FNAN307 (LUQUETTE) Connect EXAM1

A firm has $4 million in current assets and $3 million in current liabilities. It's current ratio is closest to:

1.33 Current Ratio = CA / CL

Assuming the amount of credit sales are known, a firm's collection period is equal to a firm's accounts receivable divided by ____.

A.R. / Credit Sales per Day

The payables period is equal to accounts payable divided by what account?

AP / Credit Purchases per Day

What are three broad categories on the cash flow statement?

Cash from: Operating, Investing, Financing

Which of the following best describes a firm's operating/working capital cycle?

Cash to Inventory -> Accounts Receivable -> Back to Cash

Gross Profit = Net Sales - _____

Cost of Sales

Which of the following is NOT a principal component of the return on equity (ROE)?

Current Ratio

Accounts payable is an example of a ______ liability account because accounts payable must typically be paid in _____ than one year

Current; Less

When preparing pro forma forecasts, why is it difficult to estimate interest expense?

External funding required is needed to calculate interest expense, and interest expense is needed to calculate external funding required.

Which of the following variables is least likely to vary in proportion to sales?

PP&E

Which of the following are ways a company can use cash?

Reduce a liability, increase an asset

Which of the following are attractions of the cash flow statement?

Reorganization of cash flows into new and revealing categories; sheds lights on a firms solvency by highlighting the extent to which operations are generating or consuming cash

Which of the following is not an advantage of sensitivity analysis?

Sensitivity analysis allows management to see how one event will impact multiple inputs.

Which of the following is a reason why the accounting measure of shareholders' equity does not reflect the future earning capacity of the firm?

The accounting measure does not account for the debt of the firm

How are asset and liability accounts organized on a balance sheet?

accounts are listed in order of decreasing liquidity, where the most liquid items are listed first.

As the planning cycle for a large company moves from broad strategy to implementation, the tools of financial forecasting:

become more important

A firm's price-to-earnings (P/E) ratio reveals how much money investors are willing to pay for one dollar of a firm's:

earnings

Inventory turnover is equal to a firm's cost of goods sold divided by the firm's ____.

ending inventory

Which of the following is NOT a weakness of using a firm's financial statements, such as the balance sheet and income statement, to make financial decisions?

financial statements are only developed once per year (they can be developed more than once per year, typically reported quarterly)

A firm's fixed-asset turnover is equal to ____ divided by PP&E.

sales

An income statement is similar to a:

video because it lists the income and expenses of a company over a specific period of time.

Cash budgets are typically prepared on a ____ basis.

weekly

According to the accrual principle of accounting, revenue is recognized when:

when the effort required to generate the sale is substantially complete and there is a reasonable certainty that payment will be received.

At the end of 2018, a firm's earnings and dividends were $39,000 and $11,000, respectively. If the firm had a retained earnings balance of $149,000 at the end of 2017, calculate the firm's retained earnings balance at the end of 2018.

$177,000 Beginnings RE + [Earnings - Dividends] = Ending RE $149,000 + [39,000 - 11,000] = $177,000

A firm has EBIT of $1000, Total debt of $2000, interest-bearing debt of $1200, Retained Earnings of $800, and total equity of $1700. What is the firm's return on invested capital if it has a tax rate of 35%.

22.41% [EBIT x (1 - Tax Rate)] / [Interest bearing debt + Equity]

Which depreciation method will result in higher depreciation expenses in the early years of an asset and relatively lower depreciation expenses in the later years?

Accelerated Depreciation

Basic Accounting Equation

Assets = Liabilities + Shareholders' Equity

Which of the following are reasons why the accounting measure of shareholders' equity does not reflect the future earning capacity of the firm?

Assets on the B.S. are valued at historical cost Many assets and liabilities of the firm are not listed on the balance sheet.

T or F: there is a perfect positive correlation between profits and cash flows.

False

T or F: Due to competition, new firms will enter an industry with a high return on equity, which will drive the average return on equity for that industry even higher.

False: When new firms enter an industry, the average return on equity will decrease due to increased competition from new firms.

When will the accounting equation hold?

For individual transactions as well as the firm as a whole

Does the P/E ratio reveal more about a firm's future performance or past performance?

Future performance, because the firm's stock price will rise and fall with investors' expectations of the future

Which of the following ratios does not measure financial leverage?

Gross Margin

Gross margin is equal to ____ divided by sales

Gross Profit

Which of the following is not an attraction of the cash flow statement?

It uses the accrual principle to recognize revenue when the efforts to generate the sale is substantially complete.

ROE is defined as

NI / Shareholders' Equity

Why is return on equity similar across different firms, regarding of industry?

New firms will enter industries with a high ROE, which will decrease the average ROE in that industry

A firm recorded a $10 million depreciation expense for the year. What impact will this have on the firm's cash flow for the year? (Ignore the tax consequences)

No effect, depreciation is a non-cash expense

As sales increase, fixed costs will

Not Change (fixed costs stay constant regardless of unit sales)

How are research and development (R&D) costs treated in the US?

R&D costs are expensed in the period incurred because there is too much uncertainty as to when or if R&D expenses will generate revenue.

Which of the following is the most popular measure of financial performance?

ROE

Which of the following is a weakness of using return on equity to measure financial performance?

ROE is backwards looking & gives no indication of future performance ROE focuses on the BV of equity ... investors are interested in the MV of equity ROE does not account for the risk incurred to generate the firm's return on equity

Which of the following is not a weakness of using the income statement to measure cash flow?

The income statement does not include accruals, which are needed to match revenue with expenses

Which of the following is needed to calculate asset depreciation?

The salvage value of the asset, the method of allocation/depreciation, the assets useful life

T or F: Most large US Companies keep one set of financial records for managing the company and reporting to shareholders and a second set of financial records for determining the firm's tax bill.

True

T or F: Net Income records the extent to which net sales generated during the accounting period exceed expenses incurred in producing the sales.

True

T or F: Firms with high profit margins typically have low asset turnover ratios.

True, profit margin and asset turnover are usually inversely related

Can a firm with positive accounting profits become bankrupt?

YES - if profits do not generate sufficient cash flow, the firm may not be able to repay debts, which could lead to bankruptcy

Are market value ratios superior to book value ratios?

Yes, because market value ratios measure the true worth of creditors' and owners' stakes in a business

Day's sales in cash =

[cash and marketable securities] / [sales per day]

Which of the following is not a weakness of management having a goal to maximize stock price?

a firm's decision to use a different accounting technique (ex: depreciation method) can impact stock price.

After producing a pro forma balance sheet, a firm's management predicts that at the end of the year, assets will equal $70 million, and shareholders' equity will equal $90. As a result of this forecast, management will need to

acquire additional funding of $40 million during the year

Which of the following is NOT a technique used to alleviate the uncertainty of pro forma forecasts?

advanced estimation

The return on equity is a measure of the efficiency to which a company employs owners' ____.

capital

A ____ is a listing of all anticipated sources and uses of cash by the company over the forecast period.

cash flow forecast

In a ____, external funding required is defined as the difference between forecasted sources of cash and forecasted uses of cash.

cash flow forecast

Which of the following is NOT a control ratio?

debt-to-equity ratio

After producing a pro forma balance sheet, a firm's management predicts that at the end of the year, assets will equal $150 million, liabilities will equal $70 million, and shareholders' equity will equal $90. As a result of this forecast, management will need to:

find a use for the additional $10 million that will be generated during the year.

Which of the following is NOT true about the behavior of assets during a business downturn?

fixed assets (unlike C.A.) often become a source of cash

When a company buys another company at a price above the book value, the excess is for ____

goodwill

Which of the following is NOT a step in scenario analysis?

identify how changing one individual variable will impact the forecast

As sales increase, total variable costs will:

increase total variable costs = costs per unit x # of units

The times burden covered ratio compares a firm's earnings (defined by earnings before interest and taxes) to the firm's:

interest and principal payments

The times interest earned ratio measures the amount of earnings a firm generates (defined as earnings before interest and taxes) relative to the firm's:

interest expense

The acid test ratio is the same as the current ratio except that the numerator of the acid test ratio excludes ____.

inventory acid test (aka quick ratio) = [CA-Inv] / CL

Compared to pro forma financial statements, cash flow forecasts are ____ useful than pro forma financial statements because ____.

less; they do not provide information that is useful for evaluating the company's ability to raise the external financing required

A cash budget:

lists the projected cash receipts and disbursements to forecast cash shortages or surpluses.

Which of the following is the least effect method of evaluating a firm's financial ratios?

look for high values in ratios that should be maximized and low values in ratios that should be minimized

Relative to coverage ratios, balance sheet ratios are ____ useful to investors when a firm is going through liquidation. If a firm is not going through liquidation, balance sheet ratios are ____ useful to investors relative to coverage ratios.

more; less

Should a financial manager maximize leverage?

no because increasing leverage increases the risk of the firm

Pro forma financial statements are applicable

only on the forecast date

Return on Assets measures how well a firm generates profits from the money provided by ____.

owners and creditors

Return on assets measures how well a firm generates profits from the money provided by ____.

owners and creditors

Which of the following is not a component of a firm's return on assets?

payables period

A firm's ____ measure how well it can convert sales into net income.

profit margin

Holding other factors constant, return on equity will be increased by increasing which of the following ratios?

profit margin

A pro forma financial statement is a ____ financial statement.

projected

A firm's fixed-asset turnover is equal to ____ divided by net PP&E.

sales

Asset turnover ratio measures the ____ generated per dollar of assets.

sales

In the percent-of-sales approach to forecasting, which of the following forecasts is the most crucial?

sales

____ is a method used to alleviate the uncertainty surrounding a pro forma forecast where multiple assumptions are changed simultaneously in response to a particular economic event.

scenario analysis

____ is a technique used to alleviate the uncertainty associated with pro forma financial forecasts where only one variable is changed at a time.

sensitivity analysis

Which of the following is not a step of the planning process in most large companies?

shareholder planning cycle in which shareholders vote on future corporate strategy.

____ is a method used to alleviate the uncertainty surrounding a pro forma forecast where probability distributions are assigned to each input and computer software is used to create an output based on the distributions.

simulation

A balance sheet is similar to:

snapshot, since the balance sheet lists the assets of the company and all claims against those assets at a specific point in time.

The cash flow statement essentially rearranges the information from which other statement?

sources and uses statement

Which of the following assets are subject to "market-to-market," or fair value, accounting rules?

stock options

Many academics argue that a firm should not focus on maximizing return on equity and should instead focus on maximizing ____.

stock price

Which of the following best describes depreciation?

the act of continually reducing the accounting value of fixed assets

Financial executives are most often interested in which financial statement?

the balance sheet

Which of the following is not a reason why a firm's market value of equity is often different from its book value of equity?

the firm's book value of equity will only be valid on the day the balance sheet is developed

When using the same assumptions, the values for external financing required using a cash budget will be:

the same as it will be for a cash flow forecast or a pro forma forecast

Which of the following is the most important reason for producing pro forma forecasts?

to determine the need for future external funding

A firm's common size balance sheet presents all accounts on a balance sheet as a percentage of

total assets