Acc exam 4

Which of the following ratios provides insights into the capital structure used by a company to finance its assets? a. Debt-to-equity ratio b. Return on stockholders' equity c. Return on total assets d. Acid-test ratio

a. debt-to-equity ratio

The payback period method used to make a capital investment decision is used to assess the: a. impact of an investment on liquidity. b. time value of cash inflows of an investment. c. minimum rate of return of a project. d. profitability of an investment.

a. impact of an investment on liquidity

hich of the following compounding interest formula is used for computing amounts for n periods into the future? (F= Future value; P= Present value of a future outlay; i = Interest rate) a. F = P(1 / i)n b. F = P(1 - i)n c. F = P(1 + i)n d. F = P(1 × i)n

c. F = P ( 1 + i ) to the n

The ratios that measure the ability of a company to meet its current obligations are called: a. capital structure ratios. b. profitability ratios. c. liquidity ratios. d. leverage ratios.

c. Liquidity Ratios

Which of the following activities results in a use of cash in the statement of cash flows? a. Selling long-term assets b. Reporting profitable operations c. Purchasing merchandise d. Issuing long-term debt

c. Purchase Merchandise

Which of the following is an example of a capital investment decision by a company? a. To renew raw material purchase agreement with suppliers b. To repurchase issued shares from stock market c. To invest in a new project d. To extend discount to new customers

c. To invest in a new project

Which of the following is deducted from net income while calculating operating cash flows using the indirect method? a. A decrease in accounts receivable b. A loss on sale of equipment c. A gain on sale of machinery d. An increase in accounts payable

c. a gain on sale of machinerey

Tulip Company issued preferred stock to increase its capital. Which of the following entries reflect the transaction. a. Debit Preferred Stock, credit Cash Flow from Financing Activities b. Debit Cash Flow from Investing Activities, credit Preferred Stock c. Debit Cash Flow from Financing Activities, credit Preferred Stock d. Debit Preferred Stock, credit Cash Flow from Investing Activities

c. debit cash flow from operating activities, credit preferred stock

Which of the following is a financing activity in the statement of cash flows? a. Purchase of inventory b. Sale of goods on credit c. Issuance of capital stock d. Purchase of equipment

c. issuance of capital stock

A project provides a reasonable return if: a. it provides return lower than the initial investment in the project. b. it receives a cash flow equal to the original investment in the first year of investment. c. it covers the opportunity cost of funds invested. d. it provides a return equal to initial cost of the project.

c. it covers the opportunity cost of funds invested

Which of the following statements is true of cash flow from operating activities? a. It includes cash flow from the acquisition or sale of long-term assets. b. It includes cash flow from the cash raised from creditors and owners. c. It includes cash flow from the collection of sales revenues. d. It includes cash flow from the dividends paid on the funds provided by stockholders.

c. it includes cash flow from the collection of sales revenues

current assets and current liabilities are..

operating activities

provides information regarding the sources and uses of a firm's cash

purpose of cash flows

meaningful ratios compare...

standard ratios( from past period or industrial averages) to the current ratios caluculated in the period

low accounts receivable turnover

suggests a need to modify credit and collection policies to speed up the conversion of receivables to cash

Long term assets are....

investing activities

measure the ability of a company to meet its current obligations

liquidity ratios

financing section of statement of cash flows

long term liabilities and stockholder's equity

NPV differs from IRR in two major ways:

1.The NPV method assumes that each cash inflow received is reinvested at the required rate of return 2. The NPV method measures profitability in absolute terms

How to find preferred dividends

% time the # of preferred dividends

average accounts receivable formula

(beg A/R + End A/R)/2

average inventory formula

(beg inv + end inv) / 2

Disadvantages of using the payback period

1. It ignores the cash flow performance of the investments beyond the payback period 2. It ignores the time value of money

statement of cash flows order

1. cash flows from operating activities 2. Cash flows from investing activities 3. cash flows from financing activities 4. Net increase/decrease in cash

Post audit disadvanatges

1. costly 2. assumptions driving the original analysis may often be invalidated by changes in the actual operating environment 3. Accountability must be qualified to some extent by the impossibility of foreseeing every possible eventuality

Profitability ratios

1. return on sales 2. Return on total assets 4. Return on common stock holder's equity 5. earnings per share 6. Price earnings ratio 7.dividend yield 8. dividend payout

measures the return on a project in terms of income, as opposed to using a project's cash flow

Accounting rate of return (ARR)

Comparing mutually exclusive projects

Always use NPV as your deciding factor NOT IRR

What does earnings per share represent?

Earnings per share is the ratio most frequently cited by the majority of investors because it calculates the earnings generated per share of common stock

dividends per share

Dividends / Common Shares Outstanding

Having a risky investment doesn't change the desire payback period. T or F?

False

The acquisition of equipment by issuing common stock is a cash transaction. T or F?

False

Long term liabilities and stockholders equity are...

Financing activities

the interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost

Internal Rate of Return (IRR)

measure the ability of a company to meet its long- and short-term obligations. These ratios provide a measure of the degree of protection provided to a company's creditors

Leverage ratios

the difference between the present value of the cash inflows and outflows associated with a project

Net Present Value (NPV)

presents the time required for a firm to recover its original investment and is often used to assess things such as: financial risk impact of an investment on liquidity obsolescence risk impact of investment on performance measures

Payback period

measure the earning ability of a company. These ratios allow investors, creditors, and managers to evaluate the extent to which invested funds are being used efficiently

Profitability ratios

Post audit benefits

Resource allocation, Postie impact on managers behavior, Independent perspective

Which of the following formulas is used to calculate the return on total assets? a. Return on Total Assets = Sales / Average Total Assets b. Return on Total Assets = (Net Income + Preference Dividend + Depreciation) / Average Total Assets c. Return on Total Assets = Sales - Net Income / Average Total Assets d. Return on Total Assets = {Net Income + [Interest Expense (1 - Tax Rate)]} / Average Total Assets

Return on Total Assets = {Net Income + [Interest Expense (1 - Tax Rate)]} / Average Total Assets

What is the percent of sales that ends up as net income?

Return on sales

What type of payback period would you want a high-risk investment to have?

Short

Five basic steps are followed in preparing a statement of cash flows: (indirect)

Step 1: Compute the change in cash for the period Step 2: Compute the cash flows from operating activities Step 3: Identify the cash flows from investing activities Step 4: Identify the cash flows from financing activities Step 5: Prepare the statement of cash flows based on the previous four steps

What is the return on stockholders' equity used for?

The return on stockholders' equity provides a measure that can be used to compare against other return measures

different types of leverage ratios

Times-interest-earned-ratio Debt ratio Debt-to-equity ratio

Only through comparison can someone using a financial statement assess the financial health of a company T or F?

True

The direct method computes operating cash flows by adjusting each line on the income statement to reflect cash flows T or F?

True

The indirect method computes operating cash flows by adjusting net income for noncash items, nonoperating gains and losses, and accruals T or F?

True

noncash transactions must also be disclosed in a supplementary schedule attached to the statement T or F?

True

is concerned with relationships among items within a particular time period; expresses the line item as a percentage of some other line item for the same period;within-period relationships can be assessed

Vertical analysis

Following is the financial information of Merry Company for the year ended December 31, 20X1. Compute net cash from financing activities. Net Income for the year $200,000 Payment of dividends 50,000 Issuance of share capital 100,000 Purchase of equipment 150,000 a. $50,000 b. $200,000 c. $100,000 d. $150,000

a. 50,000

The ratio that provides a measure of the degree of protection provided to a company's creditors is known as the: a. leverage ratio. b. solvency ratio. c. performance ratio. d. profitability ratio.

a. Leverage Ratio

To produce a cash flow income statement, the direct method calculates operating cash flows by: a. adjusting each line of the income statement. b. adjusting net income for noncash items. c. adjusting the income statement for changes only in current liabilities. d. adjusting net income for changes in all the current assets.

a. adjusting each line of the income statement

The financial statements of Orchid Enterprises shows a decrease in wages payable by $4,000 for the current year. Which of the following can be inferred by the users of the financial statement? a. The cash outflow was more than the wage expense recognized in the income statement by $4,000. b. The cash outflow is equal to the expense recognized on the income statement. c. The wage expense recognized in the income statement was more than the cash outflow by $4,000. d. There was no cash outflow during the current year but only a decrease in liabilities by $4,000.

a. the cash outflow was more than the wage expense recognized in the income statement by $4,000

Which of the following capital investment decision-making models is generally preferred by managers over the internal rate of return (IRR) model? a. The net present value b. The accounting rate of return c. The average rate of return d. The payback period

a. the net present value

Which of the following statements is true about profitability ratios? a. They measure the earning ability of a company. b. They measure the ability of a company to meet its long- and short-term obligations. c. They measure the ability of a company to purchase assets. d. They measure the ability of a company to meet its current obligations.

a. they measure the earning ability of a compnay

Omega Solvers Inc. has $150,000 of cash and $250,000 of marketable securities as per its beginning balance sheet. Which of the following is its total cash at the beginning of the year? a. $100,000 b. $400,000 c. $250,000 d. $150,000

b. $400,000; short term investments are treated as cash becaise they are highly liquid

During the year, Coral Inc. sold equipment with a book value of $20,000 for $15,000 (original purchase cost of $25,000). Identify a true statement about the gain or loss on the sale of equipment. a. $10,000 gain on sale of equipment is reported under cash flow from financing activities. b. $5,000 loss on sale of equipment is reported under cash flow from investing activities. c. $5,000 gain on sale of equipment is reported under cash flow from investing activities. d. $10,000 loss on sale of equipment is reported under cash flow from investing activities.

b. $5,000 loss on the sale of equipment is reported under cash flow from investing activities

Following is the financial information of Avocado Company for the year ended December 31, 20X2. Compute operating cash flows using the direct method. Cash sales $90,000 Credit sales 150,000 Accounts receivable on December 31, 20X1 300,000 Accounts receivable on December 31, 20X2 260,000 Reported profit for the year 20X2 75,000 a. $240,000 b. $130,000 c. $165,000 d. $115,000

b. 130,000

Which of the following formulas is used to calculate the debt-to-equity ratio? a. Debt-to-Equity Ratio = Total Stockholders' Equity / Total Liabilities b. Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity c. Debt-to-Equity Ratio = Total Stockholders' Equity/ Non-Current Liabilities d. Debt-to-Equity Ratio = Non-Current Liabilities / Total Stockholders' Equity

b. Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity

Which of the following is an example of common-size analysis? a. Quick ratio is calculated for the company's different divisions b. Depreciation expense is expressed as a percentage of sales c. Operating expenses are expressed as a percentage of industry average d. Current ratio is compared to industry average

b. Depreciation expense is expressed as a percentage of sales

Which of the following adjustments is subtracted from net income on the statement of cash flows? a. Losses b. Gains c. Depreciation

b. Gains

Which of the following current assets is excluded while computing the quick ratio of a company? a. Cash b. Inventory c. Accounts receivable d. Marketable securities

b. Inventory

There are two mutually exclusive projects, Project A and Project B. Project A has a net present value (NPV) of $3,000 and an internal rate of return (IRR) of 12%. Project B has an NPV of $4,000 and an IRR of 10%. Based on the scenario, which of the following statements is true regarding the mutually exclusive projects? a. Project A should be selected as Project A provides a higher IRR than project B. b. Project B should be selected as Project B provides a higher NPV than project A. c. Project B should be selected as Project B provides a lower IRR than project A. d. Project A should be selected as Project A provides a lower NPV than project B.

b. Project B should be selected as Project B provides a higher NPV than project A

Which of the following statements is a limitation of a postaudit? a. A postaudit does not suggest any corrective actions that can be taken if the overall outcome of the investment is negative. b. A postaudit's objective is not achieved if it is done by an independent party. c. A postaudit faces the limitation that the assumptions driving the original analysis may often be invalidated by changes in the actual operating environment. d. A postaudit does not ensure that resources are used wisely when evaluating the profitability of a project.

c. A postaudit faces the limitation that the assumptions driving the original analysis may often be invalidates by changes in the actual operating environment

Due to which of the following reasons is the net present value (NPV) method preferred over the internal rate of return (IRR) method when choosing among mutually exclusive alternatives? a. The NPV method measures profitability in relative terms, whereas the IRR method measures it in absolute terms. b. The NPV method assumes that each cash inflow received is reinvested at the required rate of return, whereas the IRR method assumes that each cash inflow is reinvested at the computed IRR. c. The NPV method considers the time value of money while making a capital investment decision, whereas the IRR method considers the accounting rate of return while making a capital investment decision. d. The NPV method measures the return in terms of income, whereas the IRR method measures the return in terms of a project's cash flows.

b. The NPV method assumes that each cash inflow received is reinvested at the required rate of return, whereas IRR method assumes that each inflow is reinvested at its computed IRR

Which of the following statements is a limitation of the net present value (NPV) model while making a capital investment decision? a. The NPV method measures profitability in relative terms, and in the final analysis, what counts are the total dollars earned—the absolute profit— not the relative profits. b. The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows. c. The NPV model assumes that each cash inflow received is reinvested at the internal rate of return, which is not a realistic assumption. d. The NPV model ignores the time value of money while making a capital investment decision.

b. The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows

Which of the following is deducted from net income while calculating operating cash flows using the indirect method? a. An increase in accounts payable b. A gain on sale of machinery c. A decrease in accounts receivable d. A loss on sale of equipment

b. a gain on sale of machinerey

The indirect method for calculating operating cash flows computes cash flows by: a. adjusting an income statement for changes only in current liabilities. b. adjusting net income for items that do not affect cash flows. c. adjusting net income for items that affect cash flows. d. adjusting each line of an income statement.

b. adjusting net income fo items that do not affect cash flows

A good investment will earn: a. Back its original investment b. Back its original investment and a reasonable return c. A reasonable return

b. back its original investment and a reasonable return

Which of the following will be included in operating cash flows under the direct method? a. Adjustment for foreign exchange fluctuations b. Cash paid to suppliers c. Depreciation d. A gain on sale of equipment

b. cash paid to suppliers

Which of the following statements is true about the internal rate of return (IRR)? a. If the IRR is greater than the required rate of return, the firm is indifferent between accepting or rejecting the investment proposal. b. If the IRR is greater than the required rate, the project is deemed acceptable. c. If the IRR is less than the required rate of return, the project is deemed acceptable. d. If the IRR is less than the required rate of return, the firm is indifferent between accepting or rejecting the investment proposal.

b. if the IRR is greater then the required rate, the project is deemed acceptable

The _____ is the interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost. a. accounting rate of return b. internal rate of return c. minimum rate of return d. annual rate of return

b. internal rate of return

The quick ratio differs from the current ratio in that it a. excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and possible default on payment. b. is a stricter test of a company's ability to pay its current debts as they are due. represents the amount of cash on hand instead of the c. amount of working capital.

b. is a stricter test of a company's ability to pay its current debts as they are due.

Which of the following statements is true of a decrease in inventory? a. It decreases the cash from investing activities. b. It is included in cost of goods sold. c. It decreases operating cash flows. d. It represents a cash outflow.

b. it is included in the cost of goods sold

The _____ method assumes that each cash inflow received is reinvested at the required rate of return. a. internal rate of return b. net present value c. payback period d. accounting rate of return

b. net present value

Which of the following is true of the direct and indirect methods of calculating operating cash flows? a. A company that chooses the indirect method should also present the direct method in a separate schedule. b. The direct method and the indirect method use the same adjustments and same reasoning. c. The direct method and the indirect method use different adjustments and different reasoning. d. The presentation of information is the same for both the direct and the indirect methods, but the results differ

b. the direct method and the indirect method use the same adjustments and same reasoning

Which of the following statements is true while making capital investment decisions for independent projects? a. The net present value (NPV) model and the payback period model yield the same decisions for independent projects. b. The net present value (NPV) model and the internal rate of return (IRR) model yield the same decisions for independent projects. c. The payback period model and the accounting rate of return (ARR) model yield the same decisions for independent projects. d. The internal rate of return (IRR) and the accounting rate of return (ARR) model yield the same decisions for independent projects.

b. the net present value(NPV) model and the internal rate of return (IRR) model yield the same decisions for independent projects.

Which of the following is considered a signal of success for a just-in-time (JIT) manufacturing company? a. Low quality costs b. A low quick ratio c. A high inventory turnover ratio d. A high current ratio

c. A high inventory turnover ratio

Which of the following formulas is used to calculate the discounting factor for internal rate of return (IRR) when an investment produces a series of uniform cash flows? a. Discounting Factor = (Total Annual Cash Flow - Investment) / Annual Cash Flow b. Discounting Factor = Annual Cash Flow / Investment c. Discounting Factor = Investment / Annual Cash Flow d. Discounting Factor = (Total Annual Cash Flow + Investment) / Annual Cash Flow

c. Discounting Factor = Investment / Annual Cash Flow

Which of the following is true of the treatment of depreciation expense in preparing a statement of cash flows? a. It is added back to net income to arrive at financing cash flows. b. It is shown as part of cash outflow for investing activities. c. It is added back to net income to produce operating cash flow. d. It is deducted from investing cash flows as it involves an outlay of cash

c. it is added back to net income to produce operating cash flow

_____ is the minimum acceptable rate of return for a project. a. The accounting rate of return b. The ordinary rate of return c. The required rate of return d. The average rate of return

c. required rate of return

Which of the following ratios measures the ability of a company to meet its long- and short-term obligations? a. The return on total asset b. The inventory turnover ratio c. The times-interest-earned ratio d. The acid-test ratio

c. the times-interest-earned ratio

number of common stocks

common stock #/ par

average common stockholders' equity

common stock + paid in capital + retained earnings /2

different types of liquidity ratios

current ratio quick or acid-test ratio accounts receivable turnover ratio inventory turnover ratio

Calculate the change in cash from the following information: Cash balance on December 31, 20X1 $95,000 Cash balance on December 31, 20X2 $215,000 Cash inflow from operating activities $135,000 Cash outflow due to operating activities $75,000 Cash inflow from financing activities $115,000 a. $190,000 b. $180,000 c. $60,000 d. $120,000

d. $120,000

ilson Company is considering replacing an existing piece of capital equipment. Relevant information includes: New equipment cost is $250,000; Expected annual savings is $75,000; Incremental working capital is $25,000. The incremental working capital will be recovered at the end of the project's life. Based on this information, an NPV analysis will show for Year 0 as a: a. $225,000 outflow. b. $200,000 outflow. c. $150,000 outflow. d. $275,000 outflow.

d. $275,000 outflow

Which of the following is added to net income while calculating operating cash flows using the indirect method? a. A dividend payment b. A gain on sale of machinery c. A decrease in bills payable d. A decrease in inventory

d. A decrease in inventory

Which of the following statements describes capital investment decisions? a. Capital investment decisions deal with the planning of short-term goals. b. Capital investment decisions are made for a period of not more than a year. c. Capital investment decisions are among the least important decisions made by managers. d. Capital investment decisions place large amounts of resources at risk for long periods of time.

d. Capital investment decisions place large amounts of resources at risk for long periods of time

Which of the following is the formula to compute the current ratio? a. Current Ratio = (Total Liabilities - Current Liabilities) / Current Assets b. Current Ratio = (Total Assets - Current Assets) / Current Liabilities c. Current Ratio = Current Liabilities / Current Assets d. Current Ratio = Current Assets / Current Liabilities

d. Current Ratio= Current Assets / Current Liabilities

An increase in supplies would _____ in the operating cash flow section. a. Increase retained earnings b. Decrease retained earnings c. Increase net income d. Decrease net income

d. Decrease net income

In which of the following ways does a postaudit help to improve managerial decision making? a. It corrects the estimated benefits and costs of a project. b. It provides information that helps management in choosing among various mutually exclusive projects. c. It assists management in deciding whether a project should be selected or not. d. It supplies feedback to managers to improve future decision making.

d. It supplies feedback to managers to improve future decision making

Assume that 'P' is present value of cash inflows and 'I' is present value of cash outflows of a project. Which of the following equations is used to calculate the net present value (NPV) of an investment? a. NPV = P + I b. NPV = (P × I) - I c. NPV = (P - I) / I d. NPV = P - I

d. NPV = P - I

Which of the following equations is used to calculate the present value of future amounts? (P= Present value of a future outlay; F = Future value; i = Interest rate; n = Period of investment) a. P = F / (1 - i)n b. P = F (1 - i2)n c. P = F (1 × i)n d. P = F / (1 + i)n

d. P = F / ( 1 + i ) to the n power

There are four mutually exclusive projects, Project 1, Project 2, Project 3, and Project 4, whose internal rates of return (IRR) are 5%, 20%, 12%, and 15% respectively. A company wants to invest in one of these projects. Based on the given information, which of the following projects should the company invest in? a. Project 4 b. Project 3 c. Project 1 d. Project 2

d. Project 2

Which of the following ratios assess the short-term debt-paying ability of a company? a. The return on total assets ratio b. The times-interest-earned ratio c. The debt ratio d. The acid-test ratio

d. The acid-test ratio

Wilson Company is considering replacing an existing piece of capital equipment. Relevant information includes: New equipment cost is $250,000; expected annual savings is $75,000; incremental working capital is $25,000. The incremental working capital will be recovered at the end of the project's life. In an NPV analysis, the incremental working capital will be considered as: a. a sunk cost that cannot be recovered. b. an opportunity cost that can be recovered. c. a cash outflow at the project's inception. d. a cash inflow at the project's inception.

d. a cash outflow at the projects inceotion

If a company chooses the direct method of presenting cash flows, it must also present: a. the sources of income in a separate schedule. b. a separate schedule for profits and losses. c. the sources of cash in a separate schedule. d. cash flows by the indirect method in a separate schedule.

d. cash flows by the indirect method in a separate schedule

The direct method computes the operating cash flows as the difference between: a. income recognized and cash received. b. opening cash balance and closing cash balance. c. investing cash flows and financing cash flows. d. cash receipts and cash payments.

d. cash receipts and cash payments

The ratio that measures the degree of protection afforded to creditors in case of insolvency is the: a. times-interest-earned ratio. b. inventory turnover ratio. c. current ratio. d. debt ratio.

d. debt ratio

The process of computing the present value of future cash flows is often referred to as _____. a. costing b. investing c. compounding d. discounting

d. discounting

The payback period method used to make a capital investment decision is used to assess the: a. minimum rate of return of a project. b. profitability of an investment. c. time value of cash inflows of an investment. d. impact of an investment on liquidity.

d. impact of an investment on liquidity

The _____ is the interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost. a. minimum rate of return b. accounting rate of return c. annual rate of return d. internal rate of return

d. internal rate of return

The worksheet for preparing the statement of cash flows is divided into two major sections: a. one corresponding to the transactions on cash basis and one corresponding to the transactions on accrual basis. b. one corresponding to balance sheet classifications and one corresponding to income statement classifications. c. one corresponding to the cash outflows and the other corresponding to the cash inflows. d. one corresponding to the balance sheet classifications and another to the statement of cash flows classifications.

d. one corresponding to the balance sheet classifications and another to the statement of cash flows classifications

In the direct method of cash flow computation, each item on an accrual income statement is adjusted to reflect: a. nonrecurring cash flows. b. financing cash flows. c. investing cash flows. d. operating cash flows.

d. operating cash flows

Which of the following is a limitation of the accounting rate of return (ARR) model while making capital investment decisions? a. The ARR model ignores the cash flow performance of the investments beyond the recovery of original investment. b. The ARR model is dependent upon required rate of return of investment. c. The ARR model does not consider the profitability of a project. d. The ARR model is dependent upon net income which can be easily manipulated by managers.

d. the ARR model is dependent on net income which can be easily manipulated by managers

Which of the following capital investment decision models is a discounting model? a. The payback period method b. Average rate of return c. Accounting rate of return d. The net present value method

d. the net present value method

The analysis which expresses a line item as a percentage of some other line item for the same period is known as: a. variance analysis. b. scenario analysis. c. horizontal analysis. d. vertical analysis.

d. vertical analysis

expresses a line item as a percentage of some prior-period amount; line items are expressed as a percentage of a base period amount

horizontal analysis

operating section of statement of cash flows

includes all current assets and liabilities

investing section of statement of cash flows

includes long term assets (ex: land, buildings)