Test 1 !

A firm has projected current assets to be $100 million, fixed assets to be $400 million, current liabilities to be $200 million, long-term debt to be $200 million, and owner's equity to be $100 million. Given this information, what is the discretionary financing needed? -$200 million $0 -$100 million $200 million $100 million

$0

True or false? The percent of costs method is a way to forecast financial statements.

False

True or false? The percent of sales method allows firms to project financial statements for capital budgeting purposes.

True

When evaluating cash flows, an increase in an asset account on the balance sheet, such as Inventory or Fixed Assets, most directly indicates ________. an increase in net income the sale of an asset an outflow of cash an increase in an associated liability

an outflow of cash

In the basic framework for constructing the statement of cash flows, a firm can allocate net income to one of two items. These two items are ________. dividends and retained earnings dividends and common stock additional paid-in capital and retained earnings inventory and retained earnings

dividends and retained earnings

For eBuy's industry, the industry average total asset turnover is 0.66 and fixed asset turnover is 0.76. Which one of the following statements best describes the comparison of the total asset turnover and the fixed asset turnover for eBuy relative to the industry? a. eBuy is a very large firm when compared to the industry. b. eBuy is more efficient than the industry average with fixed asset utilization. c. eBuy has a greater amount of current assets relative to sales than the industry. d. eBuy has more sales relative to total assets than the industry average.

eBuy has a greater amount of current assets relative to sales than the industry.

eBuy's competitor, Amazona, has a gross margin of 67.21% and an operating margin of 24.75%. Which of the following is most likely correct? eBuy has higher operating expenses (including depreciation) relative to sales than Amazona. eBuy has lower operating expenses (including depreciation) relative to sales than Amazona. eBuy is more profitable than Amazona. eBuy has lower cost of goods relative to sales than Amazona.

eBuy has lower operating expenses (including depreciation) relative to sales than Amazona.

If the average debt ratio in the industry is 65%, then which of the following is true? eBuy cannot compete well in its industry. eBuy is more conservatively financed than the industry average. eBuy has more debt financing than the industry norm. eBuy is more aggressively financed than the industry.

eBuy is more conservatively financed than the industry average.

eBuy's competitor, Amazona has accounts receivable turnover of 9.50. Which one of the following statements most accurately compares eBuy and Amazona? (Assume all sales are on account and that there are 365 days in a year.) eBuy and Amazona are about the same with respect to the collection of accounts receivable. eBuy is taking about 20 days longer to collect receivables than Amazona. eBuy probably has stricter credit standards than Amazona since eBuy's accounts receivable turnover is lower. eBuy is taking about 3.25 days less than Amazona to collect the accounts receivable.

eBuy is taking about 20 days longer to collect receivables than Amazona.

The industry gross margin, operating margin, and net margin are 64.3%, 23.1%, and 9.1%, respectively. Which of the following statements is the most plausible reason for eBuy to have a smaller net margin than the industry? (Assume that the tax rate is the same across the industry.) eBuy's COGS are too high relative to the industry. eBuy's sales are too low. eBuy's operating expenses are too high relative to the industry. eBuy may have greater interest expense relative to sales than the industry.

eBuy may have greater interest expense relative to sales than the industry.

For eBuy's industry, the 20X1 industry average current ratio and quick ratio were 1.55 and 1.38, respectively. Which one of the following is the most plausible statement when comparing eBuy's current and quick ratios in 20X1 to the industry average? a. eBuy has a higher liquidity than the industry average. b. eBuy has a lower liquidity than the industry average. c. eBuy's accounts receivable may be more liquid that the industry average. d. eBuy's inventory may be less liquid than the industry average.

eBuy's inventory may be less liquid than the industry average.

True or false? A firm recently lowered costs, such that net margin increased 3%. Given this information, the amount of discretionary financing needed will increase.

false

True or false? Accounts payable are generally considered discretionary (or non-spontaneous) accounts.

false

True or false? Long-term debt is generally considered a spontaneous account.

false

True or false? Spontaneous accounts are accounts on the financial statements that do not change automatically in proportion with sales.

false

True or false? The fifth step in the percent of sales method is to calculate discretionary financing needed (DFN).

false

True or false? The second step in the percent of sales method is to calculate retained earnings.

false

True or false? The third step in the percent of sales method is to determine total financing needs/assets.

false

Current assets are normally listed on the balance sheet in what order? most liquid to least liquid largest dollar amount to smallest dollar amount most commonly used to least commonly used There is no specific order for current assets.

most liquid to least liquid

OIROI is a good measurement of not only the efficiency but also the ___________ of a firm. profitability leverage tractability liquidity

profitability

Which of the following is NOT a valid use of ratios? reporting ratio deviations to the taxing authority comparing a firm to its industry to determine potential problem areas analyzing a firm's ratios over several years using ratios to gain insight about performance goals

reporting ratio deviations to the taxing authority

Cost of goods sold includes which of the following elements? (Check all that apply.) research and development costs associated with the firm's future products direct materials and direct labor associated with the production process interest expenses on funds borrowed to purchase production equipment marketing and advertising expenses for the company's products

research and development costs associated with the firm's future products; direct materials and direct labor associated with the production process

Accounts Payable represent money a firm owes to ________. suppliers for purchases made on credit a landlord or leasing agent for rental costs its employees a lender under a borrowing arrangement with an explicit interest rate

suppliers for purchases made on credit

True or false? Accruals are generally considered spontaneous accounts.

true

True or false? Firms A and B are very close competitors and are very similar. However, Firm B has a higher sales growth than Firm A. Given this information, Firm A will have less discretionary financing needed.

true

True or false? In general, current assets are considered spontaneous accounts.

true

True or false? Notes payable are generally considered discretionary (or non-spontaneous) accounts.

true

True or false? The fourth step in the percent of sales method is to calculate retained earnings.

true

True or false? The opposite of spontaneous accounts are discretionary accounts.

true

True or false? The sixth step in the percent of sales method is to calculate discretionary financing needed (DFN).

true

True or false? The first step in the percent of sales method is to project sales revenues and expenses.

True

Which of the following statements is NOT correct regarding the accrual-based accounting system? Accrual accounting provides a superior view of the operations of a company. Accrual accounting recognizes revenue only when cash is received. Accrual accounting requires matching expenses incurred with revenue recognized. Accrual accounting makes reading the financial statements more complex.

Accrual accounting recognizes revenue only when cash is received.

Revenues - Cost of Goods Sold - Operating Expenses = Operating Profit Earnings Before Interest and Taxes Operating Income All of the above

All of the above

Which of the following methods can a firm use to decrease its DFN? Reduce sales growth. Recheck existing capital constraints. Reduce dividend payouts. Improve the net margin. All of the above.

All of the above.

Which of the following is true with respect to accrual accounting? Cash-based accounting is much better when analyzing the operations of the firm. Amounts reported on the financial statements can be managed or manipulated without violating GAAP. Net income is the amount of cash a company receives from customers less cash payments to vendors and employees. Accrual accounting yields financial statements that can be interpreted easily.

Amounts reported on the financial statements can be managed or manipulated without violating GAAP.

The balance sheet equation is Assets = Liabilities + Owner's Equity. Which of the following best describes the logic behind this equation? Assets are used by a firm to pay back debt and equity. Assets must generate revenues equal to the firm's liabilities and owner's equity. Assets are financial resources used to obtain debt and equity. Assets must be financed by either other people's money or the owner's money.

Assets must be financed by either other people's money or the owner's money.

Which of the following is NOT a component of the cash flow statement? CFA CFF CFI CFO

CFA

When calculating CFO with the indirect method, depreciation expense is added to net income. Why do we add depreciation expense when calculating CFO? Depreciation expense provides a buffer against negative net income. Depreciation expense is a non-cash expense. The taxing authority reimburses the firm for depreciation expense in cash. Depreciation expense is linked to investment that creates a competitive advantage.

Depreciation expense is a non-cash expense.

Mapple and Doll are identical companies: both companies sell computers to identical clients, both recognize the same amount of revenue, and both purchased the same capital equipment at the same cost at the beginning of this year. However, Mapple's sales are 1/3 on credit while Doll's sales are 2/3 on credit. In addition, while both companies use straight-line depreciation, Mapple calculates depreciation of the new equipment based on an 8-year useful life, while Doll calculates depreciation based on 10-year life (i.e., Depreciation Expense = Cost of Machine ÷ Life of the Machine). Assume both companies had the exact same balance sheet at the beginning of the year. Which of the following statements is most likely correct? Mapple has higher accounts receivable than Doll. Mapple's interest expense is lower than Doll's. Doll has a higher net income than Mapple. None of the above are correct.

Doll has a higher net income than Mapple.

Assume a firm's reported revenue is constant from one year to the next. Which of the following is most plausible with respect to changes in the firm's Accounts Receivable balance? Decreasing Accounts Receivable may mean the firm's costs are increasing faster than its revenues. Increasing Accounts Receivable may mean the firm has not collected all the revenue reported in the current year. Increasing Accounts Receivable may mean the firm has changed to stricter credit standards. Decreasing Accounts Receivable may mean the firm is lowering credit standards.

Increasing Accounts Receivable may mean the firm has not collected all the revenue reported in the current year.

New York Pizza Kitchen (NYPK) has an equity multiplier of 2.00, total asset turnover of 1.50, and an ROE of 18.00%. In last year's annual report, NYPK established financial goals as follows: ROE of 20% or greater Asset turnover of 1.5 or greater No more than 50% of firm to be financed by debt Net margin of 8% or greater Did NYPK achieve its goals? If not, why? Yes, NYPK achieved its goals. No, debt financing was too high. No, asset turnover was too low. No, net margin was too low.

No, net margin was too low.

Which one of the following is NOT true with respect to the usefulness of ratios? Ratio creation and analysis is NOT governed by GAAP. Ratios provide definitive answers to questions about company performance. Ratio analysis helps identify key areas for further investigation. Ratios are useful for comparing firms of different sizes or that have different strategies.

Ratios provide definitive answers to questions about company performance.

While you are looking at XYZ Corporation's two most recent balance sheets, you notice that Inventory decreased by $100,000. XYZ's tax rate is 40%. As a result of the inventory decrease, when calculating cash flow from operations you will ________. add $100,000 subtract $100,000 add $100,000 times the tax rate (i.e., $100,000 × 0.4) do nothing with the change in inventory because it does not impact CFO

add $100,000

Suppose a company is planning to increase its dividend payout ratio next year. Given this information, which of the following cases do you expect to occur in the upcoming year? a. a reduction in net income b. more volatility in the firm's stock price c. an increase in discretionary financing needed d. both a and c e. all of the above

an increase in discretionary financing needed