FIN-350 - EXAM 1

Dalton Bros. has 5,000 shares of common stock outstanding, earnings before taxes of $3,000, preferred dividends of $1,000, common dividends of $500, and taxes of $900. What is the earnings per share (EPS) amount?

$0.22 Reason: EPS = Income available to common stockholders/Total shares outstanding = ($3,000 - $900 - $1,000)/5,000 - $0.22

Dexter's has operating income of $82,000 and a 30 percent tax rate and is all-equity financed. Brown's has operating income of $82,000, a 30 percent tax rate, and has $5,000 in interest expense since it is partially debt-financed. What is the difference in the income available for asset funders between these two firms?

$1,500 Reason: Asset funders includes both bondholders and stockholders so the difference = Tax savings on interest = 0.30($5,000) = $1,500

Assume net income is $32, cash dividends paid are $20, and the ending retained earnings balance is $44. What is the change in retained earnings for the period?

$12 Reason: Change in retained earnings = Net income - Cash dividends paid = $32 - $20 = $12

A firm has net income of $2,200, depreciation of $500, taxes of $600, other operating expenses of $800, interest of $200, and sales of $5,900. What is the value of EBT?

$2,800 Reason: EBT = Net income + Taxes = $2,200 + $600 = $2,800

Kettles, Inc., paid $50,000 in preferred dividends and $100,000 in common dividends this year. There are 25,000 shares of preferred stock and 40,000 shares of common stock outstanding. What is the amount of the dividends per share (DPS)?

$2.50 Reason: Dividends per share = Common stock dividends/Number of shares of common stock outstanding = $100,000/40,000 = $2.50

If Union Aerospace Corporation's Current ratio is 2.5 and it's Quick Ratio is 2, what is the size of its inventory if it's current assets total $1,000,000

$200,000 Reason: CR = CA / CL ; QR = (CA - Inventories) / CL 2.5 = 1,000,000 / CL ; 2 = (1,000,000 - Inventories) / CL CL = 400,000 ; 2 = (1,000,000 - Inventories) / 400,000 Inventories = 200,000

A firm has fixed assets of $28,000, long-term debt of $12,000, current liabilities of $4,000, current assets of $5,000 and equity of $17,000. What is the total of the assets side of the balance sheet of the firm?

$33,000

Buster's owns a machine which cost $110,000 initially. The latest financial statement shows depreciation expense of $22,000 and accumulated depreciation of $77,000. What is the book value of the firm's net plant and equipment?

$33,000 Reason: $110,000 - $77,000 = $33,000

A firm has an operating cash flow of $600, a net change in gross fixed assets of $100, and a change in net operating working capital of $50. What is the firm's free cash flow (FCF)?

$450 Reason: IOC = Change in gross fixed assets + Change in net operating working capital. FCF = OCF - IOC = $600 - ($100 + $50) = $450.

Delta's has operating income of $128,000 and a 35 percent tax rate and is all-equity financed. Sigma's has operating income of $128,000, a 35 percent tax rate, and has $15,000 in interest expense since it is partially debt-financed. What is the difference in the income available for asset funders between these two firms?

$5,250 Reason: Asset funders includes both bondholders and stockholders so the difference = Tax savings on interest = 0.35($15,000) = $5,250

A firm has EBIT of $600, depreciation of $200, and a tax rate of 34 percent. What is the operating cash flow?

$596 Reason: OCF = EBIT(1 - Tax rate) + Depreciation = $600(1 - 0.34) + $200 = $596

A firm has sales of $8,900, depreciation of $200, cost of goods sold of $3,700, other operating expenses of $4,200, and interest of $600. What is the firm's EBIT?

$800 Reason: EBIT = Sales - Cost of goods sold - Depreciation - Other operating expenses = $8,900 - $3,700 -$200 -$4,200= $800

Which of these accounts are long-term debts? Select all that apply.

- 15-year mortgage - 10-year bonds

Which of these accounts are current liabilities? Select all that apply.

- Accounts payable - Accrued wages - Notes payable

Which of these accounts are included in net working capital? Select all that apply.

- Accounts receivable - Accounts payable - Cash

Which of these assets are generally converted into cash within one year? Select all that apply.

- Accounts receivable - Inventory

Which of these statements is correct concerning the structure of a statement of cash flows? Select all that apply.

- An increase in accounts payable is an addition to the cash flows from operating activities. - A decrease in fixed assets is an addition to the cash flows from investing activities.

Which of these parties monitor corporate activities from outside as part of corporate governance? Select all that apply.

- Auditors - Investment analysts - Credit analysts

Which of the following are considered Asset Management ratios?

- Average Collection Period - Capital Intensity

Which of these is a monitor of corporate governance? Select all that apply.

- Board of directors - Securities and Exchange Commission

Which of these assets have useful lives exceeding one year and are classified as fixed assets? Select all that apply.

- Building - Machinery - Land

Which of the following are finance functions that fall under the supervision of the treasurer?

- Capital spending - Managing cash - Interest rate hedging

Debt management ratios are used to do which of the following? Select all that apply.

- Debt management ratios determine whether or not a firm can meet its debt obligations. - Debt management ratios measure the capital structure of a firm. - Debt management ratios determine the amount of financial leverage used by a firm.

Which three decisions have the most effect on shareholder wealth? Select all that apply.

- Deciding which project to accept - Deciding how to return profits to owners - Deciding between debt and equity financing

Which of these is (are) a source of cash? Select all that apply.

- Decrease in inventory - Increase in long-term debt

Which of these features could accurately be included in the definition of a corporation? Select all that apply.

- Division of ownership and control - Separate legal entity - Double taxation

Which of these statements regarding the structure of an income statement is (are) correct? Select all that apply.

- EBT = Dividends paid + Addition to retained earnings + Taxes - EBIT= Gross profit - Depreciation - Other operating expenses - Gross profit = Net sales - Cost of goods sold

Which of these are advantages of the corporate form of business ownership? Select all that apply.

- Easy access to capital - Legal status - Limited liability

Which of these characteristics apply to the definition of preferred stock? Select all that apply.

- Fixed periodic payments - Ownership interest in the firm

The subarea of finance known as financial management addresses which of these decisions? Select all that apply.

- How can a firm attract more capital financing? - Should a firm issue debt (bonds) or equity (stocks)? - How can corporate taxes be minimized?

Which of these are cash flows from financing activities? Select all that apply.

- Increase in common stock - Preferred stock dividend - Decrease in long-term debt

A levered firm's sustainable growth rate increased this year. Which one of these might have caused that increase, all else equal? Select all that apply.

- Increase in financial leverage - Increase in operating efficiency

Which of these are added or subtracted from net income to compute the net cash flows from operating activities? Select all that apply.

- Increase in inventory - Decrease in accrued wages and taxes - Depreciation

Which of these are additions to the cash flows from financing activities? Select all that apply.

- Increase in long-term debt - Increase in common stock

Which of these statements regarding the federal taxation of interest income earned by a corporation is(are) correct? Select all that apply.

- Interest earned on a corporate bond is taxable. - Interest earned on a bond issued by a city is tax-exempt.

Which of these accounts are included in net working capital? Select all that apply.

- Inventory - Notes payable

Which of these questions can be answered by monitoring a firm's balance sheets for last year and this year? Select all that apply.

- Is the firm more or less liquid than last year? - Did the firm issue additional shares of stock this year?

Which of these are personal financial decisions?

- Marie decided that leasing a car was cheaper for her than buying a car. - Samantha financed her mortgage for 20 rather than 30 years to save on interest. - Kendyll moved money from her checking account to her savings account to earn interest.

Which of the following are the well-developed viewpoints that have arisen regarding the goal of a firm?

- Maximize shareholder wealth - Emphasize social responsibility

The net impact of the lower individual income tax rates brought by TCJA is expected to be (choose all that apply):

- More free cash for consumers to spend - More potential savings on the part of investors - Downward pressure on housing sales in the high-value market

The statement of cash flows separates cash flows into which of the following categories?

- Net change in cash and marketable securities - Cash flow from investing activities. - Cash flow from financing activities. - Cash flow from operating activities.

Which of these are characteristics of a general partnership?

- Profits split among the partners - Limited access to capital

Which of these characteristics apply to a marketable security? Select all that apply.

- Provides a low rate of return - Convertible to cash within one year or less

Which of these are correct versions of the return on equity? Select all that apply.

- ROE = ROA × (1+Debt−to−equity) - ROE = Profit margin × (1 / Capitalintensityratio) × (1+Debt−to−equity) - ROE = Profit margin × Total asset turnover × Equity multiplier

Which of these is (are) a factor which requires caution when using ratios to evaluate firm performance? Select all that apply.

- Ratios may be calculated differently by different firms. - The future may differ from the past. - Firms may use different accounting methods to value inventory.

Which of these are equity accounts? Select all that apply.

- Retained earnings - Common stock - Preferred stock

Which of these are fixed assets? Select all that apply.

- Sewing machines owned by a clothing manufacturer - Land owned by a retail outlet

How is inventory turnover related to days' sales in inventory? Select all that apply.

- The shorter the inventory period, the higher the turnover rate - The lower the turnover rate, the more days' sales that are held in inventory.

Which of the following are disadvantages of a sole proprietorship? Select all that apply.

- Type of owner liability - Ability to raise capital

Union Aerospace Corporation has an ROE of 15% based on a profit margin of 10%, a total asset turnover of 1.5, and an equity multiplier of 1. The industry values are 13.1%, 7.2%, 1.3, and 1.4, respectively. Which one of these statements is accurate?

- Union Aerospace Corporation provides a greater return on its common stock than does the average firm in its industry. - Union Aerospace Corporation uses its assets more efficiently to produce sales than does the average firm in the industry. - Union Aerospace Corporation produces more earnings for its common shareholders for each dollar of sales than does the average firm in its industry.

Which of these is (are) a factor which requires caution when using ratios to evaluate firm performance? Select all that apply.

- Window dressing of annual financial statements by some firms - Comparing firms with varying fiscal years

The controller typically oversees the following areas:

- financial accounting - managing taxes

Market Value ratios relate a firm's market value to

- its earnings. - its book value.

What must the capital intensity ratio be if the total asset turnover rate is 2?

0.5 Reason: The total asset turnover is the inverse of the capital intensity ratio. Capital intensity = 1/2 = 0.5

Assume cash = $500, notes payable in six months = $600, accounts receivable = $900, inventory = $1,500, and accounts payable = $1,100. What is the quick ratio?

0.82 Reason: Quick ratio = ($500 + $900)/($1,100 + $600) = 0.82

Which one of these is equivalent in value to the equity multiplier?

1 + Debt-to-equity ratio

Rank these assets in order of liquidity with the most liquid asset listed first.

1. Cash 2. Accounts receivable 3. Inventory 4. Plant and equipment

Jen's has current assets of $2,200, cash of $400, and inventory of $1,300. The firm has accounts payable of $300, long-term debt of $3,100, and accrued wages and taxes of $400. What is the quick ratio?

1.29 Reason: Quick ratio = ($2,200 - $1,300)/($300 + $400) = 1.29

Martin's has current assets of $600 and total assets of $2,900. The firm has total debt of $1,500 and long-term debt of $1,100. What is the current ratio?

1.5 Reason: Current liabilities = $1,500 - $1,100 = $400 Current ratio = $600/$400 = 1.5

The Shoe Store has cash of $300, accounts receivable of $700, accounts payable of $800, inventory of $1,300, long-term debt of $1,900, and notes payable in three months of $500. What is the current ratio?

1.77 Reason: Current assets = $300 + $700 + $1,300 = $2,300 Current liabilities = $800 + $500 = $1,300 Current ratio = $2,300/$1,300 = 1.77

Valley Markets has an inventory turnover of 3.2 and a capital intensity ratio of 1.9. What are the days in inventory for Valley Markets?

114

A firm has taxes of $2,000, interest expense of $1,000, EBIT of $7,500, common stock dividends of $1,500, and preferred dividends of $1,200. What is the profit margin if sales are $22,000?

15.00 percent Reason: Net income available to common stockholders = $7,500 - $1,000 - $2,000 - $1,200 = $3,300 Profit margin = $3,300/$22,000 = 15 percent

A firm has net income of $38,000, preferred stock dividends of $10,000, and common stock dividends of $8,000. The firm has 10,000 shares of common stock outstanding that sells for $46 a share. What is the price-earnings (PE) ratio?

16.43 Reason: Earnings per share = ($38,000 - $10,000)/10,000 = $2.80 PE = $46/$2.80 = 16.43

NY News has net earnings per share of $3.24, a book value per share of $22, and a market-to-book ratio of 2.5. What is the price-earnings (PE)ratio?

16.98 Reason: Market price = 2.5 × $22 = $55 PE = $55/$3.24 = 16.98

The TCJA established a flat corporate tax rate of:

21 percent

Which one of these accounts is a long-term debt?

5-year bonds

Which one of these is a current liability?

6-month note payable

One change brought by TCJA is that only the interest on the first $__________ of mortgage debt is deductible.

750000

What does a dividend payout of 45 percent indicate?

A 45 percent dividend payout indicates a firm pays 45 percent of its net income available to common stockholders out in common dividends.

Which one of these statements correctly applies to a balance sheet?

A balance sheet shows what a firm owns, what it owes, and what it is worth.

Which one of these best defines a general partnership?

A brother and sister form a business. Both share jointly unlimited personal liability for the debts of the firm.

Which one of these is a correct interpretation of a cash coverage ratio of 1.4?

A cash coverage ratio of 1.4 indicates a firm generates $1.40 of operating cash for every dollar of interest and fixed charges that the firm owes.

Which of these is a requirement of the Sarbanes-Oxley Act of 2002?

A corporate board's audit committee must have considerable experience with GAAP.

The fiduciary duty is violated in which one of these examples?

A corporate treasurer invests company funds in a friend's bank at a lower interest rate than that offered by other comparable banks.

What is the definition of a current asset?

A current asset is an asset that can be converted into cash within one year.

A current asset is an asset that does which one of the following?

A current asset provides liquidity and a low rate of return.

How is a debt ratio of 0.45 interpreted?

A debt ratio of 0.45 means that for every dollar of assets, a firm has $0.45 of debt.

Buster's has a debt ratio of 1.2. What does this imply?

A debt ratio of 1.2 means a firm uses 20 percent more debt financing than equity financing.

What does a debt-to-equity ratio of 0.8 mean?

A debt-to-equity ratio of 0.8 means the firm has $0.80 of debt for every $1 of equity.

A change in financial leverage does which one of the following?

A decrease in financial leverage decreases the risks faced by the firm.

What does a dividend payout of 30 percent indicate if a firm has no preferred stock outstanding?

A dividend payout of 30 percent for a firm with no preferred stock indicates that common stock dividends equal 30 percent of net income.

What is the definition of a fiduciary relationship?

A fiduciary relationship is a legal duty between two parties where one party must act in the interest of the other party.

What is the primary function of a financial institution?

A financial institution facilitates cash flows between investors and companies.

What is the best definition of a financial market?

A financial market is defined as the places and processes that facilitate the trading of financial assets between investors.

Which one of these statements correctly interprets a sustainable growth rate of 4 percent?

A firm can grow by 4 percent annually without increasing its probability of incurring financial distress.

Which one of these best illustrates time series analysis?

A firm's profit margin has been 4.6 percent, 4.9 percent, and 4.7 percent over the past three years.

How is the fixed nature of an asset determined?

A fixed nature of an asset is determined by its useful life.

What is the definition of a general partnership?

A general partnership involves multiple business owners who are each personally responsible for all of the partnership's debts.

Which one of these examples best illustrates the definition of time value of money?

A gift of $10,000 to be received in two years is worth $8,900 today.

Which is the best definition of a hybrid organization?

A hybrid organization is a business form that has some attributes of a corporation and some of proprietorships/partnerships.

How can a low dividend payout increase future returns on equity (ROE)?

A low dividend payout means more of a firm's earnings are retained for future growth, which is expected to increase earnings and ROE.

Which of these actions fits the definition of earnings management?

A major sale to a customer was purposely delayed one day so it would be recorded in a later accounting period.

The Eatery has a market-to-book ratio of 3.2. What does this ratio indicate?

A market-to-book ratio of 3.2 means shareholders are willing to pay $3.20 per dollar of book equity to buy the firm's stock.

What is the definition of a marketable security?

A marketable security is a short-term, low-rate investment security.

How is a public corporation defined?

A public corporation is a firm owned by a large number of stockholders from the general public.

What is the definition of a sole proprietorship?

A sole proprietorship is a business entity that is not legally separate from its owner.

What is the definition of a statement of cash flows?

A statement of cash flows is a financial statement that shows the firm's cash flows over a period of time.

Which one of these is the best definition of a statement of cash flows?

A statement of cash flows summarizes the sources and uses of cash by type of cash flow.

Which of these provides the best description of the difference between accounting and finance?

Accounting records past activities of a firm while finance helps with decisions regarding the firm's future.

Which one of these assets is considered to be the most liquid?

Accounts receivable

Which one of these is a current asset?

Accounts receivable

Al's Services has a current ratio of exactly 1.2 and a quick ratio of exactly 1.2. What can you infer from these ratios?

Al's has no inventory.

Which one of these relationships best fits the definition of a fiduciary relationship?

Al's retirement funds are managed by the trust department at the local bank.

Which one of these accounts is a noncash expense?

Amortization Reason: Depreciation is the expensing of a tangible asset. Amortization is the expensing of an intangible asset. Both depreciation and amortization are noncash expenses.

What is the definition of an agency problem?

An agency problem is defined as the difficulties that arise when a principal hires an agent and cannot fully monitor the agent's actions.

An income statement is best defined by which one of these statements?

An income statement reflects the total revenues that a firm earns over a period of time and the total expenses incurred to generate those sales.

What is the definition of an income statement?

An income statement reports total revenues and expenses over a specific period of time.

Which of these best illustrates how funds flow in a financial system?

An individual invests in a bank savings account and the bank lends money to companies.

Which of one of these statements best illustrates the definition of a marginal tax rate?

Antonio will pay $0.28 more in taxes if his taxable income increases by $1, or 28 percent.

The common-size values of both net income and costs of goods sold increased this year over last year. What does this mean?

As a percentage of sales, the cost of goods sold increased while the sum of total expenses, interest, and taxes decreased for the year.

Which one of these relationships regarding liquidity is correct?

As the liquidity of assets increases, both the firm's probability of financial distress and its profits on those assets decrease.

What is the balance sheet identity formula?

Assets = Liabilities + Equity

Which one of these formulas best defines an average tax rate?

Average tax rate = Tax liability/Taxable income

Book value per share (BVPS) is based on which one of the following?

BVPS is based on the equity of a firm that is attributable to the common shareholders.

If you want to compare the operations of similar firms without the firm's capital structure or tax status affecting that comparison, which ratio should you use?

Basic earnings power

__________ holders have first claim to the cash flows of the firm.

Bond or Debt

Buster's quick ratio decreased from 0.81 to 0.76 during the year while its current ratio increased from 1.43 to 1.57. What do these changes in the ratio values imply?

Buster's is increasingly reliant on selling its inventory to meet its current obligations.

Which one of these is a subtraction from the cash flows from financing activities?

Buying back common stock

How is the capital structure of a firm defined?

Capital structure is the amount of debt versus equity financing held on the balance sheet.

Which one of these is a current asset?

Cash

A statement of cash flows for the year ending December 31, 2012 shows a net change in cash and marketable securities of $20. How can this $20 change be defined?

Cash and marketable securities were $20 more on December 31, 2012 than they were on December 31, 2011.

A statement of retained earnings showed a beginning retained earnings balance of $24 and an ending balance of $22. Net income was positive. What do you know given this information?

Cash dividends paid exceeded net income.

Which one of these is the definition of cash flows from investing activities?

Cash flow from investing activities is defined as the cash flows associated with the purchase or sale of fixed or other long-term assets.

What is the definition of cash flows from operations?

Cash flow from operations is defined as the cash flows that are the direct result of the production and sale of the firm's products.

Interest payments on long-term debt are found in what section of the Statement of Cash Flows?

Cash flows from operating activities

Balance sheets list assets in declining order of liquidity. Which of these orders best illustrates this?

Cash, accounts receivable, inventory, plant and equipment

The Sarbanes-Oxley Act of 2002 requires senior management of a firm to do which one of these?

Certify the financial statements are accurate and representative of the firm's earnings

When computing book value per share (BVPS) which of these balance sheet values is used as the total book value?

Common stock + Paid in surplus + Retained earnings

What is the definition of common stock and paid in surplus?

Common stock and paid in surplus represent the fundamental ownership claim in a public or private company.

Which one of these actions meets the definition of a liability?

Corner Bank loans $100,000 to the Corner Bakery for two years.

Why is corporate governance so important?

Corporate governance helps align managers' goals with shareholders' goals.

Which one of these best defines corporate governance?

Corporate governance is the ongoing process of monitoring managers and aligning their incentives with shareholder goals.

Which of these best defines cross-sectional analysis?

Cross-sectional analysis analyzes the performance of a firm against one or more companies in the same industry.

The common-size balance sheet value of current assets was 0.21 last year and 0.23 this year. How do you interpret this?

Current assets as a percentage of total assets increased.

Which one of these reports the amount of money a firm owes its creditors within the next year?

Current liabilities

What is the definition of current liabilities?

Current liabilities are obligations of the firm that are due within one year.

Which one of these formulas will correctly compute dividends per share (DPS)?

DPS = Common stock dividends paid/Number of shares of common stock outstanding

Cash flows from financing activities are defined as the cash flows resulting from which one of the following?

Debt and equity financing transactions

Which one of these best explains how debt financing affects the income available to a firm's asset funders?

Debt increases the income available to asset funders by an amount equal to the interest on the debt times the tax rate.

Which one of these is classified as a cash flow from operating activities?

Decrease in accounts payable

Which one of these is an addition to the cash flows from operating activities?

Decrease in accounts receivable

Which one of these is a subtraction from the cash flows from operating activities?

Decrease in accrued wages and taxes

Which one of these is a cash flow from a financing activity?

Decrease in loans payable

Which one of these is an addition to the cash flows from investing activities?

Decrease in other long-term assets

Dee's had a return on assets (ROA) of 14.4 percent last year as compared to 14.7 percent this year. What do these ratio values imply?

Dee's earned more income for its common shareholders per dollar of assets than it did last year.

The suppliers of Denver Press offer the firm 30 days credit on all its purchases. Denver Press has an average payment period of 84 days as compared to its industry average of 43 days. Which of these statements applies to Denver Press?

Denver Press is most likely abusing its credit terms.

Which one of these accounts is a noncash expense?

Depreciation

Which one of these formulas is a correct computation of EBIT?

EBIT = Gross profits - Depreciation - Other operating expenses

Which one of these correctly defines EBIT?

EBIT is the earnings a firm generates prior to paying interest to its creditors or income taxes to the government.

What is the definition of EBIT?

EBIT is the earnings before interest and taxes.

Which one of these formulas correctly computes the value of EBT?

EBT = Net income + Taxes

Reason: How can EBT be defined?

EBT is earnings before taxes, also referred to as taxable income.

What is the definition of EBT?

EBT is the taxable income of a firm.

Which one of these formulas will correctly compute the earnings per share (EPS)?

EPS = Net income available to common stockholders/Total shares of common stock outstanding

Which one of these statements is a correct interpretation of an income statement?

Earnings per share = Net income available to common stockholders / Total shares of common stock outstanding

Which one of the following is an advantage of a sole proprietorship?

Ease of formation

Which form of executive compensation is most apt to reduce agency problems?

Employee stock options

Which one of these correctly defines the balance sheet identity?

Equity = Assets - Liabilities

Which of these best defines ethics?

Ethics is the study of values, morals, and morality.

Which one of these statements related to the recording of financial statement items based on GAAP is (are) correct?

Expenses related to the production of a product are recorded on the income statement when that product is sold, not when the expenses are paid.

Which of these factors are credited for providing financial institutions with high profit margins?

Expertise and unique assets

Which of these decisions involves international finance? Assume the firms are U. S. firms.

Exports Ltd. decides to open a warehouse in Europe.

True or false: An increase in the financial leverage of a firm reduces both the firm's profits and its losses.

False Reason: An increase in the financial leverage of a firm magnifies both the firm's profits and its losses. In other words, profits get larger but losses also get larger.

True or false: Ethics is the study of values, morals, and business judgments.

False Reason: Ethics is the study of values, morals, and morality.

True or false: Finance is more concerned about the past while accounting is more concerned about the future.

False Reason: Finance focuses on the future while accounting records the past.

True or false: A firm can always increase its share price by lowering its dividend payout ratio.

False Reason: Only if the firm's ROE is high enough.

True or false: All interest payments and dividends are deducted from operating income when the firm calculates taxable income.

False Reason: Only the allowable portion of interest and no dividends are deducted

True or false: The cash flows directly resulting from a firm's sales and production activities are classified as cash flows from investing activities.

False Reason: The cash flows directly resulting from a firm's sales and production activities are classified as cash flows from operations.

True or false: To reduce the number of days' sales held in inventory, a firm needs to decrease the inventory turnover rate.

False Reason: To reduce the number of days' sales held in inventory, the turnover rate must be increased.

Which of these is an example of how finance is used throughout a firm?

Finance can be used for cost/benefit analysis.

Which one of these is NOT a sub-area of finance?

Financial Assets

Financial decision making compares which of the following factors?

Financial decision making compares rewards with risks.

Which statement best describes how finance is dependent upon accounting?

Financial decisions require an understanding of a firm's past transactions in order to plan for the future.

What role does a financial institution play in a financial system?

Financial institutions must distribute capital in an efficient manner.

How can financial leverage be defined?

Financial leverage is the degree to which a firm finances its total assets with debt securities.

How is financial leverage defined?

Financial leverage is the extent to which debt securities are used by a firm.

Financial management relates to which one of the following?

Financial management relates to a firm's decisions regarding the acquisition and use of funds.

Two firms have the same amount of assets and equity. Firm A has a market-to-book value of 3.6 compared to 2.9 for Firm B. Which one of these statements is generally correct given this information?

Firm A is expected to outperform Firm B in the future.

DJ's has an equity multiplier of 1.5. Which one of these statements is correct given this information?

For every $1 of equity, DJ's has $0.50 of debt and total assets of $1.50.

Explain why following GAAP to record sales on an income statement may differ from the cash flows generated by those sales.

GAAP requires the revenue from a sale be recorded at the time of sale, which may not coincide with the cash flow from the sale.

Generally speaking, a high price-earnings (PE) ratio indicates which one of the following as compared to a low PE ratio?

Greater risk

Gross profit is equal to net sales minus cost of goods sold. How else can gross profit be defined?

Gross profit = EBIT + Other operating expenses + Depreciation

How is gross profit defined?

Gross profit = Net sales - Cost of goods sold

Which sentence best illustrates the definition of market value?

If the Cookie Palace sells its oven today, it could receive a price of $89,000.

Which one of the following is a use of cash?

Increase in a fixed asset

Which one of these is a subtraction from the cash flows from investing activities?

Increase in a fixed asset

Which one of these is a cash flow from an investing activity?

Increase/decrease in fixed assets

Which one of these features would be considered the most advantageous benefit of a general partnership?

Increased capital financing as compared to a sole proprietorship

Which one of the following statements correctly identifies a group that supplies money to the financial markets?

Individuals saving for retirement provide money to the financial markets.

Which of these reduce the taxable income of a corporation?

Interest expense

What is the basic reason why debt financing affects the income available to asset funders?

Interest is a tax-deductible expense.

Financial institutions contribute to the dynamics of which one of the following rates?

Interest rates

International finance does which one of the following?

International finance applies finance theory to a global world with changing political, currency, and legal environments.

Which account is the least liquid of the current asset accounts?

Inventory

Abel's has a total asset turnover rate of 2.2 as compared to its industry average of 1.8. Which one of these might be the cause of Abel's higher rate?

Inventory stockouts

Which of these correctly defines a role of investments?

Investments address the timing of cash flows most desired by investors.

JJ's has a cash ratio of 0.25. How do you interpret this value?

JJ's has sufficient cash and marketable securities to pay 25 percent of its current liabilities.

Which firm is a borrower of funds in the financial markets?

Ken's has a new product that it is ready to market to the public as soon as financing can be arranged.

Which one of these features is an advantage of a sole proprietorship?

Less regulation than other business forms

Which one of these is an example of a borrower in the financial markets?

Lester's wants to expand its operations but has insufficient cash to do so.

Which one of these questions can be answered by monitoring a firm's balance sheets?

Level of net working capital

What is the definition of liabilities?

Liabilities are funds provided by lenders to a firm.

A restriction on which factor is a disadvantage of a hybrid organization?

Line of business

What is the definition of liquidity?

Liquidity is the ease of conversion of an asset into cash at a fair value.

What is the definition of long-term debt?

Long-term debt is defined as the obligations of the firm that are due in more than one year.

Which type of depreciation offers the greatest tax deferral benefit in the early years of an asset's life?

MACRS depreciation

Which one of these is the best explanation of the market value per share (MVPS)?

MVPS is the current price at which a share of common stock sells in the open market.

Which one of these is a function assigned to the company treasurer?

Management of cash

Which one of these functions is a treasury function?

Managing the firm's pension plan

Which one of these terms is the price at which one share of common stock can currently be sold?

Market value per share

For publicly traded firms, market value ratios may be more important than other ratios for which reason?

Market value ratios reflect investors' opinion of a firm's future performance and risk.

McDowell's has an ROE of 12.6 percent based on a profit margin of 6 percent, a total asset turnover of 1.4, and an equity multiplier of 1.5. The industry values are 13.1 percent, 7.2 percent, 1.3, and 1.4, respectively. Which one of these statements is accurate?

McDowell's uses its assets more efficiently to produce sales than does the average firm in the industry.

Which of these examples best defines a liquid asset?

Mia sold 100 shares of stock today at the going market price.

A firm has total assets of $439,000, current assets of $49,000, total equity of $283,000 and long-term debt of $107,000. How do you compute net working capital (NWC)?

NWC = $49,000 - ($439,000 - $107,000 - $283,000) Reason: Total liabilities and equity = Total assets = $439,000. Current liabilities = $439,000 - $107,000 - $283,000. Net working capital = $49,000 - ($439,000 - $107,000 - $283,000).

A firm has total assets of $358,000 and fixed assets of $220,000. Current liabilities are $77,000 and long-term debt is $289,000. How do you compute net working capital (NWC)?

NWC = ($358,000 - $220,000) - $77,000 Reason: Current assets = Total assets - Fixed assets. Net working capital = Current assets - Current liabilities.

The statement of retained earnings reconciles the dividends paid and the change in retained earnings to which one of these?

Net income

Which one of these formulas depicts the definition of the statement of retained earnings?

Net income = Dividends paid + Change in retained earnings

The return on assets reflects which value as a percentage of total assets?

Net income available to common stockholders

What is the definition of net income?

Net income is the aftertax profit or loss earned over a specified period of time.

Which one of these defines net income?

Net income is the amount of profit a firm can either distribute as dividends or reinvest in the firm.

How is net plant and equipment calculated?

Net plant and equipment is equal to gross plant and equipment less accumulated depreciation

What is the definition of net working capital?

Net working capital is the difference between a firm's current assets and current liabilities.

Northern Goods and Southern Goods have similar levels of EBIT and depreciation. However, Northern Goods has a much higher cash coverage ratio. Given this, which of these statements is correct?

Northern Goods is diluting its return to stockholders more than its competitors are.

Kelso's has an average collection period of 49 days. How do you interpret this?

On average, Kelso's receives cash for a sale 49 days after a credit sale occurs.

A fixed asset is an asset that is defined as having a useful life in excess of which one of these time periods?

One year

Current liabilities are debts of a firm that must be paid within what time frame?

One year

Long-term debt is defined as the obligations of the firm that are due after what period of time?

One year

Orr's Hardware had a cash ratio of 0.12 last year as compared to 0.22 this year. How do you interpret this change?

Orr's is less dependent now on its receivables and inventory to pay its current debt than it was one year ago.

Treeline Resorts has a basic earnings power ratio of 1.6 compared to 1.8 for Outer Limits Resorts. Which one of these statements is correct based on this information?

Outer Limits is generating more operating profit per dollar of assets than Treeline.

Which characteristic is an advantage of a hybrid organization?

Owners' liability

Oyster Fields has an average payment period of 21 days as compared to its industry average of 33 days. Suppliers in the industry have a 30-day credit policy. Which one of these statements most applies to Oyster Fields?

Oyster Fields is not maximizing its use of free financing.

Which of these is most apt to lessen the probability of an agency problem with an employee?

Paying a bonus for good performance

Which of the following uses of the excess cash results in maximizing owners' equity?

Paying dividends to shareholders

Which group has individual investors as participants and is a lender of funds to the financial markets?

People with money and no ideas lend funds to the financial markets.

Which two groups participate in the financial markets?

People with money but no ideas and people with ideas but no money

Petty's has a fixed asset turnover of 2 and a sales to working capital ratio of 4. The industry averages are 1.5 and 3, respectively. Assume all firms in the industry use the same depreciation method and have equipment of similar age. Which one of these statements is correct?

Petty's has twice the amount of net fixed assets as it does net working capital.

What is the definition of preferred stock?

Preferred stock is a hybrid security that has characteristics of both long-term debt and common stock.

Assume you are given the values for sales, taxable income, preferred and common stock dividends, interest, and the tax rate. How would you calculate the profit margin?

Profit margin = {(Taxableincome×(1−Taxrate))−Preferreddividends}Taxableincome×1-Taxrate-Preferreddividends/Sales

Earnings management is the process of controlling which of these for a firm?

Profits Reason: Earnings management is the process of controlling a firm's earnings, or profits.

Which one of these is the correct fully deconstructed version of the return on assets?

ROA = Net income available to common stockholders / Sales × Sales / Total assets

Which one of these formulas correctly defines the retention ratio (RR) for a levered firm with both preferred and common stock?

RR = 1 - Dividend payout ratio

Which one of these best states a requirement found in the definition of cross-sectional analysis?

Ratio comparisons must be made between firms in the same industry.

What does a balance sheet do?

Reports a firm's assets, liabilities, and equity at a particular point in time

What is the definition of retained earnings?

Retained earnings is the cumulative earnings a firm has reinvested rather than paid out as dividends.

Russell's has a fixed asset turnover of 3.1. How do you interpret this information?

Russell's generates $3.10 in sales for every dollar of fixed assets.

Which one of the following best illustrates a highly liquid asset?

Sale of a $100 asset by tomorrow at a price of $100.

The Bakery has a quick ratio of 1. This means the firm can pay it short-term debts without doing which one of the following?

Selling any inventory

Which one of these is an advantage of the corporate form of ownership?

Separate legal entity

Which one of the following is a disadvantage of the corporate form of business?

Separation of management and ownership

Corporate governance is the set of laws, policies, incentives, and monitors designed to handle issues arising from which one of these?

Separation of ownership and control

An agency problem is defined as a situation where a firm's managers fail to put the interests of which one of these parties first when making decisions?

Shareholders

Putting the interests of which party first should be the primary goal of a corporation?

Shareholders

Which one of the following is an advantage offered by a hybrid organization?

Single taxation

Which one of these is an advantage of a general partnership?

Single taxation

What are the two key characteristics of a hybrid organization?

Single taxation and limited liability

Which one of these is not one of the four basic financial statements?

Statement of ratios

You are comparing four stocks of equal risk. Which stock should have the highest price in today's market?

Stock A currently pays $2 a year in dividends and increases that amount by $.50 annually.

Which party has a residual claim to a firm's cash flows?

Stockholders

Stockholders' equity can be defined by which one of these formulas?

Stockholders' equity = Assets - Liabilities

Which of these definitions of stockholders' equity is correct?

Stockholders' equity is defined as the funds provided by the firm's preferred and common stock owners.

Which one of these statements correctly applies to straight-line depreciation?

Straight-line depreciation is commonly used when compiling financial statements.

The profitability of financial market intermediaries depends upon which of these?

Successful execution of unique professional services

Which one of these is an investments activity?

Sue has $200 a month deposited into a stock mutual fund.

Which of these is an example of a personal financial decision?

Sue opted to increase her company retirement plan contribution to 6 percent of her salary.

Assume a firm has an equity multiplier of 1.2. Given this, what is the relationship between the internal growth rate and the sustainable growth rate?

Sustainable growth rate > Internal growth rate

How is the time value of money (TVM) theory best defined?

TVM is the theory and application of valuing cash flows at various points in time.

Which aspect of a corporation is viewed as a disadvantage?

Taxation

Which one of the following best illustrates the definition of a sole proprietorship?

Ted was forced to sell his personal home in order to pay the debts of a business he owned in entirety.

Which one of these is the best definition of the DuPont system of analysis?

The DuPont system is an analytical method of breaking the ROA and ROE down into their component pieces.

Walker's has a price-earnings (PE) ratio of 16 compared to its industry average of 17. Generally speaking, which one of these statements applies to this situation?

The average firm in the industry outperforms Walker's.

What is the definition of an average tax rate?

The average tax rate is the percentage of each dollar of taxable income that the firm pays in taxes.

Jed's balance sheet lists cash of $300, accounts receivable of $700, inventory of $1,200, and fixed assets of $2,800. The inventory can be sold for 95 percent of its costs while 98 percent of the receivables can be collected. The fixed assets can be sold for $2,700. What are the book and market values of the firm's assets?

The book value is $5,000 and the market value is $4,826. Reason: Book value = $300 + $700 + $1,200 + $2,800 = $5,000 Market value = $300 + (0.98 × $700) + (0.95 × $1,200) + $2,700 = $4,826

D.O. Co. has a total of $6,500 in total assets and $4,200 in fixed assets on its balance sheet. The fixed assets were just appraised at $4,700. The firm feels it can liquidate its current assets for 96 percent of their book value. What is the book and market value of the firm's assets?

The book value is $6,500 and the market value is $6,908. Reason: Book value = $6,500 Market value = 0.96($6,500 - $4,200) + $4,700 + $6,908

Which statement correctly defines the book value of a firm's assets as shown in the gross plant and equipment account?

The book value of a firm's assets in the gross plant and equipment account is the total amount the firm paid for those assets.

How is the book value of land defined?

The book value of land is its historical cost, or the amount paid for that land.

Which one of these comparisons fits the definition of capital structure?

The capital structure of a firm compares the total debt to the total equity.

Last year, Delta's times interest earned ratio was 1.8. This year the ratio is 0.8. How should this change in value be interpreted?

The decrease in the ratio to a value less than 1 indicates the firm's debt load may have become too large for the firm.

ABE Co. has a times interest earned ratio of 3.2. How is this value interpreted?

The earnings before interest and taxes is 3.2 times greater than the firm's interest expense for the period.

How do you interpret an internal growth rate of 3 percent?

The firm can grow by a maximum of 3 percent if it only uses internally-generated financing.

Lester's has a current ratio of 0.86. What does this indicate?

The firm has $0.86 in current assets for every $1 it must pay in obligations within the next year.

A firm has a negative free cash flow and a negative operating cash flow. What does this indicate?

The firm is experiencing operating or managerial problems.

Last year, a firm had a current ratio of 1.14. This year, the ratio is 0.98. Assuming everything else equal, what do these values imply?

The firm is less liquid this year than it was last year.

A statement of cash flows reflects a net cash flow from operating activities of -$89 million, a net cash flow from investing activities of $42 million, and a net cash flow from financing activities of $28 million. What can you determine from this information?

The firm sold long-term assets, issued securities, and reduced its cash holdings in order to finance its operations.

Over the past three years, Art's Bakery has increased its debt and lowered its equity. Which one of these statements is most apt to apply to this firm?

The firm's safety cushion that helps absorb earnings fluctuations is diminishing.

PJ's has an average collection period of 42 days as compared to the industry average of 40 days. Which of these statements is supported by this information?

The industry, on average, turns over its accounts receivables more times a year than PJ's does.

Which one of the following is the key disadvantage of a general partnership?

The key disadvantage is the unlimited liability for all of the firm's legal actions and all of its debts.

Which relationship of liquidity is correct?

The liquidity of an asset is inversely related to the profitability of that asset.

What is the definition of a marginal tax rate?

The marginal tax rate is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.

How is the market value of an asset defined?

The market value of an asset is the amount the firm would receive if it sold the asset.

Which one of these correctly defines the net change in cash and marketable securities as it is used on the statement of cash flows?

The net change in cash and marketable securities is the sum of the cash flows from operations, investing activities, and financing activities.

Which one of these is NOT a financial decision made within a firm?

The president decides to fire the company treasurer for ethical violations.

Which proposed firm goal is best?

The primary goal is the maximize the value of the current shareholders' stock.

What is the retention ratio?

The retention ratio is the percentage of net income available to common stockholders that is added to retained earnings.

Which statement is correct?

The sustainable growth rate is the maximum rate achievable using internal equity and debt financing and maintaining a constant debt-to-equity ratio.

What are two primary sources of friction that decrease cash flows from companies to their investors?

The two primary sources of friction are retained earnings and taxes.

The current value of a financial asset is determined by which of the following cash flows?

The value of a financial asset is determined by the asset's expected future cash flows.

The Keyser Corporation owns 1,000 shares of Mountain Top Industries. How are the dividends paid by Mountain Top to Keyser treated for federal tax purposes?

Thirty percent of the dividend income received is taxable, the other seventy percent is tax-exempt.

Which one of these formulas correctly defines retained earnings?

Total net earnings for all years - Total dividends paid for all years

Which one of these is an intangible long-term asset?

Trademark

Travis owns a bakery and Mia is a baker. How could an agency relationship exist between these two individuals?

Travis could hire Mia to work for him. Travis would be the principal and Mia would be the agent.

The U.S. government typically restricts hybrid organization status to relatively small firms.

True

The operating profit is equal to earnings before interest and taxes.

True

True or false: After TCJA, U.S. companies are more likely to "bring home" foreign profits due to the new flat tax rate.

True

True or false: The Corner Store graphs its return on equity by quarter for a running 5-year period. This is time series analysis.

True Reason: Analyzing a firm's performance by monitoring ratio trends over time is time series analysis.

True or false: Both common stock and paid in surplus represent a fundamental ownership claim in either a private or a public company.

True Reason: Both common stock and paid-in surplus represent the fundamental ownership claim in a public or private company.

True or false: Money that firms either retain or pay to the government are sources of friction that reduce cash flows to investors in the financial markets.

True Reason: Both taxes and retained earnings are sources of friction that reduce cash flows from firms to their investors.

True or false: Cash flows that result from debt and equity financing transactions are cash flows from financing activities.

True Reason: Cash flows from financing activities are defined as cash flows that result from debt and equity financing transactions.

True or false: A decrease in a long-term asset account balance is a cash flow from investing activity.

True Reason: Changes in fixed and other long-term assets are cash flows from investing activities.

True or false: Net working capital is a measure of a firm's ability to pay its bills for the next year.

True Reason: Net working capital compares the amount of assets a firm has that can be converted into cash within one year to the amount of debts the firm must pay within the year.

True or false: The cash flows that result from debt and equity financing transactions are cash flows from financing activities.

True Reason: The statement is true. The cash flows that result from debt and equity financing transactions are financing activities.

True or false: The greater the debt the greater the financial leverage

True Reason: debt acts as leverage to move equity.

True or false: The DuPont system of analysis shows how the return on equity is dependent upon the return on assets.

True Reason: The statement is true. ROE = ROA × Equity multiplier

Which one of these is commonly considered the greatest disadvantage of a sole proprietorship?

Unlimited liability

Valley Markets has an inventory turnover of 3.2 versus an industry average of 3.5 and a capital intensity ratio of 1.9 versus an industry average of 1.8. What can you determine about the efficiency of Valley Markets?

Valley Markets uses its assets less efficiently than the average firm in its industry.

What result should you expect from firms that make wise financial decisions?

You should expect the wealth of individuals to increase in the future.

A financial statement provides an _______-based picture of a firm's financial condition.

accounting

Which of the following can create ethical dilemmas between corporate managers and stockholders?

agency relationship

Which of these are NOT basic approaches to minimizing the agency problem?

all of these choices are correct. - monitor managers' actions - align managers' personal interest with those of the owners by making the managers owners - ignore the conflict of interest

Methods to minimize agency problem include all EXCEPT

allow the CEO to purchase bonds via an employee bond option plan.

A person who works for a firm, but is not necessarily an owner, is called

an agent

This is the set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control.

corporate governance

From the perspective of access to capital, the best form of business organization is the

corporation.

Managing other people's money implies a __________ relationship from the manager.

fiduciary

Capital is exchanged by the mechanisms within the __________ markets.

financial

The sub-area of finance that deals with a firm's decisions in acquiring and using cash from investors and retained earnings is called

financial management

A firm with positive operating cash flow but negative free cash flow may be

investing heavily in operating capital

Another name for the bottom line of an income statement is

net income

Corporate governance seeks to align the goals of the managers with the goals of the __________.

owners, shareholders, stockholders, or equityholders

Financial decisions compare the rewards of a decision with the __________ of the decisions.

risk

A potential future negative impact to value and/or cash flows is often discussed in terms of probability of loss and the expected magnitude of the loss. This is called

risk.

From the perspective of control, the best form of business organization is the

sole proprietorship.

The __________ theory says that social responsibility should be at least as important if not more important to maximizing shareholder wealth.

stakeholder

The opportunity to buy stock at a fixed price over a specific period of time is referred to as

stock options.

All of the following are an example of a fiduciary relationship EXCEPT

the shareholder elects a board member.

What is the difference in perspective between finance and accounting?

timing