Finance Midterm

What account represents the cumulative depreciation of fixed assets? a. Paid in capital b. Common stock c. Retained earnings d. Accumulated depreciation

"the answer is obvious". it will have the word cumulative/accumulated in the answer choice -d. Accumulated depreciation

What is the major advantage of a sole proprietorship?

*Advantages* -Simplicity of decision-making -Low organizational and operational costs -Earnings taxed once *Disadvantages* -Unlimited liability to the owner -Limited life -Difficult to raise capital

Which if the following would represent a use of funds and, indirectly, an *increase* in cash balances?

-A reduction in accounts receivable -taking out a loan will increase liability but will also increase cash (when paying off the loan is when cash will decrease)

The primary disadvantages of accrual accounting are:

-Adequate attention not directed to actual cash flow position of firm

The primary advantages of accrual accounting are:

-Allows matching of revenues and expenses in the period in which they occur to appropriately measure profits

Which of the following would represent a use of funds and, indirectly, a *reduction* in cash balances?

-An increase in inventories -paying off loans -increase in asset will decrease cash

Frank Dodd Act- was passed in response to

-Banking industry and Financial crisis in the Mid 2000, *not early 2000!* -Passed in the wake of the Recession of 2009 and significantly changed the regulatory framework for financial activities in the US.

An increasing average collection period could be associated with...

-Decreasing sales -increasing accounts receivable -Taking longer to collect money

In break-even analysis, the variable cost is defined as:

-Production. -Variable cost varies as volume varies. Variable cost increases, as volume increases.

Articles of partnership specifies:

-The ownership interest -The methods for distributing profits -The means of withdrawing from the partnership

What are some disadvantages of a corporation

-The potential of double taxation of earnings -Professional corporate earnings taxed at highest corporate tax rate

The use of cash budgeting procedures is effective in doing all of the following except:

-cash budgeting should help manage inventory and working capital management -Anything temporary or current -Answer would be anything that is long term

Working capital management is primarily concerned with the management and financing of which of the following?

-current assets (accounts receivable, cash, inventory) -working capital = current assets - current liabilities -working capital management has to do with the management and financing of your current assets -*NOT current assets and liability*

Companies that have higher or lower risk than a competitor in the same industry will generally face which of the following conditions when raising capital? -*question* Higher risk companies are going to have...

-higher interest rate -high cost of funds -lower stock price

The calculation for Earnings per Share is (price to earnings ratio):

-price/earnings -(Market price/share) / (earnings/share)

An aggressively financed firm

-rely on debt -higher leverage -use short term financing as long as possible

Estimate of profit expected can be predicted by developing:

a pro forma income statement (if you are projecting net income then it's a pro forma income statement)

Which of the following is NOT considered to be debt utilization ratio?

a return on anything is not a debt utilization ratio (return on assets, return on equity, return on investments)

Normally, permanent current assets should be financed by: a. long-term funds. b. short-term funds. c. borrowed funds. d. internally generated funds

a. long-term funds.

Name 2 liabilities

accounts payable and accrued expenses

Which account represents the cumulative depreciation of fixed assets

accumulated depreciation

define collection period

amount of time between the sale and the time you get the money from the sale

In the past, the study of finance has included all *but* the following:

anything relating to human resources

a firm's break even point will fall if...

Fixed costs decrease - break-even point decreases, if fixed cost increases - break even point increases

What is the broader more comprehensive goal of financial management

Maximizing *shareholder* wealth (don't get confused with stakeholder), achieving the highest possible value for the firm

Is an investment considered a current asset

No

Proper risk management means...

A firm should determine an appropriate trade-off between risk and return. take risks when the benefits outweigh the costs

A normal upward sloping yield curve would suggest what about future interest rates and inflationary expectations?

A normal yield curve reflects higher longer term interest rates as opposed to short-term interest rates. Therefore, the curve is upward, sloping to the right. This is also called a positive yield curve

A rapid rate of growth in sales may require A. increased borrowing by the firm to support the sales increase. B. higher dividend payments to shareholders. C. the firm to be more lenient with credit customers. D. sales forecasts to be made less frequently.

A. increased borrowing by the firm to support the sales increase.

Which of the following would *not* be classified as a current asset?

Accrued = is a *current liability*, Not a current asset!

Agency theory deals with the issue of:

Agency theory examines the relationship between the owners of the firm and the managers of the firm. In privately owned firms, management and the owners are usually the same people. Management operates the firm to satisfy its own goals, needs, financial requirements and the like. As a company moves from private to public ownership, management now represents all owners. This places management in the agency position of making decisions in the best interest of all shareholders.

Pro forma financial statements are effective in which of the following ways *except*....

All of the above is not the right answer. Pro Forma financial statements are forward looking, financial forecasting, Projected financial statements, looking at future numbers, if the answer choice has something referring to the past -it is not included in a pro forma statement

Generally, more use is made of short term financing because of all of the following except:

All of the following EXCEPT: short term interest rates are generally higher (this statement is not true and why this is the except option)

The concept of a self-liquidating asset implies the following:

All the product will be sold, receivables collected and bills paid over the time period specified.

If sales volume exceeds the break-even point, the firm will experience?

An operating profit

Which of the following statements is NOT true about the percent-of-sales method of financial forecasting?

Assumes that balance sheet accounts maintain a constant relationship to sales. As the dividend payout ratio goes up, the required new funds also rises. ● As the dividend payout ratio increases, the required new funds also increase. ● Required new funds decrease as profit margin increases. ● As the tax rate increases, the required new funds increase. Percent of sales method is less detailed and less time consuming than the cash budget

Agency theory examines the relationship between the A.shareholders of the firm and the firm's investment banker. B.owners of the firm and the managers of the firm. C.board of directors and large institutional investors D.shareholders and the firm's transfer agent

B.owners of the firm and the managers of the firm.

Proper risk-return management means that A.the firm should take as few risks as possible. B.the firm must determine an appropriate trade-off between risk and return. C.the firm should earn the highest return possible. D.the firm should value future profits more highly than current profits

B.the firm must determine an appropriate trade-off between risk and return.

The sales volume needed to achieve a desired profit can be calculated as

Break even is when contribution margin equals fixed cost. Contribution margin covers fixed cost + profit

Which of the following assumptions is *not* a weakness of break-even analysis?

Break-even analysis assumes that some numbers are always constant (like fixed costs), but in reality some of those number are not always constant. This is a weakness of of break-even analysis, the question is asking which of the following is NOT a weakness...choose the answer that does not have the word constant in it (constant = weakness)

Long-term interest rates are generally higher than short-term interest rate due to which of the following factors except?

Collateral for loan

In examining the asset utilization ratio, the primary emphasis is the firm's ability to

Correct answer: Asset Utilization ratio to employ its resources Do Not Answer: liquidity ratio, debt ratio, profitability ratio

The primary disadvantage of accrual accounting is that? A) it does not match revenues and expenses in the period in which they are incurred. B) it does not appropriately measure accounting profit. C) it does not recognize accounts receivable. D) it does not adequately show the actual cash flow position of the firm

D) it does not adequately show the actual cash flow position of the firm

Opposite question found online:Which of the following questions does break-even analysis attempt to address? A. How much do changes in volume effect costs and profits? B. At what point does the firm break even? C. What is the most efficient level of fixed assets to employ? D. All of these

D. All of these

Question from online: In the past, the study of finance has included A.mergers and acquisitions. B.raising capital. C.bankruptcy. D.all of these.

D.all of these.

The degree of financial leverage is computed as:

DFL = percent change in EPS/percent change in EBIT

How do you calculate operating profit

EBIT. When calculating operating cost you will NOT include taxes or interest

Which of the following is *not* congruent with the primary goal of financial management?

Good financial management is focused on long term so the answer choice that says "short-term" is NOT congruent with the primary goal of financial management -a more comprehensive goal is to maximize shareholder's wealth

What is the difference between the cumulative cash balance and the required cash balance.

Required: Cash I need is it a cash disbursement? NO Is it a beginning cash flow? NO Is it net cash flow? NO Is it a *financing need*? YES

Define partnership

Similar to sole proprietorship except there are two or more owners. Carries unlimited liability for the owners -Each partner liable for the financial commitments of the other

The primary objective of the Maximization of Shareholder Wealth is a concept of what?

The goal of shareholders' wealth maximization implies that the firm will attempt to achieve the highest possible total valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision.

Which of the following sections are included in the statement of cash flows?

Three primary sections of the statement of cash flows: -Cash flows from operating activities -Cash flows from investing activities -Cash flows from financing activities

The Sarbanes-Oxley Act was passed in an effort to do what?

To establishing auditing standards within companies, controlling the quality of audits, and setting rules and standards for the independence of the auditors. It also puts great responsibility on the internal audit committee of each publicly traded company to enforce compliance with the act. The major focus of the act is to make sure that publicly traded corporations accurately present their assets, liabilities, and equity and income on their financial statements.

Which of the following statements about the percent-of-sales method of financial forecasting is true? a. It is the least commonly used method of financial forecasting. b. It is a much more precise method of financial forecasting than a cash budget would be. c. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues. d. It projects all liabilities as a fixed percentage of sales.

c. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues.

Name three current assets

cash, inventory and A/R

Which of the following statements is NOT true? a. Ratio analysis allows the comparison of different firms at the same point in time. b. Ratio analysis is used by creditors to determine the financial strength of a company. c. Ratio analysis may be used to evaluate the performance of a firm over time. d. Ratio analysis overcomes the problem of comparing firms using different accounting practices. e. all of the above are true.

d. Ratio analysis overcomes the problem of comparing firms using different accounting practices.

All of the following are debt utilization ratios except: a. debt to total assets b. times interest earned c. fixed charge coverage d. debt to sales -return on equity

d. debt to sales -return on equity

Which of the following would probably be LEAST suitable for use with the percentage-of-sales method of financial forecasting? a. wages payable b. accounts payable c. accounts receivable d. plant and equipment e. all of the above are equally suitable for use with the percentage-of-sales method Does not

d. plant and equipment

The concept of financial leverage involves the use of ______ to magnify returns at high levels of earning.

debt

Ratio analysis can be useful for which of the following reasons EXCEPT?

estimating is NOT used in ratio analysis

How do you calculate gross profit margin

gross margin/sales

Rapid rate of growth in sales may require all, but one of the following:

if there is rapid rate of growth: -pay lower (decrease) dividends -borrow more money to buy assets, hire employees to support the sales increase -more strict with credit customers (less lenient) -sales forecast will be more strict SO the answer would be for example to *increase dividends* because that does not relate to rapid rate of growth

The term structure of interest rates is influenced by all of the following except:

influenced by: inflation? Yes Inflation? Yes federal reserve? Yes *Tax laws/rates? NO*

What are long term assets

intangible assets (patents, logos, customer list)

Which type of financing has a higher interest rate

long term

What did the primary goal of financial management used to be and what were it's drawbacks

maximization of profit. -Drawbacks: •A change in profit may also represent a change in risk •Profit Maximization fails to consider the timing and risk of the benefits •Impossible task of accurately measuring the key variable "profit"

How do you calculate gross profit

sales minus cost of sales

temporary current assets should be financed by:

short term financing

in general, the smaller the portion of a firm's sales are on credit, will you have to borrow more money or not?

smaller portion of credit sales= less borrowing The more sales on credit the higher amount company needs to borrow because there is less cash available.

The primary objective of the Maximization of *Stakeholders* Wealth is a concept in which...

takes into account the need of all *stakeholders* is of importance (not shareholders)

Increasing average collection period means it is taking longer or shorter to be paid.

takes longer to collect money

What is ratio analysis used for

to analyze and compare (NOT to estimate)

In the past, the study of finance has included which of the following?

•At the turn of the 20th Century, finance emerged as a field separate from economics •By 1930s, financial practices revolved around such topics as: -Preservation of capital -Maintenance of liquidity -Reorganization of financially troubled corporations -Bankruptcy process *"Don't choose personnel or financing."*