Finance Exam 1

E. Capital structure

6.) Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. Working capital management B. Cash management C. Cost analysis D. Capital budgeting E. Capital structure

A. 12.22 percent

60.) Oil Creek Auto has sales of $3,340, net income of $274, net fixed assets of $2,600, and current assets of $920. The firm has $430 in inventory. What is the common-size statement value of inventory? A. 12.22 percent B. 44.16 percent C. 16.54 percent D. 13.36 percent E. 46.74 percent

B. Whether or not to purchase a new machine for the production line

1.) An example of a capital budgeting decision is deciding: A. How many shares of stock to issue. B. Whether or not to purchase a new machine for the production line. C. How to refinance a debt issue that is maturing. D. How much inventory to keep on hand. E. How much money should be kept in the checking account.

C. Limited partner

10.) A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: A. General partner B. Sole proprietor C. Limited partner D. Corporate shareholder E. Zero partner

A. Corporation

11.) A business created as a distinct legal entity and treated as a legal "person" is called a(n): A. Corporation B. Sole proprietorship C. General partnership D. Limited partnership E. Unlimited liability company

C. The owner of a sole proprietorship is personally responsible for all of the company's debts.

12.) Which one of the following statements concerning a sole proprietorship is correct? A. A sole proprietorship is designed to protect the personal assets of the owner. B. The profits of a sole proprietorship are subject to double taxation. C. The owner of a sole proprietorship is personally responsible for all of the company's debts. D. There are very few sole proprietorships remaining in the U.S. today. E.A sole proprietorship is structured the same as a limited liability company.

B. Double taxation of distributed profits.

13.) One disadvantage of the corporate form of business ownership is the: A. Limited liability of its shareholders for the firm's debts. B. Double taxation of distributed profits. C. Firm's greater ability to raise capital than other forms of ownership. D. Firm's potential for an unlimited life. E. Firm's ability to issue additional shares of stock.

C. Corporation can have an unlimited life.

14.) Which one of the following statements is correct? A. The majority of firms in the U.S. are structured as corporations. B. Corporate profits are taxable income to the shareholders when earned. C. Corporations can have an unlimited life. D. Shareholders are protected from all potential losses. E. Shareholders directly elect the corporate president.

C. Corporation

15.) Which business form is best suited to raising large amounts of capital? A. Sole proprietorship B. Limited liability company C. Corporations D. General partnership E. Limited partnership

C. Inability to raise cash

16.) The growth of both sole proprietorships and partnerships is frequently limited by the firm's: A.Double taxation B. Bylaws C. Inability to raise cash D. Limited liability E. Agency problems

E. Taxable income of the recipient even though that income was previously taxed.

17.) Corporate dividends are: A. Tax-free because the income is taxed at the personal level when earned by the firm. B. Tax-free because they are distributions of aftertax income. C. Tax-free since the corporation pays tax on that income when it is earned. D. Taxed at both the corporate and the personal level when the dividends are paid to shareholders E. Tabled income of the recipient even though that income was previously taxed.

D. Shareholders

18.) Financial managers should primarily focus on the interest of: A. Stakeholders B. The vice president of finance C. Their immediate supervisor D. Shareholders E. The board of directors

E. Management greed and abuses

19.) The Sarbanes-Oxley Act of 2002 is a governmental response to: A. Decreasing corporate profits B. The terrorist attacked on 9/11/2001 C. A weakening economy D. Deregulation of the stock exchanges E. Management greed and abuses

D. How much debt should be assumed to fund a project.

2.) Capital structure decisions include determining: A. Which one of two projects to accept. B. How to allocate investment funds to multiple projects. C. The amount of funds needed to finance customer purchases of a new product. D. How much debt should be assumed to fund a project. E. How much inventory will be needed to support a project.

E. Increasing current profits when doing so lowers the value of the company's equity.

20.) Which one of the following actions by a financial manager is most apt to create an agency problem? A. Refusing to borrow money when doing so will create losses for the firm. B. Refusing to lower selling prices if doing so will create losses for the firm. C. Refusing to expand the company if doing so will lower the value of the equity. D. Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales. E. Increasing current profits when doing so lowers the value of the company's equity.

C. Accounts receivable

21.) Which one of the following is a current asset? A. Accounts payable B. Trademark C. Accounts receivable D. Notes payable E. Equipment

B. Good reputation of the company

22.) Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? A. Real estate investment B. Good reputation of the company C. Equipment owned by the firm D. Money due from a customer E. An item held by the firm for the future sale

E. Current assets minus current liabilities

23.) Net working capital is defined as: A. Total liabilities minus shareholders' equity B. Current liabilities minus shareholders' equity C. Fixed assets minus long-term liabilities D. Total assets minus total liabilities E. Current assets minus current liabilities

D. Networking capital may be a negative value

24.) Which one of the following statements concerning net working capital is correct? A. Net working capital increases when inventory is purchased with cash B. Net working capital excludes inventory C. Total assets must increase if net working capital increases D. Net working capital may be a negative value E. Net working capital is the amount of cash a firm currently has available for spending

C. Accounts receivable

25.) Which of the following accounts is the most liquid? A. Inventory B. Building C. Accounts receivable D. Equipment E. Land

D. $100 of inventory that is sold today for $100 cash

26.) Which one of the following represents the most liquid asset? A. $100 account receivable that is discounted and collected for $96 today. B. $100 of inventory that is sold today on credit for $103. C. $100 of inventory that is discounted and sold for $97 cash today. D. $100 of inventory that is sold today for $100 cash. E. $100 of accounts receivable that will be collected in full next week.

E. Represents the residual value of a firm.

27.)Shareholders' equity: A. Is referred to as a firm's financial leverage B. Is equal to total assets plus total liabilities C. Decreases whenever new shares of stock are issued D. Includes patents, preferred stock, and common stock E. Represents the residual value of a firm

A. Probability a firm will encounter financial distress increases

28.) As the degree of financial leverage increases, the: A. Probability a firm will encounter financial distress increases. B. Amount of a firm's total debt decreases C. Less debt a firm has per dollar of total assets D. Number of outstanding shares of stock increases. E. Accounts payable balance decreases.

B.Based on historical cost

29.) The book value of a firm is: A. Equivalent to the firm's market value provided that the firm has some fixed assets. B. Based on historical costs. C. Generally greater than the market value when fixed assets are included. D. More of a financial than an accounting valuation. E.Adjusted to the market value whenever the market value exceeds the state book value.

E. A capital structure decision

3.) The decision to issue additional shares of stock is an example of: A. Working capital management B. A net working capital decision. C. Capital budgeting D. A controller's duties E. A capital structure decision

D. Construction of a new restricted access highway located between the store and the surrounding residential areas.

30.) You recently purchased a grocery store. At the time of the purchase, the store's market value and its book value were equal. The purchase included the building, fixtures, and inventory. Which one of the following is most apt to cause the market value of this store to be less than its book value? A. A sudden and unexpected increase in inflation. B. The replacement of old inventory items with more desirable products. C. Improvements to the surrounding area by other store owners. D. Construction of a new restricted access highway located between the store and the surrounding residential areas. E. Addition of a stop light at the main entrance to the store's parking lot.

C. Balance sheet

31.) Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? A. Income statement B. Creditor's statement C. Balance sheet D. Statement of cash flows E. Dividend statement

D. Expenses that do not directly affect cash flows

32.) Noncash items refer to: A. Fixed expenses B. Inventory items purchases using credit. C. The ownership of intangible assets such as patents. D. Expenses that do not directly affect cash flows. E. Sales that are made using store credit.

D. $1,611

33.) Galaxy Interiors income statement shows depreciation of $1,611, sales of $21,415, interest paid of $1,282, net income of $1,374, and costs of goods sold of $16,408. What is the amount of the non cash expenses? A.$2,893 B. $1,282 C. $740 D. $1,611 E. $2,351

D. Free cash flow

34.) Cash flow from assets is also known as the firm's: A. Capital structure B. Equity structure C. Hidden cash flow D. Free cash flow E. Historical cash flow

D. Cash flow from assets

35.) The cash flow that is available for distribution to a corporation's creditors and stockholders is called the: A. Operating cash flow B. Net capital spending C. Net working capital D. Cash flow from assets E. Cash flow to stockholders

E. Cash flow to creditors

36.) The cash flow related to interest payments less any net new borrowing is called the: A. Operating cash flow B. Capital spending cash flow C. Net working capital D. Cash flow from assets E. Cash flow to creditors

C. Decrease in the change in net working capital

37.) Which one of the following will increase the cash flow from assets all else equal? A. Decrease in cash flow to stockholders B. Decrease in operating cash flow C. Decrease in the change in networking capital D. Decrease in cash flow to creditors E. Increase in net capital spending

B. $720

38.) A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital? A. $970 B. $720 C. $640 D. $3,110 E. $2,860

B. $300

39.) Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of networking capital? A. -$100 B. $300 C. $600 D. $1,700 E. $1,800

C. How much inventory should be on hand for immediate sale?

4.) Which one of the following questions is a working capital management decision? A. Should the company issue new shares of stock or borrow money? B. Should the company update or replace its older equipment? C. How much inventory should be on hand for immediate sale? D. Should the company close one of its current stores? E. How much should the company borrow to buy a new building?

E. $6,890

40.) A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities? A. $2,050 B. $2,920 C. $4,130 D. $7,950 E. $6,890

A. $867,832

41.) The What-Not Shop owns the building in which it is located. This building initally cost $647,000 and is currently appraised at $819,000. The fixtures originally cost $148,000 and are currently valued at $65,000. The inventory has a book value of $319,000 and a market value equal to 1.1 times the book value. The shop expects to collect 96 percent of the $21,700 in accounts receivable. The shop has $26,800 in cash and total debt of $414,700. What is the market value of the shop's equity? A. $867,832 B. $900,166 C. $695,832 D. $775,632 E. $1,190,332

A. $98,210

42.) Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 21 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings? A. $98,210 B. $81,700 C. $95,200 D. $103,460 E. $121,680

A. $33,763

43.) Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending? A. $33,763 B. $40,706 C. $58,218 D. $65,161 E. $67,408

E. $21,903

44.) At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital? A. -$19,679 B. -$11,503 C. $19,387 D. $15,497 E. $21,903

D. Statement of cash flows

45.) The sources and uses of cash over a stated period of time are reflected on the: A. Income statement B. Balance sheet C. Tax reconciliation statement D. Statement of cash flows E. Statement of operating position

E.Sales

46.) A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of: A. Total assets B. Total equity C. Net income D. Taxable income E. Sales

D. Total assets for the current year

47.) On a common-size balance sheet all accounts for the current year are expressed as a percentage of: A. Sales for the period B. The base year sales C. Total equity for the base year D. Total assets for the current year E. Total assets for the base year

E. Having the same fiscal year

48.) All of the following issues represent problems encountered when comparing the financial statements of two separate entities except the issue of the companies: A. Being conglomerates with unrelated lines of business. B. Having geographically varying operations. C. Using different accounting methods. D. Differing seasonal peaks. E. Having the same fiscal year.

D. Accounts receivable

49.) An increase in which of the following will increase a firm's quick ratio without affecting its cash ratio? A. Accounts payable B. Cash C. Inventory D. Accounts receivable E. Fixed assets

D. Capital budgeting

5.) Which one of the following terms is defined as the management of a firm's long-term investments? A. Working capital management B. Financial allocation C. Agency cost analysis D. Capital budgeting E. Capital structure

C. Short-term solvency

50.) Ratios that measure a firm's liquidity are known as _________ ratios. A. Asset management B. Long-term solvency C. Short-term solvency D. Profitability E. Book value

B. Utilizing its total assets more efficiently than Sam's

51.) RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Smashes a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following? A. Utilizing its fixed assets more efficiently than Sam's B. Utilizing its total assets more efficiently than Sam's C. Generating$1 in sales every $1.26 in net fixed assets D. Generating $1.26 in net income for every $1 in net fixed assets E. Maintaining the same level of current assets as Sam's

D. Profitability

52.) Ratios that measure how efficiently a firm managed its assets and operations to generate net income are referred to as ____ ratios. A. Asset management B. Long-term solvency C. Short-term solvency D. Profitability E. Turnover

D. DuPont identity

53.) Which one of these identifies the relationship between the return on assets and the return on equity? A. Profit margin B. Profitability determinant C. Balance sheet multiplier D. DuPont identity E. Debt-equity ratio

A. Equity multiplier, profit margin,and total asset turnover

54.) Which one of the following accurately describes the three parts of the DuPont identity? A. Equity multiplier, profit margin, and total asset turnover B. Debt-equity ratio, capital intensity ratio, and profit margin C. Operating efficiency, equity multiplier, and profitability ratio D. Return on assets, profit margin, and equity multiplier E. Financial leverage, operating efficiency, and profitability ratio

E. Has an equity multiplier of 1.0

55.) If a company produces a return on assets of 14 percent and also a return on equity of 14 percent, then the firm: A. May have short-term, but not long-tern debt B. Is using its assets as efficiently as possible C. Has no net working capital D. Has a debt-equity ratio of 1.0 E. Has an equity multiple of 1.0

C. Total asset turnover and debt-equity ratio

56.) An increase in which of the following must increase the return on equity, all else constant? A. Total assets and sales B. Net income and total equity C. Total asset turnover and debt-equity ratio D. Equity multiplier and total equity E. Debt-equity ratio and total debt

C. I, II, and III Only

57.) The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generating per dollar of sales IV. Does the company have the ability to meet its debt obligations in a timely manner? A. I and III only B. II and IV only C. I, II, III only D. II, III, IV only E. I, II, III and IV

E. Price-earnings ratio

58.) Which one of the following will decrease if a firm can decrease its operating costs, all else constant? A. Return on equity B. Return on assets C. Profit margin D. Total asset turnover E. Price-earnings ratio

B. Negative earnings

59. The price-sales ratio is especially useful when analyzing firms that have: A. Volatile market prices. B. Negative earnings. C. Positive PEG ratios. D. A high Tobin's Q. E. Increasing sales.

D. .89

61.) Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235, and inventory of $318. What is the value of the quick ratio? A. 2.25 B. .53 C. .71 D. .89 E. 1.35

B. .5

62.) If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A. 0 B. .5 C. 1.0 D. 1.5 E. 2.0

E. $14,352.31

63.) SS Stores has total debt of $4,910 and a debt-equity ratio of 0.52. What is the value of the total assets? A. $16,128.05 B. $7,253.40 C. $9,571.95 D. $11,034.00 E. $14,352.31

A. .36

64.) Corner Books has a debt-equity ratio of .57. What is the total debt ratio? A. .36 B. .30 C. .44 D. 2.27 E. 2.75

A. $1.08

65.) The Harrisburg Store has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908. How many dollars' worth of sales are generated from every $1 in total assets? A. $1.08 B. $1.14 C. $1.19 D. $84 E. $93

A. 8.29 percent

66.) TJ's has annual sales of $813,200, total debt of $171,000, total equity of $396,000, and a profit margin of 5.78 percent. What is the return on assets? A. 8.29 percent B. 6.48 percent C. 9.94 percent D. 7.78 percent E. 8.02 percent

E. 15.26 percent

67.) Frank's Used Cars has sales of $807,200, total assets of $768,100, and a profit margin of 6.68 percent. The firm has a total debt ratio of 54 percent. What is the return on equity? A. 13.09 percent B. 12.04 percent C. 11.03 percent D. 8.56 percent E. 15.26 percent

A. 3.58

68.) Bernice's has $823,000 in sales. The profit margin is 4.2 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $16.50. What is the price-earnings ratio? A. 3.58 B. 3.98 C. 4.32 D.3.51 E. 4.27

C. $50,159

69.) A firm has a debt-equit ratio of .62, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,000. What is the amount of the net income? A. $28,079 B. $19,197 C. $50,159 D. $40,451 E. $52,418

A.Working capital

7.) A firm's short-term assets and its short-term liabilities are referred to as the firm's: A. Working capital B. Debt C. Investment capital D. Net capital E. Capital structure

B. Sole proprietorship

8.) A business owned by a solitary individual who has unlimited liability for the firm's debt is called a: A. Corporation B. Sole proprietorship C. General partnership D. Limited partnership E. Limited liability company

C. General partnership

9.) A business formed by two or more individuals who each have unlimited liability for all the firm's business debts is called a: A. Corporation B. Sole proprietorship C. General partnership D. Limited partnership E. Limited liability company