Finance Exam 1

The matching principle states that:

the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

Annuity

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

Annuity due

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 9 percent interest. Approximately how long must you wait for your investment to double in value?

Approximate time period = 72/9 = 8 years

The passage of the Tax Cuts and Jobs Act of 2017 created a revised progressive tax structure, which applies to all of the following except:

Corporations

Which one of these transactions will increase the liquidity of a firm?

Credit sale of inventory at cost

Cash flow to creditors is defined as:

interest paid minus net new borrowing.

A firm has sales of $311,000 and net income of $31,600. The price-sales ratio is 3.24 and market price is $36 per share. How many shares are outstanding?

Price-sales ratio = Market Price / (Sales/Outstanding Shares) = 3.24 = $36/($311,000/Outstanding shares) Outstanding shares = 27,990

Levi had an unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled over onto his property. The potential claim that he has against this manufacturer is that of a(n):

stakeholder

Perpetuities have:

equal payments and an infinite life.

Isaac only has $1,090 today but needs $1,979 to buy a new computer. How long will he have to wait to buy the computer if he earns 5.4 percent compounded annually on his savings? Assume the price of the computer remains constant.

$1,979 = $1,090 × (1 + .054)tt = 11.34 years IY: 5.4 PV: -1090 PMT: 0 FV: 1979 CPT for N=11.34

When you were born, your parents opened an investment account in your name and deposited $1,500 into the account. The account has earned an average annual rate of return of 5.3 percent. Today, the account is valued at $42,856. How old are you?

$42,856 = $1,500 × (1 + .053)tt = 64.91 years IY: 5.3 PV: -1500 PMT: 0 FV: 42,856 CPT for N= 64.91

You just won $17,500 and deposited your winnings into an account that pays 6.7 percent interest, compounded annually. How long will you have to wait until your winnings are worth $50,000?

16.19 years

Which one of the following(s) will increase the present value of a lump-sum future amount to be received in 15 years?

A decrease in the time period A decrease in the interest rate

It takes K's Boutique an average of 53 days to sell its inventory and an average of 16.8 days to collect its accounts receivable. The firm has sales of $942,300 and costs of goods sold of $692,800. What is the accounts receivable turnover rate? Assume a 365-day year.

Accounts receivable turnover = 365 / Average Days to Collect AR = 365 / 16.8 = 21.73

Which one of the following is the annuity present value formula?

C × ({1 − [1 / (1 + r)t]} / r)

Which one of the following has nearly the same meaning as free cash flow?

Cash flow from assets

The Dry Dock has inventory of $431,700, accounts payable of $94,200, cash of $51,950, and accounts receivable of $103,680. What is the cash ratio?

Cash ratio = Cash / Accounts Payable = $51,950 / $94,200 = .55

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?

Corporate accounting and financial fraud

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? Assume a 365-day year.

Days' sales in receivables = 365 / (Credit Sales / AR Balance) = 365/($5,338,411 / $391,648) = 26.78 days

A firm has sales of $811,000 for the year. The profit margin is 5.1 percent and the retention ratio is 56 percent. What is the common-size percentage for the dividends paid?

Dividends paid common-size percentage = [Sales x Profit Margin Ratio x Payout ratio]/Sales =[$811,000 × .051 × (1 − .56)] / $811,000 = .0224, or 2.24 percent Payout ratio is 1-Retention Ratio.

What is the future value of $8,000 invested today and held for 15 years at 8.5 percent compounded annually?

Future value = $8,000 × (1.085)15 = $27,197.94 N:15 IY: 8.5 PV: -8000 PMT: 0 CPT for FV = $27,197.94

Western Bank pays 5 percent simple interest on its savings account balances, whereas Eastern Bank pays 5 percent compounded annually. If you deposited $6,000 in each bank, how much more money would you earn from the Eastern Bank account at the end of 3 years?

Future value Western = $6,000 + ($6,000 × .05 × 3) = $6,900Future value Eastern = $6,000 × (1 + .05)3 = $6,945.75 OR N:3 IY: 5 PV: -6000 PMT: 0 CPT for FV=$6,945.75Difference = $6,945.75 − 6,900 = $45.75

Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts?

General partnership

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas?

Investments

Which one of the following statements correctly applies to a sole proprietorship?

Obtaining additional equity is dependent on the owner's personal finances.

Gino's Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners' equity?

Owners' equity = Net Working Capital + Net Fixed Assets - Long-Term Debt =$29,800 + 64,800 − 23,000 = $71,600

All else held constant, which one of the following will decrease if a firm increases its net income?

Price-earnings ratio

Dellf's has a profit margin of 3.8 percent on sales of $287,200. The firm currently has 5,000 shares of stock outstanding at a market price of $7.11 per share. What is the price-earnings ratio? Correct Answer

Price-earnings ratio = $7.11/[(.038 × $287,200)/5,000] = 3.26

Gaspares Agricultural Cooperative has current liabilities of $162,500, net working capital of $28,560, inventory of $175,800, and sales of $1,941,840. What is the quick ratio?

Quick ratio = (NWC + Current Liabilities - Inventory)/Current Liabilities = ($28,560 + 162,500 − 175,800) / $162,500 = .09 NWC is the difference between Current Assets and Current Liabilities; adding back the difference gives you Current Assets.

Generally Accepted Accounting Principles, as they relate to the Income Statement includes the recognition principle: to recognize revenue when the earnings process is virtually complete and the value of an exchange of goods or services is known or can be reliably determined. Which of the following statements is true with regard to this principle?

Revenue is recognized at the time of sale. Costs associated with the sale of that product likewise would be recognized at that time

An employee has a claim on the cash flows of Martin's Machines. This claim is defined as a claim by one of the firm's:

Stakeholders

Which one of the following statements about a limited partnership is correct?

There must be at least one general partner.

A perpetuity in Canada is frequently referred to as:

a consul.

It is important to review not just the Current Ratio, but also the Quick Ratio and Cash Ratio because:

a low Current Ratio may not necessarily indicate a problem with a company.

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are:

a perpetuity.

Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:

annual percentage rate.

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet

The goal of financial management is to increase the:

current market value per share.

Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:

effective annual rate.

Net capital spending is equal to:

ending net fixed assets minus beginning net fixed assets plus depreciation.

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:

future value

The stated interest rate is the interest rate expressed:

in terms of the interest payment made each period

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

income statement

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested.

Scott borrowed $2,500 today at an APR of 7.4 percent. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n):

pure discount loan.

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

remain constant, regardless of the investment time period.

The recognition principle states that:

sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.