What are stock dividends?

issuance of additional shares of stock in proportion to current ownership

Individuals who continually monitor the financial markets seeking mispriced securities.

make the markets increasingly more efficient.

What type of firm generally has the highest proportion of fixed assets to total assets?

manufacturers

presentation of income statement that provides several intermediate profit measures

multiple-step format

Define earnings per common share

net earnings available to common stockholders for the period divided by the average number of common shares outstanding

A change in the retained earnings account is the result of the _____ for the period and the payment of_____ .

net income, dividends

difference between all revenues and expenses

net profit

Depreciation expense:

reduces both taxes and net income.

The most popular yardstick of financial performance among investors and senior managers is the

return on equity.

Total Asset Turnover

sales or revenues /total assets

List reasons why gross profit margin might be increasing.

selling price has increased without a proportional increase in cogs, cogs are decreasing without a proportional increase in sales, cogs contains fixed costs and the volume of sales has increased

What are real earnings?

the adjusted earnings figure that reflects what is believed to be relevant to the decision at hand

Most companies will use:

the percent-of-sale method for interim statements and the aging-of-receivables method at the end of the year

The retention ratio is

the percentage of net income available to the firm to fund future growth.

Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?

times burden covered ratio

On a common-size balance sheet, all accounts are expressed as a percentage of:

total assets for the current year.

On a common-size balance sheet, all accounts are expressed as a percentage of

total assets.

The factoring firm bears responsibility for default on accounts receivable purchased from a firm.

true

Under a perpetual inventory system, when a sale is made, the seller prepares:

two journal entries

What are stock splits?

used to lower the market price of shares to make common stock more affordable (2-1 stock split=owner of 100 shares now owns 200 but market prices decreases by 50%)

Additional information helpful to the analysis of accounts receivable and the allowance account is provided in the schedule of .......

valuation and qualifying accounts

When do LIFO layer liquidations occur?

when LIFO is used, when the firm sells more goods than purchased during an accounting period, when companies are shrinking rather than increasing inventories

When are additional pension liabilities reported?

when accumulated benefit obligations are greater than fair market value of plan assets less the balance in accrued pension liability

A $1,000 par value bond with a fixed 10% rate of interest pays coupons semiannually. What amount will the bondholder receive on the bond's maturity date?

$1,050

Wilcox's effective tax rate is

35.56

Empirical evidence suggests that leveraged buyouts create value.

True

It is possible for a firm to collect payment on a sale prior to paying its suppliers for the items sold.

True

T or F The objectives of a financial statement analysis will vary depending on the perspective of the financial statement user.

True

T or F Tools used in a financial statement analysis should generally include common-size financial statements, key financial ratios, trend analysis, structural analysis, and comparison with industry competitors.

True

T or F: Users of financial statements need to distinguish between earnings increasing due to core operations versus items such as tax rate deductions.

True

The times-interest-earned ratio always equals or exceeds the times-burden-covered ratio.

True

True/False - Profit Margin and Asset Turnover tend to vary inversely

True

Under the allowance method, Uncollectible - Account expense is recorded in the same accounting period as the sale

True

Under the allowance method, Uncollectible- Account expense is recorded in the same accounting period as the sale

True

e. All else equal, a firm would prefer to have a higher asset turnover ratio.

True - Decomposing ROE shows that a higher asset turnover ratio increases ROE. Thus, a firm wants to maximize asset turnover (all else being equal, of course.)

d. A company's current ratio must always equal or exceed it acid-test-ratio.

True - The two ratios are the same except that inventory, which is never negative, is subtracted from the numerator to calculate the acid test.

Additional information helpful to the analysis of accounts receivable and the allowance account is provided in the schedule of ________.

Valuation and qualifying accounts

None of the options are correct.

Which one of the following statements is true? a.Bondholders enjoy a direct voice in company decisions. b.Bonds are low-risk investments that do well in inflationary periods. c.None of the options are correct. d.Debt instruments offer residual claims to future cash payouts. e.Bonds with call provisions will have lower coupon rates than otherwise identical bonds. f.Bonds with call provisions will have lower coupon rates than otherwise identical bonds.

What do liquidity ratios measure? a. A firm's ability to meet cash needs as they arise. b. The extent of a firm's financing with debt relative to equity. c. The overall performance of a firm. d. The liquidity of fixed assets.

Which method of calculating cash flow from operations requires the adjustment of net income for deferrals, accruals, noncash, and nonoperating expenses? a. The indirect method. b. The direct method. c. The inflow method. d. The outflow method.

Which of the following statements is false with regard to quality of financial reporting? a. Financial statements should reflect an accurate picture of a company's financial condition and performance. b. It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP. c. Financial information should be useful both to assess the past and predict the future. d. The closer that the picture presented through the financial data is to reality, the higher the quality of financial reporting.

Which of the following statements is false? a. The statement of cash flows shows how cash has been generated and how it has been used for an accounting period. b. Firms only have financial difficulties when both the net income and cash flow from operations are negative. c. The statement of cash flows is prepared by calculating changes in all balance sheet accounts. d. Understanding how to prepare a statement of cash flows helps the analyst to better understand and analyze the cash flow statement.

Which of the items below would be included under "Other income and expense"? a. Salaries, interest expense, equity losses. b. Equity earnings, gains from sale of assets, interest income. c. Research and development, dividend income, interest expense. d. Advertising, cost of goods sold, selling and administrative expenses.

Which statement is true for gains and losses from capital asset sales? a. They are included in cash flows from financing activities. b. They are included in cash flows from investing activities. c. They are included in cash flows from operating activities. d. They do not affect cash and are excluded from the statement of cash flows.

Why should the effective tax rate be evaluated when assessing earnings? a. Effective tax rates do not include the effects of foreign taxes. b. It is important to understand whether earnings have increased because of tax techniques rather than from positive changes in core operations. c. Net operating losses allow a firm to change its effective tax rates for each of the five years prior to the loss. d. Effective tax rates are irrelevant because they are mandated by law.

Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated present value of the enhancements from the merger have to be?

$150 million Minimum economic value in PV terms = $860 million - $710 million = $150 million

Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest?

$17,444.86 Present value = $51,480.79/(1 + 0.0425)^26 = $17,444.86

Wilcox's cash flow adequacy ratio is:

1.43

Wilcox's times interst earned ratio is

6.63

The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value.

B - based on historical cost

The aging-of-receivables method for computing uncollectible accounts:

B and C

What does a low asset turnover compared to the industry imply? A. The investment in assets is too low. B. The investment in assets may be too high. C. Sales are higher than average. D. Net income is low relative to the investment in assets.

B. The investment in assets may be too high.

If the statement of sources and uses of cash shows a decrease in the cash balance, an increase in which one of the following might have eliminated that decrease?

B. accounts payable

A self-liquidating line of credit is best illustrated by borrowing:

B. to purchase inventory and repaying when payment for the sale of that inventory is received

The Du Pont System shows which of the following series of relationships? a. Net profit margin x total asset turnover = Return on investment. b. Net profit margin x financial leverage = Return on equity. c. Net profit margin x total asset turnover = Return on investment and Return on investment x financial leverage = Return on equity. d. Net profit margin x total asset turnover = Return on equity and Return on equity x financial leverage = Return on investment.

Which item is not a special item that must be disclosed separately on the income statement? a. Extraordinary gain. b. Extraordinary loss. c. Foreign currency translation adjustments. d. Discontinued operations.

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover A. I and IV only B. I, II, III, and IV C. I, II, and IV only D. I, II, and III only E. I, III, and IV only

C. Profit margin, financial leverage and asset turnover

Managers are alerted to projected cash shortages by way of the:

C. cash budget

The ______________________ cycle or _____________________ cycle is the normal operating cycle of a firm that consists of buying or manufacturing inventory, selling inventory and paying accounts payable and collecting accounts receivable.

Cash conversion, Net Trade

The ______ cycle or ______ cycle is the normal operating cycle of a firm that consists of buying or manufacturing inventory, selling inventory and paying accounts payable and collecting accounts receivable

Cash conversion, net trade

Use the indirect method to answer this question. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash flow from operating activities for Felix Company? A. $70 B. $320 C. $250 D. $240

D. $240

Which of the following is an acceptable method to report total comprehensive income? A. On the face of the balance sheet. B. Total comprehensive income does not have to be reported. C. In the operating section of the cash flow statement. D. In the statement of stockholders' equity.

D. In the statement of stockholders' equity.

Which of the following is NOT an important step in the financial evaluation of an investment opportunity?

Estimate the accounting rate of return for the investment

A loss of $50,000

In March, with the spot price of wheat at $5.75 per bushel, Hollywood Bakery longs 100 July wheat futures contracts (5,000 bushels each) on the CBOE at a futures price of $5.90 per bushel. In June, Hollywood Bakery closes out its futures contracts when the futures price is $5.80 per bushel. What is Hollywood Bakery's gain (or loss) on the futures contracts?

Where can one most typically find the cost flow assumption used for inventory valuation for a specific company?

In the notes to the financial statements.

Which of the following is an acceptable method to report total comprehensive income?

In the statement of stockholders' equity.

Interest expense appears in which financial statement?

Income statement

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? Income statement Balance sheet Cash flow statement Sources and uses statement Market value statement

Income statement

The _____ method of inventory generally results in the matching of current costs with current revenues and therefore produces higher-quality earnings.

LIFO

What is considered "the bottom line"?

Net earnings; firm's profit after consideration of all revenue and expense

What are 2 noteworthy items hat may affect the effective tax rate

Net operating losses (NOLs) and foreign taxes

Price-to-Earnings ratio (P/E)

Price per share/earnings per share (says little about the current financial performance - about future prospects)

What are operating expenses classified as on the income statement?

Selling and administration fees (SG&A)

What is the difference between special items and extraordinary items?

Special items are unusual in nature OR infrequent in occurrence whereas extraordinary items are unusual in nature AND infrequent in occurrence (but extraordinary has now been eliminated)

T/F: A classified balance sheet means that the asset and liability sections are categorized into key areas.

T/F: A common-size balance sheet is useful to the analyst because it facilitates the structural analysis of the firm.

T/F: Analyzing the statement of cash flows helps determine the future external financing needs of a business firm.

T/F: GAAP-based financial statements are prepared according to the accrual basis of accounting.

T/F: If the cost of goods sold percentage increases or decreases, this does not necessarily mean that costs have increased or decreased

T/F: Three ratios that help the financial analyst assess short-term solvency are the current ratio, the quick ratio and the cash flow liquidity ratio

A company experiencing balanced growth does not generate cash surpluses or cash deficits.

TRUE

Which industries have volatile gross profit margins?

Tech industries and capital intensive industries

False

The income statement comes in two basic formats, the multiple-step and the single-step versions; however, for analysis purposes the single-step version should be used.

c. Why is Atlantic's ROA higher than Pacific's? What does this tell you about the two companies?

This is also due to Pacific's higher leverage. ROA penalized levered companies by comparing the net income available to equity to the capital provided by owners and creditors. It does not mean that Pacific is a worse company than Atlantic.

Use the indirect method to answer questions 11-14. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash from investing activities for Felix Company? a. $5 b. $40 c. $75 d. $10

What are internal sources of cash? a. Cash inflows from investing activities. b. Cash inflows from operating activities. c. Cash inflows from financing activities. d. All of the above.

What do current liabilities and current assets have in common? a. Current assets are claims against current liabilities. b. Current liabilities and current assets are those items that will be satisfied and converted into cash, respectively, in one year or one operating cycle, whichever is longer. c. If current assets increase, then there will be a corresponding increase in current liabilities. d. Current liabilities and current assets are converted into cash.

What do the asset turnover ratios measure? a. The liquidity of the firm's current assets. b. Management's effectiveness in generating sales from investments in assets. c. The distribution of assets in which funds are invested. d. The overall efficiency and profitability of the firm.

What does the additional paid-in capital account represent? a. The difference between the par and the stated value of common stock. b. The amount by which the original sales price of stock exceeds the par value. c. The market price of all common stock issued. d. The price changes that result for stock trading subsequent to its original issue.

A company that pays out a $2 million cash dividend will see a $2 million decrease in working capital.

True

A company that receives a customer's payment of $2,500 for a previous sale will see no change in its net working capital.

True

Across companies, ROA and financial leverage tend to be inversely related.

True

Which one of these will decrease net working capital?

A. cash sale of inventory at a loss

When the length of the financing is directly related to the life of the asset being financed, the firm is said to follow a:

A. policy of maturity matching

Which one of the following is least likely to be correct for a firm that repeatedly stretches its payables?

A. the firm may receive more favorable status from suppliers

Financial Leverage

Assets/SE (Amount of equity used to finance assets)

What does a financial leverage index greater than one indicate about a firm? a. Return on assets exceeds the return on equity. b. Return on equity exceeds the return on assets. c. The firm is not employing debt successfully. d. The firm does not generate enough funds to cover interest payments

Which method of inventory would be least likely to be used by a European firm? a. FIFO. b. LIFO. c. Average cost. d. LIFO and FIFO

When managers are continually short-term lenders, they are said to follow a:

C. relaxed financing strategy

The following item would be classified as an investing activity on the statement of cash flows: a. Proceeds from borrowing. b. Sale of goods. c. Sale of property. d. Payment to lenders.

What does a financial level index greater than one indicate about a firm? a. More debt financing than equity financing. b. An increased level of borrowing. c. Operating returns more than sufficient to cover interest payments on borrowed funds. d. The unsuccessful use of financial level.

What is a common-size balance sheet? a. A statement that is common to an industry. b. 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. c. A statement that expresses each account on the balance sheet as a percentage of total assets. d. A statement that expresses each account on the balance sheet as a percentage of net income.

What is a common-size income statement? a. An income statement that provides intermediate profit measures. b. An income statement that includes all changes of equity during a period. c. A statement that expresses each item on an income statement as a percentage of net sales. d. An income statement that groups all items of revenue together, then deducts all categories of expense.

Which financial statement presents the results of operations? a. Balance sheet. b. Statement of financial position. c. Income statement. d. Statement of cash flows.

Which of the following could lead to cash flow problems? a. Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers. b. Obsolete inventory, increasing notes payable, easing of credit by suppliers. c. Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers d. Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers.

What equations represents and income statement?

Revenues - Expenses = Net Income

Which is the CORRECT order for items to appear on the income statement?

Sales revenue, cost of goods sold, gross profit, operating expenses

What is operating profit?

Second step in multi step approach; shows profit directly earned from operations

T/F: The SEC regulates U.S. companies that issue securities to the public and requires the issuance of a prospectus for any new security offering

T/F: The statement of cash flows shows the changes in the balance sheet accounts between periods

What information does the auditor's report contain? a. An opinion as to the fairness of the financial statements. b. A detailed coverage of the firm's liquidity, capital resources, and operations. c. An unqualified opinion. d. The results of operations.

Which category of ratios is useful in assessing the capital structure and long-term solvency of a firm? a. Leverage ratios b. Activity ratios c. Profitability ratios d. Liquidity ratios

A company's price-to-earnings ratio is always equal to one minus its earnings yield.

False

Currently, receivables account for the majority of the current assets of retail firms. Cash and short-term securities are more important for oil companies, and inventory makes up the bulk of the current assets of electronic companies.

False

The quality of reported earnings is a minor element in evaluating financial statement data.

False

Assets are recorded in the balance sheet in order of:

Liquidity

How are companies required to report total comprehensive income? a. In the statement of stockholders' equity. b. In a separate statement of comprehensive income. c. On the face of the income statement. d. All of the above.

difference between sales revenue and expenses associated with generating sales

operating profit

How do you calculate operating profit margin?

operating profit/net sales

Cash flows are segregated on a statement of cash flows by _____ activities, _____ activities, and _____ activities.

operating, investing, financing

Depreciation expense

reduces both taxes and net income

times-burden-covered ratio

Why is it important to assess operating profit? a. Operating profit represents the firm's profits after consideration of all revenues, expenses and comprehensive income. b. The figure for operating profit provides a basis for assessing the success of the firm apart from its financing and investing activities and separate from tax considerations. c. Operating profit represents the firm's profits after consideration of all revenues and expenses. d. Operating profit represents the firm's profits after consideration of all revenues and expenses, except for taxes.

b. The figure for operating profit provides a basis for assessing the success of the firm apart from its financing and investing activities and separate from tax considerations.

An outflow of cash would result from which of the following? a. The decrease in an asset account other than cash. b. The increase in an equity account. c. The decrease in a liability account. d. The increase in a liability account.

How is goodwill evaluated? a. Goodwill must be amortized over a 40-year period. b. Goodwill should be written up each year. c. Companies should determine whether goodwill has lost value, and if so, the loss in value should be written off as an impairment expense. d. Goodwill is to be written off at the end of the tenth year.

How is the statement of cash flows connected to the balance sheet? a. The statement of cash flows shows changes in the asset and liability accounts to explain cash from operating activities. b. The changes in all revenue and expense accounts are calculated and then listed as cash inflows or outflows. c. The changes in all of the balance sheet accounts are calculated and then listed as inflows or outflows, except for cash. d. Changes in asset accounts are recorded as operating activities, changes in liability accounts are recorded as financing activities and changes in equity accounts are recorded as investing activities.

How would payments for taxes be classified? a. Operating inflow. b. Financing inflow. c. Operating outflow. d. Investing inflow.

How would the sale of a building be classified? a. Operating inflow. b. Financing inflow. c. Investing inflow. d. Operating outflow.

Use the indirect method to answer questions 11-14. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash from financing activities for Felix Company? a. $50 b. $65 c. ($50) d. $60

Use the indirect method to answer questions 7-10. The following information is available for Armstrong Company: Net income $450 Increase in plant and equip. $170 Depreciation expense 80 Payment of dividends 10 Decrease in accts. receiv. 20 Increase in long-term debt 100 Increase in inventories 15 Decrease in accounts payable 30 What is cash from financing activities for Armstrong Company? a. $70 b. $60 c. $90 d. ($110)

Which of the following statements is true? a. The straight-line method of depreciation allocates a decreasing amount of depreciation expense each year. b. Straight-line depreciation is the least used method for financial reporting purposes. c. Fixed assets are reported at historical cost less accumulated depreciation on the balance sheet. d. The total amount of depreciation over the asset's life is larger when using an accelerated method of depreciation.

What equation represents an income statement? a. Assets = liabilities + stockholders' equity. b. Cash in - cash out = net income. c. Revenues - expenses = net income. d. Beginning retained earnings + revenues - expenses = ending retained earnings.

c. Revenues- expenses= net income .

What is comprehensive income?

change in equity during a period from transactions, other events and circumstances related to nonowner sources

________ income is the change in equity of a company during a period from transactions, other events, and circumstances relating to nonowner sources.

comprehensive

Two accounts that would appear on the financial statements of a merchandising company that are not needed by a service company are:

costs of good season and inventory

The balancing equation is expressed as: a. Assets + Liabilities = Stockholders' Equity. b. Revenues - Expenses = Net Income. c. Sales - Costs = Net Profit. d. Assets = Liabilities + Stockholders' Equity

Which one of the following will increase the sustainable rate of growth a corporation can achieve?

decrease in the dividend payout ratio

allocation of costs of tangible fixed assets

depreciation

_______ and _____ represent the cost of assets other than land that will benefit a business enterprise for more than a year.

depreciation and amortization

What are impairment charges?

expenses recognized to record a decline in value of a long term asset

________charges are the expenses recognized to record a decline in value of a long-term asset.

impairmente

Principal amounts are usually exchanged

in currency swaps.

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

income statement

How do you calculate the effective tax rate?

income taxes/ earnings before taxes

The percent-of-sales method of computing uncollectible accounts for accounts receivable is used for:

interim statements because it is easier than the aging method

The most common approach to developing pro forma financial statements is called the

percent-of-sales-method

What is a firm's net profit margin?

shows % of profit earned on every $

A decrease in accrued liabilities should be _____ to convert net income to cash flow from operating activities

subtracted

T/F: Gross profit is the difference between sales and all operating expenses.

Assuming a period of inflation, which statement is true?

The FIFO method understates cost of goods sold on the income statement.

Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.

The collection period decreased.

The safety margin kept by the bank on loan against liquid assets is called:

A. a haircut

Which one of the following would not be considered a use of cash?

C. depreciation

In the preparation of cash budgets, capital expenditures are:

C. included as uses of cash and make the budget lumpy

ROE

NI/Shareholder Equity

2 Coverage ratios

Times interest earned & times burden covered

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same?

$750,000 JM Case will pay $10 per share for the 100,000 shares (= 0.20 × 500,000) it repurchases. This reduces the book value by $1 million. Assuming all else remains the same, the new book value should be $750,000.

[The following information applies to the questions displayed below.] Link, Inc.Selected financial data ($ thousands) 2016 2017Income statement and related items Sales$160,835 $274,219 Cost of goods sold 141,829 209,628 Net income (91,432) (257,981)Cash flow from operations (35,831) (12,538) Balance sheet items Cash$236,307 $164,952 Marketable securities 209,670 22,638 Accounts receivable 12,645 21,655 Inventory 3,971 40,556 Total current assets 462,593 249,801 Accounts payable 17,735 13,962 Accrued liabilities 27,184 76,596 Total current liabilities 44,919 90,558 Please refer to the financial data for Link, Inc. above. Link's profit margin for 2017 is

-94%

Companies are required to report comprehensive income in one of WHAT 3 ways?

1. on the face of its income statement 2. in a separate statement of comprehensive income 3. in statement of stockholder's equity

How does the equity method distort earnings? a. Income is recognized even though cash may never be received. b. Equity earnings are recorded even if the investor cannot exercise influence over the investee's policies. c. Equity earnings are only recorded on a cash basis of accounting. d. Equity earnings are recorded when investment ownership is 100%.

Which of the following items could be found on a statement of shareholders' equity? a. Reasons for retained earnings increases or decreases. b. A reconciliation of beginning to ending cash. c. The market value of the firm's common stock. d. Assets = Liabilities + Stockholders' Equity.

Which ratios help assess the firm's ability to meet cash needs as they arise? a. Current ratio and cash flow liquidity ratio. b. Average collection period and net profit margin. c. Debt ratio and dividend payout. d. Operating profit margin and return on equity.

During its first three months of operations, Cari's Bakery, Inc. purchased supplies such as plates, napkins, bags, and cutlery for $9,000 and recorded this as supplies inventory. Supplies on hand at the end of the first quarter, amount to $5,600. To prepare financial statement for the first quarter, the company must record which of the following accounting adjustments?

A) Increase Supplies expense by $3,400 and decrease Supplies inventory by $3,400

How would a sale of $400 of inventory on credit affect the balance sheet if the cost of the inventory sold was $160?

A) It would increase noncash assets by $400 and increase equity by $400 B) It would decrease noncash assets by $160 and decrease equity by $160 D) Both A and B, above happen simultaneously Answer: D

You manage a real estate investment company. One year ago, the company purchased 10 parcels of land distributed throughout the community for $ 11.8 million each. A recent appraisal of the properties indicates that five of the parcels are now worth $9.6 million each, while the other five are worth $17.6 million each. Ignoring any income received from the properties and any taxes paid over the year, calculate the investment company's accounting earnings and its economic earnings in each of the following cases: a/The company sells all of the properties at their appraised values today. b/The company sells none of the properties. c/The company sells the properties that have fallen in value and keeps the others. d/The company sells the properties that have risen in value and keeps the others.

ACCT INCOME : a/18 b/0 c/(11) d/29 ECON INCOME: a/18 b/18 c/18 d/18

Which of the following accounts would not appear in a closing entry?

Accumulated depreciation

______ costs are or should be a major expense in the budgets of companies for which marketing is an important element of success.

Advertising

Which of these ratios are the determinants of a firm's sustainable growth rate? I. Assets-to-equity ratio II. Profit margin III. Retention ratio IV. Asset turnover ratio

All Asset to equity ratio Profit margin Retention ratio Asset turnover ratio PRAT

The inventory method used by a company affects:

All of the above

The net realizable value of accounts receivable is the difference between gross accounts receivable and:

Allowance for Uncollectible Accounts

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. A. asset turnover and control B. financial leverage C. coverage D. profitability E. None of the above.

Asset turnover and control

Selling and administrative expenses include which of the following income statement items? a. Salaries, insurance, interest. b. Salaries, rent, advertising. c. Rent, interest, cost of goods. d. Advertising, research & development, amortization.

Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges? a. Debt ratio and price-to-earnings ratio. b. Cash flow adequacy and fixed charge coverage. c. Days payable outstanding and gross profit margin. d. Cash interest coverage and average collection period.

Which of the following statements concerning a firm's cash flows and profits is false? A. Managers must be at least as concerned with cash flows as with profits. B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production. C. The cash flows generated in a given time period can differ from the profits reported. D. Profits are no assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

Individuals who continually monitor the financial markets seeking mispriced securities: A. earn excess profits over the long term. B. make the markets increasingly more efficient. C. are never able to find a security that is temporarily mispriced. D. are overwhelmingly successful in earning abnormal profits. E. are always quite successful using only historical price information as their basis of evaluation.

B. Make the markets increasingly more efficient

According to the pecking order theory of capital structure, why do firms avoid issuing equity? A. Because fees associated with issuing new equity are so high B. Because they want to avoid dilution of earnings per share C. Because they don't want to commit to paying dividends on the new equity D. Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall E. None of the above

Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

How do purchase returns and allowances and purchase discounts affect gross purchases?

Both are subtracted from purchases

What is amortization? a. The process used to allocate the cost of natural resources. b. The process used to allocate the cost of tangible fixed assets. c. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets. d. The process used to allocate the cost of oil, gas, minerals and standing timber.

Which of the following statements is true? a. In stable industries, such as retailers, the gross profit margin is generally volatile from year to year. b. Gross profit margin and operating profit margin are complements of each other and the two percentages add up to 100%. c. Fixed costs do not vary proportionately with volume changes but remain the same within a relevant range of activity. d. In capital intensive industries sales volume changes result in a stable gross profit margin.

Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts? A. The present values of Ian and Sunny's monies are equal. B. In future dollars, Sunny's money is worth more than Ian's money. C. In today's dollars, Ian's money is worth more than Sunny's. D. Twenty years from now, the value of Ian's money will be equal to the value of Sunny's money. E. Sunny's money is worth more than Ian's money given the 7 percent discount rate.

C. In today's dollars, Ian's money is worth more than Sunny's.

Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000? A. Total assets cannot grow by more than $10,000. B. Dividends cannot exceed $10,000. C. Retained earnings cannot grow by more than $12,000. D. Long-term debt cannot grow by more than $5,000. E. None of the above

C. Retained earnings cannot grow by more than $12,000. (Homework 3)

What is amortization? C. The process used to allocate the cost of natural resources. B. The process used to allocate the cost of tangible fixed assets. C. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets. D. The process used to allocate the cost of oil, gas, minerals and standing timber.

C. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets.

Which of the following is not a condition that must be met for an item to be recorded as revenue? A. Revenues must be earned. B. The amount of the revenue must be measurable. C. The revenue must be received in cash. D. The costs of generating the revenue can be determined.

C. The revenue must be received in cash.

The time interval between paying for raw materials and collecting on sales of finished goods made from those materials is known as the:

C. cash conversion cycle

If a firm's current ratio exceeds 1.0, what happens as a result of paying cash to reduce accounts payable?

C. current ratio increases

When financial managers take action to minimize the carrying costs of current assets, they:

C. may increase costs due to shortages

A firm's permanent working capital refers to the:

C. portion of net working capital that is financed from long term sources

For most corporations, net working capital is:

C. positive to provide liquidity during the cash conversion cycle

4. Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges?

Cash flow adequacy and fixed charge coverage.

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?

Cash flow statement

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time? Income statement Balance sheet Cash flow statement Shareholders' equity statement Market value statement

Cash flow statement

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet?

Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.

Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014. The firm's current asset accounts remained constant. Given this information, which one of the following statements must be true? A. The total asset turnover rate increased. B. The days' sales in receivables increased. C. The inventory turnover rate increased. D. The fixed asset turnover decreased. E. The collection period decreased.

Collection period decreased

A ________ expresses each item on the balance sheet as a percentage of total assets.

Common-size balance sheet

________ income is the change in equity of a company during a period from transactions, other events and circumstances related to non owner sources.

Comprehensive

What is depletion?

Cost of acquiring and developing natural resources

During fiscal 2016, Caleres Inc. (formerly Brown Shoe Company), reported cost of goods sold of $1,517.4 million. Inventory at the start of the year was $546.7 million and at the end of the year was $585.8 million. Which of the following describes the closing entry that the company will make for these accounts?

Credit Cost of goods sold $1,517.4 million

1. Which group of people would be the most concerned about the ability of a firm to make interest and principal payments?

Creditors

Which group of people would be the most concerned about the ability of a firm to make interest and principal payments?

Creditors

Current Ration

Current Assets/Current Liabilities

Which ratios help assess the firm's ability to meet cash needs as they arise?

Current Ratio and Cash flow liquidity ratio

________ are those assets expected to be converted into cash within one year or operating cycle, whichever is longer.

Current assets

5. Selected financial data for Amberjack Corporation follows In thousands Year 1 year 2 Sales 271,161 457,977 COGS 249,181 341,204 Net Income -155,034 -403,509 Cash flow from operations -58,405 -20,437 Cash 341,180 268,872 Marketable securities 341,762 36,900 Accounts receivable 21,011 35,298 Inventories 6,473 72,106 Total current assets 710,42 413,176 Accounts payable 28,908 22,758 Accrues liabilities 44,310 124,851 Total current liabilities 73,218 147,610 a. Calculate the current and quick ratio at the end of each year. How has the company's short-term liquidity changed over this period?

Current ratio - Year 1= 9.70 / Year 2 = 2.80 Quick ratio - Year 1 = 9.61 / Year 2 = 2.31

How is earnings per common share calculated? a. Operating profit divided by the average number of common stock shares outstanding. b. Net profit divided by the average number of common and preferred stock shares outstanding. c. Operating profit divided by the average number of repurchased common stock shares. d. Net profit divided by the average number of common stock shares outstanding.

How is the cash conversion cycle calculated? a. Average collection period + days inventory held + Days payable outstanding. b. Average collection period - days inventory held + Days payable outstanding. c. Average collection period - days inventory held - Days payable outstanding. d. Average collection period + days inventory held - Days payable outstanding.

Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. E. The ending cash balance must equal the minimum desired cash balance.

D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.

If there is an increase or decrease in sales, what should an analyst do?

Determine if it is caused from a change in price, volume or a combination of both

Which method to record uncollectible accounts does NOT use estimates?

Direct write-off method

Management exercises control over the budget level and timing of _____ expenditures.

Discretionary

What is a negative affect of using the equity method?

Distorts earnings when income is recognized and no cash may be received and it assumes that the investor would cause the investee to pay dividends (which may not be true)

The _____ helps the analyst see how the firm's decisions and activities over the course of an accounting period interact to produce an overall return to the firm's shareholders, the return on equity.

Du Pont System

Which of the following statements is true? A. Rapid growth spurs increases in market share and profits and thus, is always a blessing. B. Firms that grow rapidly only very rarely encounter financial problems. C. The cash flows generated in a given time period are equal to the profits reported. D. Profits provide assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

When investment returns are less than perfectly positively correlated, the resulting diversification effect means that: A. making an investment in two or three large stocks will eliminate all of the unsystematic risk. B. making an investment in three companies all within the same industry will greatly reduce the systematic risk. C. spreading an investment across five diverse companies will not lower the total risk. D. spreading an investment across many diverse assets will eliminate all of the systematic risk. E. spreading an investment across many diverse assets will eliminate some of the total risk.

E. Spreading and investment across many diverse assets will eliminate all of the systematic risk

Ptarmigan Travelers had sales of $420,000 in 2016 and $480,000 in 2017. The firm's current asset accounts remained constant. Given this information, which one of the following statements must be true? A. The days' sales in receivables increased. B. The total asset turnover rate increased. C. The fixed asset turnover decreased. D. The inventory turnover rate increased. E. The collection period decreased.

E. The collection period decreased.

How should companies with more than one revenue source report revenue and cost of goods sold?

Each revenue line should be shown separately with a corresponding cost of goods sold line for each revenue source.

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal?

Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.

The cost of equity for a firm: A. tends to remain static for firms with increasing levels of risk. B. increases as the unsystematic risk of the firm increases. C. can be estimated from the capital asset pricing model or the dividend growth model. D. equals the risk-free rate plus the market risk premium. E. equals the firm's pre-tax weighted-average cost of capital.

Equals the risk-free rate plus the market risk premium

T/F: Accounts receivable are recorded on the balance sheet at gross realizable value.

T/F: An analysis of the statement of cash flows should, at a minimum, cover the following areas: analysis of cash inflows, analysis of cash outflows, and an analysis of the structure of asset and liabilities.

T/F: Articles from current business periodicals should not be used in financial statement analysis as journalists are often biased.

T/F: Cash from sales of property, plant and equipment is considered an operating activity on the cash flow statement.

T/F: Form 10-Ks and Form 10-Qs can be located through the Dun & Bradstreet Information services.

T/F: Information that is significant enough to make a difference in a decision is considered to be immaterial.

T/F: Repurchase of a firm's own shares is an investing cash outflow.

T/F: Retained earnings is the unused stash of cash that a firm has accumulated since inception.

T/F: The European Union began requiring publicly traded companies to use U.S. GAAP in 2005.

T/F: The FASB has congressional authority to set accounting policies.

T/F: The amounts on a cash flow statement cannot be manipulated

T/F: The balance sheet is prepared for a period of time, generally a year.

T/F: The common size income statement expresses each income statement item as a percentage of total assets.

T/F: The debt ratio considers the proportion of all stockholders' equity that is financed with debt

T/F: The income statement comes in two basic formats, the multiple-step and the single-step versions; however, for analysis purposes the single-step version should be used.

T/F:The time period assumption assumes a two year time frame with interim reporting occurring daily and weekly.

T or F: Gross profit is the difference between sales and operating expenses.

F; it is the difference between sales and cost of goods sold

A company's return on assets will always equal or exceed its profit margin.

FALSE

A creditor is ultimately concerned with the ability of a firm to generate profits

FALSE

A drawback of forecasting using spreadsheets is that typical spreadsheet programs are not equipped to deal with the circularity involving interest expense and debt.

FALSE

According to GAAP, revenue should not be recognized until cash is received.

FALSE

An advantage of the percent-of-sales approach to financial forecasting is that effective forecasts can be prepared without consulting historical financial statements.

FALSE

An annual financial forecast for 2017 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2017.

FALSE

Financial ratios are powerful tools due to the fact that standard definitions exist and there is a set standard that should be met for each ratio.

FALSE

Form 10-Ks and Form 10-Qs can be located through the Dun & Bradstreet Information Services

FALSE

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

FALSE

The accrual principle requires that revenue not be recognized until payment from a sale is received.

FALSE

The debt ratio considers the proportion of all stockholders equity that is financed with debt

FALSE

The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.

FALSE

The quality of reported earnings is a minor element in evaluating financial statement data.

FALSE

The sustainable growth rate is defined as the maximum rate at which company sales can increase.

FALSE

The three cost flow assumptions most frequently used in the U.S. are ...... LIFO, and average cost.

FIFO

The three cost flow assumptions most frequently used in the U.S. are _______ , _______ , and _______.

FIFO, LIFO, average cost

A company's return on assets will always equal or exceed its profit margin.

False

A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were sold during 2017.

False

Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method.

False

All else equal, a terminal value based on a no-growth perpetuity would be higher than a terminal value based on a perpetuity with 2 percent growth

False

An acquirer should never consider a target that would reduce the acquirer's earnings per share.

False

An advantage of the percent-of-sales approach to financial forecasting is that effective forecasts can be prepared without consulting historical financial statements.

False

An annual financial forecast for 2017 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2017. True or False?

False

An increase in cash and cash equivalents should appear as a source of cash on the sources and uses statement.

False

An increase in long-term assets is a source of cash.

False

Following Generally Accepted Accounting Principles, two methods to estimate uncollectible accounts receivable are the direct write-off method and the allowance method

False

If a company seeks to maximize firm value, it should never grow at a rate above its sustainable growth rate.

False

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

False

Investments in marketable securities are generally a positive NPV investment for tax-paying firms.

False

Net working capital will decrease when a firm buys raw materials on credit.

False

One way to manage an actual growth rate above the sustainable growth rate is to decrease prices.

False

Permanent working capital requirements are generally financed with commercial paper.

False

The accrual principle requires that revenue not be recognized until payment from a sale is received.

False

The balance sheet is prepared for a period of time, generally a year.

False

The cost of equity is usually reported on the income statement right below interest expense.

False

The credit crisis of 2007 to 2009 largely left the market for commercial paper unaffected.

False

The notes to the financial statements are only important to the accountants; the financial analyst can skip over them to save time.

False

The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.

False

The percent-of-sales approach to financial forecasting works well for forecasting the income statement but is not useful for forecasting the balance sheet.

False

Uncollectible-account expense is included in the Cost of Goods sold on the income statement

False

T or F: The Income statement presents cash revenues, cash expenses, net income and earnings per share for an accounting period.

False; for a period in time

T or F: The common size income statement expresses each income statement item as a % of total assets.

False; presents them as a % of net sales

Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below?

February, March, and April

Assume each month has 30 days and AmDent has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDent will collect payment for the sales it made during which of the months listed below?

February, march, April

Roadway company purchases inventory from Fedway Company with the shipping terms FOB destination. This means that:

Fedway Company will pay the freight on this transaction

The _______________ ratio is a broader measure of coverage capability than the times interest earned ratio because it includes the fixed payments associated with leasing.

Fixed Charge Coverage

The ______ ratio is a broader measure of coverage capability than the times interest earned ratio because it includes the fixed payments associated with leasing

Fixed charge coverage

True

Fixed costs do not vary proportionately with volume changes but remain the same within a relevant range of activity.

A corporate annual report contains _____ financial statements.

Four

What is the gross profit margin?

Gross profit represented as a % of gross sales (gross profit/ net sales)

Why isnt land depreciated?

Has an unlimited useful life

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?

How much will our sales grow? Will additional fixed assets be required? Will dividends be paid to shareholders? How much new debt must be obtained?

Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios II. The recognition that financing decisions do not affect firm or shareholder value III. A range of earnings chart and proximity of expected EBIT to the breakeven value IV. A conservative debt policy that obviates the need to evaluate risk

I and III

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover

I, II, and IV only

Cash collected on accounts receivable would produce what effect on the balance sheet?

Increase assets and decrease assets

Klamath Corporation has asset turnover of 3.5, a profit margin of 5.2%, and a current ratio of 0.5. What is Klamath Corporation's return on equity?

Insufficient information to find ROE

The pre-tax cost of debt: A. is based on the current yield to maturity of the firm's outstanding bonds. B. is equal to the coupon rate on the latest bonds issued by a firm. C. is equivalent to the average current yield on all of a firm's outstanding bonds. D. is based on the original yield to maturity on the latest bonds issued by a firm. E. has to be estimated as it cannot be directly observed in the market.

Is based on the current yield to maturity of the firm's outstanding bonds

Debt Ratio

L/A

___________ ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and other fixed charges.

Leverage

10. In 2013, Natural selection, a nationwide computer dating service, had $500 million of assets and $200 million of liabilities. Earnings before interest and taxes were $120 million, interest expense was $28 million, the tax rate was 40%, principal repayment requirements were $24 million, and annual dividends were 30% per share on 20 million shares outstanding. a. Calculate the following for Natural Selection: i. Liabilities-to-equity ratio ii. Time-interest-earned ration iii. Times burden covered

Liabilities-to-equity ratio = 200/300 = 0.67, Times interest earned = EBIT/interest expense = 120/28 = 4.29 Times burden covered = EBIT/ (interest + (principal repayment/(1-tax rate))) = 120/[28+24/(1-0.40)]= 1.76

Which of the following statements best describes how the company's short-term liquidity changed from 2011 to 2012?

Link's short-run liquidity has deteriorated considerably, but from a high initial base.

______ ratios measure a firm's ability to meet cash needs as they arise

Liquidity

___________ ratios measure a firm's ability to meet cash needs as they arise.

Liquidity

When inventory costs are increasing, the FIFO costing method will generally yield a cost of goods sold that is:

Lower than cost of goods sold under the the LIFO method

2. Which group of people would be the most concerned about the operating areas that have contributed to the success of the firm and which have not?

Management

Which group of people would be the most concerned about the operating areas that have contributed to the success of the firm and which have not?

Management

______ is responsible for the preparation of the financial statements, including the notes, and the _____ attests to the fairness of the presentation.

Management, auditor's report

______ ratios measure returns to stockholders and the value the marketplace puts on a company's stock.

Market

_____________ ratios measure returns to stockholders and the value the marketplace puts on a company's stock.

Market

________ are also referred to as short-term investments.

Marketable securites

________ are also referred to as short-term investments.

Marketable securities

are also referred to as short-term investments.

Marketable securities

One of the generally accepted accounting principles that provide the foundation for preparing financial statements is the _____ principle.

Matching

How are earnings measured?

On an accrual basis either by the multi step approach or single step approach

b. Why is Pacific's ROE so much higher than Atlantic's? Does this mean Pacific is a better company? Why or why not?

Pacific's higher ROE is a natural reflection of its higher financial leverage. It does not mean that Pacific is the better company.

The inventory system that uses computer software to keep a running record of inventory on hand is the:

Perpetual inventory system

All of the following are steps of a financial statement analysis except:

Prepare pro forma statements

7. All of the following are steps of a financial statement analysis except:

Prepare pro forma statements.

In a financial analysis, changes in revenue should be divided into those due to————— and those due to ——————

Price, volume

Which company would you expect to have a higher price-to-earnings ratio, Google or railroad company Union Pacific? Why?

Price-to-earnings ratios are highly dependent on future growth expectations. I would thus expect high growth Google to have the higher ratio than low growth GM.

______ financial statements are projections of financial statements based on a set of assumptions regarding future revenues, expenses, level of investments in assets, financing methods and costs, and working capital management.

Pro Forma

__________________ financial statements are projections of financial statements based on a set of assumptions regarding future revenues, expenses, level of investments in assets, financing methods and costs, and working capital management.

Pro Forma

_____ financial statements are projections of financial statements based on a set of assumptions regarding future revenues , expenses, level of investments in assets, financing methods and costs, and working capital management.

Pro forma

10. What is important to understand about the label "pro forma"?

Pro forma earnings or financial statements are sometimes based on a firm's own definition which is not technically a correct definition.

What is important to understand about the label "pro forma"

Pro forma earnings or financial statements are sometimes based on a firms own definition which is not technically a correct definition.

Define the multi step approach

Provides several intermediate profit measures on the income statement (gross profit, profit from operations and earnings before taxes)

The most popular yardstick of financial performance among investors and senior managers is the:

ROE

7. Answer the questions below based on the information in the table. The tax rate is 40%and all dollars in in millions. For simplicity, assume that the companies have no other liabilities other than the debt shown below. Atlantic Corp. Pacific Corp Earnings before interest and taxes $450 $470 Debt (at 8% interest) $290 $1,490 Equity $910 $370 a. Calculate each company's ROE, ROA, and ROIC

ROE - Atlantic = 28.1% / Pacific = 56.9% ROA - Atlantic = 21.3% / Pacific = 11.3% ROIC - Atlantic = 22.5% / Pacific = 15.2%

Which one of the following statements does NOT describe a problem with using ROE as a performance measure?

ROE is a forward-looking, one-period measure, while business decisions span the past and present.

Which of the following items could be found on a statement of shareholders' equity?

Reason for increase and decrease in retained earnings.

Selling and administrative expenses include which of the following income statement items?

Salaries, rent, advertising

How are sales reported on the income statement?

Sales are shown for three years net of returns and allowances.

Asset Turnover

Sales/Assets

Fixed-asset Turnover

Sales/Net Property, Plant, and equipment

The _____ was passed in 2002 and was one of the most sweeping corporate reforms since the Securities Act of 1934.

Sarbanes Oxley Act

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis

Simulation Scenario analysis Sensitivity analysis

T/F: Congress passed the Sarbanes-Oxley Act of 2002 in hopes of ending future accounting scandals and renewing investor confidence in the marketplace

T/F: External auditors are required to audit the internal control assessment of the company as well as the financial statements.

T/F: Supplementary schedules, such as data related to the breakdown of key financial figures by operating segment, are helpful to financial statement analysts.

T/F: The Management Discussion and Analysis is of potential interest to the analyst because it contains information that cannot be found in the financial data.

T/F: The analyst of financial statements should consider cash flows over a period of time, looking at patterns of performance and exploring underlying causes of strength and weakness.

T/F: The balance sheet is also called the statement of condition or statement of financial position.

T/F: The objectives of a financial statement analysis will vary depending on the perspective of the financial statement user.

T/F: The statement of stockholders' equity is an important link between the balance sheet and the income statement.

T/F: The valuation of marketable securities on the balance sheet requires the separation of investment securities into three categories: held to maturity, trading securities, and securities available for sale.

A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing activities, or financing activities.

TRUE

Issue costs of equity are high relative to those of debt.

TRUE

Supplementary schedules, such as data related to the breakdown of key financial figures by operating segment , are helpful to financial statement analysis.

TRUE

The accounts receivable turnover, inventory turnover and accounts payable turnover ratios are mathematical complements to the ratios that make up the cash conversion cycle.

TRUE

Why is it important to asses operating profit?

The figure for operating profit provides a basis for assessing the success of the firm apart from its financing and investing activities and separate from tax considerations.

Which company would you expect to have the higher debt-to-equity ratio, a financial institution or a high-technology company? Why?

The financial institution should have the higher debt to equity ratio because the liquid, relatively safe nature of its assets enables it to borrow more money at attractive rates. And in the case of banks, deposit insurance enables the institution to collect low cost deposits. The principal asset of financial institutions tends to be relatively safe loans that generate relatively predictable income streams. The uncertain income stream of the high tech company makes it less creditworthy.

d. Which company would you expect to have a higher current ratio, a jewelry store or an online bookstore? Why?

The jewelry store should have the higher current ratio. Jewelry stores typically need to have a lot of expensive display inventory on hand and often offer time payment plans to customers. Online bookstores, on the other hand, typically carry little inventory and rely on credit card sales involving little accounts receivable.

all of the following items should be discussed in the management discussion and analysis except for:

The market value of all assets

Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future? A. Inflation reduces the purchasing power of future dollars. B. The value of a dollar in the future will be compounded more than the value of a dollar today. C. There is more uncertainty of receiving dollars further into the future. D. A dollar today can be productively invested in the time before receiving a dollar in the future. E. None of the above

The value of a dollar in the future will be compounded more than the value of a dollar today.

b. How important should changes in ROE be in this decision?

This, however, is not important to the decision. This is another example of the timing problem. If the technology company has great promise, it may make complete sense to acquire the business even though it is currently losing money. The proper way to evaluate the acquisition is by estimating the target's fair market value and acquiring it at a lower price. This is the topic of Chapter 9.

Times-burden-covered ratio

On a common-size balance sheet, all accounts are expressed as a percentage of: A. sales. B. profits. C. equity. D. total assets. E. None of the above.

Total assets

What causes material changes in the number of common stock shares outstanding?

Treasury stock purchases, purchases and retirement of firm's own common stock, stock splits and reverse stock splits

A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing activities, or financing activities.

True

A company experiencing balanced growth does not generate cash surpluses or cash deficits.

True

A company that borrows $1 million long term and invests the proceeds in inventory will see a $1 million increase in its net working capital.

True

A company that borrows $1 million long term and invests the proceeds in inventory will see its cash position unchanged.

True

A company that borrows $1 million short term and invests the proceeds in inventory will see its cash position unchanged.

True

A company that borrows $1 million short term and invests the proceeds in inventory will see no change in its net working capital.

True

In recent years, U.S. companies as a whole have repurchased more equity than they have issued.

True

Investment-grade bonds are usually defined as bonds with ratings of BBB- or higher.

True

Once the firm has sold its receivables, the factor bears all the responsibility for collecting on the account.

True

One way to manage an actual growth rate below the sustainable growth rate is to repurchase shares.

True

Premiums paid by acquirers indicate that the shareholders of target firms benefit

True

Return on assets can be calculated as profit margin times asset turnover.

True

When a loan is secured by receivables, the firm assigns the receivables to the bank. If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.

True

Companies that are paid in advance for services or products record a liability on the receipt of cash in an account titled ________ or ________.

Unearned revenue; deferred credits

What are extraordinary gains and losses?

Unusual in nature AND infrequent in occurrence

What way can firms legally record revenue before it is earned?

Use the "bill and hold" method

Which of the following is a reason why a company's market value of equity differs from its book value of equity?

Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

FALSE

Valuing a call option requires an accurate estimate of the future value of the underlying asset.

When does cookie jar accounting occur?

When companies create or use reserve accounts for the purpose of setting aside funds in goods years by over-reserving and then reducing or reversing charges to the reserve accounts in poor years

According to GAAP, when should revenue be recognized on the income statement?

When it is actually earned (proof that a true sale has taken place)

When should the equity method be used?

When the investor can exercise significant influence over the investee's operating and financing policies

Using the following excerpts from the most recent annual report of woohoo, a high technology firm, analyze the accounts receivable and allowance for doubtful accounts. Be sure to show all calculations and write a thorough interpretation of those calculations.

Woo hoo experienced an increase in sales in 2015; however, both the accounts receivables an allowance for doubtful accounts decrease. The estimated percentage of bad debt relative to total accounts receivable has declined from 3.7% in 2014 to 2.2% in 2015, indicating management is expecting to collect more of their accounts receivables in the future. The valuation schedule indicates that the allowance balance was somewhat high compared to actual write-offs in 2013 and 2014. The firm charged very little to the bad expense account in 2014 and 2015 which would have resulted in higher net income in those years. The allowance account balance at the end of 2015 is now lower than the actual write-offs in 2015 and may be in adequate in the upcoming year. Woo hoo may have tighten their credit policy and isn't dissipating better collections in the future or they may be intentionally manipulating the account to report higher income in a year with poor earnings.

6. Top management measures your division's performance by calculating the division's return on investment (ROI), defines as division operating income divided by division assets. Your division has done quite well recently; its ROI is 30%. Your believe the division should invest in a new production process, but a colleague disagrees, pointing out that because the new investment's fir-year ROI is only 25 %, it will hurt performance. How would you respond?

Your colleague's argument has several holes in it. a. He has forgotten the timing problem. The investment has consequences over many years, and it is inappropriate to base the decision on only one year's results. As will be discussed beginning in Chapter 7, the appropriate rate of return for evaluating investment opportunities is not the division's accounting ROI but a rate that specifically incorporates the time value of money. b. Your company's performance appraisal system is faulty. Investment return should be judged against a minimum acceptable return, not the division's historical return. An irrational implication of the performance system used by your company is that divisions with very low returns will want to make lots of investments because many will promise returns higher than the division's ROI. Conversely, high return divisions, such as yours, will find few opportunities beating the division's ROI. We will look at this issue again in Chapter 8 as part of our look at Economic Value Added.

. What is the preferred method to generate cash in a firm? a. Operating activities. b. Investing activities. c. Financing activities. d. Investing and financing activities

Assuming a period of inflation, which statement is true? a. The FIFO method understates cost of goods sold on the income statement. b. The FIFO method understates balance sheet inventory. c. The LIFO method overstates balance sheet inventory. d. The LIFO method understates cost of goods sold on the income statement.

In what industry would it be expected that companies would spend a significant amount on research and development activities? a. Pharmaceutical. b. Clothes retailer. c. Groceries. d. Wholesale distributor of computer parts.

The change in retained earnings is affected by which of the following? a. Net income and payment of dividends. b. Net income and common stock. c. Net income and paid-in capital. d. Payment of dividends and common stock.

Use the indirect method to answer questions 11-14. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash flow from operating activities for Felix Company? a. $240 b. $70 c. $320 d. $250

Use the indirect method to answer questions 7-10. The following information is available for Armstrong Company: Net income $450 Increase in plant and equip. $170 Depreciation expense 80 Payment of dividends 10 Decrease in accts. receiv. 20 Increase in long-term debt 100 Increase in inventories 15 Decrease in accounts payable 30 What is cash flow from operating activities for Armstrong Company? a. $505 b. $495 c. $335 d. $55

What basic financial statements can be found in a corporate annual report? a. Balance sheet, income statement, statement of shareholders' equity, and statement of cash flows. b. Balance sheet, auditor's report and income statement. c. Earnings statement and statement of retained earnings. d. Statement of cash flows and five-year summary of key financial data

What is a Form 10-K? a. A document filed with the SEC by companies selling securities to the public, containing much of the same information as the annual report as well as additional detail. b. A document filed with the SEC containing nonpublic information. c. A document filed with the American Institute of Certified Public Accountants (AICPA) containing supplementary schedules showing management remuneration and elaborations of financial statement disclosures. d. A document filed with the SEC containing key business ratios and forecasts of earnings.

What is an investor's objective in financial statement analysis? a. To determine whether an investment is warranted by estimating a company's future earnings stream. b. To decide whether the borrower has the ability to repay interest and principal on borrowed funds. c. To determine the company's taxes for the current year. d. To determine if the firm would be a good place to obtain employment.

What is the first step in an analysis of financial statements? a. Specify the objectives of the analysis. b. Do a common-size analysis. c. Check the auditor's report. d. Check references containing financial information.

What organization has the authority to register, inspect, and discipline auditors of all publicly owned companies? a. Public Company Accounting Oversight Board. b. SOX. c. Congress. d. FASB.

When will a firm regard goodwill on its books? a. When one company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired. b. When the firm donates property to charities. c. When it is determined that there has been a loss of value of long-term assets. d. When fixed assets are impaired.

Which format of the income statement should be used for analysis purposes? a. Multiple-step. b. Cash basis. c. Single-step. d. Accrual basis.

Which item would not be classified as an operating expense? a. Interest expense. b. Rent expense. c. Depreciation. d. Repairs and maintenance.

Which method of inventory assumes the last units purchased will remain in ending inventory on the balance sheet? a. FIFO. b. LIFO. c. Average cost. d. LIFO and FIFO.

Which of the following accounts could be categorized as either a current or noncurrent liability depending on date the debt is due? a. Notes payable and deferred taxes. b. Accounts payable and current portion of long-term debt. c. Deferred taxes and mortgages due in 30 years. d. Long-term warranties and accounts payable.

Which of the following accounts would be classified as current assets on the balance sheet? a. Accounts receivable, inventory, cash equivalents. b. Marketable securities, accounts payable, property, plant and equipment. c. Prepaid expenses, goodwill, long-term investments. d. Property, plant and equipment, inventory, goodwill.

Which of the following assets would be classified as current assets on the balance sheet? a. Cash equivalents, inventory, prepaid expenses. b. Cash, accounts payable, deferred income taxes. c. Accounts receivable; prepaid expenses; property, plant and equipment. d. Inventory, goodwill, unearned revenue.

Which of the following is not a tool or technique used by a financial statement analyst? a. Random sampling analysis b. Trend analysis c. Industry comparisons d. Common-size financial statement

Which of the following ratios would not be used to measure the extent of a firm's debt financing? a. Times interest earned b. Debt to equity c. Long-term debt to total capitalization d. Debt ratio

Which of the following statements about inventory turnover is false? a. A low inventory turnover is generally a sign of efficient inventory management. b. Inventory turnover is calculated with cost of goods sold in the numerator. c. Inventory turnover is a gauge of the liquidity of a firm's inventory. d. Inventory turnover measures the efficiency of the firm in managing and selling inventory.

Which of the following statements is false? a. An increase in accounts payable represents accounts not yet collected in cash. b. To obtain cash flow from operations, the reported net income must be adjusted. c. A negative cash flow can occur in a year in which net income is positive. d. An increase in accounts receivable represents accounts not yet collected in cash.

Which of the following statements is false? a. The Sarbanes-Oxley Act of 2002 was the cause of the demise of Enron. b. The Norwalk Agreement in 2002 was a result of the FASB and IASB agreeing to work toward a convergence of standards. c. The Public Company Accounting Oversight Board is responsible for monitoring auditors of all publicly owned companies. d. The Sarbanes-Oxley Act of 2002 requires the chief executive officer and the chief financial officer of a publicly traded company to certify the accuracy of the financial statements.

Which of the following statements is true? a. Foreign firms registered with the SEC may file reports based on IFRS. b. U.S. firms registered with the SEC may file reports based on IFRS. c. The European Union requires firms to report based on GAAP. d. Foreign firms registered with the SEC may file reports based on IFRS only if they reconcile all amounts to GAAP.

Which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and in generating return to shareholders? a. Return on investment and return on equity. b. Gross profit margin and net profit margin. c. Return on investment. d. Total asset turnover and operating profit margin.

Why can the equity method of accounting for investments in the voting stock of other companies cause distortions in net earnings? a. Income is recognized where no cash may ever be received. b. Income is recognized only to the extent of cash dividends received. c. Significant influence may exist even if the ownership of voting stock is less than 20%. d. Income should be recognized in accordance with the accrual method of accounting.

Why is the figure for operating profit important? a. The figure for operating profit provides a basis for assessing the success of a company apart from its financing and investment activities and separate from its tax status. b. The operating profit figure includes all operating revenues and expenses as well as interest and taxes related to operations. c. This is the figure used for calculating federal income tax expense. d. The figure for operating profit provides a basis for assessing the wealth of a firm.

Why is the method of valuing inventory important? a. 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. b. Inventories always account for more than 50% of total assets and therefore have a considerable impact on a company's financial position. c. Companies desire to use the inventory valuation method that minimizes the cost of goods sold expense. d. Inventory valuation is based on the actual flow of goods.

Why is the quick ratio a more rigorous test of short-run solvency than the current ratio? a. The quick ratio eliminates inventories from the numerator. b. The quick ratio eliminates prepaid expenses for the numerator. c. The quick ratio considers only cash and marketable securities as current assets. d. The quick ratio eliminates prepaid expenses for the denominator.

Why should an individual learn to read and interpret financial statements? a. Individuals cannot necessarily rely on auditors and management of firms to offer honest information about the financial well-being of firms. b. An individual need not learn to read and interpret financial statements because auditors offer a report indicating whether the company is financially sound or not. c. Learning to read and interpret financial statements will enable individuals to gain employment. d. Understanding financial statements will guarantee at least a 20% return on investments.

An increase in accounts payable should be _____ to convert net income to cash flow from operating activities.

added

Depreciation and amortization should be _____ to convert net income to cash flow from operating activities.

added

Under the allowance method for estimating uncollectible accounts:

all of the above

What is the cost method?

allows recognition of investment income only to the extent of any cash dividends actually received ; carries an investment asset account at cost

balancing equation is expressed as:

assets = liabilites + stockholders equity

All of the following items should be discussed in the management discussion and analysis except for: a. Anticipated changes in the mix and cost of financing resources. b. The market value of all assets. c. The internal and external sources of liquidity. d. Unusual or infrequent transactions that affect income from continuing operations.

How is a common-size income statement prepared? a. Each income statement item is expressed as a percentage of total assets. b. Each income statement item is expressed as a percentage of net sales. c. Each income statement item is expressed as a percentage of net income. d. Each income statement item is expressed as a percentage of cash flow.

How is it possible for a firm to be profitable and still go bankrupt? a. Earnings have increased more rapidly than sales. b. The firm has positive net income but has failed to generate cash from operations. c. Sales have not improved even though credit policies have been eased. d. Net income has been adjusted for inflation.

Jett Co.'s average tax rates for 2015 and 2014 are: a. 15.5% and 10.0% b. 20.0% and 35.0% c. 25.8% and 35.4%. d. 31.4% and 36.8%.

Jett Co.'s gross profit, operating profit and net profit margins for 2015 are: a. 50.0%, 32.5%, 22.5% respectively. b. 29.2%, 12.5%, 10.0%, respectively. c. 27.0%, 11.0%, 10.5%, respectively. d. 21.5%, 17.5%, 12.0%, respectively.

The following item would be classified as a financing activity on the statement of cash flows: a. Payments for inventory. b. Payment of dividends. c. Acquisition of land. d. Sales of goods.

What information can be found on a statement of stockholders' equity? a. A reconciliation of the cash account and the retained earnings account. b. A reconciliation of the beginning and ending balances of all accounts that appears in the stockholders' equity section of the balance sheet. c. A reconciliation of the operating, investing and financing activities of a firm. d. A reconciliation of net profit or loss and the cash account.

What information would not be found in a firm's annual report? a. Notes to the financial statements. b. Financial Reporting Rulings. c. Auditor's report. d. High and low stock prices.

What is a creditor's objective in performing an analysis of financial statements? a. To determine whether an investment is warranted by estimating a company's future earnings stream. b. To decide whether the borrower has the ability to repay interest and principal on borrowed funds. c. To determine the company's taxes for the current year. d. To determine if the firm would be a good place to obtain employment.

What is a limitation common to both the current and quick ratio? a. Prepaid expenses are potential sources of cash. b. Accounts receivable may not be truly liquid. c. Inventories may not be truly liquid. d. Marketable securities are not liquid.

What is a serious limitation of financial ratios? a. Ratios indicate weaknesses only. b. Ratios are not predictive. c. Ratios are screening devices. d. Ratios can be used only by themselves.

What is the balancing equation for the balance sheet? a. Revenues - Expenses = Net income. b. Assets = Liabilities + Stockholders' equity. c. Assets + Liabilities = Stockholders' equity. d. Assets + Stockholders' equity = Liabilities.

What type of firm generally has the highest proportion of fixed assets to total assets? a. Wholesalers b. Manufacturers c. Retailers and wholesalers d. Retailers

Where can one most typically find the cost flow assumption used for inventory valuation for a specific company? a. On the face of the balance sheet with the total current asset amount. b. In the notes to the financial statements. c. In the statement of retained earnings. d. In The Risk Management Association, Annual Statement Studies.

Which financial statement provides information about operating, financing and investing activities? a. Statement of financial position. b. Statement of cash flows. c. Statement of stockholders' equity. d. Income statement.

Which of the following items needs to be disclosed separately in the income statement? a. Warranty expense b. Discontinued operations c. Salary expense d. Bad debt expense

Which of the following items should be recorded as other comprehensive income? a. Realized gains and losses b. Foreign currency translation effects c. Extraordinary gains and losses d. All of the above.

Which of the following items would cause the cash conversion cycle to decrease? a. Increasing the days inventory held. b. Increasing days payable outstanding. c. Increasing the average collection period. d. None of the above.

Which of the following items would not be classified as cash equivalents? a. U.S. Treasury bills. b. Trading securities. c. Commercial paper. d. Money market funds.

Which of the following liabilities would be included in the current liabilities section on the balance sheet? a. Current maturities of long-term debt, additional paid-in capital, pension obligations. b. Accounts payable, short-term debt, unearned revenues. c. Capital lease obligations, notes payable, common stock. d. Accrued liabilities, deferred credits, retained earnings.

Which of the following marketable securities are reported at fair value? a. Held to maturity and trading securities. b. Trading securities and securities available for sale. c. Held to maturity and securities available for sale. d. Corporate bonds and convertible debt.

Which of the following organizations write accounting rules? a. SOX, SEC, and IASB. b. FASB, SEC, and IASB. c. FASB and Congress. d. EDGAR and IASB.

Which profit margin measures the overall operating efficiency of the firm? a. Return on equity b. Operating profit margin c. Net profit margin d. Gross profit margin

Why is it important to evaluate increases and decreases in operating expenses? a. It is important to determine whether companies are spending at least 10 cents of every sales dollar on advertising expenses. b. Increases in operating expenses may indicate inefficiencies, and decreases in operating expenses may be detrimental to long-term sales growth. c. Increases in operating expenses are always an indication that a firm will increase sales in the future. d. None of the above.

How is the common-size income statement prepared? a. Each income statement item is expressed as a percentage of total assets. b. Each income statement item is expressed as a percentage of net sales. c. Each income statement item is expressed as a percentage of net income. d. Each income statement item is expressed as a percentage of cash flow.

b. Each income statement item is expressed as a percentage of net sales.

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets?

balance sheet

Earnings per share figure calculated by dividing the average number of common stock shares outstanding into the net earnings available to common stockholders.

basic earnings per share

How is it possible for a U.S. firm to have increasing earnings but a lower effective tax rate? a. The firm has expenses that are not deductible for tax purposes. b. Tax rates in foreign countries where the firm operates are higher. c. Tax rates in foreign countries where the firm operates are lower. d. It is not possible for a firm to have an effective tax rate different from the U.S. federal statutory tax rate.

Use the indirect method to answer questions 7-10. The following information is available for Armstrong Company: Net income $450 Increase in plant and equip. $170 Depreciation expense 80 Payment of dividends 10 Decrease in accts. receiv. 20 Increase in long-term debt 100 Increase in inventories 15 Decrease in accounts payable 30 What is the change in cash for Armstrong Company? a. $315 b. $565 c. $425 d. $215

What accounts are most likely to be found in the stockholders' equity section of the balance sheet? a. Common stock, retained earnings, dividends payable b. Common stock, additional paid-in capital, liabilities c. Common stock, additional paid-in capital, retained earnings d. Common stock, long-term debt, preferred stock

What are three major cost flow assumptions used by U.S. companies in valuing inventory? a. LIFO, FIFO, actual cost b. LIFO, FIFO, average market c. LIFO, FIFO, average cost d. LIFO, FIFO, double-declining balance

What does the price to earnings ratio measure? a. The earnings for one common share of stock. b. The relationship between dividends and market prices. c. The "multiple" that the stock market places on a firm's earnings. d. The percentage of dividends paid to net earnings of the firm.

What information can be gained from sources such as Industry Norms and Key Business Ratios, Annual Statement Studies, and Industry Surveys? a. Forecasts of earnings b. The general economic condition c. A company's relative position within its industry d. Elaborations of financial statement disclosures

What is a qualified report? a. A report stating that the auditors are not qualified to report on a firm. b. A report that states the financial statements are in violation of GAAP. c. A report that states that departures from GAAP exist in the firm's financial statements. d. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

What is implied if the inventory account has increased? a. Cash flow from financing activities has decreased relative to net income. b. Cash flow from operating activities has increased relative to net income. c. Cash flow from operating activities has decreased relative to net income. d. Cash flow from financing activities has increased relative to net income.

When is a dual presentation of basic and diluted earnings per share required? a. When a company has a simple capital structure. b. When convertible securities are in fact converted. c. When a company has a complex capital structure. d. When a company has pension liabilities.

Which agency requires the filing of Form 10-Ks, Form 10-Qs and Form 8-Ks? a. FASB. b. IASB. c. SEC. d. GAAP.

Which equation represents an income statement? a. Assets = liabilities + stockholders' equity. b. Cash in - cash out = net income. c. Revenues - expenses = net income. d. Beginning retained earnings + revenues - expenses = ending retained earnings.

Which group of people would be the most concerned about the ability of a firm to make interest and principal payments? a. Auditors. b. Customers. c. Creditors. d. Investors.

Which of the following is an external source of liquidity? a. Sales of services. b. Repurchase of stock. c. Borrowing. d. Sales of products

Which of the following items should alert the analyst to the potential for manipulation when analyzing accounts receivable and the allowance for doubtful accounts? a. Sales, accounts receivable and the allowance for doubtful accounts are all growing at approximately the same rate. b. A company lowers its credit standards and also increases the balance in the allowance for doubtful accounts. c. Accounts receivable is growing at a large rate and the allowance for doubtful accounts is decreasing. d. An analysis of the "Valuation and Qualifying Accounts" schedule required in the Form 10-K reveals that the amounts recorded for bad debt expense are close in amount to the actual amounts written off each year.

Which of the following items would be a way to manipulate the cash flow from operating activities amount on the statement of cash flows? a. Adding depreciation back to net income to determine cash flow from operating activities. b. Including interest expense and tax expense in the calculation of cash flow from operating activities. c. Recording an item that should be recorded as an operating activity as an investing activity. d. The cash flow statement cannot be manipulated.

Which of the following statements is false? a. Common-size balance sheets allow for comparison of firms with different levels of total assets by introducing a common denominator. b. The common-size balance sheet reveals the composition of assets within major categories. c. Each item on a common-size balance sheet is expressed as a percentage of sales. d. The common-size balance sheet reveals the capital and the debt structure of the firm.

Which of the following statements is incorrect with regard to gross profit or gross profit margin? a. The gross profit margin tends to be more stable in industries such as groceries. b. The gross profit margin and cost of goods sold percentage are complements of each other. c. When cost of goods sold increases, most firms do not raise prices. d. Generally, firms want to maintain the relationship between gross profit and sales, or, if possible, increase gross profit margin.

Which of the following would be classified as long-term debt? a. Accounts payable, bonds, obligations under leases b. Mortgages, current maturities of long-term debt, bonds c. Mortgages, long-term notes payable, bonds due in 10 years d. Accounts payable, long-term notes payable, long-term warranties

Which stockholders' equity account represents the sum of every dollar a company has earned since its inception, less any payments made to shareholders in the form of dividends? a. Treasury stock. b. Accumulated other comprehensive income c. Retained earnings. d. Preferred stock.

Why should the expenditures for repairs and maintenance correspond to the level of investment in capital equipment and to the age and condition of that requirement? a. Repairs and maintenance are depreciated over the remaining life of the assets involved. b. It is a generally accepted accounting principle that repairs and maintenance expense is generally between 5% and 10% of fixed assets. c. Inadequate repairs of equipment can impair the operating success of a business enterprise. d. Repairs and maintenance expense is calculated in the same manner as depreciation expense.

c. Tax rates in foreign countries where the firm operates are lower.

What can firms do to offset tax payments if they are operating at a loss?

carry it back 2 years or carry it forward 20 years

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a

cash budget.

The _____ cycle or ________ cycle is the normal operating cycle of a firm that consists of buying or manufacturing inventory, selling inventory and paying accounts payable and collecting accounts receivable.

cash conversion, net trade

Foreign currency translation effects, unrealized gains and losses, additional pension liabilities and cash flow hedges are items that may comprise a company's other ________income.

comprehensive

recognition of income from investments in voting stock other companies to the extent of cash dividend received.

cost method

What is depreciation and amortization?

cost of assets other than land that will benefit a business enterprise for more than a year

The gross profit margin and ______ are complements of each other and the two percentages always add up to 100%.

cost of goods sold %

The gross profit margin and ________ are complements of each other and the two percentages always add up to 100%.

cost of goods sold percentage

All of the following are reasons that the statement of cash flows is useful to the analyst except: a. The statement of cash flows shows how cash is generated during an accounting period and how it has been used. b. A positive net income figure on the income statement is ultimately insignificant unless a company can translate its earnings into cash, and the only source in financial statements for learning about cash generation is the statement of cash flows. c. The statement of cash flows shows the adjustments made to net income in order to calculate cash flow from operations; those should be examined to determine why cash flow from operations is negative or positive. d. The statement of cash flows is the only financial statement that cannot be manipulated.

An inflow of cash would result from which of the following? a. The increase in an asset account other than cash. b. The decrease in a liability account. c. The decrease in an equity account. d. The decrease in an asset account other than cash.

How are deferred taxes recorded on the balance sheet? a. As current or noncurrent liabilities. b. As stockholders' equity. c. As noncurrent assets or noncurrent liabilities. d. As current or noncurrent assets or liabilities.

How are revenues and expenses recognized under the accrual basis of accounting? a. Revenues are recognized when cash is received and expenses are recognized when cash is paid. b. Revenues and expenses are recognized equally over a twelve month period. c. Revenues and expenses are recognized based on the choices of management. d. Revenues are recognized in the accounting period when the sale is made and expenses are recognized in the period in which they relate to the sale of the product.

The statement of cash flows segregates cash inflows and outflows by: a. Financing and investing activities. b. Operating and financing activities. c. Operating and investing activities. d. Operating, financing, and investing activities

Unit Cost per Unit 1 $10 2 $12 3 $15 4 $18 5 $13 Assume ABC sells two items and uses the LIFO method of inventory valuation. What amount would appear for cost of goods sold on the income statement? a. $37 b. $41 c. $22 d. $31

Use the indirect method to answer questions 11-14. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is the change in cash for Felix Company? a. $310 b. $205 c. $330 d. $230

What type of accounts are notes payable and current maturities of long-term debt? a. Cash accounts. b. Operating accounts. c. Investing accounts. d. Financing accounts.

Which financial statement shows the assets, liabilities and stockholders' equity of the firm on a particular date? a. Statement of stockholders' equity. b. Statement of cash flows. c. Earnings statement. d. Balance sheet.

Which of the following are methods by which management can manipulate earnings and possibly lower the quality of reported earnings? a. Refusing to take a loss on inventory in an accounting period when the inventory is known to be obsolete. b. Changing an accounting policy to increase earnings. c. Decreasing discretionary expenses. d. All of the above.

Which of the following cause(s) a change in the retained earnings account balance? a. Prior period adjustment b. Payment of dividends c. Net profit or loss d. All of the above.

Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities? a. Inventory. b. Prepaid expenses. c. Accounts receivable. d. All of the above.

Which of the following items could cause the recognition of accrued liabilities? a. Salaries, interest expense, interest income b. Sales, taxes, interest income c. Sales, interest expense, rent d. Salaries, rent, insurance

Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities? a. The amount by which equity income recognized exceeds cash received. b. Depreciation expense for the period. c. The change in deferred taxes. d. All of the above.

Which of the following statements is false? a. Companies are allowed to use more than one inventory valuation method. b. LIFO is an income tax concept. c. Using FIFO for high-technology products makes sense if the firm is trying to reduce taxes because the technology industry is generally deflationary. d. Companies using IFRS may not reverse entries for inventory write-downs if the market recovers.

Which of the following would be helpful to an analyst evaluating the performance of a firm? a. Reviewing the annual reports of a company's suppliers, customers, and competitors. b. Understanding the economic and political environment in which the company operates. c. Preparing common-size financial statements and calculating key financial ratios for the company being evaluated. d. All of the above.

Which of the following would increase cash from operating activities? a. Increasing accounts receivable. b. Increasing inventories. c. Decreasing accounts payable. d. Decreasing accounts receivable.

Which statement is false? a. Deferred taxes arise when taxes actually paid are less than tax expense reported in the financial statements. b. Deferred taxes are the product of temporary differences in the recognition of revenue and expense for taxable income relative to reported income. c. 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. d. Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes.

Why are gains and losses from asset sales removed from net income when calculating the cash flows from operating activities? a. Selling assets is a noncash item. b. Gains and losses from asset sales are a financing activity. c. Gains and losses are not removed from net income when calculating the cash flows from operating activities d. The entire proceeds from sales of long-lived assets are included in investing activities.

Why has cash flow from operations become increasingly important as an analytical tool? a. Inflation has distorted the meaningfulness of net income. b. Firms may have uncollected accounts receivable and unsalable inventory on the books. c. High interest rates can put the cost of borrowing to cover short-term cash needs out of reach for many firms. d. All of the above.

d. In the statement of stockholders' equity.

Using a perpetual inventory system, what journal entry(ies) is(are) prepared when two units of merchandise are sold on account?

debit accounts receivable and credit Sales Revenue; debit cost of goods Sold and credit inventory

Define Sales allowance

deduction from original sales invoice price

What are cash flow hedges?

derivatives designed as hedging the exposure to variable cash flows

Earnings per share figure based on the assumption that all potentially dilutive securities have been converted to common stock

diluted earnings per share

Per FASB rules, firms may use the _____ method or the _____ method to calculate and present cash flow from operating activities.

direct, indirect

operations that will not continue in the future because the firm sold a major portion of its business

discontinued operations

Which 2 items are disclosed separately on the income statement?

discontinued operations and extraordinary transactions

Two other terms used interchangeably with income are_______ and_______

earnings, profit

proportionate recognition of investee's net income for investments in voting stock of other companies

equity method

What are the two accounting methods for reporting equity earnings when less than 100% of voting stock is owned by another company?

equity method and cost method

unusual events not expected to recur in the foreseeable future

extraordinary events

all of the following items should be discussed in the management discussion and analysis except for:

explain the key items of interest to the following groups of people when completing a financial statement analysis: investors, creditors and management." -investors attempt to arrive at an estimation of the companies future earnings stream in order to attach a value to the securities being considered for purchase or liquidation. The investment analysis poses such questions as: . What is the companies performance record, and what are the future expectations? What is its record with regard to growth and stability of earnings? Of cash flow from operations? . How much risk is inherent in the firms existing capital structure? What are the expected returns, given the firms current condition and future outlook? . How successfully just a firm compete in its industry, and how well positioned is the company to hold or improve its competitive position? The investment analyst also uses historical financial statement data to forecast the future. In the case of the investor, the ultimate objective is to determine whether the investment is sound. Creditors are concerned with the ability of an existing or perspective forward to make interest and principal payments on borrowed funds. The questions raised in a credit analysis should include: . What is the purpose of the burning? What do the financial statements reveal about the reason of firm has requested a loan or the purchase of goods on credit? . What is the firms capital structure? How much debt is currently outstanding? How well has debt been serviced in the past? . What will be the source of debt repayment? How well does the company manage working capital? Is the firm generating cash from operations? The credit analyst will use the historical record of the company, as presented in the financial statements, to answer such questions and to protect the potential of the firm to satisfy future demands for cash, including debt service. Management is concerned with all of the questions raised by creditors and investors because these user groups must be satisfied for the firm to obtain capital as needed. Management must also consider its employees, the general public, regulators, and the financial press. Management looks to financial statement data to determine: . How well has the firm performed and why? What operating areas have contributed to success and which have not? . What are the strengths and weaknesses of the company's financial possession? . What changes should be implemented to improve future performance? Financial statements provide insight into the company's current status and lead to the development of policies of strategies for the future.

The entry to write off an account receivable under the allowance method:

has no effect on total assets and net income

When does the cost of goods sold increase/decrease

if firms lower prices or increase costs

Which one of the following is a source of cash?

increase in accounts payable

What is a reverse stock split?

occurs when outstanding shares are decreased (market price per share increases)

which of the following items could be found on the statement of shareholder's equity?

reasons for retained earnings increases or decreases

Presentation of income statement that groups all revenue items, then deducts all expenses, to arrive at net income

single step format

A gain on sale of asset should be _____ to convert net income to cash flow from operating activities.

subtracted

An increase in inventory should be _____ to convert net income to cash flow from operating activities.

subtracted

To determine the cost of ending inventory under the LIFO method:

the beginning inventory and earliest purchase costs are used

Under the average-cost inventory method, to determine the average cost per unit:

the cost of beginning inventory plus the cost of purchases is divided by the number of units available

Effective Tax Rate

total tax expense/EBT

Please refer to Oscar's financial statements above. All of Oscar's costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year?

$1,034

Please refer to Oscar's financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the PROJECTED ADDITION to retained earnings for next year?

$1,421.40

ABC Company purchases five products for sale in the order and at the costs shown: Unit Cost per Unit 1 $10 2 $12 3 $15 4 $18 5 $13 Assume ABC uses the average cost method of inventory valuation. What unit cost would be used to determine the amount in ending inventory or cost of goods sold?

$13.60

The following information is available about Chiantivino Corp. (CC): Stock price per share - $8 Common shares outstanding (millions) - 10 Market value of interest-bearing debt (millions) - $75 Weighted average cost of capital - 14% An activist investor is confident that by terminating CC's money-losing fortified wine division, she can increase free cash flow by $4 million annually for the next decade. In addition, she estimates that an immediate, special dividend of $10 million can be financed by the sale of the division. Assuming these actions do not affect CC's cost of capital, what is the fair market value under existing management?

$155 million A plausible estimate of CC's fair market value under existing management is its standalone value = current market value of firm = $8 × 10 million + 75 million = $155 million.

A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The after-tax salvage value of the project is expected to be $2,500 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent?

$2,168.02 Solve for the PV of the cash inflows, and then subtract the initial investment: NPV = 11668.02 - 9,500 = $2,168.02

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. Immediately prior to the Ginormous Oil bid, the shares of Slick Co. traded at $33 per share. What value did Ginormous Oil place on the control of Slick Co.?

$2.21 billion Ginormous paid $60 per share for a firm that minority shareholders valued at $33 per share, so they placed a value of 60 - 33 = $27 per share on control of Slick. $27 × 82 million = $2.21 billion.

You are estimating your firm's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year?

$20 Million

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya's sales for April were $430, and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya's accounts receivable period is 30 days. What is the firm's beginning cash balance on June 1?

$205

Please refer to the financial information for Foodtek, Inc.above. During 2017, what was the cost of merchandise (in millions of dollars) produced by Foodtek?

$218

At the end of 2017, Stacky Corp. had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2017, Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2017?

$3,000,000

At the end of 2014, Stacky Corp. had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2014 Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2014?

$3,000,000 Liabilities/Assets = 0.5 = $500,000/$1,000,000 So Assets = $1,000,000 Then, Sales/$1,000,000 = 3 So sales = $3,000,000

STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1's stock is trading for $50, and comparable firm 2's stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.)

$36.00 Comp. 1 P/E = 10, Comp. 2 P/E = 14, Avg. P/E = 12 STU = 12 × $3.00 (EPS) = $36.00

Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2017, what should be the projection for shareholders' equity for 2017?

$5,349

What would be the carried interest (at 20%) on a private equity portfolio with an initial value of $500 million that was subsequently liquidated for $750 million?

$50 million

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt, but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance?

$560,000 Interest tax shield = interest rate × amount of debt × tax rate = 0.07 × 20,000,000 × 0.40= $560,000

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil?

$6.38 billion The value of the bid to Ginormous's shareholders is the value of the assets acquired in the merger. This would include the value of the equity acquired and the liabilities that accompany the equity. Therefore, the cost of the acquisition was ($60 × 82 million shares) + $1.46 billion = 6.38 billion.

Dental Corporation's income statement shows a provision for income taxes of $65 million in 2014. At the end of 2013, Dental Co's balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2014 their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million. What were Dental Corp's taxes paid in 2014?

$63 million

ZZZ Corporation's income statement shows a provision for income taxes of $65 million in 2017. At the end of 2016, ZZZ's balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2017, their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million. What were ZZZ's taxes paid in 2017?

$63 million

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?

$643

Aspenn Dental expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?

$643 August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643

Tutter Corporation is being valued using discounted cash flow methodology with terminal value calculated as a growing perpetuity. Not including the terminal value, the present value of projected free cash flows for years 1 through 5 is $200 million (total). In year 5, projections show free cash flow of $60 million. What is the estimated fair market value of Tutter Corporation? Assume a WACC of 10% and a growth rate of 2%.

$675 million FMV = PV{FCF, 1-5} + PV{Terminal value}. Terminal value = FCF(1 + g)/(KW - g) = $61.2/0.08 = $765 million. PV of Terminal value = $765 million/1.115 = $475 million. FMV = 200 million + 475 million = $675 million.

$750,000

Income statement

(statement of earnings); presents a firms revenues, expenses, net income and earnings per share

using the ratios in information given below for PepsiCo company, analyze the short-term liquidity of the firm.

- PepsiCo current, quick, and cash flow liquidity ratios are all below one. The firm has fewer current assets and fewer liquid items than the current liability amounts each year. The ratios have increased slightly from 2014 to 2015. The average collection is good and stable. The inventory days is held steady at 74 days, but without an industry average it is difficult assess if the firm could shorten the time inventory is held. Im concerned with the long time it takes PepsiCo to pay its suppliers. At more than five months the firm risks losing a quality supplier if they are not paying bills on time. The high days payable outstanding is the reason the cash conversion cycle is negative. Even though this is beneficial to PepsiCo to keep cash on hand longer, it could be a problem with as mentioned above. Both sales in cash from operations are increasing which is a positive sign that the firm is able to cover Debts as they come due.

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss's sustainable growth rate and its actual growth rate for 2017?

-3.04%

Which of the following statements concerning risk are correct? I. Systematic risk is measured by beta. II. The risk premium increases as unsystematic risk increases. III. Systematic risk is the only part of total risk that should affect asset prices and returns. IV. Diversifiable risks are market risks you cannot avoid.

1 and III

Classify the following ratios: (1) Dividend payout (2) Fixed charge coverage (3) Cash flow margin (4) Days inventory held (5) Times interest earned (6) Net profit margin (7) Earnings per share (8) Fixed asset turnover (9) Total asset turnover (10) Current ratio

1) Market Measures 2) Leverage 3) Profitability 4) Liquidity 5) Leverage 6) Profitability 7) Market Measures 8) Operating Efficiency 9) Operating Efficiency 10) Liquidity

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2016 period)?

1. Common stocks, 2. long-term corporate bonds, 3. long-term government bonds, 4. short-term government bills

What is the benefit-cost ratio for an investment with the following cash flows at a 14.5 percent required return? Year Cash Flow 0 -46,500 1 12,200 2 38,400 3 11,300

1.02 PVinflows = (12,200/1.145) + (38,400/1.1452) + (11,300/1.1453) = $47,472.78 BCR = $47,472.78/$46,500 = 1.02

Gujarat Corporation doubled its shareholders' equity during the year 2014. Gujarat did not issue any new equity, repurchase any equity, or pay out any dividends during the year. What is Gujarat's sustainable growth rate for 2014? A. 50% B. 100% C. 150% D. 200% E. None of the above

100% If equity doubled, then g* = change in equity/equitybop = 100%. For example, if equitybop was 25, the change in equity must also be 25 in order to double equity.

Wilcox's days payable outstanding is:

16 Days

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000, and dividends were $44,640. What is Westcomb's sustainable growth rate?

18.24 percent

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2016?

21.4%

Assume a 365-day year for your calculations. The days' sales in cash at the end of 2012 is:

219.6

Assume a 365-day year for your calculations. The payables period in days, based on cost of goods sold, at the end of 2012 is:

24.3

Please refer to the financial data for Link, Inc. above. Assume a 365-day year for your calculations. Link's days' sales in cash at the end of 2017 is:

249.7

Assume a 365-day year for your calculations. The collection period in days, based on sales, at the end of 2012 is:

28.8

2015 2014 Sales 1,200 1,000 COGS 850 700 Operating expenses 200 200 Income taxes 30 35 Jett Co.'s gross profit, operating profit and net profit margins for 2015 are:

29.2%, 12.5%, and 10%

Wilcox's total asset turnover ratio is:

3.34

Please refer to the financial information for foodtek, inc. above. During 2017, how much cash (in millions of dollars) did Foodtek collect from sales?

324

Wilcox's debt ratio is

43.02%

Wilcox's debt ratio is:

43.02%

Assume a 365-day year for your calculations. The inventory turnover, based on cost of goods sold, at the end of 2012 is:

5.2

Wilcox's average collection period is:

9 Days

Wilcox's average collection period is

9 days

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2016?

9.97%

Which item would not be classified as an operating expense? a. Interest expense. b. Rent expense. c. Depreciation. d. Repairs and maintenance.

The allowance method records Uncollectible- Account Expense:

A and B

Which of the following statements concerning a firm's cash flows and profits is false?

A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

A loss of $50,000

Which of the following accounts would not appear in a closing entry?

A) Net income D) Inventory E) Both A and D Answer: E

Unsystematic risk: A. can be effectively eliminated by portfolio diversification. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. is related to the overall economy.

A. Can be effectively eliminated by portfolio diversification

All of the following are steps of a financial statement analysis except: A. Prepare pro forma statements. B. Establish objectives of the analysis. C. Study the industry in which the firm operates. D. Develop knowledge of the firm and the quality of management.

A. Prepare pro forma statements.

Which of the following items could be found on a statement of shareholders' equity? A. Reasons for retained earnings increases or decreases. B. A reconciliation of beginning to ending cash. C. The market value of the firm's common stock. D. Assets = Liabilities + Stockholders' Equity.

A. Reasons for retained earnings increases or decreases.

Which one of the following is an example of systematic risk? A. The Federal Reserve unexpectedly announces an increase in target interest rates. B. A flood washes away a firm's warehouse. C. A city imposes an additional one percent sales tax on all products. D. A toymaker has to recall its top-selling toy. E. Corn prices increase due to increased demand for alternative fuels.

A. The federal reserve unexpectedly announces an increase in target interest rates.

When will a firm record goodwill on its books? A. When the company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired. B. When the firm donates property to charities. C. When it is determined that there has been a loss of value of long-term assets. D. When fixed assets are impaired.

A. When the company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired.

A revolving line of credit would be considered:

A. an agreement to borrow up to a specific total amount on demand from a bank

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

A. asset turnover and control

Which one of the following is least likely to be correct about the factoring of receivables?

A. the selling firm bears the risk of default

On a common-size balance sheet, all accounts are expressed as a percentage of A. total assets. B. sales. C. profits. D. equity. E. None of the options are correct.

A. total assets

______ ratios measure the liquidity of specific assets and the efficiency of managing assets.

Activity

___________ ratios measure the liquidity of specific assets and the efficiency of managing assets.

Activity

________ costs are or should be a major expense in the budgets of companies for which marketing is an important element of success.

Advertising

Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process? I. Should the firm merge with a competitor? II. Should additional equity be sold? III. Should a particular division be sold? IV. Should a new product be introduced?

All of them

What does the retained earnings account measure?

All undistributed earnings

Which of the following would increase a company's need for external finance, all else equal? A. An increase in the dividend payout ratio B. A decrease in sales growth C. An increase in profit margin D. A decrease in the collection period E . None of the above

An increase in the dividend payout ratio

An increase in the retention ratio

What are 'repairs and maintenance'?

Annual costs of repairing and maintaining property, plant and equipment; expenditures in this area should correspond to the level of investment in capital equipment and to the age and condition of the company's fixed assets

Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets? A. current ratio B. debt-to-equity C. retention D. asset turnover E. return on assets

Asset turnover

5. How is the cash conversion cycle calculated?

Average collection period + days inventory held - Days payable outstanding.

Which of the following accounts would not be involved in preparing the income statement?

B) Accumulated depreciation C) Taxes payable E) B and C Answer: E

Suppose an acquiring firm pays $100 million for a target firm, and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account? A. $0 million B. $20 million C. $30 million D. $70 million E. $80 million F. None of the options are correct.

B. $20 million

Which of the following statements is FALSE with regard to quality of financial reporting? A. Financial statements should reflect an accurate picture of a company's financial condition and performance. B. It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP. C. Financial information should be useful both to assess the past and predict the future. D. The closer that the picture presented through the financial data is to reality, the higher the quality of financial reporting.

B. It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP.

Although commercial paper is unsecured, the companies that issue this short-term security are:

B. Large firms with top credit quality

Selling and administrative expenses include which of the following income statement items? A. Salaries, insurance, interest. B. Salaries, rent, advertising. C. Rent, interest, cost of goods. D. Advertising, research & development, amortization.

B. Salaries, rent, advertising.

Which of the following items would be classified as an investing activity on the statement of cash flows: A. Payment to lenders. B. Sale of property. C. Sale of goods. D. Proceeds from borrowing.

B. Sale of property.

If a firm decided to reduce the receivables period by speeding up its collections from its customers while keeping the inventory period and payables period the same, then the:

B. cash conversion cycle will decrease

A firm has borrowed $1 million and assigned its receivables to the lender. Because of defaults, the receivables prove insufficient to cover the debt. In this case, the:

B. firm bears the risk of default

The principle of matched maturities in finance refers to:

B. funding long term assets with long terms sources and short term assets with short term financing

Which one of the following would not be included as a source of short-term financing?

B. increase in the minimum operating cash balance

Which one of the following is a use of cash?

B. repayment of a bank loan

Which one of these is most associated with a disadvantage of the relaxed strategy of long- versus short-term financing?

B. short term investment income is often unattractive

A firm that follows a relaxed strategy toward the total capital requirement will be a:

B. short-term lender

Which one of the following situations should provide managers with the most comfort if accounts receivable balances are increasing each quarter?

B. the sales level has increased

Which equation represents an income statement? A. Assets = liabilities + stockholders' equity. B. Cash in - cash out = net income. C. Revenues - expenses = net income. D. Beginning retained earnings + revenues - expenses = ending retained earnings.

C. Revenues - expenses = net income

In field warehousing the inventory is kept by the:

C. independent warehousing company

Which one of the following would not be included among the costs of carrying inventory?

C. raw material cost

Which one of the following is not typically a characteristic of commercial paper?

C. secured loan

Which one of the following statements best describes the total capital requirement for most profitable firms?

C. there are seasonal fluctuations around the total capital retirement trend

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet? A. Equity rises $250,000; net plant and equipment falls $250,000. B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000. C. Cash rises $250,000; accounts receivable falls $100,000; goodwill rises $150,000. D. Cash rises $250,000; net plant and equipment falls $250,000. E. None of the above

Cash rises $250,000; net plant and equipment falls$100,000; equity rises $150,000

b. Assuming a 365-day year for all calculations, compute the following a. The collection period each year based on sales. b. The inventory turnover and the payables period each year based on COGS c. The days' sales in cash each year. d. The gross margin and profit margin each year.

Collection Period (days) - Year 1 = 28.3 / Year 2 = 28.1 Inventory turnover (x) - Year 1 = 38.5 / Year 2 = 4.7 Payables Period (days) - Year 1 = 42.3 / Year 2 = 24.3 Days' sales in cash - Year 1 = 919.3 / Year 2 = 243.7 Gross Margin - Year 1 = 8% / Year 2 = 25% Profit Margin - Year 1 = -57% / Year 2 = -88%

9. You are trying to prepare financial statements for Bartlett Pickle company, but seem to be missing it balance sheet. You have Bartlett's income statement, which shows sales last year were $420 million with a gross profit margin of 40%. You also know that credit sales equaled 3-quarters of Bartlett's total revenues last year. In addition, Bartlett had a collection period of 55 days, a payables period of 40 days, and an inventory turnover of 8 times based on cost of goods sold. Calculate Bartlett's year-ending balance for accounts receivable, inventory, and accounts payable.

Collection Period = Accounts Receivable / Credit Sales per day Credit Sales = .75 X $420 million = $315 million Accounts receivable = collection period X Credit sales per day = 55 X $315 million/365 = $47.5 million Inventory turnover = COGS / Ending Inventory COGS = Sales X (1-Gross Margin) = $420 million X (1-.40) = $252 million Inventory = COGS / Inventory turnover = $252 million / 8 = $31.5 million Payables Period = Accounts payable / Purchases per day (Since information is not available on purchases, use COGS) Accounts Payable = Payables period X COGS per day = 40 X $252 million / 365 = $27.6 million

What accounts are most likely to be found in the stockholders' equity section of the balance sheet?

Common stock, additional paid-in capital, retained earnings

Company A has inventory out on consignment and held for sale by Company B. Which company will include the goods in their inventory?

Company A

Why might the repairs and maintenance section show a decrease?

Could be a result of having fewer fixed assets needing fewer repairs, could be a choice to repair to delay repairs in order to increase operating profit in the short term

During 2016, Nike Inc., reported net income of $3,760 million. The company declared dividends of $1,022 million. The closing entry for dividends would include which of the following?

Credit Dividends for $1,022 million

3. Which ratios help assess the firm's ability to meet cash needs as they arise?

Current ratio and cash flow liquidity ratio.

What is important to understand about the label "pro forma"? a. Pro forma refers to GAAP-based financial statements. b. Pro forma requires firms to present two distinct net profit amounts in their Form 10-Ks. c. Pro forma relates to the amount of debt in a firm's capital structure. d. Pro forma earnings or financial statements are sometimes based on a firm's own definition which is not technically a correct definition.

Which of the following statements is true? a. It is unnecessary to analyze operating expenses over which management exercises discretion. b. Impairment charges do not need to be analyzed since they are generally a non-recurring expense. c. A good way to improve operating profit is to cut repairs and maintenance costs as much as possible. d. Operating expenses can be easily analyzed by preparing a common-size income statement.

What is an unqualified audit report? A. A report stating that the auditors are not qualified to report on a firm. B. A report that states the financial statements are in violation of GAAP. C. A report that states that departures from GAAP exist in the firm's financial statements. D. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

D. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance? A. A stock repurchase B. A decrease in accounts payable C. An increase in cash and marketable securities D. An increase in the retention ratio E. None of the above

D. An increase in the retention ratio Retention ratio is the percent of net income available to the firm to fund future growth.

Which item may be of concern when analyzing cash flow from financing activities? A. Payments of dividends. B. Repayment of debt. C. Increasing inventories. D. Borrowing each year to repay debt from prior years.

D. Borrowing each year to repay debt from prior years.

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal? A. Ellsbury starts paying off all outstanding invoices to suppliers twice a month instead of once a month. B. Ellsbury changes the credit terms it offers to customers, allowing them to pay in 45 days instead of 30 days. C. Ellsbury increases its cash/assets ratio from 12% to 15%. D. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products

D. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products

What is true? A. The profits reported in a given time period equal the cash flows generated. B. A company's operations and finances are independent of each other. C. Financial statements have nothing to do with reality. D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle. E. A profitable company will always have sufficient cash to meet its obligations.

D. The movement of cash to inventory, to accounts receivable and back to cash is known as the firm's working capital cycle.

Customers may change firms when faced with minimal inventory selection. Sales lost in this manner illustrate the:

D. impact of shortage costs

What happens to a firm whose uses of cash exceed its sources of cash during an accounting period?

D. it experiences a decrease in its cash balance

Which one of the following is more likely for a firm practicing the relaxed strategy of long-versus short-term borrowing at the height of sales demand?

D. it's long term financing will approximately equal its totally capital requirements

The sustainable growth rate of a firm is best described as the: A. minimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing.

D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

Field warehousing can be an important source of:

D. short term financing with low risk to the lender

When a firm finances long-term assets with short-term sources of funding, it:

D. violates the principle of matched maturities

The cash conversion cycle is computed as

Days sales outstanding + Days inventory outstanding - Days payable outstanding

A company records an adjusting journal entry to record $10,000 depreciation expense. Which of the following describes the entry?

Debit Depreciation expense and Credit Property Plant and Equipment

On January 1, Fey Properties paid $12,600 for a three-year insurance premium, with coverage beginning immediately. Fey Company prepares monthly financial statements.

Debit Insurance expense for $350 and Credit Prepaid insurance for $350

Which of the following would NOT be considered a use of cash?

Depreciation

_____ and _____ represent th cost of assets other than land that will benefit a business enterprise for more than a year.

Depreciation and amortization

What is the difference between use of depreciation and use of amortization?

Depreciation is for tangible fixed assets; amortization is for intangible things such as capital leases, leasehold improvements and cost expiration of intangible goods (patents, copyrights etc)

The ______________________ shows the relationship between cash dividends and market price.

Dividend Yield

Stock _____ and stock____ result in issuance of additional shares of stock to existing shareholders.

Dividends, splits

The ______ helps the analyst see how the firm's decisions and activities over the course of an accounting period interact to produce an overall return to the firm's shareholders, the return on equity.

Du Pont System

The ______________________ helps the analyst see how the firm's decisions and activities over the course of an accounting period interact to produce an overall return to the firm's shareholders, the return on equity.

Du pont System

How would a purchase of inventory on credit affect the income statement?

E) None of the above

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I, III, and IV only B. I and III only C. I, II, and III only D. III and IV only E. II and IV only

E. II and IV only

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn a 6 percent annual rate on your money, compounded monthly. Which option should you take and why? A. You should accept the monthly payments because they are worth $209,414 to you. B. You should accept the $200,000 lump sum because the monthly payments are only worth $16,057 to you today. C. You should accept the monthly payments because they are worth $336,000 to you. D. You should accept the $200,000 lump sum because the monthly payments are only worth $189,311 to you today. E. You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today.

E. You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today The number of monthly periods = 20 × 12 = 240 The monthly interest rate = 6%/12 = 0.5% =PV(0.005,240,1400)

Return on Invested Capital (ROIC)

EBIT (1-Tax Rate)/Interest-bearing debt + Equity

T/F: A creditor is ultimately concerned with the ability of a firm to generate profits.

T/F: A firm's annual report contains only two pieces of information: the financial statements and the notes to the financial statements.

T/F: Financial ratios are powerful tools due to the fact that standard definitions exist and there is a set standard that should be met for each ratio.

T/F: Operating profit margin is impacted by sales and all operating expenses except cost of goods sold.

T/F: Proceeds from borrowing are a financing cash outflow.

All else equal, an increase in a company's asset turnover will decrease its ROE.

FALSE

An inventory turnover ratio of 10 means that, on average, items are held in inventory for 10 days.

FALSE

Articles from current business periodicals should not be used in financial statement analysis as journalists are often biased.

FALSE

Scenario analysis involves changing one input to a financial forecast, whereas sensitivity analysis involves changing multiple inputs.

FALSE

According to GAAP, revenue should not be recognized until cash is received.

False

All else equal, an increase in a company's asset turnover will decrease its ROE.

False

Extraordinary gains and losses should be included when evaluating a firm's future earnings potential.

False

Premature revenue recognition is acceptable under GAAP.

False

Principal is exchanged in interest rate swaps but not in currency swaps.

False

Private equity firms comprise a relatively insignificant portion of the American economy.

False

T or F A creditor is ultimately concerned with the ability of a firm to generate profits.

False

T or F Articles from current business periodicals should not be used in financial statement analysis as journalists are often biased.

False

T or F Financial ratios are powerful tools due to the fact that standard definitions exist and there is a set standard that should be met for each ratio.

False

T or F Form 10-Ks and Form 10-Qs can be located through the Dun & Bradstreet Information services.

False

T or F The debt ratio considers the proportion of all stockholders' equity that is financed with debt.

False

T or F: Operating profit margin is impacted by sales and all operating expenses except cost of goods sold.

False

The only reason why the price would fall on a corporate bond is if market interest rates increase.

False

Valuing a call option requires an accurate estimate of the future value of the underlying asset.

False

When accounts payable exceed the sum of inventory and accounts receivable, net working capital must be negative.

False

Working capital refers to the investment in property, plant and equipment.

False

In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".

False The bake off involves investment bankers trying to get the company to use them. The road show occurs after when top company executives market the issue to investors. They put together a syndicate.

f. Two firms can have the same earnings yield but different price-to-earnings ratios.

False - Earnings yields and price-to-earnings ratios are the inverse of one another. If two firms have identical earnings yields, they will have identical price-to-earnings ratios.

g. Ignoring taxes and transactions costs, unrealized paper gains are less valuable than realized cash earnings.

False - Ignoring taxes and transactions costs, unrealized gains can always be realized by the act of selling, so must be worth as much as a comparable amount of realized gains.

Which of the following is NOT used to determine the cost of net purchases?

Freight- Out

________ arises when one company acquires another company for a price in excess of the fair market value of the net identifiable assets.

Goodwill

Which of the following statements are correct? I. Going-concern value of a firm is equal to the present value of expected future cash flows to owners and creditors. II. When an acquiring firm purchases a target firm's equity, the acquirer need not assume the target's liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value.

I and III

Which of the following statements are correct concerning diversifiable, or unsystematic, risks? I. Diversifiable risks can be largely eliminated by investing in 50 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

I, II and III

Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. III. Issue costs for debt are typically greater than issue costs for equity. IV. Bearer bonds make it easier for investors to avoid paying taxes on interest income.

I, II and IV

Which of the following statements related to market efficiency tends to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for the typical investor to earn above-average returns without taking above-average risks. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely strong-form efficient.

I, II, III

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. A firm's capital structure is dictated by its need for external financing.

I, II, IV

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover

I, II, and IV only

Which of the following statements are correct? I. Liquidation value of a firm is equal to the present worth of expected future cash flows from operating activities. II. When an acquiring firm purchases a target firm's equity, the acquirer must assume the target's liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value.

II and III

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. I, III, and IV only

II and IV Current ratio and acid test

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test

II and IV only

Financial leverage: I. increases expected ROE but does not affect its variability. II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners.

II, III, IV

Which of the following factors favor the issuance of equity in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility

II, IV

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? I. Insiders knew the information prior to the announcement II. Investors need time to digest the information prior to reacting III. The information has no bearing on the value of the firm IV. The information was anticipated

III. And IV. The information has no bearing on the value of the firm. The information was anticipated

Increase Supplies expense by $3,400 and decrease Supplies inventory by $3,400

Cari's Bakery, Inc., began operations in October 2017. The owner contributed cash of $18,000 and a delivery truck with fair value of $24,000 to the company. Which of the following describes how these transactions would affect the company's equity accounts?

Increase contributed capital by $42,000

During fiscal 2016, Stanley Black & Decker Corporation reported Net income of $965.3 million and paid dividends of $330.9 million. Which of the following describes how these transactions would affect Stanley Black and Decker's equity accounts? (in millions)

Increase earned capital by $634.4

During fiscal 2016, Shoe Productions recorded inventory purchases on credit of $337.8 million. Inventory at the start of the year was $38.2 million and at the end of the year was $53.0 million. Which of the following describes how these transactions would be entered on the financial statement effects template?

Increase expenses (Cost of goods sold) by $323.0 million

Breakers Bay Inc. 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. All else held constant, how will this accomplishment be reflected in the firm's financial ratios? A. decrease in the fixed asset turnover rate B. decrease in the financial leverage ratio C. increase in the inventory turnover rate D. increase in the days' sales in inventory E. decrease in the total asset turnover rate

Increase in the inventory turnover rate

During fiscal 2016, Shoe Productions recorded inventory purchases on credit of $337.8 million. The financial statement effect of these purchase transactions would be to:

Increase liabilities (Accounts payable) by $337.8 million

An accrual of wages expense would have what effect on the balance sheet?

Increase liabilities and decrease equity

Sales on account would produce what effect on the balance sheet?

Increase noncash assets (Accounts receivable)

In comparison to industry averages, Okra Corp. has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corp.? A. Its current liabilities are too low. B. Its cost of goods sold is too low. C. Its cash and securities balance is too low. D. Its inventory level is too high. E. None of the above

Inventory level is too high

Milano Corporation has experienced growth of 20% for each of the last 5 years. Over this 5-year period, Milano's return on equity has never exceeded 15%, its profit margin has held steady at 5%, and its total asset turnover has not changed. Over the 5-year period, Milano paid no dividends and issued no new equity. Based on this information, which of the following can you most likely infer about Milano's performance over the past 5 years?

Milano's leverage has increased.

Milano's leverage increased Note first that g > g* because g = 20% and g*<15%. With g > g* one of PRAT must increase. P has held steady at 5%, R has remained at 100%, A has not changed. Thus T (leverage) must have increased.

Which of the following would be classified as long-term debt?

Mortgages, long-term notes payable, bonds due in 10 years

Earnings Yield

Net Income/Market Value of SE

Profit Margin

Net Income/Sales

Return on Equity (ROE)

Net Income/Shareholder's Equity (Measures efficiency with which a company employs Owner's capital)

A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet?

Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

9. The Du Pont System shows which of the following series of relationships?

Net profit margin x total asset turnover = Return on investment and Return on investment x financial leverage = Return on equity.

How do you calculate gross profit?

Net sales - cost of goods sold

Which of the following would allow a corporation to issue a bond at a lower coupon rate, all else equal?

None are correct

None of the Answers above

How would a purchase $400 of inventory on credit affect the income statement?

None of the above Rationale: There is no income statement effect of an inventory purchase.

Please refer to the income statement for VGA Associates below. If VGA had a principal repayment of $8,000 due in 2017, what was its times-burden-covered ratio in 2017?

None of the options are correct.

What are discontinued operations?

Occur when a firm sells or discontinues a clearly distinguishable portion of its business

What are special items?

Often one time items that will not recur in the future (examples are discontinued operations and extraordinary gains or losses)

True

Operating expenses can be easily analyzed by preparing a common-size income statement.

Which profit indicator is the best for determining how well a company is performing in its industry?

Operating profit

False

Operating profit margin is impacted by sales and all operating expenses except cost of goods sold.

The most common approach to developing pro forma financial statements is called the: A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach.

Percent-of-sales method

The following information is available for Escalante Computer Company. Analyze the gross profit margin making any calculations deemed necessary.

Product sales- 2700 in 2015, 2400 in 2014, and 1960 in 2013. The gross profit margin of the firm has decreased significantly in 2015. This is the result of product sales as service gross profit margin's have been steadily increasing. Product sales make up the majority of the companies revenues although the service area appears to be expanding in 2015. In 2013 and 2014 the overall gross profit margin was the same percentage as the product sales gross profit margin due to the minimal service revenues. The overall gross profit margin was slightly higher than the product gross profit margin because of the increased amount of service revenue. The firm either lowered selling prices on products and/ or cost of good sold has increased. A volume decrease in product sales could account for the lower gross profit margin if the firm has significant fix cost and cost of goods sold. Service revenues appears to be increasing in volume, or the price charged has increased, or cost of good sold has decreased.

1. A _______________ statement contains useful information about the board of directors and executive compensation, option grants, audit-related matters, related party transactions and proposals to be voted on by shareholders.

Proxy

A ______ statement contains useful information about the board of directors and executive compensation, option grants, audit-related matters, related party transactions and proposals to be voted on by shareholders.

Proxy

The _____ is a document used to solicit shareholder votes.

Proxy statement

The sharper and clearer the picture presented through the financial data and the closer that picture is to financial reality, the higher the _____ financial statements and reported earnings.

Quality

4. Your firm is considering the acquisition of a very promising technology company. One executive argues against the move, pointing out that because the technology company is presently losing money, the acquisition will cause your firm's return on equity to fall. a. Is the executive correct in predicting that ROE will fall?

ROE will most likely fall. The numerator of the ratio, net income, will decline because the acquired company is losing money. Unless the acquiring firm's equity declines due to the acquisition, a highly unlikely event, ROE will decline.

d. How do the two companies' ROICs compare? What does this suggest about the two companies?

ROIC abstracts from differences in leverage to provide a direct comparison of the earning power of the two companies' assets. On this metric, Atlantic is the superior performer, although both percentages are quite attractive. Before drawing any firm conclusions, however, it is important to ask how the business risks faced by the companies compare and whether the observed ratios reflect long-run capabilities or transitory events.

What is the principle of conservatism in accounting?

Requires that firms carry inventory in the accounting records at the lower of cost or market

The abuse of what type of account has been an ongoing issue?

Reserve accounts

Which of the following is included as a component of stockholders' equity?

Retained earnings

Which stockholders' equity account represents the sum of every dollar a company has earned since its inception, less any payments made to shareholders in the form of dividends?

Retained earnings

What does a financial leverage index greater than one indicate about a firm?

Return on equity exceeds the return on assets

8. What does a financial leverage index greater than one indicate about a firm?

Return on equity exceeds the return on assets.

The cash basis of accounting recognizes _____ when cash is received and recognizes _____ when cash is paid.

Revenues, expenses

The excess return earned by a risky asset, for example with a beta of 1.4, over that earned by a risk-free asset is referred to as a: A. market risk premium. B. risk premium. C. systematic return. D. total return. E. real rate of return.

Risk premium

The _____ requires all public companies to file a Form 10-K report annually.

SEC

ABC furniture Unlimited sells antique furniture. ABC will most likely use the ______ method to cost its ending inventory.

Specific- Unit- Cost

T/F: Cash flow from operations represents the "cash" income from the company's business operations.

T/F: Cash outflows result from increases in asset accounts and decreases in liability and equity accounts.

T/F: In volatile industries, such as high technology, gross profit margin may increase or decrease significantly each year

T/F: The accounts receivable turnover, inventory turnover and accounts payable turnover ratios are mathematical complements to the ratios that make up the cash conversion cycle.

T/F: Tools used in a financial statement analysis should generally include common-size financial statements, key financial ratios, trend analysis, structural analysis, and comparison with industry competitors.

T/F: Two special items, discontinued operations and extraordinary items, must be disclosed separately on the income statement

T/F:Companies that use IFRS may switch the order of presentation of assets and liabilities, listing noncurrent items before current items.

Current liabilities are defined as liabilities with a maturity of less than one year.

TRUE

The objectives of a financial statement analysis will vary depending on the perspective of the financial statement user

TRUE

How is it possible for a U.S. firm to have increasing earnings but a lower effective tax rate?

Tax rates in foreign countries where the firm operates are lower.

1. The Board of Directors of Collins Entertainment, Inc., has been pressuring its CEO to boost ROE. During a recent interview on CNBC, he announces his plan to improve the firm's financial performance. He will raise prices on all of the company's products by 10%. He justifies the plan by observing the ROE can be decomposed into the product of profit margin, asset turnover, and financial leverage. By raining prices, he will increase the profit margin and thus ROE. Does this plan make sense to you? Why or why not?

The CEO is correct that ROE is the product of profit margin, asset turnover and financial leverage, but an increase in prices will not necessarily increase ROE because increased prices will likely reduce sales. If operating costs are fixed, the profit margin could actually fall when prices rise. Even if operating costs are variable, a decrease in sales will reduce the asset turnover, and thus reduce ROE. It is uncertain whether the effect of the increase in profit margin on ROE will out-weigh the effect of the decrease in asset turnover. When thinking about the levers of performance, it is important to remember that changes in company strategy can affect multiple levers, often in different directions.

What does the additional paid-in capital account represent?

The amount by which the original sales price of stock exceeds the par value

c. Which company would you expect to have a higher profit margin, an appliance manufacturer or a grocer? Why?

The appliance manufacturer should have the higher profit margin because it adds more value to its product than a grocer does and hence can charge a higher markup over cost.

Which one of the following statements is correct?

The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio.

False

The common size income statement expresses each income statement item as a percentage of total assets.

c. What do these calculations suggest about the company's performance?

The company lost money in both years, more in the second year than the first. Cash flow from operations is negative In both years - but has improved. Liquidity has fallen and the inventory turnover is down sharply. The more than 10 fold increase in inventory suggests that Amberjack was either wildly optimistic about potential sales or completely lost control of its inventory. A third possibility is that the company is building inventory in anticipation of a major sales increase next year. In any case, the inventory investment warrants close scrutiny. In general, these numbers look like those of an unstable, startup operation.

6. What does a low asset turnover compared to the industry imply?

The investment in assets may be too high.

What does a low asset turnover compared to the industry imply?

The investment in assets may be too high.

Which of the following statements is/are correct? I. Going-concern value of a firm is equal to the present value of expected net income. II. When a buyer values a target firm, the appropriate discount rate is the buyer's weighted-average cost of capital. III. The liquidation value estimate of terminal value usually vastly understates a healthy company's terminal value. IV. The value of a firm's equity equals the discounted cash flow value of the firm minus all liabilities.

The liquidation value estimate of the terminal value usually vastly understates a healthy company's terminal value

b. What percentage decline in earnings before interest and taxes could Natural Selection have sustained before failing to cover: i. Interest payment requirements? ii. Principal and interest requirements? iii. Principal, interest, and common dividend payments?

To fail to cover the existing interest payments, the times interest earned ratio has to fall below one. (4.29 - 1)/4.29 = 76.7%, or (120 - 28)/120 = 76.7% To fail to cover the interest and sinking fund payment, the times burden covered ratio has to fall to below one. (1.76-1)/1.76 = 43.2%, or [120-(28+24/(1-0.40))]/120 = 43.3% (The difference is due to rounding.) To fail to cover interest, principal, and dividend payments we must further subtract the impact of dividends on the EBIT. [120-(28 + ((24 +0.30*20)/(1-0.4))]/120 = (120 - 78)/120 = 35%

The basic lesson of the M&M theory is that the value of a firm is dependent upon: A. the firm's capital structure. B. the total cash flow of the firm. C. minimizing the marketed claims. D. the amount of marketed claims to that firm. E. the size of the stockholders' claims.

Total cash flow of the firm

A cash conversion cycle is the period between a firm's payment for materials and collection on its sales.

True

A company that pays $5,000 previously owed to one of its suppliers will see a $5,000 decrease in cash.

True

A company that pays $5,000 previously owed to one of its suppliers will see no change in its net working capital.

True

A company that sells $5 million of marketable securities for cash will see a $5 million increase in cash.

True

A company that sells $5 million of marketable securities for cash will see no change in its net working capital.

True

A firm can reduce the cash conversion cycle by selling fewer goods on credit and more for cash.

True

A firm's inventory period can be estimated by the ratio of inventory to daily output.

True

A reduction in inventory levels would be considered a source of cash.

True

Accounts Receivable are reported on the balance sheet at their net realizable value

True

After issue, the market price of a fixed-rate bond can differ substantially from its par value.

True

All else equal, increasing the assumed collection period in a financial forecast will decrease external funding required.

True

An acquirer should be willing to pay a higher control premium for a poorly managed company than for a well-managed company.

True

An increase in accounts payable is a source of cash.

True

An increase in current liabilities is a source of cash for the firm.

True

An increase in short-term interest rates will increase the carrying costs of the firm.

True

Banks will not usually lend the full value of the assets that are used as security. The safety margin is likely to be even larger in the case of loans that are secured by inventory.

True

Because control is valuable, trades of controlling interest shares are typically priced differently from shares of minority interest shares

True

Biotech firms require large amounts of cash if their drugs succeed in gaining regulatory approval. Therefore, these firms often have substantial cash holdings to fund their possible investment needs.

True

Bond investors should be more concerned with real returns than with nominal returns.

True

Cash flow forecasts are less informative than pro forma financial statements.

True

Companies that use IFRS may switch the order of presentation of assets and liabilities, listing noncurrent items before current items.

True

Comparable trades valuation infers value from the prices at which comparable public firms trade

True

Current liabilities are defined as liabilities with a maturity of less than one year.

True

Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding.

True

In a strong-form efficient market, insider trading is not profitable.

True

In evaluating a business firm it is essential that the financial analyst consider the qualitative as well as the quantitative components of earnings for an accounting period.

True

In venture capital valuation, the post-money valuation is equal to the pre-money valuation plus the amount of the venture capitalist's investment.

True

Incentive effects argue that debt disciplines a firm to generate healthy cash flows or face bankruptcy

True

Interest rates for bank loans are frequently linked to either the London Interbank Offered Rate (LIBOR) or the Treasury bill rate.

True

Shelf registration is possible for both debt and equity issues

True

Shelf registration is possible for both debt and equity issues.

True

Some companies solve their financing problem by borrowing on the strength of their current assets; others solve it by selling their current assets.

True

T or F Supplementary schedules, such as data related to the breakdown of key financial figures by operating segment, are helpful to financial statement analysts.

True

T or F The accounts receivable turnover, inventory turnover and accounts payable turnover ratios are mathematical complements to the ratios that make up the cash conversion cycle.

True

T or F Three ratios that help the financial analyst assess short-term solvency are the current ratio, the quick ratio and the cash flow liquidity ratio.

True

T or F: Gross profit margin and cost of goods sold % will always equal 100% together?

True

T or F: If the cost of goods sold % increases or decreases, this does not necessarily mean that costs have increased or decreased.

True

T or F: In volatile industries, such as high technology, gross profit margin may increase or decrease significantly each year.

True

T or F: The statement of stockholder's equity is an important link between the balance sheet and the income statement.

True

T or F: gross profit is the first determination of profit in the multi step approach to the income statement?

True

The accounting rate of return is deficient as a figure of merit because it is insensitive to the timing of cash flows.

True

The allowance for doubtful accounts is a type of account that can be manipulated to over or under estimating bad debt expense and so influence earnings.

True

The cost of issuing commercial paper is generally lower than that of a revolving line of credit.

True

The sustainable growth rate is the only growth rate in sales that is consistent with stable values of the profit margin, retention rate, asset turnover, and leverage (assets/equitybop).

True

When financial managers are asked the key reason for choosing short-term rather than long-term debt, they often say that they try to match the maturities of the firm's assets and liabilities.

True

When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the straight-line method.

True

With a revolving line of credit, a firm can borrow and repay whenever it wants so long as the balance does not exceed the credit limit.

True

True or False? a. A company's assets-to-equity ratio always equals one plus its liabilities-to-equity ratio.

True - Does A/E = 1 + L/E? Yes

b. A company's return on equity will always equal or exceed its return on assets.

True - The numerators of the two ratios are identical. ROA can exceed ROE only if assets are less than equity, which implies that liabilities would have to be negative.

True/False - ROA and Financial Leverage tend to be inversely related

True - safe, stable, liquid investments tend to generate low returns but substantial borrowing capacity

T or F: The income statement comes in two basic formats: the multi step and the single step versions; however, for analysis purposes the single step should be used.

True; use the multi step approach for analysis

In general, the capital structures used by non-financial U.S. firms: A. typically result in debt-to-asset ratios between 60 and 80 percent. B. tend to converge to the same proportions of debt and equity. C. tend to be those that maximize the use of the firm's available tax shelters. D. vary significantly across industries. E. None of the above.

Vary significantly across industries

Which one of the following is not a current liability?

Wage expense

When should a firm have a major advertising expense on the income statement?

When marketing is important to success of the firm

When would a company do a reverse stock split?

When struggling financially.

bonds

Which of the following securities has a purely fixed claim against a firm's cash flows?

How are sales reported on the income statement? a. Sales are shown for three years net of returns and allowances. b. Sales amounts are inflation-adjusted. c. Sales are shown for two years and are reported in nominal terms. d. Sales are shown at gross amounts, adjusted for inflation.

How would the repayment of debt principal be classified? a. Financing outflow. b. Operating inflow. c. Investing inflow. d. Operating outflow.

The following item would be classified as an operating activity on the statement of cash flows: a. Payments for inventory. b. Acquisitions of equipment. c. Proceeds from borrowing. d. Payments on loans

What does the balance sheet summarize for a business enterprise? a. Financial position at a point in time. b. Operating results for a period. c. Financing and investment activities for a period. d. Profit or loss at a point in time.

Why is the fixed charge coverage ratio a broader measure of a firm's coverage capabilities than the times interest earned ratio? a. The fixed charge ratio includes lease payments as well as interest payments. b. The fixed charge ratio includes both operating and capital leases whereas the times interest earned ratio includes only operating leases. c. The fixed charge ratio indicates how many times the firm can cover interest payments. d. The times interest earned ratio does not consider the possibility of higher interest rates.

The aging-of-recievables method of estimating uncollectible accounts is:

a balance sheet approach

a. Sales are shown for three years net of returns and allowances.

A decrease in accounts receivable should be _____ to convert net income to cash flow from operating activities.

added

Estimating uncollectible accounts by analyzing individual accounts receivable according to the length of time they have been outstanding is known as the:

aging-of-recievables method

A periodic inventory system:

all of the above

What is the equity method?

allows the investors proportionate recognition of the investee's net income, irrespective of the payment or nonpayment of cash dividends; fits accrual accounting requirements

Unit Cost per Unit 1 $10 2 $12 3 $15 4 $18 5 $13 Assume ABC sells two items and uses the FIFO method of inventory valuation. What amount would appear in ending inventory on the balance sheet? a. $22 b. $46 c. $45 d. $31

Unit Cost per Unit 1 $10 2 $12 3 $15 4 $18 5 $13 Assume ABC uses the average cost method of inventory valuation. What unit cost would be used to determine the amount in ending inventory or cost of goods sold? a. $12.67 b. $13.60 c. $15.00 d. $13.00

Which item below would not be a quality of financial reporting issue related to the balance sheet? a. Mismatching the type of debt (short or long-term) used to finance assets. b. Discretionary expenses. c. Overvaluation of assets. d. Off-balance sheet financing.

Which item is a noncash item that would be added to net income to convert it to cash flow from operating activities? a. Accounts receivable. b. Depreciation. c. Accounts payable. d. Inventory.

Which item may be of concern when analyzing cash flow from financing activities? a. Increasing inventories. b. Borrowing each year to repay debt from prior years. c. Repayment of debt. d. Payments of dividends.

Which of the following statements is true? a. The shareholders' letter should be ignored. b. Public relations material should be used cautiously. c. Annual reports only contain glossy pictures. d. Market data refers to the advertising budget of a firm.

What do firms with complex capital structures report in addition to EPS

basic AND diluted earnings per common share

What is the most widely used liquidity ratio? a. Quick ratio b. Debt ratio c. Current ratio d. Inventory turnover

Which information is hard to find or missing from the financial statements? a. Net income. b. Total long-term debt. c. Reputation of the firm with its customers. d. Five-year summary of selected financial data.

Which items would be classified as long-term debt? a. Accounts payable, unearned revenue, pension liabilities. b. Common stock, retained earnings, bonds payable. c. Mortgages, convertible debentures, bonds payable. d. Deferred taxes, accrued expenses, treasury stock.

Which of the following is not a condition that must be met for an item to be recorded as revenue? a. Revenues must be earned. b. The amount of the revenue must be measurable. c. The revenue must be received in cash. d. The costs of generating the revenue can be determined.

Which of the following is not required to be discussed in the Management Discussion and Analysis of the Financial Condition and Results of Operations? a. Operations b. Capital resources c. Earnings projections d. Liquidity

Why is the amount of debt in a company's capital structure important to the financial analyst? a. Debt is less costly than equity. b. Equity is riskier than debt. c. Debt implies risk. d. Debt is equal to total assets.

Why would a company switch to the LIFO method of inventory valuation? a. By switching to LIFO, reported earnings will be higher. b. A new tax law requires companies using LIFO for reporting purposes also to use LIFO for figuring taxable income. c. LIFO produces the largest cost of goods sold expense in a period of inflation and thereby lowers taxable income and taxes. d. A survey by Accounting Trends and Techniques revealed that the switch to LIFO is a current accounting "fad."

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a

cash budget

Cash Flow Adequacy Ratio

cash flow from ops/(LT debt+fixed asset purchased+dividends paid)

What do foregin currency translation effects arise from?

changes in the equity of foreign subsidiaries

Foreign currency translation effects, unrealized gains and losses, additional pension liabilities and cash flow hedges are items that may comprise a company's other ________ income.

comprehensive

How do you calculate the cost of goods sold %?

cost of goods sold / net sales

Use the indirect method to answer questions 7-10. The following information is available for Armstrong Company: Net income $450 Increase in plant and equip. $170 Depreciation expense 80 Payment of dividends 10 Decrease in accts. receiv. 20 Increase in long-term debt 100 Increase in inventories 15 Decrease in accounts payable 30 What is cash from investing activities for Armstrong Company? a. ($160) b. $160 c. $170 d. ($170)

What does Section 404 of the Sarbanes-Oxley Act of 2002 require? a. Rotation of audit partners every five years. b. A ten-year jail sentence and $1 million fine for violations of the act. c. Auditor independence, which prohibits audit firms from offering any services other than audit services. d. A statement by the company regarding the effectiveness of internal controls and a disclosure of any material weaknesses in a firm's internal control system.

What does an increasing collection period for accounts receivable suggest about a firm's credit policy? a. The credit policy is too restrictive. b. The collection period has no relationship to a firm's credit policy. c. The firm is probably losing qualified customers. d. The credit policy may be too lenient.

What does the income statement measure for a firm? a. The financial position of a firm for a period. b. The financing and investment activities for a period c. The changes in assets and liabilities that occurred during the period. d. The results of operations for a period.

What does the retained earnings account measure? a. Cash held by the company since its inception. b. Payments made to shareholders in the form of cash or stock dividends. c. Financial resources currently available to satisfy financial obligations. d. All undistributed earnings.

What information can be found in a proxy statement? a. Information on the breakdown of audit and nonaudit fees paid to the audit form. b. Information on voting procedures. c. Information on executive compensation. d. All of the above.

What is a statement of stockholders' equity? a. It is the same as a retained earnings statement. b. It is a statement reconciling the difference between stock issued at par value and stock issued at market value. c. It is a statement that reconciles only the treasury stock account. d. It is a statement that summarizes changes in the entire stockholders' equity section of the balance sheet.

What is an unqualified audit report? a. A report stating that the auditors are not qualified to report on a firm. b. A report that states the financial statements are in violation of GAAP. c. A report that states that departures from GAAP exist in the firm's financial statements. d. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

What is the accrual basis of accounting? a. Recognition of revenue when it is received in cash. b. Recognition of revenue in the accounting period when the sale is made rather than when cash is received. c. Matching expenses with revenue in the appropriate accounting period. d. Both (b) and (c).

What is the goal of the IASB? a. To work with the SEC to create a set of accounting rules for publicly held companies. b. To create a set of accounting rules that Europe and the United States will follow. c. To create a set of accounting rules for countries other than the United States. d. To have worldwide acceptance of a set of international financial reporting standards.

What items should be calculated when analyzing the accounts receivable and allowance for doubtful accounts? a. The growth rates of all assets and liabilities. b. The growth rates of sales and inventories. c. The common-size balance sheet. d. 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.

What subject(s) should the management discussion and analysis section discuss? a. Commitments for capital expenditures. b. A breakdown of sales increases into price and volume components. c. Liquidity. d. All of the above.

What type of accounts are accounts receivable and inventory? a. Cash accounts. b. Investing accounts. c. Financing accounts. d. Operating accounts.

What type of information found in supplementary schedules is required for inclusion in an annual report? a. Inflation data b. Management remuneration and segmental data c. Material litigation and management photographs d. Segmental data

If inventory costs are rising and a company is using LIFO, large purchases of inventory near the end of the year will:

decrease income taxes paid

Stock _____and stock _____ result in the issuance of additional shares of stock to existing shareholders.

dividends, splits

The percent-of-sales method for computing uncollectible accounts:

employs the expense recognition (matching) concept

The ______method of accounting for investments should be used when the investor can exercise significant influence over the investee's operating and financing policies.

equity

What 4 items comprise comprehensive income?

foreign currency translation effects, unrealized gains or losses, additional pension liabilities, cash flow hedges

increase in the inventory turnover rate

_____ ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interests and other fixed charges.

leverage

Statement of Stockholder's Equity

link between the balance sheet and the income statement

________ ratios measure a firm's ability to meet cash needs as they arise.

liquidity

_____ ratios measure returns to stockholders and the value the marketplace puts on a company's stock.

market

The sustainable growth rate of a firm is best described as the:

maximum growth rate achievable, excluding any external equity financing while maintaining a constant debt-equity ratio.

Accounts Receivable Turnover Ratio

net credit sales/average accounts receivable--> add accts receivable at beg and end of the period then divide by 2

A __________ statement contains useful information about the board of directors and executive compensations, option grants, audit related matters, related party transactions and proposals to be voted on by shareholders.

proxy

Where are unrealized gains/ losses calculated from?

securities available for sale

Sales revenue is based on the________ of the inventory, while cost of goods sold is based on the ________ of the inventory

selling price, cost

When evaluating the collectability of accounts receivable:

the allowance method uses estimates developed from the companys collection experience

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