Finance chapter 4, FIN Chapter 3, Ch. 2, FinExam1

Brad's Company has equipment with a book value of $500 that could be sold today at a 50 percent discount. Its inventory is valued at $450 and could be sold to a competitor for that amount. The firm has $100 in cash and customers owe the firm $250, all of which is collectible. What is the current market value of the firm's assets?

$1,050

A firm has $820 in inventory, $3,200 in fixed assets, $1,210 in accounts receivable, $890 in accounts payable, and $360 in cash. What is the amount of the net working capital?

$1,500

Mart's Boutique has sales of $820,000 and costs of $540,000. Interest expense is $36,000 and depreciation is $59,000. The tax rate is 35 percent. What is the net income?

$120,250

Deep Water Mining added $411 to retained earnings last year on sales of $24,646. The administrative expenses were $4,370, depreciation was $812, dividends paid were $285, and the interest expense was $103. What was the cost of goods sold if the firm's tax rate was 35 percent?

$18,290

Last year, Webster Farms had annual revenue of $87,200, depreciation of $11,600, cost of goods sold of $54,700, and administrative expenses of $8,300. The firm paid $3,200 in dividends and paid taxes of $4,300. What was the operating cash flow?

$19,900

At the beginning of the year, a firm has current assets of $16,200 and current liabilities of $13,280. At the end of the year, the current assets are $14,800 and the current liabilities are $14,210. What is the change in net working capital?

$2,330

Last year, Johnson Mills had annual revenue of $37,800, cost of goods sold of $23,200, and administrative expenses of $6,300. The firm paid $700 in dividends and had a tax rate of 35 percent. The firm added $2,810 to retained earnings. The firm had no long-term debt. What was the depreciation expense?

$2,900

Peggy Grey's Cookies had net income of $8,110. The firm paid out 30 percent of the net income to its shareholders as dividends. During the year, the company repurchased $500 worth of common stock. What is the cash flow to stockholders?

$2,933

At the beginning of the year, long-term debt of a firm is $2,400 and total debt is $3,150. At the end of the year, long-term debt is $2,800 and total debt is $4,370. The interest paid is $40. What is the amount of the cash flow to creditors?

$360

Oscar's Dog Treats had a cash flow to creditors of $2,840, a cash flow to stockholders of $1,630 last year. The firm spent a net of $1,420 on fixed assets and reduced net working capital by $330. What was the operating cash flow?

$5,560

Thompson's Jet Skis has operating cash flow of $11,618. Depreciation is $2,345 and interest paid is $395. A net total of $485 was paid on long-term debt. The firm spent $6,180 on fixed assets and decreased net working capital by $420. What is the cash flow of the firm?

$5,858

Total assets are $1,450, fixed assets are $790, long-term debt is $750, and short-term debt is $300. What is the amount of current assets?

$660

Your firm has total sales of $22,980, costs of $14,715, and depreciation of $6,045. The tax rate is 34 percent. There are no interest expenses or other income. What is the operating cash flow?

$7,510.20

Awnings Incorporated has beginning net fixed assets of $234,100 and ending net fixed assets of $243,600. Assets valued at $42,500 were sold during the year. Depreciation was $62,500. What is the amount of net capital spending?

$72,000

The tax rates are as shown. Your firm currently has taxable income of $83,200. How much additional tax will you owe if you increase your taxable income by $24,600?

$8,754

Pete's Boats has beginning long-term debt of $840 and ending long-term debt of $790. The beginning and ending total debt balances are $1,220 and $1,360, respectively. The interest paid is $30. What is the amount of the cash flow to creditors?

$80

Martha's Enterprises spent $4,100 to purchase equipment three years ago. This equipment is currently valued at $2,700 on today's balance sheet but could actually be sold for $3,200. Net working capital is $400 and long-term debt is $2,300. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity?

$800

What questions do capital structure financial managers ask ?

- How to raise money -What -When -Where -Debt or equity , what is the optimal mix

an example of financing decisions are?

- How to raise money to pay for a firms investments

an example of investment decisions are?

- What long term investments should the firm take on - What lines of business to obtain -Which real assets to acquire

What is the main role of working capital management?

-to deal with the day to day finances of the firm -managing short term assets and liabilities

Which of the following individuals have unlimited liability based on their ownership interest? I. general partner II. sole proprietor III. stockholder IV. limited partner

1 2

Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life

1 3 4

Which of the following are cash flows from a corporation into the financial markets? I. repayment of long-term debt II. payment of government taxes III. payment of loan interest IV. payment of quarterly dividend

1 3 4

A business owned by a solitary individual who has unlimited liability for its debt is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. limited liability company

B

Which one of the following best states the primary goal of financial management? A. maximize current dividends per share B. maximize the current value per share C. increase cash flow and avoid financial distress D. minimize operational costs while maximizing firm efficiency E. maintain steady growth while increasing current profits

B

Which one of the following functions should be the responsibility of the controller rather than the treasurer? A.daily cash deposit B. income tax returns C. equipment purchase analysis D. customer credit approval E. payment to a vendor

B

Which one of the following is a working capital management decision? A. determining the amount of equipment needed to complete a job B. determining whether to pay cash for a purchase or use the credit offered by the supplier C. determining the amount of long-term debt required to complete a project D. determining the number of shares of stock to issue to fund an acquisition E. determining whether or not a project should be accepted

B

Which one of the following statements is correct? A. A general partnership is legally the same as a corporation. B. Both sole proprietorship and partnership income is taxed as individual income. C. Partnerships are the most complicated type of business to form. D. All business organizations have bylaws. E. Only firms organized as sole proprietorships have limited lives.

B

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A. 0.0 B. 0.5 C. 1.0 D. 1.5 E. 2.0

B) 0.5

Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's? A. Al's has more net income than Ben's. B. Ben's is increasing its earnings at a faster rate than the Al's. C. Al's has a higher market value per share than does Ben's. D. Ben's has a lower market-to-book ratio than Al's. E. Al's has a higher net income than Ben's.

B) Ben's is increasing its earnings at a faster rate than the Al's.

Which one of the following statements is correct? A. Book values should always be given precedence over market values. B. Financial statements are frequently used as the basis for performance evaluations. C. Historical information provides no value to someone who is predicting future performance. D. Potential lenders place little value on financial statement information. E. Reviewing financial information over time has very limited value.

B) Financial statements are frequently used as the basis for performance evaluations.

Which one of the following is a source of cash? A. repurchase of common stock B. acquisition of debt C. purchase of inventory D. payment to a supplier E. granting credit to a customer

B) acquisition of debt

A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit? A. current B. cash C. debt-equity D. quick E. total debt

B) cash

Ratios that measure a firm's financial leverage are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. book value

B) long-term solvency

Atlas industries combines the smaller investment proposals from each operational unit into a single project for planning purposes. This process is reffered to as which one if the following

Aggregation

The price-sales ratio is especially useful when analyzing firms that have which one of the following? A. volatile market prices B. negative earnings C. positive PEG ratios D. a negative Tobin's Q E. increasing sales

B) negative earnings

Activities of a firm which require the spending of cash are known as: A. sources of cash. B. uses of cash. C. cash collections. D. cash receipts. E. cash on hand.

B) uses of cash.

Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91. Sam's has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88. Both companies have similar operations. Based on this information, Dee's must be doing which one of the following? A. utilizing its fixed assets more efficiently than Sam's B. utilizing its total assets more efficiently than Sam's C. generating $1 in sales for every $1.12 in net fixed assets D. generating $1.12 in net income for every $1 in net fixed assets E. maintaining the same level of current assets as Sam's

B) utilizing its total assets more efficiently than Sam's

Lenders probably have the most interest in which one of the following sets of ratios? A. Return on assets and profit margin. B. Long-term debt and times interest earned. C. Price-earnings and debt-equity. D. Market-to-book and times interest earned. E. Return on equity and price-earnings.

B. Long-term debt and times interest earned.

Which one of the following statements concerning liquidity is correct?

Balance sheet accounts are listed in order of decreasing liquidity

Which of the following represent cash outflows from a corporation? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment of government taxes

2 4

Which of the following questions are addressed by financial managers ? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment?

2 3 4

Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $218,700?

31.34%

U.S. corporate taxes switch to a constant flat-rate tax once the average tax rate reaches:

35%

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. limited liability company.

C

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: A. generally partner. B. sole proprietor. C. limited partner. D. corporate shareholder. E. zero partner.

C

The U.S. government coding system that classifies a firm by the nature of its business operations is known as the: A. NASDAQ 100. B. Standard & Poor's 500. C. Standard Industrial Classification code. D. Governmental ID code. E. Government Engineered Coding System.

C) Standard Industrial Classification code.

Jasper United had sales of $21,000 in 2011 and $24,000 in 2012. The firm's current 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 net working capital turnover rate increased. D. The fixed asset turnover decreased. E. The receivables turnover rate decreased.

C) The net working capital turnover rate increased.

Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time? A. statement of standardization B. statement of cash flows C. common-base year statement D. common-size statement E. base reconciliation statement

C) common-base year statement

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values. A. increase in the cash ratio B. increase in the net working capital to total assets ratio C. decrease in the quick ratio D. decrease in the cash coverage ratio E. increase in the current ratio

C) decrease in the quick ratio

Which one of the following accurately describes the three parts of the Du Pont identity? A. operating efficiency, equity multiplier, and profitability ratio B. financial leverage, operating efficiency, and profitability ratio C. equity multiplier, profit margin, and total asset turnover D. debt-equity ratio, capital intensity ratio, and profit margin E. return on assets, profit margin, and equity multiplier

C) equity multiplier, profit margin, and total asset turnover

According to the Statement of Cash Flows, a decrease in accounts receivable will _____ the cash flow from _____ activities. A. decrease; operating B. decrease; financing C. increase; operating D. increase; financing E. increase; investment

C) increase; operating

The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations? A. payment to supplier B. payment to employee C. payment of interest to a lender D. payment of principle to a lender E. payment of a dividend to a shareholder

C) payment of interest to a lender

It is easier to evaluate a firm using financial statements when the firm: A. is a conglomerate. B. has recently merged with its largest competitor. C. uses the same accounting procedures as other firms in the industry. D. has a different fiscal year than other firms in the industry. E. tends to have many one-time events such as asset sales and property acquisitions.

C) uses the same accounting procedures as other firms in the industry.

According to the statement of cash flows, an increase in inventory will _____ the cash flow from _____ activities. A. Increase; operating. B. Decrease; financing. C. Decrease; operating. D. Increase; financing. E. Increase; investment.

C. Decrease; operating.

Which one of the following is defined as a firm's short-term assets and its short-term liabilities? A. working capital B. debt C. investment capital D. net capital E. capital structure

A

Which one of the following statements is correct? A. Book values should always be given precedence over market values. B. Financial statements are rarely used as the basis for performance evaluations. C. Historical information is useful when projecting a firm's future performance. D. Potential lenders place little value on financial statement information. E. Reviewing financial information over time has very limited value.

C. Historical information is useful when projecting a firm's future performance.

On the statement of cash flows, which of the following are considered operating activities? I. Costs of goods sold. II. Decrease in accounts payable. III. Purchase of equipment. IV. Dividends paid. A. I and III only. B. III and IV only. C. I and II only. D. I, III, and IV only. E. I, II, III, and IV.

C. I and II only.

An increase in which of the following will increase the return on equity, all else constant? I. Total asset turnover. II. Net income. III. Total assets. IV. Debt-equity ratio. A. I only. B. I and II only. C. I, II, and IV only. D. I, II, and III only. E. I, II, III, and IV.

C. I, II, and IV only.

Ratios that measure a firm's liquidity are known as _____ ratios. A. Asset management. B. Long-term solvency. C. Short-term solvency. D. Profitability. E. Book value.

C. Short-term solvency.

All-State Moving had sales of $899,000 in 2014 and $967,000 in 2015. The firm's current 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 net working capital turnover rate increased. D. The fixed asset turnover decreased. E. The receivables turnover rate decreased.

C. The net working capital turnover rate increased.

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

Capital intensity ratio

According to the Statement of Cash Flows, an increase in interest expense will _____ the cash flow from _____ activities. A. decrease; operating B. decrease; financing C. increase; operating D. increase; financing E. increase; investment

A) decrease; operating

A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action? A. equity multiplier B. total asset turnover C. profit margin D. return on assets E. return on equity

A) equity multiplier

The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current: A. financial ratios to the firm's historical ratios. B. financial statements to the financial statements of similar firms operating in other countries. C. financial ratios to the average ratios of all firms located within the same geographic area. D. financial statements to those of larger firms in unrelated industries. E. financial statements to the projections that were created based on Tobin's Q.

A) financial ratios to the firm's historical ratios.

Relationships determined from a firm's financial information and used for comparison purposes are known as: A. financial ratios. B. identities. C. dimensional analysis. D. scenario analysis. E. solvency analysis.

A) financial ratios.

According to the statement of cash flows, an increase in interest expense will _____ the cash flow from _____ activities. A. Decrease; operating. B. Decrease; financing. C. Increase; operating. D. Increase; financing. E. Increase; investment.

A. Decrease; operating.

Which of the following can be used to compute the return on equity? I. Profit margin × Return on assets II. Return on assets × Equity multiplier III. Profit margin × Total asset turnover × Debt-equity ratio IV. Net income / Total assets A. II only. B. II and III only. C. II and IV only. D. I, II, and III only. E. I, II, III, and IV.

A. II only.

Depreciation is classified as a noncash item because no cash is spent when depreciation is recorded. Why are expenses that have been accrued, but not yet paid, not also considered to be noncash items and therefore excluded from operating cash flow just as depreciation is excluded?

Accrued expenses that have not been paid will appear in accounts payable and the change in net working capital. Via the change in net working capital, these unpaid expenses are subtracted from the operating cash flow to determine the cash flow of the firm. This method allows for the computation of the cash flows based solely on financial statement information. Depreciation, on the other hand, is the expensing of a fixed asset cost that was paid for when the asset was acquired.

Which of the following correctly defines the retention ratio

Addition. To retained earnings divided by net income

When utilizing the percentage of sales approach, managers

Consider the current production capacity level, can project both net income and net cash flows

Financial planning

Considers multiple options and scenarios for the next two to five years

Decisions made by financial managers should primarily focus on increasing which one of the following? A. size of the firm B. growth rate of the firm C. gross profit per unit produced D. market value per share of outstanding stock E. total sales

D

Which form of business structure is most associated with agency problems? A. sole proprietorship B. general partnership C. limited partnership D. corporation E.limited liability company

D

Which one of the following is a capital structure decision? A.determining which one of two projects to accept B. determining how to allocate investment funds to multiple projects C. determining the amount of funds needed to finance customer purchases of a new product D. determining how much debt should be assumed to fund a project E. determining how much inventory will be needed to support a project

D

Which type of business organization has all the respective rights and privileges of a legal person? A.sole proprietorship B. general partnership C.limited partnership D.corporation E.Limited liability company

D

A firm uses 2011 as the base year for its financial statements. The common-size, base-year statement for 2012 has an inventory value of 1.08. This is interpreted to mean that the 2012 inventory is equal to 108 percent of which one of the following? A. 2011 inventory B. 2011 total assets C. 2012 total assets D. 2011 inventory expressed as a percent of 2011 total assets E. 2012 inventory expressed as a percent of 2012 total assets

D) 2011 inventory expressed as a percent of 2011 total assets

The formula which breaks down the return on equity into three component parts is referred to as which one of the following? A. equity equation B. profitability determinant C. SIC formula D. Du Pont identity E. equity performance formula

D) Du Pont identity

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio? A. accounts payable B. cash C. inventory D. accounts receivable E. fixed assets

D) accounts receivable

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following? A. pay all of its debts that are due within the next 48 hours B. pay all of its debts that are due within the next 48 days C. cover its operating costs for the next 48 hours D. cover its operating costs for the next 48 days E. meet the demands of its customers for the next 48 hours

D) cover its operating costs for the next 48 days

The Corner Hardware 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. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways? A. decrease in the inventory turnover rate B. decrease in the net working capital turnover rate C. no change in the fixed asset turnover rate D. decrease in the day's sales in inventory E. no change in the total asset turnover rate

D) decrease in the day's sales in inventory

Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in notes payable C. decrease in common stock D. increase in accounts payable E. increase in inventory

D) increase in accounts payable

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. turnover

D) profitability

The sources and uses of cash over a stated period of time are reflected on the: A. income statement. B. balance sheet. C. tax reconciliation statement. D. statement of cash flows. E. statement of operating position.

D) statement of cash flows.

On a common-size balance sheet all accounts are expressed as a percentage of: A. sales for the period. B. the base year sales. C. total equity for the base year. D. total assets for the current year. E. total assets for the base year.

D) total assets for the current year.

Which one of the following is a source of cash for a non-tax-paying firm? A. Increase in accounts receivable. B. Increase in depreciation. C. Decrease in accounts payable. D. Increase in common stock. E. Increase in inventory.

D. Increase in common stock.

Which of the following terms is defined as dividends paid expressed as a percentage of net income

Dividend payout ratio

Which of the following policies most directly affect the projection of the retained earnings balance to be used on a pro forma statements

Dividend policy

For a firm with long-term debt, net income is equal to:

Dividends + Addition to retained earnings

The decision to issue additional shares of stock is an example of which one of the following? A. working capital management B. net working capital decision C. capital budgeting D. controller's duties E. capital structure decision

E

Which one of the following statements is correct? A. If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0. B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. C. The debt-equity ratio can be computed as 1 plus the equity multiplier. D. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity. E. An increase in the depreciation expense will not affect the cash coverage ratio.

E) An increase in the depreciation expense will not affect the cash coverage ratio.

On a common-base year financial statement, accounts receivables will be expressed relative to which one of the following? A. current year sales B. current year total assets C. base-year sales D. base-year total assets E. base-year accounts receivables

E) base-year accounts receivables

Which one of the following is a use of cash? A. increase in notes payable B. decrease in inventory C. increase in long-term debt D. decrease in accounts receivables E. decrease in common stock

E) decrease in common stock

Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in common stock C. decrease in long-term debt D. decrease in accounts payable E. decrease in inventory

E) decrease in inventory

If a firm produces a twelve percent return on assets and also a twelve percent return on equity, then the firm: A. may have short-term, but not long-term debt. B. is using its assets as efficiently as possible. C. has no net working capital. D. has a debt-equity ratio of 1.0. E. has an equity multiplier of 1.0.

E) has an equity multiplier of 1.0.

Which one of the following will decrease if a firm can decrease its operating costs, all else constant? A. return on equity B. return on assets C. profit margin D. total asset turnover E. price-earnings ratio

E) price-earnings ratio

Shareholders probably have the most interest in which one of the following sets of ratios? A. return on assets and profit margin B. long-term debt and times interest earned C. price-earnings and debt-equity D. market-to-book and times interest earned E. return on equity and price-earnings

E) return on equity and price-earnings

A common-size income statement is an accounting statement that expresses all of a firm's expenses as percentage of: A. total assets. B. total equity. C. net income. D. taxable income. E. sales.

E) sales.

Tobin's Q relates the market value of a firm's assets to which one of the following? A. initial cost of creating the firm B. current book value of the firm C. average asset value of similar firms D. average market value of similar firms E. today's cost to duplicate those assets

E) today's cost to duplicate those assets

Operating cash flow is defined as:

EBIT + Depreciation - Taxes

Which one of these statements is correct?

Earnings per share can be negative but dividends per share cannot

Which one of the following statements concerning financial planning for a firm is correct

Financial plans often contain alternative options based on economic developments

A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of the following accounts values when compiling pro forma statements

Fixed assets

Why is cash flow management important?

GAAP accounting principles allow significant subjective decisions to be made in many key areas. The use of cash flow as a metric to evaluate a company comes from the idea that there is less subjectivity involved and therefore, it is harder to spin the numbers.

An increase in which of the following will increase the return on equity, all else constant? I. sales II. net income III. depreciation IV. total equity

I and II only

On the Statement of Cash Flows, which of the following are considered financing activities? I. increase in long-term debt II. decrease in accounts payable III. interest paid IV. dividends paid

I and IV only

Which of the following represent problems encountered when comparing the financial statements of two separate entities? I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business. II. The operations of the two firms may vary geographically. III. The firms may use differing accounting methods. IV. The two firms may be seasonal in nature and have different fiscal year ends.

I, II, III, and IV

On the Statement of Cash Flows, which of the following are considered operating activities? I. costs of goods sold II. decrease in accounts payable III. interest paid IV. dividends paid

I, II, and III only

The Du Pont identity can be used to help managers answer which of the following questions related to a firm's operations? I. How many sales dollars has the firm generated per each dollar of assets? II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity? III. How much net profit is a firm generating per dollar of sales? IV. Does the firm have the ability to meet its debt obligations in a timely manner?

I, II, and III only

Which of the following can be used to compute the return on equity? I. Profit margin × Return on assets II. Return on assets × Equity multiplier III. Net income/Total equity IV. Return on assets × Total asset turnover

II and III only

Which of the following ratios are measures of a firm's liquidity? I. cash coverage ratio II. interval measure III. debt-equity ratio IV. quick ratio

II and IV only

Which of the following is correct in relation to the pro forma statements

Inventory changes are directly proportional to sales changes

A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume that the firm

Is currently operating at full capacity

Define liquidity and explain what a firm would need to do to ensure all of the current assets displayed on its balance sheet are liquid.

Liquid assets are those that can be sold quickly with little or no loss in value. To ensure the current assets are liquid, the firm needs to review its accounts receivable to ensure the accounts are collectible and also review its inventory to ensure it is salable for at least the amount at which it is recorded.

67-82

Look at word

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

The internal growth rate of a firm is best described as the

Maximum growth rate achievable excluding external financing of any kind

Explain why the income statement is not a good representation of cash flow.

Most income statements contain some noncash items, so these must be accounted for when calculating cash flows. More importantly, however, since GAAP is used to create income statements, revenues and expenses are booked when they accrue, not when their corresponding cash flows occur.

Why is interest expense excluded from the operating cash flow calculation?

Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities. Interest expense arises from a financing decision and thus is considered as a cash flow to creditors.

Interpret, in words, what cash flow of the firm represents by discussing operating cash flow, changes in net working capital, and additions to fixed assets.

Operating cash flow is the cash flow a firm generates from its day-to-day operations. In other words, it is the cash inflow generated as a result of putting the firm's assets to work. Changes in net working capital and fixed assets represent investments a firm makes in these assets. That is, a firm typically takes some of the cash flow it generates from using assets and reinvests it in new assets. Cash flow of the firm, then, is the cash flow a firm generates by employing its assets, net of any acquisitions.

Which one of the following terms is applied to the financial planning method which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values

Percentage of sales method

Phil is working on a finaicial plan for the next three years. This period is referred to as which one of the following

Planning horizon

Which of the following is correct

Pro forma statements are projections, not guarantees

Explain the difference between product costs and period costs as they relate to the income statement. Are these terms synonymous with short-run and long-run?

Product costs are the total production costs incurred during a period - raw materials, direct labor, and manufacturing overhead - and are reported as cost of goods sold. Period costs are costs - management and office salaries, office expenses, insurance - that are allocated to a time period and are recorded as selling, general, and administrative expenses. The terms short-run and long-run are used to differentiate between fixed and variable costs, depending upon the length of time required to vary the cost amount.

You are getting ready to prepare pro forma statements for your business. Which one of the following are you most apt to estimate first as you begin this process

Sales forecast

Which one of these equations is an accurate expression of the balance sheet?

Stockholders' equity = Assets -Liabilities

Sometimes when businesses are critically delinquent on their tax liabilities, the tax authority comes in and literally seizes the business by chasing all of the employees out of the building and changing the locks. What does this tell you about the importance of taxes relative to our discussion of cash flow? Why might a business owner want to avoid such an occurrence?

Taxes must be paid in cash, and in this case, they are one of the most important components of cash flow. The reputation of a business can undergo irreparable harm if word gets out that the tax authorities have confiscated the business, even if only for a couple of hours until the business owner can come up with the money to clear up the tax problem. The bottom line is if the owner can't come up with the cash, the tax authority has effectively put them out of business.

Discuss the difference between book values and market values on the balance sheet and explain the best method for determining the value of a firm to its stockholders.

The accounts on the balance sheet are generally carried at historical cost, not market values. Although the book value of current assets and current liabilities may closely approximate market values, the same cannot be said for the rest of the balance sheet accounts. Ultimately, stockholders should focus on the firm's stock price, which is a market value measure, for the value of their investment in the firm.

Note that in all of our cash flow computations to determine cash flow of the firm, we never include the addition to retained earnings. Why not? Is this an oversight?

The addition to retained earnings is not a cash flow. It is simply an accounting entry that links the income statement to the balance sheet and allows the balance sheet to balance. Any additions to retained earnings will show up as cash flow changes in other balance sheet accounts.

When constructing a pro forms statement net working capital generally

Varies proportionally with sales

A business created as a distinct legal entity and treated as a legal "person" is called a: a. corporation. b. sole proprietorship. c. general partnership. d.limited partnership. e.unlimited liability company.

a

The controller is responsible for which of the following tasks? a)financial accounting b)raising capital c)tax reporting d)capital expenditure

a and c

corporations in other countries are often called a. public limited companies b. joint stock companies c. recalibrated partnerships d. autonomous entities

a b

Which of the following are considered stakeholders in a company ? a. employees b. suppliers c. government d. stockholder

a b c

Which of the following are important when considering a partnership? a. taxation of partnership income b. fund raising limitations c. future dividend policy d. personal liability for firm debts

a b d

On a balance sheet, deferred taxes are classified as:

a long-term liability

Which one of the following assets is generally the most liquid?

accounts receivable

Which one of the following accounts is included in stockholders' equity?

accumulated retained earnings

Assuming the number of shares outstanding remains constant, an increase in dividends per share will reduce the:

addition to retained earnings

the relationship between stockholders and management can best be described as a ====== relationship

agency

Which one of these will increase the book value of the stockholders' equity in a profitable, non-dividend paying firm? Assume no shares of stock are repurchased or sold.

an increase in earnings per share

an organization must prepare ===== and bylaws when forming a corporation

articles of incorporation

The officer responsible for corporate tax reporting is the a. chief operating officer b. controller c. ombudsman d. treasurer

b

Which one of the following is a capital budgeting decision? a. determining how many shares of stock to issue b. deciding whether or not to purchase a new machine for the production line c. deciding how to refinance debt issue that is maturing d. determining how much inventory to keep on hand e. determining how much money should be kept in the checking account

b

Which one of the following is a primary market transaction? a. sale of currently outstanding stock by a dealer to an individual investor b. sale of a new share of stock to an individual investor c. stock ownership transfer from one shareholder to another shareholder d. gift of stock from one shareholder to another shareholder e. gift of stock by a shareholder to a family member

b

What items are included in a firms capital structure? a)current assets b)long term debt c)equity d)net sales

b and c

A treasure's responsibilities typically include a. financial accounting b. making financial plans c. managing capital expenditure decisions d. handling cash flows

b c d

When a corporation is formed, it is granted which of the following rights ? a. corporate life of up to 100 year b. the ability to issue stock c. legal powers to sue d. state citizenship for jurisdictional purposes

b c d

Shareholder A sold 500 shares of ABC stock on the New York Stock exchange. This transaction - a. took pace in the primary market b. occurred in a dealer market c. was facilitated in the secondary market d. involved a proxy e. was a private placement

c

Which corporate officer is responsible for managing the firms cash? a. controller b. sales manager c. treasurer d. corporate secretary

c

Which one of the following statements concerning a sole proprietorship is correct? a.A sole proprietorship is designed to protect the personal assets of the owner. b.The profits of a sole proprietorship are subject to double taxation. c.The owner of a sole proprietorship is personally responsible for all of the company's debts. d.There are very few sole proprietorships remaining in the U.S. today. e.A sole proprietorship is structured the same as a limited liability company.

c

which one of the following business types is best situated to raising large amounts of capital? a. sole proprietorship b. limited liability company c. corporation d. general partnership e. limited partnership

c

Cash flow from assets:

can be positive, negative, or equal to zero

____ budgeting is the process of making and managing expenditures on long term assets

capital

which term applies to the mixture of debt and equity maintained by a firm? a. capital structure b. net working capital c. capital budget d. cash management

capital structure

Cash flow to stockholders is defined as:

cash dividends paid plus repurchases of equity minus new equity financing

In the accounting statement of cash flows, which one of these is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities?

cash flow from operating activities

Which one of these terms refers to the firm's interest payments less any net new borrowing?

cash flow to creditors

A firm's dividend payments less any net new equity raised is referred to as the firm's:

cash flow to stockholders

The cash flow of the firm must be equal to:

cash flow to stockholders plus cash flow to creditors

Free cash flow is:

cash that the firm can distribute to creditors and stockholders

in large firms, financial activity is usually associated with which top officer?

chief financial officer

Net working capital is defined as:

current assets minus current liabilities

Which one of the following terms is defined as the management of a firms long term investments? a. working capital management b. financial allocation c. agency cost analysis d. capital budgeting e. capital structure

d

Which one of the following is a current liability?

debt payable to a mortgage company in nine months

All else held constant, the earnings per share will:

decrease as the number of shares outstanding increase

Depreciation for a profitable firm:

decreases net income by less than $1 for every $1 of depreciation expense

Assets are listed on the balance sheet in order of:

decreasing liquidity

An increase in which one of the following will cause the operating cash flow to increase for a profitable firm?

depreciation

Which one of these is a non-cash item?

depreciation

Earnings per share will increase when:

depreciation decreases

As seen on an income statement:

depreciation reduces both the pretax income and the net income

some of the cash flow generated by a firm goes back to the financial markets in the form of

dividends and debt payments

The controller of a corporation generally reports directly to the -- a. board of directors b. chairman of the board c. chief executive officer d. president e. vice president of finance

e

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? a. increase in the amount of the quarterly dividend b. decrease in the per unit production costs c. increase in the number of shares outstanding d. decrease in the net working capital e. increase in the market value per share

e

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? a.working capital management b. cash management c. cost analysis d. capital budgeting e. capital structure

e

Capital spending is equal to:

ending net fixed assets minus beginning net fixed assets plus depreciation

Noncash items refer to:

expenses charged against revenues that do not directly affect cash flow

Under generally accepted accounting principles (GAAP), a firm's assets are reported at:

historical cost less accumulated depreciation

The income statement:

includes noncash expenses

The financial statement summarizing a firm's accounting performance over a period of time is the:

income statement

Which one of these accounts is classified as a current asset on the balance sheet?

inventory

Corporate finance deals with?

investment decisions and financing decisions

Book value:

is based on historical cost

The carrying value or book value of assets:

is determined under GAAP and is based on the cost of the asset

One of the reasons why cash flow analysis is popular is because:

it is difficult to manipulate, or spin the cash flows

businesses are motivated to organize as corporations because stockholders in a corporation have===== liability for corporate debts

limited

An asset that can be quickly converted into cash without significant loss in value is referred to as being:

liquid

When you are making a financial decision, the most relevant tax rate is the ____ rate.

marginal

Which term defines the tax rate that applies to the next dollar of taxable income earned?

marginal

If you sell an asset, you are most apt to receive which value for that asset?

market value

According to the Generally Accepted Accounting Principles, costs are:

matched with revenues

An increase in total assets:

must be offset by an equal increase in liabilities and stockholders' equity

Net capital spending is equal to the:

net change in fixed assets plus depreciation

The cash flow resulting from a firm's ongoing, normal business activities is referred to as the:

operating cash flow

The statement of cash flows consists of the cash flows from:

operations, investing activities, and financing activities

The cash flow to creditors includes the firm's cash:

outflow when interest is paid on outstanding debt

A business without separate legal authority formed by two or more people is known as a _____

partnership

An increase in treasury stock:

results from a repurchase of outstanding shares of stock

The cash flow to stockholders must be positive when:

the cash flow from assets is positive and also exceeds the cash flow to creditors

A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that:

the ending net working capital can be positive, negative, or equal to zero

The primary responsibility of financial managers is to increase the value of ...

the existing shares of stock

According to generally accepted accounting principles (GAAP), revenue is recognized as income when:

the transaction is complete and the goods or services are delivered

Chief Financial Officer ...

this financial officer coordinates the activities of the treasurer and the controller

Treasurer ...

this financial officer oversees cash management , credit management, financial planning and capital expenditures

Controller....

this financial officer oversees costs and financial accounting, taxes and information systems

Liquidity is:

valuable to a firm even though liquid assets tend to be less profitable to own

Earnings per share:

will increase if net income increases and number of shares outstanding decreases