Fincial Statement Analysis 1-4
The most common approach to developing pro forma financial statements is called the A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach. F. None of the options are correct.
D
A company experiencing balanced growth does not generate cash surpluses or cash deficits.
true
A reduction in long-term debt is a use of cash.
true
The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect A. 60 percent of February sales. B. 15 percent of April sales. C. 60 percent of March sales. D. 15 percent of March sales. E. 25 percent of February sales.
C
Which of the following would NOT be considered a use of cash? A. Dividends paid B. A decrease in accounts payable C. Depreciation D. An increase in the cash and marketable securities account
C
Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover A. I and IV only B. II and IV only C. I, II, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV
C
Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets? A. income statement B. creditor's statement C. balance sheet D. cash flow statement E. sources and uses statement
C
The sustainable growth rate is the only growth rate in sales that is consistent with stable values of the profit margin, retention rate, asset turnover, and leverage (assets/equity bop).
true
When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the straight-line method.
true
Issue costs of equity are high relative to those of debt.
true
A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing activities, or financing activities.
true
Across companies, ROA and financial leverage tend to be inversely related
true
All else equal, a firm would prefer to have a higher gross margin
true
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.
A
The most popular yardstick of financial performance among investors and senior managers is the A. profit margin. B. return on equity. C. return on assets. D. times-burden-covered ratio. E. earnings yield. F. None of the options are correct.
B
Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. I, III, and IV only
B
Which one of the following correctly defines the retention ratio? A. one plus the dividend payout ratio B. additions to retained earnings divided by net income C. additions to retained earnings divided by dividends paid D. net income minus additions to retained earnings E. net income minus cash dividends F. None of the options are correct.
B
Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets? A. current ratio B. debt-to-equity C. retention D. asset turnover E. return on assets
D
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 inventory E. increase in accounts payable
E
A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were sold during 2017.
false
A drawback of forecasting using spreadsheets is that typical spreadsheet programs are not equipped to deal with the circularity involving interest expense and debt.
false
Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method.
false
Share repurchases usually decrease earnings per share.
false
Which one of the following is a use of cash? A. increase in notes payable B. increase in inventory C. increase in long-term debt D. decrease in accounts receivable E. increase in common stock
B
The retention ratio is A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the asset turnover ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales. F. None of the options are correct.
B
The sustainable growth rate A. assumes there is no external financing of any kind. B. assumes no additional long-term debt is available. C. assumes the debt-equity ratio is constant. D. assumes the debt-equity ratio is 1.0. E. assumes all income is retained by the firm. F. None of the options are correct.
C
The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.
false
You can construct a sources and uses statement for 2017 if you have a company's year-end balance sheets for 2017 and 2018.
false
Which of the following statements concerning a firm's cash flows and profits is false? A. Managers must be at least as concerned with cash flows as with profits. B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production. C. The cash flows generated in a given time period can differ from the profits reported. D. Profits are no assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke"
B
Which one of the following statements does NOT describe a problem with using ROE as a performance measure? A. ROE measures return on accounting book value, and this problem is not solved by using market value. B. ROE is a forward-looking, one-period measure, while business decisions span the past and present. C. ROE measures only return, while financial decisions involve balancing risk against return. D. None of these describe problems with ROE. E. All of these describe problems with ROE.
B
Which of these ratios are the determinants of a firm's sustainable growth rate? I. Assets-to-equity ratio II. Profit margin III. Retention ratio IV. Asset turnover ratio A. I and III only B. II and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV F. None of the options are correct
E
You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV
E
The percent-of-sales approach to financial forecasting works well for forecasting the income statement but is not useful for forecasting the balance sheet.
false
The sustainable growth rate is defined as the maximum rate at which company sales can increase
false
Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding.
true
In recent years, U.S. companies as a whole have repurchased more equity than they have issued.
true
Return on assets can be calculated as profit margin times asset turnover.
true
The forecast for retained earnings on the 2019 balance sheet can be determined as 2018 retained earnings plus projected 2019 after-tax earnings less projected 2019 dividends.
true
Which one of the following is a source of cash? A. decrease in accounts receivable B. decrease in common stock C. decrease in long-term debt D. decrease in accounts payable E. increase in inventory
A
An annual financial forecast for 2017 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2017.
false
An increase in cash and cash equivalents should appear as a source of cash on the sources and uses statement.
false
An inventory turnover ratio of 10 means that, on average, items are held in inventory for 10 days.
false
Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal? A. Ellsbury changes the credit terms it offers to customers, allowing them to pay in 45 days instead of 30 days. 2-11 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. B. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products. C. Ellsbury starts paying off all outstanding invoices to suppliers twice a month instead of once a month. D. Ellsbury increases its cash/assets ratio from 12% to 15
B
Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan? A. current ratio B. debt-to-equity ratio C. times-interest-earned ratio D. times-burden-covered ratio E. None of the options are correct
D
The cost of equity is usually reported on the income statement right below interest expense.
false
To estimate Missed Places, Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? A. $169,000 B. $170,400 C. $181,400 D. $506,300 E. $518,700 F. None of the options are correct.
A
Which of the following is NOT a major category on the cash flow statement? A. Cash flows from selling activities B. Cash flows from operating activities C. Cash flows from financing activities D. Cash flows from investing activities
A
Which of the following would increase a company's need for external finance, all else equal? A. An increase in the dividend payout ratio B. A decrease in sales growth C. An increase in profit margin D. A decrease in the collection period
A
Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. cash flow statement D. sources and uses statement E. market value statement
A
All else equal, increasing the assumed payables period in a financial forecast will decrease external funding required.
true
Cash flow forecasts are less informative than pro forma financial statements.
true
Current liabilities are defined as liabilities with a maturity of less than one year.
true
Breakers Bay Inc. 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. All else held constant, how will this accomplishment be reflected in the firm's financial ratios? A. decrease in the fixed asset turnover rate B. decrease in the financial leverage ratio C. increase in the inventory turnover rate D. increase in the days' sales in inventory E. decrease in the total asset turnover rate
C
Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a A. pro forma income statement. B. sales projection. C. cash budget. D. receivables analysis. E. credit analysis. F. None of the options are correct.
C
Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000? A. Total assets cannot grow by more than $10,000. B. Dividends cannot exceed $10,000. C. Retained earnings cannot grow by more than $12,000. D. Long-term debt cannot grow by more than $5,000.
C
Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. net working capital policy B. capital structure policy C. dividend policy D. capital budgeting policy E. capacity utilization policy F. None of the options are correct.
C
Which one of the following statements is correct? A. If the debt-to-assets ratio is greater than 0.50, then the debt-to-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 assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio. D. To realize the best risk and reward profile, financial leverage should be maximized. E. None of the options are correct.
C
You are estimating your company's external financing needs for the next year. Your first-pass pro forma financial statements showed a large financing deficit for next year. Which of the following changes to your company's operating plan would reduce the financing deficit if incorporated in revised pro forma financial statements? A. Increase the sales growth rate B. Increase cost of goods sold as a percentage of sales C. Reduce the collection period D. Increase the dividend payout ratio E. None of the options are correct.
C
In comparison to industry averages, Okra Corp. has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corp.? A. Its current liabilities are too low. B. Its cost of goods sold is too low. C. Its cash and securities balance is too low. D. Its inventory level is too high.
D
On a common-size balance sheet, all accounts are expressed as a percentage of A. sales. B. profits. C. equity. D. total assets. E. None of the options are correct.
D
The sources and uses of cash over a stated period of time are reflected in the A. income statement. B. balance sheet. C. shareholders' equity statement. D. cash flow statement. E. statement of operating position.
D
The sustainable growth rate of a firm is best described as the A. minimum growth rate achievable, assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable, excluding external financing of any kind. D. maximum growth rate achievable, excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. F. None of the options are correct.
D
Which of the following statements concerning the cash flow production cycle is true? A. The profits reported in a given time period equal the cash flows generated. B. A company's operations and finances are independent of each other. C. Financial statements have nothing to do with reality. D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle. E. A profitable company will always have sufficient cash to meet its obligation
D
Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. E. The ending cash balance must equal the minimum desired cash balance.
D
Which one of the following will increase the sustainable rate of growth a corporation can achieve? A. avoidance of external equity financing B. increase in corporate tax rates C. reduction in the retention ratio D. decrease in the dividend payout ratio E. decrease in sales given a positive profit margin F. None of the options are correct.
D
Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below? A. October, November, and December B. November, December, and January C. December, January, and February D. January, February, and March E. February, March, and April
E
Ptarmigan Travelers had sales of $420,000 in 2016 and $480,000 in 2017. The firm's current asset 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 inventory turnover rate increased. D. The fixed asset turnover decreased. E. The collection period decreased.
E
Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis A. II and IV only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV
E
Which of the following can affect a firm's sustainable rate of growth? I. Asset turnover ratio II. Profit margin III. Dividend policy IV. Financial leverage A. III only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the options are correct
E
Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process? I. Should the firm merge with a competitor? II. Should additional equity be sold? III. Should a particular division be sold? IV. Should a new product be introduced? A. I, II, and III only B. I, II, and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the options are correc
E
Which of the following statements is true? A. Rapid growth spurs increases in market share and profits and thus, is always a blessing. B. Firms that grow rapidly very rarely encounter financial problems. C. The cash flows generated in a given time period are equal to the profits reported. D. Profits provide assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". F. None of the options are correct.
E
All else equal, an increase in a company's asset turnover will decrease its ROE
false
All else equal, increasing the assumed collection period in a financial forecast will decrease external funding required.
false
An advantage of the percent-of-sales approach to financial forecasting is that effective forecasts can be prepared without consulting historical financial statements.
false
If a company seeks to maximize firm value, it should never grow at a rate above its sustainable growth rate.
false
If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.
false
One advantage of ROE is that it is a risk-adjusted measure of performance.
false
One way to manage an actual growth rate above the sustainable growth rate is to decrease prices.
false
Scenario analysis involves changing one input to a financial forecast, whereas sensitivity analysis involves changing multiple inputs
false
The accrual principle requires that revenue not be recognized until payment from a sale is received.
false
