Financial Management Exam 1

What is the balance sheet identity equation?

Assets = Liabilities + Shareholder's Equity

Operating Cash Flow

EBIT + Depreciation - Taxes

Which one of the following is classified as a tangible fixed asset? Accounts receivable Goodwill Computer equipment Cash Inventory

computer equipment

Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time? Income statement Balance sheet Statement of cash flows Tax reconciliation statement Market value report

income statement

Agency problems are most likely to be associated with: sole proprietorships. general partnerships. limited partnerships. corporations. limited liability companies.

corporations.

NCS (net capital spending)

ending net fixed assets - beginning net fixed assets + depreciation

Ryu and Fowler Attorneys has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital? −$100 $300 $600 $1,700 $1,800

$300 ((4,900 - 3200) - 1400)

Vasquez Pottery has shareholders' equity of $218,700. The firm owes a total of $141,000, only 40 percent of which is payable within the next 12 months. The firm has net fixed assets of $209,800. What is the amount of the net working capital? Multiple Choice $149,900 $93,500 $125,600 −$47,500 $56,500

$93,500 = 149,900 - 56,400 (current assets-current liabilities)

What are the four general principles on financial management?

1. "cash flow is what matters" -cash flow drives the business, not profits 2. "Money has a time value"- one dollar today is better than one dollar tomorrow 3. "risk requires reward"-investors will not take on additional risk unless they expect to be compensated with additional reward or return. 4. 'Market prices are generally correct" - in an efficient market

common-sized statement

A financial statement in which all items are expressed only in relative terms. (percentages)

Which one of the following accounts is the most liquid? Inventory Building Accounts Receivable Equipment Land

Accounts Receivable

Net New Borrowing

Ending Long Term Debt - Beginning Long Term Debt

Change in Net Working Capital (NWC)

Ending NWC - Beginning NWC

Which one of the following statements concerning net working capital is correct? Net working capital increases when inventory is purchased with cash. Net working capital may be a negative value. Total assets must increase if net working capital increases. Net working capital excludes inventory. Net working capital is the amount of cash a firm currently has available for spending.

Net working capital may be a negative value.

CFFA (cash flow from assets)

OCF - NCS - Change in NWC

Total income taxes divided by total taxable income equals the ______ tax rate. deductible average total residual marginal

average

Deciding which long-term investment a firm should make is a ______ decision. working capital management capital constraints cost of capital capital budgeting capital structure

capital budgeting

CFTS cash flow to shareholders

dividends - net new equity

Determining the number of shares of stock to issue is an example of a ______ decision. a. capital rationing b. net working capital c. capital budgeting d. capital allocation e. capital structure

e. capital structure

Liquidity

how quick and easy an asset can be turned into cash

CFTC Cash flow to creditors

interest paid - net new borrowing

Which one of the following is classified as a current asset? Accounts payable Patent Inventory Correct Notes payable Office furniture

inventory

The ______ tax rate is the percentage of the last dollar you earned that must be paid in taxes. marginal residual total average standard

marginal

A firm's ______ is the firm's mix of short-term assets and short-term liabilities. net working capital net debt investment capital net currency capital structure

net working capital

Ultimately, the ______ control(s) the corporation. chair of the board members of the board of directors chief executive officer chief operating officer shareholders

shareholders

marginal tax rate

the extra taxes paid on an additional dollar of income

Capital Budgeting

the process of planning and managing a firm's long-term investments ("spending money")

average tax rate

total taxes paid divided by total income

Which one of the following is a current liability? A loan payable to the bank in 4 years An invoice payable to a supplier in 45 days An amount due from a customer in 90 days A note payable to a lender in 18 months An amount due from a customer, which is already past due

An invoice payable to a supplier in 45 days

Which one of the following involves a working capital management decision? a. What is the maximum level of cash to be kept in the firm's bank account? b. What is the most efficient process for producing a product? c. How many hours of overtime should manufacturing employees be allowed to work? d. When is the appropriate time to replace the delivery fleet? e. Should a newly available parcel of land be acquired?

a. What is the maximum level of cash to be kept in the firm's bank account?

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

an increase in the market value per share

Which one of the following questions involves a capital budgeting decision? a. How many shares of stock should the firm issue? b. Should the firm purchase a new machine for the production line? c. Should the firm borrow money to acquire new equipment? d. How much inventory should the firm keep on hand? e. How much money should be kept in the checking account?

b. Should the firm purchase a new machine for the production line

Which one of the following is a working capital management decision? a. What equipment will be required to complete a project? b. Should the firm require immediate payment from customers or offer credit terms? c. What amount of long-term debt is required to complete a project?d. What percentage of the firm's equity should the firm issue to fund an acquisition? e.Which one of several acceptable projects should be implemented?

b. Should the firm require immediate payment from customers or offer credit terms?

Which one of the following questions is a working capital management decision? a. Should the company issue new shares of stock or borrow money? b. Should the company refurbish its equipment or replace it? c. How much inventory should the company keep on hand? d. Should the company close one of its current stores? e. How much money should the company borrow to buy a new building?

c. How much inventory should the company keep on hand?

What are the three financial management decisions?

capital budgeting, capital structure, working capital management

A firm's mixture of debt and equity financing is the result of its ______ decisions. working capital management cash management cost analysis capital budgeting capital structure

capital structure

what is the cash flow equation?

cash flow from assets= cash flow to creditors + cash flow to stockholders

Net Working Capital (NWC)

current assets - current liabilities

Which one of the following questions involves a capital structure decision? a.Which one of two project proposals should the firm implement? b.How should the firm allocate its limited available funds among acceptable projects? c.How much funding should be allocated to financing customer purchases of a new product? d.How much debt should the firm incur to fund a project? e.How much inventory will be needed to support a project?

d.How much debt should the firm incur to fund a project?

Net New Equity

end Common stock - beginning Common stock

cash flow from assets

operating cash flow - net capital spending - change in net working capital

As the degree of financial leverage increases, the: probability a firm will encounter financial distress increases. amount of a firm's total debt decreases. less debt a firm has per dollar of total assets. number of outstanding shares of stock increases. accounts payable balance decreases.

probability a firm will encounter financial distress increases.

Financial managers should primarily focus on the interests of: themselves. the vice president of finance. their immediate supervisor. shareholders. the board of directors.

shareholders.

DuPont Analysis

technique of breaking return on total assets and return on equity into their component parts= net profit margin ( Net income / sales ) x (sales / total assets) x equity multiplier(total assets / equity)

Working Capital Management

the managing of short-term assets and liabilities ("staying alive")

Capital Structure

the mixture of debt and equity maintained by a firm ("raising money")

The Agency problem

the possibility of conflict of interest between the stockholders and management of a firm