Finance 318 Connect (Chapters 1-3)
Which of the following is the correct representation of the total debt ratio?
(TA-TE)/TA
For a mature firm, operating cash flow:
- is a sign of trouble if negative over a long period of time - is usually positive
A general partnership has which of the following characteristics?
-All the partners share in gains or losses of the partnership -Each owner has unlimited liability for all firm debts
Assets can be categorized as:
-Current and fixed -tangible and intangible
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
-Enron -Tyco -WorldCom
The controller is responsible for which of the following tasks?
-Financial accounting -Tax reporting and payments
The three most important items to keep in mind when reviewing an income statement are:
-GAAP -cash versus noncash items -time and costs
Which of the following are true of a sole proprietorship?
-Has a limited life -One of the simplest types of businesses to form
Which of these questions can be answered by reviewing a firm's balance sheet?
-How much debt is used to finance the firm? -What is the total amount of assets the firm owns?
Which of the following are included in a firms capital structure?
-Long-term debt -Equity
Which of the following are defining features of the primary market?
-Proceeds from the sale of securities goes to the issuing firm -it is the market where initial public offerings are made
Which of the following is (are) true of financial ratios?
-They are used for comparison purposes -They are developed from a firm's financial information
Which of the following are classified as fixed assets on the balance sheet?
-Trademark -Equipment -Buildings
According to GAAP, when is revenue recognized on an income statement?
-When the value of an exchange of goods or services is known or reliably determined -When the earnings process is virtually completed
Which of the following are classified as liabilities on a firm's balance sheet?
-accounts payable -long term debt
A general partnership has which of the following characteristics?
-all the partners share in gains or losses of the partnership -each owner has unlimited liability for all firm debts
The Sarbanes-Oxley Act requires corporate officers to:
-be responsible for errors in the annual report -confirm the validity of the financial statements
A corporation receives cash from financial markets by selling ______ and ______
-bonds -stocks
Under GAAP, assets are generally carried on a firm's balance sheet at ________
-book value -historical cost
Which of the following are components of cash flow from assets?
-capital spending -operating cash flow -change in net working capital
What should you keep in mind when examining an income statement?
-cash versus non-cash items -GAAP -time and costs
Common-size statements are best used for comparing:
-competitors -firms of different sizes -year to year for your firm
Which of the following are considered non-owner stakeholders in a company?
-employees -suppliers -government
Which of these have been noted as unintended consequences of the Sarbanes-Oxley Act?
-firms going public outside of the U.S. market -eliminating public disclosure for many firms -public firms "going dark" and leaving the stock market
Marginal tax rates are the most important tax rates because:
-incremental cash flows are taxed at marginal tax rates -financial decisions are usually based on new cash flows
When are corporate profits taxed?
-individuals pay taxes on corporate dividends -corporations pay taxes on corporate profits
Working Capital includes which of the following?
-inventory -short term assets -cash
Corporations in other countries are often called:
-joint stock companies -public limited companies -limited liability companies
When a corporation is formed, it is granted which of the following rights?
-legal powers to sue -the ability to issue stock
Based on the DuPont Identity, an increase in sales, all else held equal, __________ ROE
-may increase or decrease -may not change
Which of the following are traditional financial ratio categories?
-turnover -profitability -financial leverage
Long-term liabilities represent obligations of the firm lasting over _____
1 year
Rank the ease (from easiest to hardest) of turning the following assets into cash
1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment
The DuPont identity shows that __________ times total asset turnover times equity multiplier equals ROE
1. net 2. profit 3. margin
A partnership must have at least ____ owners
2
a sole proprietorship
is owned by one person
Which of the following is true about the sustainable growth rate?
it is the maximum rate of growth
How does the Sarbanes-Oxley Act primarily work to make sure that companies tell the truth in financial statements?
it makes management personally responsible for the accuracy of a company's financial statements
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
it will increase
Long-term solvency ratios measure what aspect of the firm's financial position?
its financial leverage
A corporation is a distinct_________ entity and as such can have a name and take advantage of the legal powers of natural persons
legal
A limited liability company's owners have ______ liability
limited
Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts.
limited
What type of parnership involves both general and limited partners to run the business?
limited partnership
Current assets are classified as relatively _______; these assets can be converted to cash within the next 12 months
liquid
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______
liquidity
Short-term solvency ratios are also called _________ ratios
liquidity
Agency costs occur when _________ and stockholder interests are not in line with one another
management
Since ________ and ownership are separated, a corporation's life is unlimited
management
In a shareholder-manager relationship, who is the agent?
managers
The price at which willing buyers and sellers would trade is called ______ value
market
The price-earnings (PE) ratio is a ____ ratio
market value
The ______ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service
matching
The goal of a "for profit" business is to ________ the value of shareholder wealth
maximize
Current assets _____ current liabilities equals NWC (Net Working Capital)
minus
A firm may use a price-sales ratio when it has had __________ earnings over the past year
negative
The last item (or "bottom line") on the income statement is typically the _________
net income
Non-cash items are expenses that directly affect _____ but do not directly affect ______
net income; cash flow
A primary reason that accounting income differs from cash flow is that an income statement contains ______
noncash items
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm
overstate; understate
A limited liability company is taxed like a ________, but retains __________ __________ for owners
partnership, limited liability
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows
Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:
period costs
In practice, accountants tend to classify costs as either ______ costs or _______ costs
product; period
Return on assets (ROA) is a measure of _____
profitability
Which one of these is an important mechanism used by unhappy stockholders to replace current management?
proxy fight
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value
Stockholders' equity is always shown on the ______ of the balance sheet
right side
Why would the threat of a takeover motivate a manager to act in stockholders' interest?
running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with
In a common-size income statement, each item is expressed as a percentage of total
sales
The profit margin is equal to net income divided by ______
sales
When one owner or creditor sells to another, the transaction takes place in the _________ market
second
The owners of a corporation are called _______
shareholders
Who is entitled to the residual value of a firm's cash flows?
shareholders
The times interest earned ratio is a measure of long-term
solvency
A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm
stakeholder
Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:
stock options
Who elects the board of directors, and ultimately maintains control of the firm?
stockholders
Physical assets are termed ______ assets
tangible
A shareholder's liability is limited to which of these?
the amount the shareholder invested in the corporation
The market value of an item is:
the cash value you'd get if you sold it
Cash flow refers to _____
the difference between the number of dollars that came in and the number that went out
In a for profit business, owners' equity is equivalent to
the total value of stock in a corporation
What is the primary objective of an auction market?
to bring buyers and sellers together
A common-size balance sheet expresses accounts as a percentage of ______
total assets
Common stockholders are entitled to the difference between ______ and ________
total assets and total liabilities
Operating cash flow does not include depreciation or interest
true
A sole proprietorship has ________ personal liability for all business debts and obligations
unlimited
Financial leverage refers to a firm's _________
use of debt in its capital structure
______ changes as the output of the firm changes
variable cost
Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of __________ management.
working capital
U.S. corporations pay tax at a rate of _________ percent
21
The DuPont identity breaks ROE into _______ parts
3
Days' sales in receivables is given by the following ratio:
365/Receivables Turnover
Why dont large businesses organize as sole proprietorships or partnerships?
It can be difficult to raise cash for investment in these forms, and that limits the ability of the business to grow
Assets=
Liabilities + Equity
In a limited partnership, a limited partner's liability for business debts is _________
Limited to their cash contribution to the partnership
Which one of the following is the correct equation for computing return on assets (ROA)?
Net Income/Total Assets
Is profit maximization the primary objective of a business?
No; profit maximization may not take into account other strategic objectives necessaty to maximize shareholder value
Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?
Non-cash expenses
Which of the following represents the receivables turnover ratio?
Sales/Accounts Receivable
Which one of the following equations defines the total asset turnover ratio?
Sales/Total Assets
How is owenership of a corporation represented?
Shares of stock
_______ financial statements enable one to compare firms that differ in size
Standardized
_______ ______ can be used to encourage managers to maximize the value of the stock
Stock options
Which of the following best explains why financial managers use a common-size income statement?
The common-size income statement can show which costs are rising or falling as a percentage of sales
What does it mean when a company reports ROA of 12 percent?
The company generates $12 in net income for every $100 invested in assets
What does it mean when a firm has a days' sales in receivables of 45?
The firm is able to collect sales in 45 days on average
What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?
The total asset turnover ration will increase
What is the main goal of financial management?
To maximize current share value
Which one of the following best explains why financial managers use a common-size balance sheet?
To track changes in a firm's capital structure
How is the average income tax rate computed?
Total tax bill / Total taxable income
A corporation borrows money in its own name
True
In a corporation, stockholders and managers are usually separate groups
True
Long-term liabilities are not due in the current year (from the date of the balance sheet)
True
According to GAAP, when is income reported?
When it is earned or accrued
Ensuring that the firm has sufficient funds to continue operations of day-to-day basis comes under the heading of _____ management
Working capital
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell
a long time
What does shareholders' equity represent?
a residual claim against the firm's total assets
The threat of ______ motivates managers to make good decisions
a takeover
A balance sheet reflects a firm's:
accounting value on a specific date
Amounts not yet collected from customers on sales already made are called:
accounts receivable
Net earnings refers to income earned ______
after interest and taxes
The relationship between stockholders and management can best be described as a(n) ________ relationship
agency
The costs incurred due to a conflict of interest between stockholders and management are called ______ costs
agency costs
The conflict of interest between an agent and a principal is called a(n)
agency problem
In the long-run, costs may be considered as ________
all variable
Net working capital will be negative when current assets ______ current liabilities
are less than
The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors
assets
Equity=_______
assets - liabilities
Liquidity refers to the ease of changing _____
assets to cash
The New York Stock Exchange is a(n) _____
auction market
A company's ______ tax rate is its tax bill divided by its total taxable income, and its ______ tax rate is the tax rate it pays on the next dollar of income
average; marginal
On the balance sheet, assets are listed at their _____ value
book
The short run is a period when there are ______ costs
both fixed and variable
How is ownership transferred in a corporation?
by gifting or selling shares of stock
A problem with the TIE ratio is that it is based on EBIT, which is not a measure of _________ available to pay interest
cash
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
cash flow from assets
In finance, the value of a firm depends on its ability to generate ______
cash flows
The SOX act is intended to strengthen protection against
corporate accounting fraud and financial malpractice
Public limited companies and joint stock companies are other names for __________
corporations
Product costs are usually shown on the income statement under the heading of _________________
cost of goods sold
A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders
created
The cash flow identity states that cash flow from assets equals cash flows to ____
creditors and stockholders
Liabilities can be classified as _______ or long-term
current
The current ratio computes the relationship between ____
current assets and current liabilities
Increasing shareholder wealth means increasing the
current common stock value
The cash ratio is found by dividing cash by:
current liabilities
Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm increased. The firm has ____________ its liquidity over the past year.
decreased
A bad financial decision is defined as a decision that ______ shareholder wealth
decreases
The more debt a firm has, the greater its:
degree of financial leverage
Which of the following is an example of a non-cash item on an income statement?
depreciation
The GAAP matching principle requires revenues to be matched with:
expenses
Non-cash items are ______ that ____ cash flow
expenses; do not directly affect
Current assets plus current liabilities equals net working capital
false
Financial ratios are computed using balance sheet information
false
If a company has inventory, the quick ratio will always be greater than the current ratio.
false
The Sarbanes-Oxley Act provides incentives for companies to go public in US markets
false
Long-term solvency ratios are also known as:
financial leverage ratios
Which of the following is NOT a component of cash flow from assets?
financing expenses
Costs that do not change in the short run arise because of ______
fixed commitments
Given an internal growth rate of 3 percent, a firm can _____
grow by 3 percent or less without any additional external financing
The information needed to compute the profit margin can be found on the ____
income statement
The purpose of a(n) ______ is to measure performance over a set period of time
income statement
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______
increase
Period costs are the costs that are allocated to a specific ______
interval of time
Which of the following is a current asset?
inventory
Which one of the following does not affect ROE according to the DuPont identity?
investment sentiment
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
Which of the following items are used to compute the current ratio?
Accounts Payable (CL) Cash (CA)
A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?
Accounts Receivable
Which one of these is considered to be the most liquid?
Accounts Receivable
If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?
Agency problem
Which of the following is shown on the left hand side of the balance sheet?
Assets
Cal's Market has return on equity (ROE) of 15 percent. What does this mean?
Cal's generated $.15 in profit for every $1 of book value of equity
which applies to the mixture of debt and equity maintained by a firm?
Capital structure
Tax rates for proprietorships, partnerships, and LLCs __________ with the passage of the Tax Cuts and Jobs Act of 2017
Changed
which is responsible for accurate financial accounting of the firms activities?
Controller
The federal government taxes which of the following?
Corporate earnings and shareholder dividends
which of the following is a disadvantage of sole proprietorships and partnerships?
Difficulty of transferring ownership
When a firm smooths earnings to please investors, it is called ________
Earnings Management
For financial analysis, financial statements and accounting numbers are more important than cash flows
False
Profit maximization is the goal for the management of a corporation in short run only
False
With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
False
A partnership in which partners share in gains or losses, and carry unlimited liabilty for all partnership debts is called a:
General partnership
What does GAAP stand for?
Generally Accepted Accounting Principles
