1. A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing activities, or financing activities. A. TRUE
2. A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this transaction affect the company’s balance sheet? A. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.
3. A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company’s balance sheet? A. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000
4. A company’s price-to-earnings ratio is always equal to one minus its earnings yield. A. false
5. A company’s return on assets will always equal or exceed its profit margin. A. False
6. A decline in the Net Property, Plant, and Equipment account between year-end 2020 and year-end 2021 is a clear indication that fixed assets were sold during 2021. A. FALSE
7. A drawback of forecasting using spreadsheets is that typical spreadsheet programs are not equipped to deal with the circularity involving interest expense and debt. A. false
8. A firm’s operating cycle is never longer than its cash conversion cycle. A. false
9. A reduction in long-term debt is a use of cash. A. TRUE
10. A times-interest-earned ratio of 4.3 indicates that the firm A. has EBIT equal to 4.3 times its interest expense.
11. Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method. A. FALSE
12. Across companies, ROA and financial leverage tend to be inversely related. A. true
13. All else equal, a firm would prefer to have a lower gross margin. A. False
14. All else equal, an increase in a company’s asset turnover will decrease its ROE. A. false
15. All else equal, decreasing the assumed collection period in a financial forecast will decrease external funding required. A. true
16. All else equal, increasing the assumed payables period in a financial forecast will decrease external funding required. A. true
17. All else equal, increasing the projected amount of accounts receivable in a financial forecast will increase external funding required. A. true
18. An advantage of the percent-of-sales approach to financial forecasting is that effective forecasts can be prepared without consulting historical financial statements. A. false
19. An annual financial forecast for 2022 showing no external funding required assures a company that no cash shortfalls are likely to occur anytime during 2022. A. false
20. An annual financial forecast for 2022 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2022. A. false
21. An increase in cash and cash equivalents should appear as a use of cash on the sources and uses statement. A. TRUE
22. An inventory turnover ratio of 10 means that, on average, items are held in inventory for 10 days. A. False
23. Assume that Sequoia’s collection period is 60 days. What would be its cash receipts in May? What would be its accounts receivable balance at the end of May? A. 60 Days
Cash receipts: 472,000
AR Balance: 597,000
24. Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm’s ability to repay its loan? A. Times-burden-covered ratio
25. At the end of 2021, Stacky Corporation had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2021, Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2021? A. $3,000,000
26. Breakers Bay Incorporation has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. The firm’s cost per unit and selling price per unit also remained constant. All else equal, how will this accomplishment be reflected in the firm’s financial ratios? A. Increase in the inventory turnover ratio
27. Cash budgets are based on cash accounting rather than accrual accounting. A. true
28. Cash flow forecasts are less informative than pro forma financial statements. A. true
29. Current liabilities are defined as liabilities with a maturity of less than one year. A. TRUE
30. decreases both taxes and net income. A. Depreciation expense
31. Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal? A. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.
32. Estimates of external funding required based on cash flow forecasts are usually higher than estimates based on pro forma financial statements. A. false
33. Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding. A. true
34. If a firm increases its accounts payable period, all else equal, it increases its cash conversion cycle. A. False
35. In comparison to industry averages, Okra Corporation has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corporation? A. Inventory level is too high
37. JM Case Incorporation has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case’s price per share? A. Stock price per share = $5 million ÷ 500,000 shares = $10 per share $10.00
38. JM Case Incorporation has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case’s book value per share? A. Book value per share = $1,750,000 ÷ 500,000 shares = $3.50 per share
39. JM Case Incorporation has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20% of its shares in the stock market at the current market price, what will be the book value of equity after the repurchase if all else remains the same? (Assume there are no taxes, no transactions costs, and that investors do not change their perceptions of the firm.) A. JM Case will pay $10 per share for the 100,000 shares (= 0.20 × 500,000) it repurchases. This reduces the book value by $1 million (= $10 × 100,000). Assuming all else remains the same, the new book value should be $750,000.
40. JM Case Incorporation has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20% of its shares in the stock market at the current market price, what will be the market value of equity after the repurchase if all else remains the same? (Assume there are no taxes, no transactions costs, and that investors do not change their perceptions of the firm.) A. Since nothing else has changed, the market value should fall by exactly the amount of the cash paid in the transaction, $1 million (= $10 × 100,000). The new market value will be $4 million. Another way to think about this is to note that repurchase of the shares will reduce cash by $1 million (or increase liabilities by the same amount if financed with debt), and thus the firm is worth $1 million less to the owners after the repurchase, or $4 million. After repurchasing 100,000 shares (= 0.20 × 500,000), 400,000 shares will be outstanding, and the price per share remains $10 ($4 million ÷ 400,000).
41. Klamath Corporation has asset turnover of 3.5, a profit margin of 5.2%, and a current ratio of 0.5. What is Klamath Corporation’s return on equity? A. Insufficient information is provided to answer the question.
42. Now assume that Sequoia’s collection period is 45 days. What would be its cash receipts in May? What would be its accounts receivable balance at the end of May? A. 45 days
Cash Receipts: 534,500
AR Balance: 431,500
43. On a common-size balance sheet, all accounts are expressed as a percentage of A. total assets.
44. One advantage of ROE is that it is a risk-adjusted measure of performance. A. False
45. Playtime Products earned net income of $500,000 last year. The firm increased its accounts receivable during the year by $220,000. The book value of its assets declined by the year’s depreciation charge, which was $140,000, and the market value of its assets increased by $50,000. Based only on this information, how much cash did Playtime Products generate during the year? Please ignore taxes for this problem. A. Playtime Products generated $420,000 of cash during the year. The $500,000 net income ignores the fact that accounts receivable rose $220,000, a use of cash. It also treats $140,000 depreciation as an expense, whereas it is a noncash charge. The $50,000 increase in market value of assets adds to the value of the business, but is not a cash flow. Summary:
46. Please refer to the financial data for Link, Incorporation above. What is the current ratio for Link at the end of 2021? A. total current assets/total current liabilities
249,801 ÷ 90,558 = 2.76
47. Please refer to the financial data for Link, Incorporation above. Which of the following statements best describes how the Link’s short-term liquidity changed from 2020 to 2021? A. Link’s short-term liquidity has deteriorated considerably, but from a high initial base.
48. Please refer to the financial data for Link, Incorporation above. What is Link’s collection period in days, based on sales, for 2021? A. Collection period = Accounts recievables/ (sales/365)
21,655/(274,219/365)= 28.8
49. Please refer to the financial data for Link, Incorporation above. What is Link’s inventory turnover for 2021? A. 5.2 = cost of goods sold/inventory
50. Please refer to the financial data for Link, Incorporation above. What is Link’s payables period in days, based on cost of goods sold, for 2021? A. Average payment period = 365 * Accounts payable / Cost of goods sold
365x (13,962/209,628) = 24.3
51. Please refer to the financial data for Link, Incorporation above. What is Link’s days’ sales in cash for 2021? A. (Cash + Marketable securities) / (sales/365) = 249.7
52. Please refer to the financial data for Link, Incorporation above. What is Link’s gross margin for 2021? A. Gross Margin = (sales – COGS)/ sales
53. Please refer to the financial data for Link, Incorporation above. What is Link’s profit margin for 2021? A. NPM = Net Income/Sales
54. Please refer to the financial information for Foodtek, Incorporation above. During 2021, how much cash (in millions of dollars) did Foodtek collect from sales? A. 324
55. Please refer to the financial information for Foodtek, Incorporation above. During 2021, what was the cost of merchandise (in millions of dollars) produced by Foodtek? A. Inventoryeop=Inventorybop+Production−Cost of goods sold
56. Please refer to the financial information for Foodtek, Incorporation above. Assuming the company neither sold nor salvaged any assets during the year, what were Foodtek’s capital expenditures (in millions of dollars) during 2021? A. Net fixed assetseop=Net fixed assetsbop+Capital expenditures−Depreciation
57. Please refer to the financial information for Foodtek, Incorporation above. Assuming that there were no financing cash flows during 2021 and basing your answer solely on the information provided, what were Foodtek’s cash flows from operations (in millions of dollars) for 2021? A. None of the options are correct.
58. Please refer to the income statement for VGA Associates below. Assuming that cost of goods sold are variable and operating expenses are fixed, what was VGA Associates’ breakeven sales volume in 2021? A. Break-even sales = operating expenses / gross profit margin %
60. Please refer to the income statement for VGA Associates below. If VGA had a principal repayment of $8,000 due in 2021, what was its times-burden-covered ratio in 2021? A. Operating income / (interest expense + short term principle payments/ (1 – tax rate))
61. Primavera Holdings has a profit margin of 25%, an asset turnover of 0.5, and financial leverage (assets to equity) of 1.5. Primavera has $20 billion in assets, half of which is in cash and marketable securities. Assume that Primavera earns a 3% after-tax return on cash and securities. What would Primavera’s return on equity be if it paid out 90% of its cash and marketable securities as a dividend to shareholders? A. Between 40% and 60%
62. Ptarmigan Travelers had sales of $420,000 in 2020 and $480,000 in 2021. The firm’s current asset accounts remained constant. Given this information, which one of the following statements about the change in Ptarmigan’s ratios between 2020 and 2021 must be true? A. None of the answers are correct
63. Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as A. asset turnover and control ratios.
64. Return on assets can be calculated as profit margin times asset turnover. A. true
65. Scenario analysis involves changing one input to a financial forecast, whereas sensitivity analysis involves changing multiple inputs. A. false
66. Suppose an acquiring firm pays $100 million for a target firm, and the target’s assets have a book value of $60 million and an estimated replacement value of $70 million. What amount would be allocated to the acquiring firm’s goodwill account? A. Goodwill = purchase price – fair value of assets 100 -70 = 30
67. The accrual principle requires that revenue not be recognized until payment from a sale is received. A. FALSE
68. The book value of an asset A. could be greater than, equal to, or less than its market value.
69. The cost of equity is usually reported on the income statement right below interest expense. A. FALSE
70. The forecast for retained earnings on the year-end 2022 balance sheet can be determined as retained earnings on the year-end 2021 balance sheet plus projected 2022 after-tax earnings less projected 2022 dividends. A. true
71. The most common approach to developing pro forma financial statements is called the A. percent of sales method
72. The most popular yardstick of financial performance among investors and senior managers is the A. return on equity.
73. The percent-of-sales approach to financial forecasting works well for forecasting the income statement but is not useful for forecasting the balance sheet. A. False
74. The sources and uses of cash over a stated period of time are reflected in the A. cash flow statement
75. The times-interest-earned ratio always equals or exceeds the times-burden-covered ratio. A. true
76. The United States was one of the first countries to adopt International Financial Reporting Standards. A. FALSE
77. To estimate H-32 Corporation’s external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, H-32’s retained earnings were $158,000. The controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and H-32 will pay $10,400 in dividends. What are the estimated retained earnings at the end of next year? A. 171,000
78. What is the length of the cash conversion cycle for a firm with $3 million in inventory, $1.5 million in accounts payable, a collection period of 40 days, and an annual cost of goods sold of $18 million? A. Cash conversion cycle = Days inventory outstanding + Collection period − Payables period
79. When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the straight-line method. A. TRUE
80. Which of the following formulas describes the calculation of cash flow from operating activities? A. Net income + Noncash charges − Net increase in current assets + Net increase in current liabilities
81. Which of the following is a reason why a company’s market value of equity can differ from its book value of equity? A. The value of some assets on the balance sheet reflect historical cost, adjusted for depreciation.
82. Which of the following is NOT a major category on the cash flow statement? A. Cash flows from selling activities
83. Which of the following is NOT a typical reason for differences between profits and cash flow? A. Goodwill
84. Which of the following ratios are measures of a firm’s liquidity?
Fixed asset turnover ratio
Current ratio
Debt-equity ratio
Acid test A. 2 and 4 only
85. Which of the following statements concerning a firm’s cash flows and profits is false? A. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.
86. Which of the following statements concerning the cash flow-production cycle is true? A. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm’s working capital cycle.
87. Which of the following statements regarding common-size financial statements is true? A. On a common-size balance sheet, the sum of all items under liabilities and equity is 100%.
88. Which of the following statements regarding the practice of reporting adjusted earnings is true? A. U.S. corporations are required to explain differences between adjusted earnings and official earnings.
89. Which of the following would NOT be considered a use of cash? A. depreciation
90. Which of these ratios, or levers of performance, are the determinants of ROE?
Profit margin
Financial leverage
Times interest earned
Asset turnover A. 1, 2, and 4 only
91. Which one of the following is a source of cash? A. decrease in accounts receivable
92. Which one of the following is a source of cash? A. increase in accounts payable
93. Which one of the following is a use of cash? A. increase in inventory
94. Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets? A. balance sheet
95. Which one of the following is the financial statement that summarizes a firm’s revenue and expenses over a period of time? A. Income statement
96. Which one of the following is the financial statement that summarizes changes in the company’s cash balance over a period of time? A. cash flow statement
97. Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets? A. Asset turnover ratio
98. Which one of the following statements does NOT describe a problem with using ROE as a performance measure? A. ROE is a forward-looking measure that ignores past performance.
99. Which one of the following statements is correct? A. The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio.
100. You are estimating your company’s external financing needs for the next year. Your first-pass pro forma financial statements showed a large financing deficit for next year. Which of the following changes to your company’s operating plan would reduce the financing deficit if incorporated in revised pro forma financial statements? A. Reduce the collection period
101. You can construct a sources and uses statement for 2021 if you have a company’s year-end balance sheets for 2021 and 2022. A. FALSE
102. ZZZ Corporation’s income statement shows a provision for income taxes of $65 million in 2021. At the end of 2020, ZZZ’s balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2021, their balance sheet shows income taxes payable of $13 million and deferred taxes of $17 million. What were ZZZ’s taxes paid in 2021? A. Taxes paid = Provision for income taxes − Increase in taxes payable − Increase in deferred taxes = 65 − 1 + 1 = $65 million
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