Financial Management Chapters 3 & 4

MARNI COMPANY Balance Sheet As of December 31 ASSETS Cash---------------------------------$50,000 Accounts receivable -------------------------100,000 Inventory -------------------------------------200,000 Net plant and equipment --------------------650,000 Total assets---------------------------------$1,000,000 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable----------------------------$100,000 Accrued expenses ----------------------------90,000 Long-term debt ------------------------------250,000 Common stock -------------------------------100,000 Paid-in capital ---------------------------------50,000 Retained earnings ----------------------------410,000 Total liabilities and stockholders' equity---$1,000,000 MARNI COMPANY Income Statement For the year ended December 31 Sales (all on credit)---------------------------$2,000,000 Cost of goods sold ----------------------------1,750,000 Gross profit-------------------------------------$250,000 Sales and administrative expenses --------------30,000 Fixed lease expenses -----------------------------10,000 Depreciation -------------------------------------60,000 Operating profit--------------------------------$150,000 Interest expense ---------------------------------25,000 Profit before taxes------------------------------$125,000 Taxes (40%) --------------------------------------50,000 Net income--------------------------------------$75,000 Refer to the tables above. Marni's current ratio is ____.

1.84:1

TEW COMPANY Balance Sheet As of December 31 ASSETS Cash---------------------------------------$20,000 Accounts receivable ---------------------80,000 Inventory ---------------------------------50,000 Net plant and equipment-------------- 250,000 Total assets------------------------------$400,000 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable--------------------------$40,000 Accrued expenses -------------------------60,000 Long-term debt---------------------------- 130,000 Common stock -----------------------------100,000 Paid-in capital------------------------------- 10,000 Retained earnings --------------------------60,000 Total liabilities and stockholders' equity----$400,000 TEW COMPANY Income Statement For the year ended December 31 Sales (all on credit)------------------------------$500,000 Cost of goods sold -----------------------------200,000 Gross profit------------------------------------$300,000 Sales and administrative expenses------------- 20,000 Fixed lease expenses-------------------------- 10,000 Depreciation--------------------------------------40,000 Operating profit-------------------------------$230,000 Interest expense ------------------------------20,000 Profit before taxes-----------------------------$210,000 Taxes (35%)-------------------------------------73,500 Net income-----------------------------------$136,500 Refer to the tables above. Times interest earned for Tew Company is ____.

11.5x

The Bubba Corp. had earnings before taxes of $400,000 and sales of $2,000,000. If it is in the 40% tax bracket, its after-tax profit margin is

12%

MEGAFRAME COMPUTER COMPANY Balance Sheet As of December 31 ASSETS Cash--------------------------------$50,000 Accounts receivable----------------------- 70,000 Inventory -----------------------------------110,000 Net plant and equipment---------------- 220,000 Total assets-------------------------------$450,000 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable-------------------------$70,000 Accrued expenses------------------------ 50,000 Long-term debt --------------------------130,000 Common stock ---------------------------70,000 Paid-in capital ---------------------------40,000 Retained earnings -----------------------90,000 Total liabilities and stockholders' equity--$450,000 MEGAFRAME COMPUTER COMPANY Income Statement For the year ended December 31 Sales (all on credit)----------------------$875,000 Cost of goods sold-------------------- 600,000 Gross profit-----------------------------$275,000 Sales and administrative expenses ------30,000 Depreciation ----------------------------55,000 Operating profit-----------------------$190,000 Interest expense -----------------------25,000 Profit before taxes-------------------$165,000 Taxes (30%) -----------------------------49,500 Net income-----------------------------$115,500 Refer to the tables above. Megaframe's quick ratio is ____.

1:1

In using a systems approach to financial planning, it is necessary to develop a

All of the options are true = pro forma income statement. production plan. cash budget.

During inflation, replacement cost accounting will

All of the options are true = increase the value of assets. reduce incomes. lower the debt-to-asset ratio.

Ratio analysis can be useful for

All of the options are true= comparison of ratios within a single industry. historical trend analysis within a firm. measuring the effects of debt or equity financing.

A firm's long-term assets = $100,000, total assets = $400,000, inventory = $50,000 and current liabilities = $200,000. What are the firm's current ratio and quick ratio?

Current ratio = 1.5; quick ratio = 1.25

When developing a pro forma income statement, which of the following steps are not used?

Establish a marketing projection

The _______ method of inventory costing is least likely to lead to inflation-induced profits.

LIFO

The key initial element in developing all pro forma statements is

a sales forecast

In order to estimate production requirements, we

add projected sales in units to desired ending inventory and subtract beginning inventory

Disinflation, as compared to inflation, would normally be good for investments in

bonds

Assuming proper accounting disclosure is used, a large extraordinary loss has what effect on the normal operating profits in the future?

it has no effect

In general, a firm with higher amounts of sales on cash has

lower needs to borrow

The difference between total receipts and total payments is referred to as

net cash flow

In a cash budget, the cumulative cash balance is equal to

net cash flow plus the beginning cash balance.

In the development of the pro forma financial statements, the last step in the process is the development of the

pro forma balance sheet

All of the following are common examples of possible distortion in reported income except: treatment of nonrecurring items. reporting of revenue. reporting of cash. inflation.

reporting of cash

In the percent-of-sales method, an increase in dividends

will increase required new funds.