Ch2 Test Bank + Answers – Financial Statement And Cash Flow - Corporate Finance Asia Pacific 2e Complete Test Bank by Chris Adam. DOCX document preview.
Chapter 2 – Financial statement and cash flow analysis
MULTIPLE CHOICE
1. Which of the following items cannot be found on an income statement?
a. | Depreciation expense |
b. | Cost of goods sold |
c. | Sales |
d. | Inventory |
REF: 2.1 Financial Statements NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
2. If you only knew a company’s total assets and total debt, which item could you easily calculate?
a. | Sales |
b. | Depreciation |
c. | Total equity |
d. | Inventory |
REF: 2.1 Financial Statements NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
3. How do you calculate a company’s operating cash flow?
a. | EBIT – Taxes + Depreciation |
b. | EBIT – Taxes – Depreciation |
c. | EBIT + Taxes + Depreciation |
d. | EBIT – Sales |
REF: 2.2 Cash Flow Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
4. If all other things are constant, which of the following represents a cash outflow?
a. | The company sells a machine. |
b. | The company acquires inventory. |
c. | The company receives a bank loan. |
d. | The company increases accounts payable. |
REF: 2.2 Cash Flow Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
5. Which of the following is a liquidity ratio?
a. | Quick ratio |
b. | P/E ratio |
c. | Inventory turnover |
d. | Equity multiplier |
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
Use the following information to answer questions 6 to 16.
Bavarian Sausage, Inc. recently posted the following balance sheet and income statement.
Balance sheet | ||||
Cash | $ 100 000 | Accounts payable | $235 000 | |
Accounts receivable | 125 000 | Notes payable | 125 000 | |
Inventories | 225 000 | Long-term debt | 115 000 | |
Net plant and equipment | 525 000 | Ordinary share | 350 000 | |
Retained earnings | 150 000 | |||
Total assets | $975 000 | Total liabilities and shareholders’ equity | $975 000 | |
Income statement | ||
Sales | $500 000 | |
Cost of goods sold | 215 000 | |
Depreciation | 65 000 | |
Earnings before interest and taxes | 220 000 | |
Interest expense | 35 000 | |
Net profit before taxes | 185 000 | |
Taxes (@ 40%) | 74 000 | |
Net income | $111 000 | |
6. What is Bavarian Sausage, Inc.’s operating cash flow?
a. | $394 000 |
b. | $197 000 |
c. | $212 000 |
d. | $359 000 |
220(1 – 0.4) + 65 = 197
PTS: 1 DIF: E
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
7. What is Bavarian Sausage, Inc.’s quick ratio?
a. | 0.5645 |
b. | 1.2903 |
c. | 1.9565 |
d. | 0.6250 |
(Current assets – Inventory)/Current liabilities
225/360 = 0.625
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
8. What is Bavarian Sausage, Inc.’s average collection period?
a. | 91.25 days |
b. | 4.20 days |
c. | 122.56 days |
d. | 86.90 days |
Avg. collection period = Accounts receivable/Avg. daily sales
Avg. daily sales = Sales/365 ==> 500/365 = 1.3698Avg. collection period = 125/1.3698 = 91.25
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
9. Bavarian Sausage, Inc. has 100 000 shares of ordinary shares outstanding, but no preferred shares. The current price of Bavarian’s ordinary shares is $15. What is the company’s P/E-ratio?
a. | 119.00 |
b. | 13.51 |
c. | 11.90 |
d. | 12.60 |
EPS = Earnings available for ordinary shareholders/No. of shares outstanding
EPS = 111 000/100 000 = 1.11
P/E = Price/EPS
P/E = 15/1.11 = 13.51
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
10. What is Bavarian Sausage, Inc.’s net profit margin?
a. | 40% |
b. | 47% |
c. | 22% |
d. | 24% |
Net profit margin = Net income/Sales = 111/500 = 0.22
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
11. What is Bavarian Sausage, Inc.’s debt-to-equity ratio?
a. | 0.23 |
b. | 0.52 |
c. | 1.25 |
d. | 0.85 |
Long-term debt/Equity = 115/(350 + 150) = 0.23
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
12. Calculate Bavarian Sausage, Inc.’s return on assets.
a. | 25.20% |
b. | 16.35% |
c. | 13.62% |
d. | 11.38% |
ROA = Net income/Total assets = 111/975 = 0.1138
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
13. If Bavarian Sausage, Inc. has 100 000 shares outstanding, what is the book value per share?
a. | $5.00 |
b. | $9.25 |
c. | $3.50 |
d. | $1.50 |
Book value/Share = (350 + 150)/100 = 5.00
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
14. Calculate Bavarian Sausage, Inc.’s inventory turnover.
a. | 1.05 |
b. | 0.96 |
c. | 0.76 |
d. | 1.51 |
Inventory turnover = Cost of goods sold/Inventory = 215/225 = 0.96
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
15. Calculate Bavarian Sausage, Inc.’s return on equity.
a. | 24.00% |
b. | 13.62% |
c. | 15.74% |
d. | 22.20% |
111/(150 + 350) = 0.222
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
16. What is Bavarian Sausage, Inc.’s times interest earned ratio?
a. | 3.60 |
b. | 7.00 |
c. | 15.00 |
d. | 6.28 |
Time interest earned = EBIT/Interest = 220/35 = 6.28
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
17. If a company’s net profit margin is 3% and its total asset turnover is 5.5, what is its ROA?
a. | 17.50% |
b. | 1.43% |
c. | 70.00% |
d. | 16.50% |
ROA = Net profit margin × Inventory turnover
ROA = 0.03 × 5.5 = 0.1650
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
18. You have the following information about a company: total asset = $350 000; ordinary share equity = $175 000; and ROE = 14.5%. What are the company’s earnings available for ordinary shareholders?
a. | $43 750 |
b. | $21 875 |
c. | $25 375 |
d. | $47 632 |
0.145 × 175 000 = 25 375
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
Use the following tax table to answer questions 19 to 23.
Tax table
Taxable income over | Not over | Tax rate |
$ 0 | $ 50 000 | 15% |
50 000 | 75 000 | 25% |
75 000 | 100 000 | 34% |
100 000 | 335 000 | 39% |
335 000 | 10 000 000 | 34% |
10 000 000 | 15 000 000 | 35% |
15 000 000 | 18 333 333 | 38% |
18 333 333 | ............... | 35% |
19. Refer to the tax table. First Watch, Inc. has a pre-tax income of $12 755 250. What is the company’s average tax rate?
a. | 25% |
b. | 35% |
c. | 39% |
d. | 34% |
REF: 2.4 Corporate Taxes NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
20. Refer to the tax table. First Watch, Inc. has a pre-tax income of $12 755 250. What is the company’s tax liability?
a. | $1 276 785 |
b. | $1 390 571 |
c. | $1 464 548 |
d. | $4 364 337.50 |
Tax on excess over 335 000 ===> (12 755 250 –10 000 000) × 0.35 = 964 337.50
Tax = 964 337.50 + 3 286 100 + 91 650 + 8500 + 6250 + 7500 = 1 276 785
PTS: 1 DIF: E
REF: 2.4 Corporate Taxes NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
21. Refer to the tax table. Bavarian Sausage, Inc. has a pre-tax income of $315 000. What is the company’s tax liability?
a. | $126 750 |
b. | $110 000 |
c. | $106 100 |
d. | $325 000 |
Tax on excess of 100 000 ===> (315 000 – 100 000) × 0.39 = 83 850
Tax = 83 850 + 8500 + 6250 + 7500 = 106 100
PTS: 1 DIF: E
REF: 2.4 Corporate Taxes NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
22. Refer to the tax table. Bavarian Sausage, Inc. has a pretax income of $315 000. What is the company’s marginal tax rate?
a. | 34% |
b. | 15% |
c. | 39% |
d. | 25% |
REF: 2.4 Corporate Taxes NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
23. Refer to the tax table. Bavarian Sausage, Inc. has a pretax income of $315 000. What is the company’s average tax rate?
a. | 39.00% |
b. | 29.55% |
c. | 33.68% |
d. | 33.85% |
Tax on excess of 100 000 ===> (325 000 – 100 000) × 0.39 = 83 850
Tax = 83 850 + 8500 + 6250 + 7500 = 106 100
Average tax rate = 106/315 = 0.3368
PTS: 1 DIF: E
REF: 2.4 Corporate Taxes NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
24. A company has an average collection period of 52 days and accounts receivables of $300 000. What are the company’s annual sales?
a. | $2 234 756 |
b. | $1 754 808 |
c. | $1 543 823 |
d. | $2 105 769 |
Annual sales/365 = Avg. daily sales
Accounts receivable = Avg. collection period × Avg. daily sales
300 000 = 52 × (Annual sales/365)
Annual sales = 2 105 769
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
25. Your company has an average collection period of 30 days and accounts receivables of $345 000. What are the company’s annual sales?
a. | $12 600 000 |
b. | $1 754 808 |
c. | $2 874 375 |
d. | $3 832 500 |
Annual sales/365 = Avg. daily sales
Accounts receivable = Avg. collection period × Avg. daily sales
345 000 = 30 × (Annual sales/365)
Annual sales = 3 832 500
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
26. A company has a total asset turnover of 4 and sales of $800 000. What are the company’s total assets?
a. | $1 000 000 |
b. | $250 000 |
c. | $750 000 |
d. | $200 000 |
800/4 = 200
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
27. You have the following information about a company: quick ratio = 0.80; inventory = $130 000; and current assets = $380 000. What is the company’s current ratio?
a. | 0.85 |
b. | 1.22 |
c. | 2.56 |
d. | 1.28 |
Current ratio = Current assets/Current liabilities
Quick ratio = (Current assets – Inventory)/Current liabilities
0.80 = (380 – 130/Current liabilities
Current liabilities = 312
Current ratio = 380/312 = 1.22
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
28. In a given year a company decreased its inventory by $250 000, increased its accounts receivable by $50 000 and increased its accounts payable by $100 000. What is the net change of the company’s cash?
a. | $400 000 |
b. | $300 000 |
c. | $200 000 |
d. | $100 000 |
250 + 50 + 100 = 400
PTS: 1 DIF: M
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
29. In a given year a company decreased its inventory by $250 000, purchased $350 000 worth of fixed assets and took on a new $500 000 loan. What is the net change of the company’s cash flows as a result of these transactions?
a. | $100 000 |
b. | –$100 000 |
c. | $400 000 |
d. | –$400 000 |
250 – 350 + 500 = 400
PTS: 1 DIF: M
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
30. Given the following information, calculate the company’s current assets.
Current assets: | ? |
Current liabilities: | $ 50 000 |
Net fixed assets: | $100 000 |
Long-term debt | $100 000 |
Total equity: | $180 000 |
a. | $330 000 |
b. | $230 000 |
c. | $150 000 |
d. | $50 000 |
Total liabilities and shareholder’s equity = Current liabilities + Long-term debt + Total equity
Total liabilities and shareholder’s equity = 50 + 100 + 180 = 330
Total assets = Total liabilities and shareholder’s equity
Total assets = Current assets + Net fixed assets
Total assets = Current assets + 100
330 = Current assets + 100
Current assets = 230
PTS: 1 DIF: E
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
31. Given the following information, calculate the company’s long-term debt.
Current assets: | $125 000 |
Current liabilities: | $ 85 000 |
Net fixed assets: | $250 000 |
Total equity: | $200 000 |
a. | $375 000 |
b. | $50 000 |
c. | $285 000 |
d. | $90 000 |
Total assets = 125 + 250 = 375
Total assets = Total liabilities + Equity
Total liabilities = Current liabilities + Long-term debt
375 = 85 + Long-term debt + 200
Long-term debt = 90
PTS: 1 DIF: E
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
32. Financial professionals prefer to focus on an accounting approach that focuses on:
a. | governmental accounting methods |
b. | current and prospective cash flows |
c. | economically based accruals |
d. | international accrual accounting standards |
REF: Introduction NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
33. The balance sheet entry that represents the cumulative total of the earnings that a company has reinvested since its inception is:
a. | ordinary shares |
b. | paid-in-capital |
c. | par value |
d. | retained earnings |
REF: 2.1 Financial Statements NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
34. Company X had sales of $120, with a cost of goods sold equal to 25% of sales. In addition, X had total other operating expenses of $50 with an interest expense of $20. If X pays a flat 40% of its pre-tax income in income taxes, what is X’s net income?
a. | $20 |
b. | $27 |
c. | $12 |
d. | $10 |
(120 – 30 – 50 – 20) × 0.6 = 12
PTS: 1 DIF: M
REF: 2.1 Financial Statements NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
35. If you are looking to review a company’s sources and uses of cash flows over the year, the easiest place to find that information is:
a. | the income statement |
b. | the statement of retained earnings |
c. | the statement of cash flows |
d. | the balance sheet |
REF: 2.1 Financial Statements NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
36. In order to identify the amount of funds that a company borrowed during the preceding year, which section is the best source within the statement of cash flows?
a. | Operating flows |
b. | Investment flows |
c. | Financing flows |
d. | Total net cash flows |
REF: 2.2 Cash Flow Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
37. If you start with earnings before interest and taxes and then subtract a company’s tax expense while adding back the amount of depreciation expense for the company during the year, the resulting figure is called:
a. | free cash flow |
b. | operating cash flow |
c. | net cash flow |
d. | gross cash flow |
REF: 2.2 Cash Flow Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
38. Emma Corp. had earnings before interest and taxes of $500 000 and had a depreciation expense of $200 000 this last year. If the company was subject to an average tax rate of 30%, what was Emma’s operating cash flow for the year? If you need to, assume that Emma’s interest expense was zero for the year.
a. | $175 000 |
b. | $82 500 |
c. | $25 000 |
d. | It lost money. |
(75 000 × 0.7) + (100 000 × 0.3) = 82 500
PTS: 1 DIF: H
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
39. Edison Bagels had an operating cash flow equal to $850 for 2012. If its earnings before interest and taxes (EBIT) were $1000 while its tax bill was $300, what was Edison’s depreciation expense for the year?
a. | $150 |
b. | $550 |
c. | $1550 |
d. | There is not enough information to calculate this. |
OCF = EBIT – Taxes + Depreciation
850 = 1000 – 300 + Depreciation
150 = Depreciation
PTS: 1 DIF: H
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
40. When calculating a company’s free cash flow from earnings before interest and taxes, we must add back depreciation, amortisation and depletion expense and allowances because:
a. | they are non-cash expenditures |
b. | the accounting method for reporting such expenses may be different from that reported to the tax authority |
c. | they approximate the value of fixed asset purchases during the year |
d. | they are unrelated to the amount of taxes paid during the year |
REF: 2.2 Cash Flow Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
Use the following information to answer questions 41 to 43.
Cold Weather Sports, Inc. (CWS) just completed its 2012 fiscal year. During the year, CWS had sales of $10 000 and total expenses (no interest expenses were incurred) of $6000. Assume that CWS pays 30% of its EBIT in taxes and that depreciation expense of $1200 is included in the total expense number listed above. A list of some balance sheet items for CWS for end of fiscal year 2011 and 2012 is as below.
2016 | |
Current assets | $1000 |
Net long-term assets | 5000 |
Accounts payable | 600 |
Accrued expenses | 500 |
Short-term debt | 2000 |
Long-term debt | 3000 |
2017 | |
Current assets | $1200 |
Net long-term assets | 5600 |
Accounts payable | 800 |
Accrued expenses | 600 |
Short-term debt | 2100 |
Long-term debt | 3200 |
No fixed assets were disposed of during the year.
41. What is Cold Weather Sports’ operating cash flow for 2017?
a. | $2400 |
b. | $2800 |
c. | $4000 |
d. | $6000 |
10 000 sales – 6000 expense = 4000 EBIT
4000 EBIT – 1200 tax + 1200 depreciation expense = 4000
PTS: 1 DIF: M
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
42. What was the dollar amount of fixed assets purchased during the year for Cold Weather Sports?
a. | $600 |
b. | $1200 |
c. | $1800 |
d. | $2000 |
5600 – 5000 + 1200 = 1800
PTS: 1 DIF: M
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
43. What is the amount of free cash flow generated by Cold Weather Sports in 2017?
a. | $100 |
b. | $2100 |
c. | $2300 |
d. | $2500 |
Change in current assets = 1200 – 1000 = 200
Change in accounts payable = 800 – 600 = 200
Change in accrued expenses = 600 – 500 = 100
OCF = 10 000 sales – 6000 expense – 1200 tax + 1200 depreciation expense = 4000
Change in fixed assets = 5600 – 5000 + 1200
FCF = OCF – Change in fixed assets – (Change in current assets – Change in accounts payable – Change in accrued expenses)
FCF = 4000 – 1800 – (200 – 200 – 100) = 2300
PTS: 1 DIF: H
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
44. If it is assumed that the current asset portion of a company’s balance sheet remains the same, the effect of an increase in a company’s accounts payable during the year is:
a. | an outflow of cash |
b. | an inflow of cash |
c. | neither an inflow nor an outflow of cash |
d. | a decrease in the equity of the company |
REF: 2.2 Cash Flow Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
45. Roxy Corp. has total current liabilities of $22 000 and an inventory of $7000. If its current ratio is 1.2, then what is Roxy’s quick ratio?
a. | 0.88 |
b. | 0.75 |
c. | 0.64 |
d. | 0.36 |
1.2 = Current assets/22 000
Current assets = 26 400
Quick ratio = (Current assets – Inventory)/Current liabilities
Quick ratio = (26 4000 – 7000)/22 000 = 2.0
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
46. Granny’s Jug Herbal Shop has total current liabilities of $2000 and an inventory of $1000. If its current ratio is 2.5, then what is its quick ratio?
a. | 2.0 |
b. | 2.5 |
c. | 3.0 |
d. | 3.5 |
2.5 = Current assets/2000 ===> Current assets = 5000
Quick ratio = (Current assets – Inventory)/Current liabilities = (5000 – 1000)/2000 = 2.0
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
47. BadBanna Co. has an average age of inventory equal to 25 days. If its end of year inventory level is $8500, then what does that imply for the cost of goods sold during the year? (Round to the nearest dollar.)
a. | $582 |
b. | $4964 |
c. | $21 250 |
d. | $124 100 |
25 = (365/Inventory turnover)
Inventory turnover = 14.6
Inventory turnover = (Cost of goods sold/ Inventory)
14.6 = (Cost of goods sold/8500)
Cost of goods sold = 21 250
PTS: 1 DIF: H
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
48. Emma Corp. had credit sales of $300 000 last year and on average had $25 000 in its accounts receivable during the year. What is its average collection period?
a. | About 30 days |
b. | About 12 days |
c. | About 1 day |
d. | About 90 days |
300 000/365 = 821.92 average sales per day
Average collection period = 25 000/821.92 = 30.41 days
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
49. The company that you work for had credit sales of $3 500 000 last year and on average had $33 000 in its accounts receivable during the year. What is its average collection period?
a. | 3 days |
b. | 3.44 days |
c. | 3.5 days |
d. | 3.6 days |
3 500 000/365 = 9589.04 average sales per day
Average collection period = 33 000/9589.04 = 3.44 days
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
50. In general, the more debt a company uses in relation to its total assets:
a. | the less risk there is to the company’s equity holders |
b. | the less financial leverage it uses |
c. | the greater the financial leverage it uses |
d. | the greater extent to which it uses equity |
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
51. Devil Inc. has total liabilities equal to $3500 and total assets equal to $5000. What is Devil’s asset-to-equity ratio?
a. | 1.43 |
b. | 2.33 |
c. | 3.33 |
d. | 4.33 |
Total assets = 5000 ===> Equity = 5000 – 3500 = 1500
Asset-to-equity = 5000/1500 = 3.33
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
52. Roxy Corp has an operating profit of $15 000 produced from $12 000 in sales. If Roxy has no interest expense and currently pays 35% of its operating profits in taxes, what is Roxy’s net profit margin?
a. | 81.25% |
b. | 12.50% |
c. | 1.25% |
d. | 65.00% |
[15 000 – (0.35 × 15 000)]/12 000 = 81.25%
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
Use the following information to answer questions 53 and 54.
Import, Inc. has earnings available for ordinary shareholders of $700 produced by sales of $10 000. It also has total assets of $20 000 and an assets to equity ratio of 2.5.
53. What is Import, Inc.’s return on assets?
a. | 14% |
b. | 7% |
c. | 3.5% |
d. | 5% |
ROA = (Earnings avail for ordinary shareholders/Sales) × (Sales/Total assets)
ROA = (700/10 000) × (10 000/20 000) = 0.035
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
54. What is Import, Inc.’s return on ordinary equity?
a. | 7.0% |
b. | 8.75% |
c. | 17.5% |
d. | 19.00% |
ROE = (Earnings avail. for ordinary shareholders/Sales) × (Sales/Total assets) × (Total assets/Equity)
ROE = (700/10 000) × (10 000/20 000) × (20 000/8000) = 0.0875
PTS: 1 DIF: H
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
55. FactorMax is currently selling for $75 per share. If it is selling at a P/E ratio of 50, calculate FactorMax’s recent earnings per share.
a. | $0.15 |
b. | $0.67 |
c. | $1.50 |
d. | $1.33 |
P/E = Market price per share/EPS
50 = 75/EPS ===> EPS = 1.50
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
56. What is the financial ratio that measures the price per share divided by earnings per share?
a. | Return on assets |
b. | Return on equity |
c. | Debt-to-equity ratio |
d. | Price/earnings ratio |
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
Use the following information to answer questions 57 to 63.
Stone Cold, Inc.
Balance Sheet: 31/12/17 | ||
Assets | 2017 | 2016 |
6Cash and marketable securities | 10 | 80 |
Accounts receivable | 375 | 315 |
Inventories | 615 | 415 |
Total current assets | 1000 | 810 |
Net plant and equipment | 1000 | 870 |
TOTAL ASSETS | 2000 | 1680 |
Liabilities and Equity | 2017 | 2016 |
Accounts payable | 60 | 40 |
Notes payable | 140 | 60 |
Accruals | 110 | 130 |
Total current liabilities | 310 | 230 |
Long-term bonds | 754 | 580 |
TOTAL DEBT | 1064 | 810 |
Preferred share | 40 | 40 |
Ordinary share | 130 | 130 |
Retained earnings | 766 | 700 |
TOTAL ORDINARY EQUITY | 896 | 830 |
TOTAL LIABILITIES AND EQUITY | 2000 | 1680 |
Income Statement: 31/12/17 | 2017 | 2016 |
Net sales | 3200 | 2850 |
Operating costs (excludes depreciation and amortisation) | 2700 | 2497 |
EBITDA | 500 | 353 |
Depreciation | 100 | 90 |
Amortisation | 0 | 0 |
Depreciation and amortisation | 100 | 90 |
EBIT | 400 | 263 |
Less interest | 88 | 60 |
EBT | 312 | 203 |
Taxes (40%) | 124.8 | 81.2 |
NET INCOME (before preferred dividends) | 187.2 | 121.8 |
Preferred dividends | 4 | 4 |
NET INCOME | 183.2 | 117.8 |
Ordinary dividends | 117 | 53 |
Addition to retained earnings | 66.2 | 64.8 |
57. For 2017, what was Stone Cold, Inc.’s return on assets?
a. | 9.16% |
b. | 12.40% |
c. | 15.60% |
d. | 20.00% |
ROA = 183.2/2000 = 0.0916
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
58. For 2017, what was Stone Cold, Inc.’s return on ordinary equity?
a. | 9.36% |
b. | 12.40% |
c. | 20.44% |
d. | 20.90% |
Return on ordinary equity = 183.2/896 = 0.2044
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
59. For 2017, what was Stone Cold, Inc.’s debt-to-equity ratio?
a. | 0.81 |
b. | 0.84 |
c. | 0.98 |
d. | 1.19 |
Debt-to-equity ratio = 754/(896 + 40) = 0.81
PTS: 1 DIF: H
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
60. For 2017, what was Stone Cold, Inc.’s average collection period?
a. | 6.84 days |
b. | 8.77 days |
c. | 42.77 days |
d. | 51.22 days |
= 3200/365 = 8.767
= 375/8.767 = 42.77
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
61. What was Stone Cold, Inc.’s total asset turnover for 2017?
a. | 0.80 |
b. | 1.20 |
c. | 1.40 |
d. | 1.60 |
Total asset turnover = 3200/2000 = 1.60
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
62. What was Stone Cold, Inc.’s times interest earned ratio for 2017?
a. | 2.13 |
b. | 2.77 |
c. | 3.55 |
d. | 4.55 |
Times interest earned ratio = 400/88 = 4.55
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
63. What was the free cash flow in 2017 for Stone Cold, Inc.?
a. | –$55.20 |
b. | –$44.80 |
c. | $145.20 |
d. | $215.00 |
FCF = OCF – ΔFA – (ΔCA – ΔA/P – Δaccruals)
OCF = EBIT – Taxes + Depreciation
OCF = $400 – $124.8 + $100 = $375.20
ΔFA = Change in gross fixed assets = Change in net fixed assets + Depreciation
ΔFA = ($1000 – $870) + $100 = $230
ΔCA = Change in current assets = $1000 – $810 = $190
ΔA/P = Change in A/P = $60 – $40 – $20
Δaccruals = Change in accruals = $110 – $130 = –$20
FCF = OCF – ΔFA – (ΔCA – ΔA/P – Δaccruals)
FCF = $375.20 – $230 – ($190 – $20 – $20)
FCF = $375.20 – $230 – $190
FCF = –$44.80
PTS: 1 DIF: H
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
64. Consider the following financial information for Classic City Ice-Cream Corporation:
2017 financial data | |
Net income | $ 50 000 |
Total assets | $300 000 |
Total shareholder equity | $200 000 |
Net sales | $100 000 |
What is the total asset turnover for the company in 2017?
a. | 16.67% |
b. | 25.00% |
c. | 33.33% |
d. | 40.00% |
Total asset turnover = 100 000/300 000=0.3333
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
65. Consider the following financial information for Classic City Ice Cream Corporation:
2017 financial data | |
Net income | $ ??? ??? |
Total assets | $250 000 |
Total shareholder equity | $200 000 |
Net sales | $100 000 |
If the return on equity is 20%, what was net income for 2017?
a. | $25 000 |
b. | $40 000 |
c. | $50 000 |
d. | $65 000 |
0.20 = x / 200 000
x = 40 000
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
Use the following information to answer questions 66 and 67.
Titans Electronics reports the following data for the past year:
EBIT | $1 000 000 | No. of ordinary shares | 400 000 |
Net income | $480 000 | Total dividends paid | $120 000 |
Interest paid | $200 000 | Current assets | $80 000 |
Total assets | $6 000 000 | Current liabilities | $60 000 |
Market price of ordinary equity | $20 |
66. What is the current P/E ratio for the Titans?
a. | 8.00 |
b. | 10.00 |
c. | 15.50 |
d. | 16.67 |
20/(480 000/400 000) = 16.67
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
67. Titans Electronics is applying for a new line of credit from their banking partner. To issue the credit, the bank requires the following cutoffs for certain financial ratios: times interest earned ratio of 4.25; current ratio of 1.50; and ROA of 5%. What is a likely response from the bank to the application?
a. | The bank will have concerns, because the times interest earned ratio does not meet requirements. |
b. | The bank will have concerns, because the current ratio does not meet requirements. |
c. | The bank will have concerns, because the ROA is not high enough. |
d. | The bank will have concerns, as two or more of the requirements are not met. |
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
68. What ratio measures the ability of a company to satisfy its short-term obligations as they come due?
a. | Activity ratio |
b. | Times interest earned ratio |
c. | Current ratio |
d. | Inventory turnover ratio |
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
69. The asset-to-equity ratio for a company is 1.5, and the company has total assets of $3 000 000. Last year, net income for the company was $250 000, and the earnings per share for the company was reported as $0.50. What is the current book value per share for the company?
a. | $2 |
b. | $4 |
c. | $6 |
d. | $8 |
1.5 = 3 000 000/x, if x = Shareholder equity = 2 000 000
EPS = 0.50 = 250 000/y; y = No. of shares = 500 000
Book value per share = $2 000 000/500 000 = $4
PTS: 1 DIF: M
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
70. Which financial ratio measures the effectiveness of management in generating returns to ordinary shareholders with its available assets?
a. | Gross profit margin |
b. | Return on equity |
c. | Return on assets |
d. | Current ratio |
REF: 2.1 Financial Statements NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
71. Return on assets is equal to return on equity when:
a. | the current ratio of a company equals 1 |
b. | a company issues equal amounts of long-term debt and ordinary shares |
c. | a company issues no dividends for a given period |
d. | a company only issues equity to finance its borrowing |
REF: 2.1 Financial Statements NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
72. Consider the following working capital information for Full House Corporation:
Year | 2016 | 2017 |
Accounts receivable | $ 0 | $100 |
Inventory | $100 | $100 |
Accounts payable | $ 0 | $ 50 |
What was the effect on free cash flow for the company this past year?
a. | increase of $100 |
b. | increase of $150 |
c. | decrease of $50 |
d. | decrease of $100 |
Change in net working capital = Change in current assets – Change in current liabilities
Change in current assets = (200 – 100) = 100
Change in current liabilities = (50 – 0) = 50
Change in net working capital = +50
Effect on free cash flow = –50
PTS: 1 DIF: H
REF: 2.2 Cash Flow Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
73. A company reports net income of $500 000 for 2017. The most recent balance sheet for the reports retained earnings of $2 000 000. The company will pay out 25% of net income as dividends. What will be the new balance for retained earnings?
a. | $1 875 000 |
b. | $2 125 000 |
c. | $2 375 000 |
d. | $2 500 000 |
Addition to retained earnings = 500 000 × (1 – 0.25) = 375 000
New retained earnings = 2 000 000 + 375 000
PTS: 1 DIF: M
REF: 2.1 Financial Statements NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
74. Emmacorp reports a current ratio of 2 and a quick ratio of 1.4. The company has total current assets of $8000. If Emmacorp reports cost of goods sold at $30 000 for the given year, what is Emmacorp’s inventory turnover?
a. | 12.5 |
b. | 15.5 |
c. | 21.4 |
d. | 5.2 |
Current ratio = 2 = Current assets/Current liabilities
Current ratio = 2 = 8000/Current liabilities, Current liabilities = 4000
Quick ratio = 1.4 = (8000 – Inventory)/4000
Inventory = 2400
Inventory turnover = 30 000/2400 = 12.5
PTS: 1 DIF: H
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
75. The average age of the inventory for a company is 10 days. If the current dollar amount of inventory is $1000, what is a good estimate for the cost of goods sold over the last year?
a. | $16 500 |
b. | $26 500 |
c. | $32 500 |
d. | $36 500 |
10 = 365/Inventory turn, Inventory turn = 36.5
36.5 = Cost of goods sold/Inventory = Cost of goods sold/1000
Cost of goods sold = 36 500
PTS: 1 DIF: H
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
76. Which of the following statements is true?
a. | Financial professionals prefer the accrual-based approach, because it focuses more attention on cash inflows and outflows. |
b. | Financial managers do not need to make any adjustments to financial statements for decision making. |
c. | Financial managers must convert cash-based financial statements to accrual-based ones before they can begin analysing a company. |
d. | Financial professionals prefer the cash-based approach, because it focuses more attention on cash inflows and outflows. |
REF: 2.1 Financial Statements NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
77. The statement of retained earnings:
a. | reconciles the net income earned during a given period and any cash dividends paid with the change in retained earnings between the start and end of that period |
b. | shows a snapshot of the company’s financial position at a specific point in time |
c. | reconciles the net income earned during a given period and any cash dividends and interest on debt paid with the change in retained earnings between the start and end of that period |
d. | shows the impact of treasury shares on the company’s ordinary equity |
REF: 2.1 Financial Statements NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
78. Which of the following is not a classification of a company’s cash flows?
a. | Investment flows |
b. | Financial flows |
c. | Operating flows |
d. | Capital flows |
REF: 2.2 Cash Flow Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
79. Which of the following represents an inflow of cash?
a. | A decrease in any liability |
b. | Dividends paid |
c. | Repurchase or retirement of shares |
d. | An increase in any asset |
e. | A decrease in any asset |
REF: 2.2 Cash Flow Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
80. How is depreciation accounted for on the statement of cash flows?
a. | Depreciation is irrelevant for cash flow purposes and has no place on the statement of cash flows. |
b. | Depreciation expense is included in the operating activities section of the statement. |
c. | Depreciation is deducted to determine net income, so there is no need to include it on the statement. |
d. | Depreciation is recorded on a separate statement of cash flows. |
REF: 2.2 Cash Flow Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
81. Which of the following statements is true?
a. | Net working capital is a company’s current assets divided by its current liabilities. |
b. | Net working capital is a company’s current assets minus its current liabilities. |
c. | Net working capital measures a company’s ability to meet its short-term obligations. |
d. | Net working capital measures a company’s ability to meet its long-term obligations. |
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
82. Use the following information about a company to determine the company’s solvency ratio.
Total net worth: $180 000
Cash surplus: $15 000
Income after taxes: 105 000
Total assets: $320 000
a. | 14.29% |
b. | 50% |
c. | 56.25% |
d. | 3% |
180 000/320 000 = 56.25%
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
SHORT ANSWER
1. What are the four types of financial statements?
PTS: 1 DIF: E
REF: 2.1 Financial Statements
2. Define activity ratios and indicate why analysts use such ratios.
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis
3. Explain how companies calculate capital gains.
PTS: 1 DIF: E
REF: 2.4 Corporate Taxes
4. What is free cash flow?
PTS: 1 DIF: E
REF: 2.2 Cash Flow Analysis
5. What financial statements are required in DuPont analysis?
PTS: 1 DIF: E
REF: 2.3 Assessing Financial Performance Using Ratio Analysis