Financial Analysis Exam 2 Questions

2. Which of the following transactions would increase the net cash flow from operating activities? A.The collection of an account receivable from a customer B.The issuance of capital stock for cash at a price above par C.Cather purchase of a delivery truck by issuing a note payable D. The sale of equipment for cash at a gain

Answer: A

32. Which of the following financial ratios is NOT used in determining a company's return on equity with the extended DuPont model? A.Total asset turnover B. Total debt ratio C. Operating profit margin D. Interest expense rate

Answer: B

13.Which of the following would not be reported on a statement of cash flows? A.Common stock was sold at a price more than its par value. B.Bonds were issued at price less than their par or stated value. C.Cash dividends were declared. D. Land was purchased by paying $10,000 down and issuing a mortgage note. E.Equipment that had no book value was sold for $1,000.

Answer 22: C

22.In calculating total cash flow to a firm, which of the following is not included? A.Cash dividends B. Operating cash flow C.Additions to net working capital D.Capital spending

Answer: A

14. In the statement of cash flows prepared under the indirect method, depreciation expense is treated as an adjustment to net income because it ______ A.reduces net income but does not involve an outflow of cash. B. generally represents a small part of operating expenses. C. is an inflow of cash used to replace aging plant assets

Answer: A Depreciation is a non-cash expense that reduces net income.

24. Generally, a high inventory turnover is a sign of ______. A.efficient inventory management B. an increase in prices C.fewer sales than planned

Answer: A Generally, a high inventory turnover is a sign of efficient inventory management and profit. The faster the company sells its inventory, the lower the company's investment in inventory. However, in some cases, a high inventory turnover could mean understocking of inventory and lost orders, a decrease in the cost of inventory, or a shortage of available products.

How much cash did Pelton pay for inventory purchases in Year 2? A.$54,000 B. $60,000 C. $66,000

Answer: A $54,000. The correct computation is $60,000 accrual basis cost of goods sold minus $2,000 decrease in inventory minus $4,000 increase in accounts payable equals $54,000 cash paid for inventory purchases.

15.Uses of cash do not include ______. A.dividend payments B. increases in accounts receivable C.increases in prepayments D.increases in taxes payable E.investments in inventory

Answer: D

29. EBIT = 100, Depreciation = 40, Interest = 20, Dividends = 10, calculate the Times Interest Earned (TIE) ratio. A.5.0 B. 7.0 C. 14.0

Answer: A TIE = 100/20 = 5

9. Which one of the following is a financing activity? A.Writing off an account receivable as uncollectible B.Selling debt investments C.Repaying a bank loan D. Selling equipment at a loss

Answer: C Both obtaining and repaying loans are considered financing activities.

7. Decision-makers often compare net income to net cash flows from operating activities. Which of the following accounts would not be included in both amounts? A.Interest expense that has been paid B. Interest revenue that has been received C. Dividends declared and paid D. D. Dividend revenue that has been received

Answer: C Dividends declared and paid are financing activities that do not affect net income or net cash flows from operating activities.

33.If a firm's profit margin increases by 8%, the debt-to-equity ratio increases from 35% to 55%, and asset turnover falls by 20%, the effect on ROE is ______. A. +1.6% B. +0.24% C. -0.8%

Answer: C ROE = net income/equity = (net income/sales) x (sales/assets) x (assets/equity) Assets = equity + debt let us divide all by equity then Assets/ equity = 1 + (debt/ equity) ROE= (profit margin) x (asset turnover) x (1+debt/equity) Original assets/equity = 1 + 0.35 = 1.35 and changed to be assets/equity = 1.55. Therefore, the change in ROE equals (1+8%) x (1-20%) x 1.55/1.35 = 0.992. Thus, ROE falls by 0.8%... this is (1- 0.992) ... ROE became 0.992 ROE

16. Net cash provided by operating activities was $45,000. Net cash provided by investing activities was $50,000. The beginning and ending cash and cash equivalent balance was $12,000 and $14,000, respectively. What was the cash flow provided (or used) in financing activities? A.$93.000 B.$97,000 C.$107,000 D.$87,000

Answer: A $93,000 Change (increase) in cash and cash equivalents = $2,000. $45,000 + $50,000 - X = $2,000. $95,000 - X = $2,000. X = $93,000, the net cash outflow from financing activities.

4. Successful companies usually generate the largest percentage of their cash inflows (sources) in the long run from ______ A. operating activities B. investing activities C. gains on the sale of plant assets

Answer: A Companies that are financed with operating cash flows are said to be internally financed. They have less need of debt and equity financing and do not need to sell assets to meet cash needs.

28.To compute the days to sell the average inventory, the numerator is 365 days and the denominator is which of the following? A.Inventory turnover rate B. Average inventory C. Net sales

Answer: A Days to sell the average inventory = 365/Inventory turnover rate. Inventory turnover rate = Cost of goods sold/Average inventory. The ratio of the days to sell the average inventory indicates (in days) how quickly inventory converts to cash.

31.The quick ratio ______ A.is a measure of short-term debt-paying ability? b.calculation includes inventory. c. is used to evaluate profitability.

Answer: A The quick ratio is used to evaluate liquidity. Only current assets that can be quickly converted to cash are included in the quick ratio, so inventory is not included in the calculation.

1. Which of the following is not an operating activity? A.Receiving dividends B. Paying interest C. Collecting accounts receivable D. Purchasing insurance policies of more than one year E. Dividend payments

Answer: E

26. Which of the following is calculated by a formula that uses net sales as the denominator? A.Operating expense ratio B.Gross profit rate C.Return on assets D.A and B

Answer: A and B

3. Which of the following statement(s) is (are) true? A.Transactions involving sales and the cost of goods sold are summarized as operating activities. B.Since interest and dividend receipts are not related to operating activities, they are not shown as part of the net cash flow from operating activities on the statement of cash flows.

Answer: A operating activities are transactions entering the determination of net income, except for gains and losses relating to financing or investing activities. B is incorrect: while interest and dividend receipts are not related to operating activities, they do enter the determination of net income. Because of this, the FASB decided to classify the related cash flows as operating activities. Dividend payments are financing activities.

12.According to GAAP, available-for-sale investments should be included in ______ cash flow, dividends from such investments should be included in ______ cash flow, and interests from such investments should be included in ______ cash flow. A.operating, investing, investing B.investing, operating, operating C. investing, investing, investing

Answer: B

21. Free cash flow can be measured as ______. A.cash - current liabilities B.cash from operations - capital expenditure C.net income + depreciation expense

Answer: B

27.Which of the following is not a measure of profitability? A.Return on equity B.Interest coverage ratio C.Operating income D.Operating expense ratio E.Return on assets

Answer: B Return on equity is the rate of return earned on stockholders' equity in the business. It is a measure of profitability. Return on assets indicates the firm's return on all the capital employed.

23. Which of the following ratios evaluates the effectiveness with which a company uses its assets? Receivables Turnover: Interest Coverage A.Yes: Yes B. Yes: No C. No: No

Answer: B Since receivable turnover is equal to net credit sales divided by average net receivables, this ratio provides information related to how many times the company has been able to convert net receivables (assets) into cash during the period. Interest coverage, on the other hand, provides information about a firm's ability to generate a sufficient level of operating profits to cover interest expense on related debt obligations.

5. The three sections of the statement of cash flows are ______ . A. operating activities, marketing activities, and financing activities B. operating activities, investing activities, and financing activities C. design activities, production activities, and marketing activities

Answer: B The three sections of the statement of cash flows are operating activities, investing activities, and financing activities.

25. With an inventory turnover rate of 10.0, over how many days does inventory turnover? A. 10 days B. B. 36.5 days C. 365 days

Answer: B With an inventory turnover rate of 10.0, inventory turns over every 36.5 days. (365 days/10.0 turnover rate = 36.5 days)

17. If inventory increased by $5,000, accounts payable decreased by $8,000, and the cost of goods sold was $125,000, the cash payment for purchases was ______. A.$13,000 B.$122,000 C.$138,000 D.$112,000

Answer: C $138,000 Cash payments of purchases: $125,000 + $5,000 + $8,000 = $138,000

30. Receivable turnover measures ______. A.the time it takes to collect an average receivable B.the amount of the average receivable account C.how many times, on average, the accounts receivable was converted into cash during the period

Answer: C Receivable turnover is equal to net sales divided by average accounts receivable.

18. Talofa Company has the following information for its accounts payable: Balance at December 31, 2015, $40 Balance at December 31, 2016, $25,000. How should Talofa treat this information when preparing its statement of cash flows under the indirect approach for the year ending December 31, 2016? A. Add $15,000 to cash flow from financing activities B. Add $15,000 to cash flow from operations C. Subtract $15,000 from cash flow from operations

Answer: C Talofa paid cash to decrease the accounts payable balance by $15,000. This is a use of cash, and Talofa subtracts $15,000 from operating cash flow.

20. Oak Inc. conducted the following activities during 2016: Sold an investment in Mackey Motors for $35,000 (carrying amount of $ 33,000) Collected dividends of $1,200 on stock investments Acquired 2000 shares of stock in Fleming Co. for $26,000 Purchased a $50,000, five-year bank certificate of deposit. Received $3,750 in interest from the bank. What amount should be reported as "Net Cash Flows Used by Investing Activities" in Oak's 2016 Statement of Cash Flows? A.$37,250 B.$39,800 C.$41,000

Answer: C This consists of $35,000 from the sale of investments less $26,000 for the purchase of Fleming stock and $50,000 for the purchase of the bank CD.

6. Which of the following would not appear in the operating activities section of the statement of cash flows? A.Cash collected from customers for goods and services B. Cash payments to employees for salaries, wages, benefits, etc. C. Cash payments for income taxes D. Cash payments made on borrowings (repaying the amounts borrowed)

Answer: D Cash transactions relating to a firm's own debt or equity are classified as financing activities according to SFAS No. 95. Note that D does not include interest payments!

8. Which of the following activities is not a financing activity? A.Retiring preferred stock B. Issuing convertible bonds C. Paying cash dividends D. Borrowing money by issuing a long-term note payable E. Purchasing land with cash

Answer: E It's an investing activity.

19. A transaction in which an asset that cost $45,000, had a book value of $4,000, and was sold for $3,000 would appear on the statement of cash flows as an investing activity of $4,000. A. True B. False

Answer: False The investing activity is the amount of cash flows from the transaction. In this case, the net cash inflow was $3,000.

11. Since the payment of dividends is often made on a regular quarterly basis, dividends payments are classified as an operating cash flow. A, True B. False

Answer: False The payment of dividends is considered a financing activity, according to FASB No. 95.

10. Although short-term notes payable is classified as a current liability, cash transactions involving short-term notes are classified as financing activities on the statement of cash flows. A. True B.False

Answer: True According to FASB No. 95, cash transactions involving short-term notes relate to debt and, despite being a current liability, are classified as financing activities.