Finance Exam 1

Which of the following items is NOT included in current assets?

a. Accounts payable. b. Inventory. c. Accounts receivable. d. Cash. e. Short-term, highly liquid, marketable securities.

Which of the following statements is CORRECT?

a. Accounts receivable are reported as a current liability on the balance sheet. b. Dividends paid reduce the net income that is reported on a company's income statement. c. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. d. If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year. e. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will fall.

Which of the following would indicate an improvement in a company's financial position, holding other things constant?

a. The current and quick ratios both increase. b. The TIE coverage ratio declines. c. The debt ratio increases. d. The inventory and total assets turnover ratios both decline. e. The profit margin declines.

A firm wants to strengthen its financial position. Which of the following actions would INCREASE its current ratio?

a. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. b. Reduce the company's days' sales outstanding ratio to the industry average and use the resulting cash savings to purchase plant and equipment. c. Use cash to increase inventory holdings. d. Use cash to repurchase some of the company's own stock. e. Issue new stock and use some of the proceeds to purchase additional inventory and hold the remainder of the funds received as cash.

Which of the following statements is CORRECT?

a. Four key financial statements are the balance sheet, the income statement, the statement of cash flows, and the statement of retained earnings. b. The balance sheet gives us a picture of the firm's financial situation over a period of time. c. The income statement gives us a snapshot of what is happening at a point in time. d. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits. e. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.

Which of the following statements is correct?

a. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase. b. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline. c. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio. d. If a securities analyst saw that a firm's days' sales outstanding was increasing and was higher than the industry average and also was trending still higher, this would be interpreted as a sign of strength. e. There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure different things.

Which of the following statements is CORRECT?

a. In the statement of cash flows, depreciation charges are reported as a use of cash. b. In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash. c. In the statement of cash flows, a decrease in inventories is reported as a use of cash. d. In the statement of cash flows, a decrease in accounts payable is reported as a use of cash. e. All of the above answers are correct.

Nelson Automotive is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Nelson pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

a. Net income will decrease. b. The times interest earned ratio will decrease. c. The ROA will decrease. d. The tax bill will increase. e. Taxable income will decrease.

Which of the following statements is correct?

a. Other things held constant, a reduction in the inventory turnover ratio will increase the ROE. b. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease. c. A reduction in inventories held would have no effect on the current ratio. d. An increase in inventories held would have no effect on the current ratio. e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

a. Reduce the days' sales outstanding (DSO) without reducing sales. b. Increase the number of years over which fixed assets are depreciated. c. Decrease the accounts payable balance. d. Reduce the inventory turnover ratio without affecting sales. e. Decrease the accrued wages balance.

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

a. The company issues new common stock. b. The company repurchases common stock. c. The company pays a dividend. d. The company purchases a new piece of equipment. e. The company gives customers more time to pay their bills.

On its 2004 balance sheet, Sherman Books showed $510 million of retained earnings, and exactly the same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

a. The company must have had zero net income in 2005. b. The company must have paid no dividends in 2005. c. Dividends could have been paid in 2005, but they would have had to equal the earning for the year. d. If the company lost money in 2005, they must have paid dividends. e. The company must have paid out half of its earnings as dividends.

Analysts who follow Sierra Nevada Inc. recently noted that, relative to the previous year, the company's operating net cash flow increased, yet cash as reported on the balance sheet declined. Which of the following factors could explain this situation?

a. The company sold a division and received cash in return. b. The company cut its dividend. c. The company made a large investment in a new plant. d. The company issued new long-term debt. e. The company issued new common stock.

Maple Furniture recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action?

a. The company's equity multiplier increased. b. The company's return on assets decreased. c. The company's times interest earned ratio decreased. d. The company's debt ratio increased. e. The company's current ratio increased.

The CFO of Mulroney Industries plans to have the company issue $300 million of new common stock and to use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?

a. The company's net income would increase. b. The company's taxable income would fall. c. The company would have to pay less taxes. d. The company would have less common equity than before. e. The company's interest expense would remain constant.