Deck 3: Cash Flows and Financial Analysis

Question 1

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.

Answer 1

D

Question 2

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.

Answer 2

D

Question 3

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

Answer 3

D

Question 4

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.

Question 5

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 6

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 7

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 8

Which of the following represents a source of cash?

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

Question 9

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 10

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 11

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 12

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 13

The Statement of Cash Flows does not include the change in retained earnings account as it is embedded in the statement itself. Which of the following represents the items in the cash flow statement that, when added together, equals the change in retained earnings?

A) Net income, Stock account changes, Dividends Paid
B) Net income, Stock account changes, Dividends Paid, Dividend Income
C) Net income, Stock account changes, Dividends Paid, Addition to Retained Earnings from Income Statement
D) None of the above

Question 14

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

Question 15

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 16

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.

Question 17

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 18

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 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

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 21

____ indicate the firm's capacity to meet its debt obligations, both short term and long term.

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

Question 22

_____ 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 23

Which of the following is not affected by a change in interest expense?

A) Gross margin
B) EBIT
C) ROE
D) a and b
E) All of the above

Question 24

Ratios are used to analyze activities in the following areas:

A) asset management; liquidity; profitability; dividend use; debt management, market value.
B) profitability; asset management; liquidity; debt management; growth, market value.
C) asset management; liquidity; profitability; debt management, market value.
D) asset utilization; liquidity; profitability; debt management; security analysis.

Question 25

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 26

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 27

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 28

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 29

Which of the following measures is used to assess the success of a venture in making money?

A) Debt to equity ratio
B) Market to book value ratio
C) Return on sales
D) Current ratio

Question 30

Which of the following is a debt management ratio?

A) Inventory turnover
B) Current ratio
C) Return on sales
D) Fixed charge coverage

Question 31

The reliability of the current ratio as a measure of liquidity can be reduced by:

A) a surplus of marketable securities.
B) accounts receivable that are paid in advance.
C) inventory that will not sell.
D) the use of trade credit to finance current assets.
E) None of the above

Question 32

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 33

Cash flow from operating activities is increased by:

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

Question 34

Since EBIT is not necessarily indicative of cash flow, many financial analysts adjust the formulation by:

A) adding unpaid taxes to EBIT in the TIE formula.
B) adding unpaid taxes and interest to EBIT in the formula.
C) adding depreciation to EBIT in the TIE formula.
D) adding unpaid taxes, interest and depreciation to EBIT in the TIE formula.

Question 35

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 36

The ratio group most likely to be used to indicate a firm's ability to meet short-term financial obligations would be:

A) liquidity ratios.
B) financial leverage ratios.
C) activity ratios.
D) profitability ratios.

Question 37

_____ show how effectively the firm uses other people's money.

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

Question 38

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 39

_____ include average collection period and inventory turnover.

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

Question 40

The fixed asset turnover ratio is influenced by:

A) the age of the assets employed.
B) the depreciation method used by the firm.
C) the firm's choice of a production technology.
D) All of the above

Question 41

Which of the following may reduce the effectiveness of ratio analysis?

A) Highly diversified companies may have activities that obscure trends that may appear more clearly in single function companies.
B) Management may use window dressing at the end of the year to improve apparent performance.
C) Companies in the same industry may use different accounting practices which may indicate differing levels of performance that don't really exist.
D) Book values may not be comparable from company to company because of the age of the asset, inflation, etc.
E) All of the above can reduce the effectiveness of ratio analysis.

Question 42

The ____ ratio, sometimes called the "acid test," is a more stringent measure of ____ than the current ratio.

A) quick; liquidity
B) fixed-asset turnover; activity
C) net profit margin; gross profit margin
D) None of the above

Question 43

____ indicate the ability of the firm to meet its short-term financial obligations.

A) Activity ratios
B) Liquidity ratios
C) Leverage ratios
D) Profitability ratios

Question 44

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 45

Common size statements can be most effective when comparing:

A) companies in different industries.
B) the same company for different time periods.
C) companies of different sizes in the same industry.
D) a company's results versus its budget.

Question 46

Christy would like to improve the current ratio of her firm, which is now .5, so that she will have a better chance of obtaining a working capital loan. Which of the following options would improve her current ratio?

A) Use cash to pay off notes payable
B) Collect some of her accounts receivables
C) Purchase additional inventory on credit
D) Borrow short-term funds to pay off some payables

Question 47

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 48

Which of the following actions will improve the current ratio?

A) Take a nine-month loan from the bank to pay off some of its suppliers
B) Accelerate the collection of accounts receivable
C) Sell off some old equipment
D) All of the above

Question 49

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 50

Asset management ratios indicate:

A) how well a firm is using its assets to support sales.
B) how efficiently a firm is allocating its liabilities.
C) the return on assets.
D) the profitability of the firm.

Question 51

Which business transaction will affect the quick ratio?

A) Purchase a fixed asset with money borrowed long term
B) Liquidate a temporary investment and put the money in a checking account
C) Sell some inventory and use the cash immediately to buy a fixed asset
D) Make a payment to a vendor on an account payable

Question 52

Assume a firm has an average inventory of $25,000, sales of $250,000, gross profit of $100,000, and net income of $25,000. The preferred formulation for an inventory turnover results in an inventory turn of:

A) 1 time
B) 10 times
C) 4 times
D) 6 times

Question 53

The major types of financial ratios include all of the following except:

A) activity.
B) liquidity.
C) financial leverage.
D) equity.

Question 54

A market to book value ratio, of less than 1.0 indicates that:

A) the firm's stock may be a speculative opportunity.
B) the firm is doing poorly, but investors have confidence in its recovery.
C) investors are seriously concerned about the firm's survival.
D) a and c

Question 55

Which of the following ratios is least controllable by management?

A) The inventory turnover ratio
B) The total asset turnover ratio
C) The debt ratio
D) The price/earnings ratio

Question 56

The common size income statement:

A) facilitates comparisons by stating every line item as a percent of revenue.
B) eliminates the need to evaluate the firm by its dollar performance by showing how each component of the income statement stands as a percentage of assets.
C) shows the interaction of the income statement and balance sheet.
D) All of the above

Question 57

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 58

Which of the following financial ratios are market-based ratios?

A) Debt-to-equity
B) Price-to-earnings
C) Return on investment
D) All of the above

Question 59

Using average (as opposed to end-of-period) values in ratio analysis is most appropriate when:

A) both values in the ratio come from the income statement.
B) both values in the ratio come from the balance sheet.
C) one value comes from the balance sheet and one value comes from the income statement.
D) Both a. and b. are correct.
E) All of the above are correct.

Question 60

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 61

Common size income statements divide each account by:

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

Question 62

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 63

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 64

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 65

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 66

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 67

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 68

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 69

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 70

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 71

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 72

The market to book value ratio, or price to book ratio, as it is sometimes called, is an indication of the market's perception of the company's value as a "going concern." Generally, when the market "prices" the firm's stock below the book value of its common equity, the market is said to be:

A) disappointed with the firm's future growth potential.
B) disappointed with the firm's future earnings prospects such that the value of the stock is not equivalent to the net assets of the firm.
C) disappointed that the return falls below that which the firm is capable of producing.
D) All of the above

Question 73

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 74

The following items provide information about an individual for the past year. What is the individual's ending cash balance? $\begin{array}{lr}\text { Purchase of a new car}&\$25,000\\\text { Cash used on living expenses }&30,000\\\text { Beginning cash balance}&8,000\\\text {Net worth, begining }&22,000\\\text { Unpaid utility and rent bills}&2,000\\\text { Car loan proceeds}&20,000\\\text {Sale of old car }&1,000\\\text {Annual net pay from job }&44,000\\\text {Car loan payment }&1,000\\\end{array}$

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

Question 75

Which of the following is not part of the cash conversion cycle?

A) Receivable
B) Sale
C) Inventory
D) none of the above

Question 76

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 77

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 78

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 79

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 80

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