FNAN 307 Exam 1
Does the P/E ratio revel more about a firms future performance or past performance
future because the firms stock price will rise and fall with investors expectations of the future
Many academics argue gthat a firm should not focus on maximizing return on euity and should instead focus on maximizing ____________ - net income - stock price - assets - sales
- stock price
A firms common-sized balance sheet presents all accounts on a balance sheet as a percentage of - equity - assets - cash - debt
- assets
Which of the following is not a technique used to alleviate the uncertainty of pro forma forecast - scenario analysis - sensitivity analysis - simulation - advanced estimation
- advanced estimation
Gross profit is equal to net sales less: - fixed costs - total costs - operating costs - cost of sales
- cost of sales
Can a firm with positive accounting profits become bankrupt? - yes-profits will always lead to bankruptcy - yes- if profits do not generate sufficient cash flow, the firm may not be able to repay debts, which could lead to bankruptcy. - no- it is impossible for profitable firms to become bankrupt because profits imply that the firm is successful - no- profits will always generate cash flow, and this cash can be used to repay the firm's debts
- yes- if profits do not generate sufficient cash flow, the firm may not be able to repay debts, which could lead to bankruptcy.
Which of the following is a weakness of using return on equity to measure financial performance? - A firms return on equity does not account for the risk incurred to generate the firms return on equity - return on equity focuses on the bool value of equity, while investors are more interested in the market value of equity - return on equity is a backwards- looking measurement and gives no indication about future performance - return on equity measure the efficiency with which a company employs owners capital
- A firms return on equity does not account for the risk incurred to generate the firms return on equity - return on equity focuses on the bool value of equity, while investors are more interested in the market value of equity - return on equity is a backwards- looking measurement and gives no indication about future performance
How are research and development (RAD) costs treated in the united states? - RAD costs are treated as assets and depreciated over their expected useful life to match revenues with expenses - RAD costs are expensed in the product incurred because there is too much uncertainty as to where or if RAD expenses will generate revenue
- RAD costs are expensed in the product incurred because there is too much uncertainty as to where or if RAD expenses will generate revenue
which of the following is not a weakness of management having a goal to maximize stock price - investors may not be able to accurately assess the future impact of a firms business strategy - a firms decision to use different accounting techniques such as different depreciation methods can impact stock price - it can be difficult for a firm's management to decide on a business strategy since the business strategy impact on stock price may be ambiguous - there are many factors that will impact a firms stock price such as the external economic environment that are outside of a managers control
- a firms decision to use different accounting techniques such as different depreciation methods can impact stock price
Which of the following is not a step of the planning process is most large companies - an operational cycle in which divisional managers translate qualitative strategic foals into concrete plans - a shareholder planning cycle in which shareholders vote on future corporate strategy - a budgeting cycle that essentially puts a prices tag on the operational plans - a strategic planning cycle in which senior management is most active
- a shareholder planning cycle in which shareholders vote on future corporate strategy
How are asset and liability accounts organized on a balance sheet? - accounts are listed in order of decreasing liquidity, where the most liquid items are listed first - accounts are listed in order of size, where largest accounts are listed first. - accounts are listed in alphabetical order to help the reader quickly fine specific accounts.
- accounts are listed in order of decreasing liquidity, where the most liquid items are listed first
How are asset and liability accounts organized on a balanced sheet? - accounts are listed in order of size, where the largest accounts are listed first - accounts are listed in alphabetical order to help the reader quickly find specific accounts - accounts are listed in order of decreasing liquidity, where the most liquid items are listed first
- accounts are listed in order of decreasing liquidity, where the most liquid items are listed first
after producing a pro forma balance sheet , a firm's management predicts that at the end of the year, assets will equal 200 million liabilities will equal 70 million and shareholders equity will equal 90. as a result of this forecast,management will need to - find a use for additional 40 million in cash that will be generated during the year -find a use for the additional 220 million in cash that will be generated during the year -acquire additional funding of 220 million during the year - acquire additional funding at 40 million during the year
- acquire additional funding at 40 million during the year
After producing a pro farma balance sheet a firms management predicts that at the end of the year assets wil equal 200 million liabilities will equal 70 million and shareholders equity will equal 90. As a result of this forecast management will need to - find a use for the additional 40 million in cash that will begenerated during the year - find a use for the additional 220 million in cash that will be generated during the year - acquire additional funding of 40 million during the year - acquire additional funding of 220 million during the year
- acquire additional funding of 40 million during the year
Which of the following is not a technique used to allocate the uncertainty of pro forma forecast - simulation - sensitivity analysis - scenario analysis - advanced estimation
- advanced estimation
As the planning cycle for a large company moves form broad strategy to implementation, the tools of financial forecasting - become less important - become more important - are equally important
- become more important
The return on equity is a measure of the efficiency to which a company employs owners __________ - capital - debt - net income - ideas
- capital
Days sales in cash is equal to: - cash/total sales - cash and marketable securities/ sales per day - cash and marketable securities/total sales - cash/ sales per day
- cash and marketable securities/ sales per day
A ______________ is a listing of all anticipated sources and uses of cash by the company over the forecast period - pro forma balance sheet - cash flow forecast - proforma income statement - statement of cash flows
- cash flow forecast
In a _______________ external funding required is defined as the difference between forecasted sources of cash and forecasted uses of cash - pro forma income statement - cash flow statement - cash flow forecast - pro forma balance sheet
- cash flow forecast
Gross profit is equal to net sales less: - total cost - operating costs - fixed cost - cost of sales
- cost of sales
The payables period is equal to accounts payable divided by what account - credit purchases per day - annual credit purchases - annual cost of goods sold - cost of goods sold per day
- credit purchases per day
Assuming the amount of credit sales are known, a firms collection period is equal to a firms accounts receivable divided by ___________ - total credit sales - credit sales per day - total sales - total sales per day
- credit sales per day
Which of the following is not a principal component of the return on equity? - profit margin - current ratio - asset turnover - financial leverage
- current ratio
Which of the following is not a control ratio - inventory turnover - debt to equity ratio - days sales in cash - fixed asset turnover
- debt to equity ratio
A firms price to earnings ratio reveals how much money investors are willing to pay for one dollar of a firms - sales - debt - assets - earnings
- earnings
Inventory turnover is equal to a firms cost of goods sold dividend by the firms ___________ - average inventory - sales - total purchases - ending inventory
- ending inventory
When preparing pro forma forecasts, why is it difficult to estimate interest expense? - interest expense tends to vary proportionally to sales, which can be very difficult to forecast - external funding requited is need to calculate interest expense and interest expense is need to calculate external funding required - the amount of interest a company pays will not be fully known until the end of the forecast period - a company's interest expense for the year depends on the level of interest rates which can be very difficult to forecast.
- external funding requited is need to calculate interest expense and interest expense is need to calculate external funding required
true/false: there is a perfect positive correlation between profits and cash flows
- false
Which of the following is not a weakness of using a firms financial statements such as the balance sheet and income statement to make financial decisions? - assets on a balance sheet are typically listed at historical cost - the income statement does not account for the cost of equity - financial statements are only developed once per year - the income statement typically does not account for the unrealized gains in asset values
- financial statements are only developed once per year
After producing a pro forma balance sheet a firms management predicts that are the end of the year, assets will equal 150 million liabilities will equal 70 million and shareholders equity will equal 90 million. As a result of this forecast, management will need to: - find a use for the additional 10 million in cash that will be generate during the year - acquire additional funding of 10 million during the year -acquire additional funding of 170 million during the year - find a use for the additional 170 million in cash that will be generated during the year
- find a use for the additional 10 million in cash that will be generate during the year
Which of the following ratios does not measure financial leverage? - debt to assets ratio - debt to equity ratio - times interest earned - gross margin
- gross margin
Gross margin is equal to _____________ divided by sales - net profit - cost of goods sold - EBIT - gross profit
- gross profit
Which of the following is not a step in scenario analysis? - generate a new forecast for each of the scenarios - identify how changing one individual variable will impact the forecast - identify one or more events that might occur in a company - recalculate the variables used in the initial forecast based on the chosen scenario
- identify how changing one individual variable will impact the forecast
Which of the following is not true about the behavior of assets during a business downturn - If something goes wrong in business such as an unexpected drop in sales current assets can increase rapidly - current assets are often a source of cash during business downturns unlike fixed assets - in a business downturn fixed assets unlike current assets often become a source of cash
- in a business downturn fixed assets unlike current assets often become a source of cash
As sales increase total variable cost will
- increase
Which of the following are ways a company can use cash? - reducing an asset - increasing an asset - reducing a liability - increasing a liability
- increasing an asset - reducing a liability
The times burden covered ratio compared ratio compares a firms earnings (defined by earnings before interest and taxes) to the firms - total interest expense - total debt - interest and principle payments - principle payments
- interest and principle payments
The times interest earned rato measures tha amount of earnings a firm generates relative to the firms - principal payments - interest expense - total debt - interest expense sand principle payments
- interest expense
Which of the following is not an attraction of the cash flow statement? - it sheds light on firms solvency by highlighting the extent to which operations are generating or consuming cash - it uses the accrual principle to recognize revenue when the effort to generate the sale is substantially complete - it allows companies to reorganize their cash flows into new and revealing categories
- it uses the accrual principle to recognize revenue when the effort to generate the sale is substantially complete
A cash budget: - lists the projected assets that can be converted easily into cash and cash equivalents - lists the projected cash receipts and disbursements to forecast cash shortages or surpluses - lists all accounts on an income statement as a percentage of total sales - forecasts future net income by projecting all expenses based on projected sales
- lists the projected cash receipts and disbursements to forecast cash shortages or surpluses
which of the following is the least effective method of evaluating a firms financial ratio? - evaluate how a firm financial ratio change over time - use rules of thumb, or reasonable level a ratio - compare a firms financial ratio to the average ratios for the firms industry - look for the high values in ratio that should be maximized and low values in ratios that should be maximized
- look for the high values in ratio that should be maximized and low values in ratios that should be maximized
Return on equity is defined as - net income/shareholders equity - net income/retained earnings - sales/ retained earnings -sales/shareholders equity
- net income/shareholders equity
Return on euity is defined as: - net income/ retained earnings - sales/retained earnings - net income/shareholders equity - sales/ shareholders equity
- net income/shareholders equity
Why is return on equity (ROE) similar across different firms, regardless of industry - new firms will enter industries with a high ROE, which will decrease the average ROE in that industry - by law firms are limited in the amount of leverage they can take which limits the ROE a firm can earn - All firms will have a similar profit margin due to operating constraints - on average shareholders tend to allocate their capital equally across firms
- new firms will enter industries with a high ROE, which will decrease the average ROE in that industry
Should a financial manager maximize leverage? - no, because increasing leverage increases the risk of the firm - yes, but only to the extent that the bank will allow - yes, because increasing leverage will decrease the proportion of debt relative to equity - no, because leverage should always be avoided
- no, because increasing leverage increases the risk of the firm
Pro forma financial statements are applicable - until management decides they are irrelevant - until a new one is released - only for one year - only on the forecast date
- only on the forecast date
Return on assets measures how well a firm gerateds profits from the money procided by __________ - creditors - owners and creditors - neither owners or creditors - owners
- owners and creditors
Which of the following is not a component of a firms return on assets? - payable period - profit margin - asset turnover
- payable period
A firms ____________ measures how well it can covert sales into net income - asset turnover - profit margin - days sales in cash - return on equity
- profit margin
A firms _______________ measures how well it can covert salees into net income - profit margin - asset turnover - return on equity - days sales in cash
- profit margin
Holding other factors constant, return on equity will be increased by increasing which of the following ratios? - Inventory turnover - Payable period - profit margin - days sales in cash
- profit margin
A pro forma financial statement is a ____________ financial statement - percentage- based - modified - historical - projected
- projected
Which of the following variable is least likely to vary in proportion to sales - accounts receivable - accounts payable - property, plant, and equipment - inventory
- property, plant, and equipment
Which of the following is the most popular measure of financial performance - current ratio - return on assets - return on equity - profit margin
- return on equity
A firms common-size income statement presents all accounts on the income statement as a percentage of - taxes - sales - expenses - net income
- sales
In the percent on sales approach in forecasting which of the following forecast is the most crucial - current assets - sales - current liabilities - fixed assets
- sales
The asset turnover ratio measures the _________ generated per dollar of assets - net income - sales - cash - dividends
- sales
The asset turnover ratio measures the ___________ generated per dollar of assets - dividends - net income - sales - cash
- sales
a firms fixed asset turnover is equal to _______ divided by net property plant and equipment.
- sales
____________________ is the method used to alleviate the uncertainty surrounding a pro forma forecast where multiple assumptions are changed simultaneously in response to a particular economic event - economic analysis - simulation - sensitivity analysis - scenario analysis
- scenario analysis
Which of the following is not an advantage of sensitivity analysis? - sensitivity analysis allows management to see a range of possible outcomes - sensitivity analysis allows management to see how one event will impact multiple inputs - sensitivity analysis forces managers to focus their efforts on variables that have the biggest impact on the forecast
- sensitivity analysis allows management to see how one event will impact multiple inputs
a balance sheet is similar to a - snapshot since the balance sheet list the assets of the company and all claims against those assets at a specific point in time - video since the balance sheet lists all of the assets acquired and the resources used to acquire those assets over a specified period of time
- snapshot since the balance sheet list the assets of the company and all claims against those assets at a specific point in time
Which of the following assets are suject to "mark-to-market or fair value, accounting rules? - stock options -land - accounts payable - equipment
- stock options
Which method of depreciation will result in a uniform amount of depreciation over each year of an asset's useful life? - accelerated depreciation - straight- line deprecation
- straight- line deprecation
When will the accounting equation hold? - the accounting equation will only hold at the firm level but not for individual transactions - the accounting equation only provides a rough estimate of the firm. There is no exact relation between assets, liabilities, and shareholders equity - the accounting equation will hold for individual transactions as well as the firm as a whole - the accounting equation will hold for individual transactions but not for the firm as a whole.
- the accounting equation will hold for individual transactions as well as the firm as a whole
Which of the following is not a reason why the accounting measure of shareholders equity does not reflect the future earning capacity of the firm? - the accounting measure does not account for the debt of the firm - many assets and liabilities of the firm are not listed on the balance sheet - assets on the balance sheet are valued at historical cost
- the accounting measure does not account for the debt of the firm
Which of the following best describes depreciation - the act of continually reducing the accounting value of accounts receivable - the act of continually reducing the accounting value of fixed assets - the act of expensing the entire value of fixed assets immediately upon purchase - expensing inventory immediately after its sold
- the act of continually reducing the accounting value of fixed assets
Which of the following best describes depreciation? - the act of continually reducing the accounting value of accounts receivable -expensing inventory immediately after its sold - the act of expensing the entire value of fixed assets immediately upon purchase - the act of continually reducing the accounting value of fixed assets
- the act of continually reducing the accounting value of fixed assets
Financial executive are most often interested in which financial statement? - the balance sheet - the income statement
- the balance sheet
Which of the following is not a reason why a firms market value of equity is often different from its book value of equity? - the firms book value of equity will only be valid on the day the balance sheet is developed - the market value of equity reflects the exceptions that investors have of the future earnings of the firm, while the book value of equity does not - the book value of equity is largely transactions based, meaning assets are typically valued at historical cost
- the firms book value of equity will only be valid on the day the balance sheet is developed
Which of the following is not a weakness of using the income statement to measure cash flow? - the income statement does not include accruals, which are needed to math revenue with expenses - the income statement includes accruals that are not actual cash flows - the income statement only lists cash flows associated with the sale of goods or services during the accounting period
- the income statement does not include accruals, which are needed to math revenue with expenses
Which of the following best describes a firms operating, or working capital, cycle? - the movement of cash to fixed assets, to accounts receivables, and back to cash - the movement of cash to inventory, to accounts payable, and back to cash - the movement of cash to inventory, to accounts receivable, and back to cash - the movement of cash to accounts receivables, to inventory, and back to cash
- the movement of cash to inventory, to accounts receivable, and back to cash
When using the same assumptions the value for external financing requited using a cash budget will be - the same as it will be for a cash flow forecast or a pro forma forecast - higher than it will be for both cash flow forecasts and pro forma forecasts - higher than it will be for a cash flow forecast but lower than it will be for a pro forma forecast - lower than it will be for both cash flow forecasts and pro forma forecasts
- the same as it will be for a cash flow forecast or a pro forma forecast
The cash flow statement essentially rearranges the information from which other statement? - the income statement - the balance sheet - the sources and uses statement
- the sources and uses statement
A firm recorded a 10 million depreciation expense for the year. What impact will this have on the firms cash flow for the year? - this will have no effect on cash flow because depreciation is a non cash expense - this will have a negative impact on cash flow since depreciation is an expense - this will have a positive impact on cash flow since depreciation is an expense
- this will have a negative impact on cash flow since depreciation is an expense
Which of the following is not needed to calculate the annual amount of depreciation for a particular period? - the method of allocation or depreciation - the useful life of the asset - the salvage value of the asset - total assets
- total assets
an income statement is similar to -snapshot because it lists the cumulative revenues and expenses of a company at a specific point in time - video because it list the income and expenses of a company over a specific period of time
- video because it list the income and expenses of a company over a specific period of time
Cash budgets are typically prepared on a __________________ basis - weekly - annual - quarterly
- weekly
According to the accrual principle of accounting, revenue is recognized - at the end of the year - when the customer receives the product or service from the firm, even if it is unlikely that the customer will pay for the product or service. - when the effort required to generate the sale is substantially complete and there is a reasonable certainty that payment will be received - when cash has been collected from the sale
- when the effort required to generate the sale is substantially complete and there is a reasonable certainty that payment will be received
Are market value ratios superior to book value rations? - no, because market values are based on supply and demand, which can fluctuate greatly from one year to the next - yes, because market value ratios measure the true worth of creditors and owner steaks in a business -no, because book values represent historical values which is the most objective way to value debt and equity - yes, because market values are always higher than book values
- yes, because market value ratios measure the true worth of creditors and owner steaks in a business
a firm has million in current assets and 3 million in current liabilityies. its current ration is closets to? -.75 -.33 -2.33 -1.33
-1.33
At the end of 2018 a firms earnings and dividends were 39,000 and 11,000 respectively. IF the firm had a retained warnings balances of 149,000 at the end of 2017 calculate the firms retained earnings balanced at the end of 2018 -177,000 -138,000 -121,000 -188,000
-177,000
A firm has earning before intrest and taxes of 1000 total debt of 2000 intrest bearing debt of 1200 retained earnings of 800 and total equity of 1700. WHat is the firms return on invested capital if ot has a tax rate of 35% -22.41% -17.57% -34.48% -38.24%
-22.41%
____________________ is a method used to alleviate the uncertainty surrounding a pro forma forecast where probability distributions ate assigned to each input and computer software is used to create sn output based on the distributions - sensitivity analysis - scenario analysis - simulation - statistical analysis
-Simulation
True/ false: forms with high profit margins typically have low asset turnover ratios
-True
true/false: Net income records the extent to which net sales generated during the accounting period exceed expenses incurred in producing the sales
-True
Which of the following correctly describes the basic accounting equation?
-assets= liabilities+stockholders equity
What are the three broad categories on the cash flow statement? -cash from operating activities, cash from investing activities, and cash from financing activities - cash from the income statement, cash from investing activities, and cash from financing activities - cash from the income statement, cash from liabilities, and cash from assets
-cash from operating activities, cash from investing activities, and cash from financing activities
gross margin is equal to __________ divided byh sales - EBIT - cost of goods sold - net profit -gross profit
-gross profit
Property is an example of a (current/long-term) asset account because it typically takes (less/more) than one year to convert property into cash.
-long-term -more
Which of the following is the most important reason for producing pro forma forecast -to determine the need for future external funding - to make sure that the firms earnings are in line with with analyst estimates - to provide a difficult yet attainable target for the firms employees - to determine the amount of the executives bonus
-to determine the need for future external funding
True/False: most large U.S. companies keep one set of financial records for managing the company and reporting to shareholders and a second set of financial records for determining the firms tax bill
-true
When a company buys another company at a price above the book value, the excess is for _________
good will
