Deck 3: Cash Flows and Financial Analysis

Question 1

Accounting and finance each have significant responsibilities related to the firm's financial performance; however, the accountant's role is informational, while the financial analyst's role is critical and investigative. Therefore, we can say that:

A)the accountant's job stops at the presentation of information.
B)the analyst must rely on the accountant to assist in analyzing the financial statements because the accountant is more familiar with their content.
C)the financial analyst assesses the information presented in the accountant's financial statements to seek out problems and their ramifications for the firm.
D)financial analysts qualified to practice as CPAs may undertake both responsibilities and eliminate any overlap of similar tasks.

Answer 1

C

Question 2

The principal function of financial statements is to:

A)convey information to managers, investors, and creditors.
B)provide benchmark information for projecting the firm's future performance.
C)inform the firm's shareholders of its likely prospects for growth and cash flows.
D)All of the above

Answer 2

D

Question 3

The principal function of financial statements is to:

A)convey confidential information to the board of directors.
B)accurately project future cash flows of a company.
C)convey information to outside investors.
D)guarantee an accurate accounting record.

Answer 3

C

Question 4

​Which of the following would be classified as a use of cash?

A)An increase in depreciation.
B)A decrease in accounts receivable.
C)A decrease in accruals.
D)Both b & c
E)All of the above

Question 5

Which of the following activities will not impact the operating section of the Statement of Cash Flows?

A)Receipt of cash from a customer paying a bill
B)Payment of cash to a vendor
C)Payment of interest expense on outstanding bonds
D)Payment of dividends to stockholders
E)Neither c. or d. will impact the operating section.

Question 6

The difference between current assets and liabilities is defined as:

A)net assets.
B)current funds.
C)net working capital.
D)None of the above

Question 7

Changes to net working capital are categorized as:

A)cash flow from operating activities.
B)cash flow from investment activities.
C)cash flow from financing activities.
D)None of the above

Question 8

Which of the following activities will impact the operating section of the statement of cash flows?

A)Sale of stock
B)Payment of dividends
C)Purchase of fixed assets
D)Payment to a vendor

Question 9

Cash flow from operating activities is increased by:

A)depreciation and amortization.
B)a decrease in accounts receivable.
C)a decrease in inventory.
D)an increase in accounts payable.
E)All of the above

Question 10

Free cash flow:

A)includes investing cash flows as well as the financial cash flows.
B)assumes that a company needs a constant asset base.
C)assumes that the firm will remain competitive and continue growing.
D)always includes increases in net fixed assets and in long-term liabilities.

Question 11

Annual reports are in a sense, evaluations of management's performance but since they are prepared by management they are likely to:

A)exclude the details of management discussion and analysis.
B)portray the firm's past performance in a most favorable light.
C)give the shareholders the opportunity to objectively evaluate management's day-to-day performance during the past year.
D)exclude the details of the minority interests groups.

Question 12

A source of cash would be generated by which of the following?

A)An increase in accounts receivable
B)An increase in inventory
C)A decrease in accrued expenses
D)An increase in accounts payable

Question 13

With respect to the statement of cash flows:

A)increasing assets is always the predominant use of cash while borrowing is the predominant source of cash.
B)increases in assets are sources of cash and increases in liabilities are uses.
C)its most important function is to identify the principal sources and uses of cash.
D)All of the above

Question 14

A use of cash would be generated by which of the following?

A)An increase in accounts receivable
B)A decrease in inventory
C)An increase in accounts payable
D)An increase in accrued expenses

Question 15

The statement of cash flow is divided into the following sections:

A)operating activities and investing activities.
B)operating activities, financing activities, and equity activities.
C)operating activities; investing activities, and equity activities.
D)operating activities, financing activities; and investing activities.

Question 16

Cash beyond the firm's typical needs that is available for distribution to common shareholders is called "free cash flow" and consists of the following:

A)net cash flow of the firm.
B)net cash flow after payment of dividends.
C)net cash flow less certain cash reinvested to keep the business competitive.
D)net cash flow plus depreciation.

Question 17

Dividend payments are categorized as:

A)cash flow from operating activities.
B)cash flow from investment activities.
C)cash flow from financing activities.
D)All of the above

Question 18

Cash flow from operating activities is decreased by:

A)depreciation and amortization.
B)a decrease in accounts receivable.
C)a decrease in inventory.
D)a decrease in accounts payable.
E)All of the above

Question 19

Firms sometimes disguise the cost or layoffs and reorganizations that may be attributable to poor management as:

A)continuing operations.
B)unusual activities.
C)restructuring charges.
D)None of the above

Question 20

A DECREASE in Cash Flow from Operations could be caused by:

A)a decrease in land.
B)an increase in inventory.
C)a decrease in accruals.
D)Both b and c
E)All of the above

Question 21

Which of the following is a debt management ratio?

A)Fixed charge coverage
B)P/E ratio
C)Return on sales
D)Current ratio

Question 22

The usefulness of ratios is enhanced by comparisons. The most common comparisons are:

A)history, national performance measures, and budget.
B)history, competition, and budget.
C)history, stock market indexes, and competition.
D)competition, budget, and internal financing sources.

Question 23

_____ include average collection period and inventory turnover.

A)Liquidity ratios
B)Debt management ratios
C)Asset management ratios
D)Profitability ratios

Question 24

The quick ratio is the same as current ratio except it does not consider:

A)cash.
B)accounts receivable.
C)prepaid items.
D)inventories.

Question 25

Depreciation is considered in which area of the Statement of Cash Flows?

A)Operating activities
B)Investing activities
C)Financing activities
D)Income activities

Question 26

Holding all other variables constant, which of the following would increase return on equity? An increase in ____.

A)the tax rate
B)the equity ratio (equity/total assets)
C)total assets
D)total asset turnover

Question 27

A firm has decided to increase the time it takes to pay suppliers from 45 days to 55 days. The industry average is 30 days. Holding all other variables constant, which of the following statement(s)is/are true?

A)The firm is stretching payables
B)Current liabilities will increase
C)The current ratio will decrease
D)Both a & b
E)All of the above (a, b, and c)are correct.

Question 28

The ratio of EBIT to interest expenses is known as the:

A)quick-ratio.
B)debt-to-assets ratio.
C)debt-to-equity ratio.
D)times interest earned.
E)None of the above

Question 29

Common size income statements divide each account by:

A)revenues.
B)total assets.
C)net income.
D)None of the above

Question 30

Most financial ratios are formed from sets of financial statement figures. Which of the following ratios are not?

A)Cost ratio
B)Current ratio
C)P/E ratio
D)Market/book ratio
E)Both c and d

Question 31

Which of the following would cause a decrease in cash?

A)An increase in the Average Collection Period from 15 days to 30 days
B)Selling off fixed assets for more than book value
C)An increase in accrued salaries expense
D)Paying suppliers in 60 days versus 45 days

Question 32

A high average collection period may indicate:

A)management's willingness to quickly write-off questionable receivables.
B)customers are paying for purchases quickly.
C)a strict collection policy.
D)None of the above

Question 33

Ratios by themselves have some value, but not nearly as much as they have when compared with other similar figures. Which of the following comparisons are generally used by managers and analysts?

A)Historical
B)Competition
C)Budgeted
D)All of the above

Question 34

_____ give an indication of how investors feel about the company's financial future.

A)Liquidity ratios
B)Debt management ratios
C)Asset management ratios
D)Market value ratios

Question 35

An increase in the average collection period may suggest all of the following except:

A)easing of credit terms.
B)customers are not paying their bills on time.
C)sales have decreased.
D)firm could have a liquidity problem in the future.

Question 36

Under the DuPont system, the return on assets is equal to:

A)the product of the gross profit margin and inventory turnover.
B)the sum of the debt-equity ratio and the return on sales.
C)the product of the return on sales and total asset turnover.
D)the product of the return on sales, total asset turnover, and equity multiplier.
E)None of the above

Question 37

The _____ ratio is unusual in that, it is commonly stated as a proportion rather than as a decimal or a percentage.

A)times interest earned
B)debt to equity
C)return on assets
D)price/earnings

Question 38

Average values are most appropriate in ratio analysis when:

A)the ratio reflects an activity that goes on throughout the year.
B)the company is relatively stable.
C)the company is growing rapidly.
D)Both a & b
E)Both a & c

Question 39

Which of the following ratios would probably not be used to assess the profitability of a firm?

A)Return on stockholders' equity
B)Return on total assets
C)Times interest earned
D)a and c only

Question 40

Other things held constant, which of the following will DECREASE the current ratio, assuming an initial current ratio greater than 1.0?

A)Machinery is purchased using cash
B)Inventory is sold at cost for cash
C)Accounts payables are paid with cash
D)Both a & c
E)None of the above

Question 41

Find the debt ratio of a firm with total debt equal to $800,000 and net worth equal to $2,400,000.

A).33
B).50
C).75
D).25
E).67

Question 42

The Ragin Cajun had an operating income (EBIT)of $260,000 last year. The firm had $18,000 in depreciation expenses, $15,000 in interest expenses, and $60,000 in selling, general, and administrative expenses. If the Cajun has a marginal tax rate of 40 percent, what was its cash flow from operating activities last year?

A)$165,000
B)$230,000
C)$132,000
D)$162,000

Question 43

Last year, Monroe Products had $25,000 net cash provided by its operating activities. Its investing activities used $30,000, and its financing activities provided $10,000. Its cash balance at the beginning of the year was $15,000. By how much did Monroe's cash balance increase?

A)$10,000
B)$0
C)$5,000
D)None of the above

Question 44

A firm has current assets of $10,000 and current liabilities of $6,000. Cash and marketable securities total $4,000, the balance in accounts receivable is $2,000, and the book value of inventory is $4,000. The firm's net working capital is:

A)$2,000.
B)$4,000.
C)$6,000.
D)$9,000.
E)None of the above

Question 45

Stepping Out has inventory purchases of $2,200 during the month of June. If June 1 accounts payable were $1,700 and June 30 accounts payable were $1,900, what was the cash payment?

A)$3,900
B)$2,000
C)$1,900
D)$1,700

Question 46

Ship-to-Shore had a net income of $280,000 last year. Its expenses included depreciation of $55,000 and interest of $40,000. It sold new stock for which it received $20,000. The company also purchased a new commercial fishing boat for $40,000. What is Ship-to-Shore's net cash flow for last year?

A)$395,000
B)$355,000
C)$315,000
D)$280,000

Question 47

Triangle Systems had earnings after tax (EAT)of $1,000,000 last year. Included in its expenses were $50,000 of interest, $100,000 of deferred taxes (taxes that show up on the current year's income statement as expenses but aren't paid in cash in the current year), and $150,000 of depreciation. In addition, the company paid dividends of $200,000 to its stockholders last year. What was Triangle's net cash flow last year?

A)$1,500,000
B)$1,300,000
C)$1,150,000
D)$1,050,000

Question 48

CVD, Inc. has a debt ratio of 50%, and an equity multiplier of 2. What is CVD's stockholders' equity if total debt is $100,000?

A)$100,000
B)$150,000
C)$200,000
D)$50,000

Question 49

Williamson Trucking has current sales of $10,000 and a cost of goods sold of $4,300. Williamson has projected sales to increase 50% and expects the new cost ratio to decrease by 2% due to increased efficiency. Assuming that Williamson wants to maintain an inventory turnover of 5.0, calculate their projected level of inventory. (round to the nearest $)

A)$1,230
B)$1,920
C)$2,180
D)$2,340

Question 50

Given the following selected information on McMillen's Chocolate, Inc., calculate Cash Flow from Operating Activities for 2001.

A)$350,000
B)$550,000
C)$1,750,000
D)$2,050,000

Question 51

What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and pays its shareholders dividends equal to 40% of earnings?

A)$16.80
B)$42
C)$3
D)$28

Question 52

Last year Molex's net cash provided by operating activities was $14.1 million and its net cash used by investing activities was $20.7 million. If net cash provided by financing activities was $9.8 million, what was the net increase (or decrease)in cash during the year? Molex started the year with $2.1 million in cash.

A)$44.6 million
B)$3.2 million
C)$25.0 million
D)$5.3 million

Question 53

A decrease in accounts receivables is categorized as a use of funds.

Question 54

The Marshall Company has determined that its return on equity is 18.5%. Management is interested in the various components that went into this calculation. You are given the following information: Sales = $12 M, Return on Assets = 7.5% and Return on Sales = 4.5%. What percentage of the company's assets are financed by equity? (Round to the nearest whole percentage)

A)24%
B)37%
C)41%
D)53%

Question 55

The following items provide information about an individual for the past year. What is the individual's ending cash balance?

A)$35,000
B)$37,000
C)$17,000
D)$19,000

Question 56

Baker Corporation conducted the following activities during 2001: (1)they sold 10,000 shares of their own stock for $20.00 per share; (2)they issued bonds for which they received $500,000; (3)they paid dividends to their stockholders totaling $85,000; (4)they sold a piece of equipment for $50,000 that they were carrying on their books for $20,000; (5)they earned net income of $140,000. What would be shown on the Statement of Cash Flows for "cash from financing activities" based on the information above?

A)$615,000
B)$650,000
C)$655,000
D)$700,000
E)$740,000

Question 57

The Danville Company is considering a $50 million expansion (capital expenditure)program next year. Next year, the company expects to earn $25 million after interest and taxes. The company also plans to increase its dividends from $5 million to $7 million. If the expansion program is accepted, the company expects working capital requirements to increase by approximately $8 million next year. Long-term debt retirement obligations total $3 million next year and depreciation is expected to be $13 million. No fixed assets are expected to be sold next year. How much additional financing will be needed if the expansion program is undertaken?

A)$30 million
B)$43 million
C)$32 million
D)$22 million

Question 58

Given the following information, determine Salem Company's net fixed assets. Sales = $10,000,000
Total asset turnover = 4 times
Current ratio = 2.40
Current liabilities = $500,000
Total assets = current assets + fixed assets

A)$1,200,000
B)$4,800,000
C)$1,300,000
D)Cannot be determined

Question 59

Average inventory is $25,000, sales is $250,000, gross margin is 40% of sales, and net income is $35,000. The most meaningful calculation of inventory turnover results in an inventory turns figure of:

A)1 time.
B)2 times.
C)4 times.
D)6 times.

Question 60

Belvedere, Inc. has an annual payroll of $250,000. The firm pays employees every two weeks on Friday afternoon. Last month, the books were closed at the end of business on the Monday before payday. How much is the payroll accrual at the end of the month? (Use 260 days a year. Round to nearest dollar.)

A)$2,852
B)$3,846
C)$4,616
D)$5,769

Question 61

The fixed charge coverage ratio is a more comprehensive version of the times interest earned ratio.

Question 62

Financing activities also include long-term purchases and sales of financial assets.

Question 63

Ratio analysis involves taking a set of numbers out of the financial statements and forming ratios with them.

Question 64

A firm can never go out of business as long as it makes a profit, even if it manages its cash poorly.

Question 65

Profitability ratios give an indication of how investors feel about the company's financial future.

Question 66

Holding all other variables constant, a decrease in the cost ratio would cause the times interest earned ratio to increase.

Question 67

Operating activities have to do with running the business on a day-to-day basis.

Question 68

A common size income statement presents each line item as a percent of assets.

Question 69

A high interest coverage ratio would normally be associated with a low debt ratio.

Question 70

Operating activities involve the income statement and current accounts of the balance sheet.

Question 71

If a firm's sales are held constant, an increase in inventory would increase both the current ratio and inventory turnover.

Question 72

The acid-test ratio is normally smaller than the current ratio for a firm.

Question 73

Liquidity Ratios measure the firm's ability to meet its short-term financial obligations.

Question 74

A decrease in the equity multiplier indicates that the firm has increased its use of debt.

Question 75

A high inventory turnover ratio would be important to a company whose product has a high level of spoilage.

Question 76

Ratios are typically compared with similar figures from history, the competition, and budget.

Question 77

If a firm's current ratio and quick ratio have been steadily decreasing, the underlying cause might be traced to the credit manager's relaxed attitude about enforcing prompt payment from customers.

Question 78

In two successive years, it is possible for a firm to have identical profit and maintain identical levels of assets, but have different return on equity.

Question 79

Du Pont analysis breaks a firm's ROE into components such as profit margin, asset turnover and equity multiplier.

Question 80

Ratio analysis is of significant value in comparing the performance of a firm against its history, its budget, and its competitors.