exam 3 htm 301

Quick Ratio

(Cash+Credit card receivables+AR+Marketable securities)/ Total Current Liabilities

A low inventory turnover rate indicates a low investment in inventory. True or false

False

Cash Budget

Helps gain control over working capital accounts and discretionary spending of cash receipts and cash disbursements.

A motel can operate with a relatively low current ratio because:

Most of its assets are fixed rather than current

Working capital is:

The difference between current assets and current liabilities

Average nightly demand for hotel rooms is 1,796 in a particular area and hotels in that area are averaging 75% occupancy. Total number of rooms presently available in that area is 2,395. True or false

True

Business travel demand for hotel rooms in an area is 80% and vacation travel demand 20%. Annual compound business travel growth is 7% and vacation travel 10%. Total composite growth rate is 7.6%. True or false

True

Depreciation and amortization for the period are treated as positive numbers and added back in the operating section of a SCF, indirect method. True or false

True

Forecast income statements are the usual starting point in cash budgeting True or false

True

Forecast income statements are the usual starting point in cash budgeting. True or false

True

The difference between a company's record of cash in the bank and the bank's record is known as

a bank float.

Straight-line depreciation=

cost-residual/life

Bank Float

difference between the bank balance shown on a company's records and the balance of actual cash in the bank.

The payback period method formula is:

initial investment divided by net annual cash savings.

cash flow - indirect method

starts with accrual net income and adjusts it for changes in current asset and current liability account

The main purpose of cash budgeting is

to forecast cash surpluses and deficiencies.

working capital formula

total current assets - total current liabilities

If current assets are $75,000 and current liabilities are $100,000, the current ratio is?

0.75:1

Business travel demand is estimated to comprise 80% and convention delegate demand 20% for a proposed new hotel. The annual average growth rate in business travel is 4% and convention delegates 5%. Composite overall average growth rate of demand is

4.2%

Feasibility study

A feasibility study is an in-depth analysis of the financial situation of property development, rather than a promoter's guess that a new idea will be economically successful. A feasibility study is not designed to prove that a new venture will be profitable. An independent feasibility study that is professionally prepared by an impartial third party could result in either a positive or a negative recommendation.

ADR

Average Revenue from rooms/ # of rooms sold

Which of the following would not be part of the supply and demand information section of a hotel feasibility study?

Average daily spending of the local population when they are away on vacation

Which of the following would not be part of the supply and demand information section of a hotel feasibility study? - A list of competitive hotels currently serving that market - Average daily spending of the local population when they are away on vacation - Hotel occupancy trends in the local area for the past five years - The principle likely sources of demand for the new hotel

Average daily spending of the local population when they are away on vacation

Current Ratio

Current assets/ Current Liabilities

A pro‑forma income statement is an income statement calculated on a cash basis. True or false

False

Average nightly demand for rooms in an area is 3,598 and area hotels are averaging an occupancy rate of 75%. A new hotel is to be built that will cause all hotels (including the new one) to operate at a 70% occupancy in the first year. The new hotel will have 496 rooms. True or False

False

Decisions concerning investment in long-life assets are no more complex than decisions concerning day-to-day matters. True or false

False

Depreciation expense is a use of working capital. True or false

False

Discounted cash flow factors cannot be used if future cash flows are negative. True or false

False

Feasibility study sales revenue projections are usually prepared for one possible level of sales revenue only. True or false

False

In a hotel, accounts receivable comprises the city ledger accounts only. True or false

False

In deciding to purchase or lease an asset, any asset trade-in value under the ownership option can be ignored. True or False

False

Most feasibility studies begin with a financial analysis of the proposal and conclude with other matters such as site evaluation.

False

The business traveler component of demand for hotel rooms in an area is 80% and has been growing at 7% a year. Composite growth rate is 56%. True or false

False

The current ratio in a hotel or restaurant should be higher than 2:1. True or false

False

The discount rate used with the NPV investment method will be the same as the current bank savings account interest rate. True or false

False

The major source of demand for all downtown city hotels is the tourist. True or false

False

The procedure of aging accounts receivable is carried out to indicate to management when to write off accounts as bad debts. True or false

False

The statement of source inflows and use outflows of working capital shows certain transactions that occurred at a specific point in time. true or false

False

With the ARR method, if there is a trade-in value of the asset, that value is deducted from initial investment (before dividing by two) to arrive at average investment. True or false

False

Inventory Turnover

Food cost for the month/Average food investment during the months

A restaurant owner borrowed $150,000 from a bank on a long-tem note. This transaction would be shown on a SCF as $150,000 cash?

Inflow in the investing section

One of the following statements is not correct. A feasibility study: - Is designed to ensure the financial success of an investment - May reduce the risk of a particular investment but does not eliminate it - Should be independently prepared by an impartial third party -Can indicate either a positive or a negative outcome of an investment

Is designed to ensure the financial success of an investment

One of the following statements is not correct. A feasibility study: - Should be independently prepared by an impartial third party - Can indicate either a positive or a negative outcome of an investment - May reduce the risk of a particular investment but does not eliminate it - Is designed to ensure the financial success of an investment

Is designed to ensure the financial success of an investment

Which of the following items would not be included in the general market characteristics section of a feasibility study? - Transportation available - Employment and economic trends - Industrial growth trends - Local population's vacation patterns

Local population's vacation patterns

Cash management is:

Managing all working capital accounts

Concentration

Method of accelerating the flow of funds from the individual unit in the chain to the company's head office bank account.

If the total present value of a 5-year investment using NPV and a 15% rate is $82,300, and the initial investment is $100,000, one should:

Not invest because NPV is negative

If a company has an income of $5,000 (after depreciation but before income tax) during a particular month, its bank account should have increased by: -$5,000, plus depreciation, plus tax -$5,000, less income tax -$5,000, plus depreciation -Probably some amount other than any of the above

Probably some amount other than any of the above

Depreciation

Systemic Expensing of the cost of a long-lived physical asset (except land) that provides economic benefits in excess of 1 year

ARR

The Accounting Rate of Return is sometimes called the average rate of return. it compares the average annual net income after taxes resulting from the investment with the average investment.

Payback

The Payback period method overcomes the cash flow shortcoming of the accounting rate of return method. The payback method compares the initial investment with the annual cash inflows.

Decisions about investing in fixed assets differ from day-to-day expense decisions because:

The expenditure for any one decision is usually larger

Cash Management

The management of money so that bills and debts are paid when they are done.

A schedule of aging of accounts shows:

The proportion of total accounts receivable outstanding for various lengths of time

A house account in a hotel is:

The unpaid account of a guest still in the hotel

If two different companies had the same dollar amounts of working capital:

Their current ratios might be quite different

If the furniture and equipment account balance was $50,000 at the beginning of the period and $40,000 at the end of the period, we could assume that:

There has been a $10,000 reduction in the account that could have been caused by one or more purchases and sales of assets

If inventory turnover is increasing over time, and all other things remain equal, this means that:

There is now less dollar value in inventory than previously

Cash management should be practiced:

To anticipate both surpluses and deficiencies of cash

Average Check

Total sales/ Total guests

A company should only have sufficient cash on hand on the premises to cover normal day-to-day operations. True or false

True

A mutually exclusive alternative means that, if only one of a number of proposals is to be accepted, the others will be rejected. True or false

True

Average inventory is calculated by adding beginning and ending inventory figures together and dividing by two. True or false

True

If a company leases an asset, it will have a cash flow advantage because depreciation can be deducted and produces savings on income tax. True or false

True

One of the purposes of a statement of source inflows and use outflows of working capital is to provide prospective investors with information

True

Renting an asset, from a cash flow point of view, may be more profitable than purchasing. True or false

True

The IRR investment method determines the interest (discount) rate that will equate total discounted cash inflows with the initial investment. True or false

True

The actual amount of working capital is not as indicative of a company's debt paying ability as is its current ratio. True or false

True

The difference between the direct and indirect methods of preparing a SCF only affects the operating section of the statement. True or false

True

The general market characteristics section of a feasibility study covers both descriptive and statistical data where these are relevant. True or false

True

The payback period method measures the speed of recovering the cash put into an investment. True or false

True

The statement of changes in working capital accounts shows how individual current asset and liability accounts increased or decreased during the period

True

The statement of changes in working capital accounts shows how individual current asset and liability accounts increased or decreased during the period True or false

True

To prepare monthly cash budgets, it is necessary to know the normal pattern for collection of accounts receivable. True or false

True

Under the payback period method, the possible trade-in value of the asset at the end of its useful life is ignored. True or false

True

cash flow - direct method

Uses cash receipts from operations and cash disbursements to create income statements on a cash basis.

What is the payback period method formula?

initial investment divided by net annual cash savings.

The ARR formula is:

net annual savings divided by average investment

The three sections of a SCF are:

operating activities, investing activities and financing activities.

Days of Inventory

operating days for the period/ inventory turnover ratio for the period