2024 – Ch1 1 In the past the study of finance has included A mergers and acquisitions B raising

Ch1: 

1.In the past, the study of finance has included 

A)     mergers and acquisitions.

B)raising capital.

C)bankruptcy.

D)all of the above.

2.One of the major disadvantages of a sole proprietorship is 

A)    that there is unlimited liability to the owner. 

B)the simplicity of decision making. 

C)low organizational costs. 

D)low operating costs. 

3.Many companies such as Tyco, Enron, WorldCom, etc. that suffered financial distress in the late 1990s and early 2000s,

A)    committed fraud.

B)had failed corporate governance oversight.

C)went bankrupt.

D)all of the above are true.

4.Agency theory would imply that conflicts are more likely to occur between management and shareholders when

A)    the company is owned and operated by the same person.

B)management acts in the best interests of maximizing shareholder wealth.

C)the chairman of the board is also the chief executive officer (CEO).

D)the board of directors exerts strong and involved oversight of management

5.Maximization of shareholder wealth is a concept in which 

A)   increased earnings is of primary importance. 

B)profits are maximized on a quarterly basis. 

C)virtually all earnings are paid as dividends to common stockholders. 

D)optimally increasing the long-term value of the firm is emphasized. 

6.Money markets would include which of the following securities? 

A)    common stock and corporate bonds.

B)treasury bills and commercial paper.

C)certificates of deposit and preferred stock.

D)all of the above.

 

7.The Internet has affected the financial markets by 

A)    creating more competition between markets.

B)pushing the cost of trading down.

C)forcing brokerage companies to consolidate.

D)   all of the above

 

 

Ch. 2

1.A short-term creditor would be most interested in 

A)profitability ratios. 

B)asset utilization ratios. 

C)liquidity ratios. 

D)debt utilization ratios. 

2.Given the balance sheet and income state for Simmons Maintenance Company, compute the ratios that are also shown for the industry average.  The “right answer” refers to the question of whether a particular ratio for Simmons is better or worse than the industry average.  

 

SIMMONS MAINTENANCE COMPANY

Balance Sheet

 

AssetsLiabilities

Cash$  15,000Accounts Payable$  21,000

Accts. Receivable22,000Notes Payable20,000

Inventory    30,000Accrued Expenses      5,000

  Current Assets67,000Current Liabilities46,000

Net Fixed Assets    73,000Long-term Debt30,000

Stockholders’ Equity    64,000

 

Total Assets$140,000Total Liabilities & Stockholders’ Equity$140,000

 

 

Income Statement

 

Sales (80% credit)$120,000

Less: Cost of Goods Sold    45,000

Gross Profit75,000

Selling and Administrative Expense20,000

Rent Expense (Lease)  8,000    28,000

EBIT47,000

Interest Expense      5,000

Earnings before taxes42,000

Taxes (@ 25%)    10,500

Net Income$  31,500

 

Common shares outstanding15,000

EPS$      2.10

 

 

RatioRatios for SimmonsIndustry AverageBetter (B) or Worse (W)

 

Profit margin

Return on assets

Return on equity

Receivables turnover

Avg. collection period

Inventory turnover

Fixed asset turnover

Total asset turnover

Current ratio

Quick ratio

Debt to total assets

Times interest earned

Fixed charge coverage

 

 

 

 

 

 

 

 

 

 

Ch. 4

1.In developing the pro forma income statement we follow four important steps:

1)compute other expenses, 

2)determine a production schedule,

3)establish a sales projection,

4)determine profit by completing the actual pro forma statement.  

What is the correct order for these four steps? 

A)1,2,3,4 

B)4,3,2,1 

C)2,1,3,4 

D)3,2,1,4 

2.Ellis Sport Shop projects the following sales:

 

AprilMayJune

$75,000$95,000$110,000

 

Ninety percent of Ellis’ sales are on credit with 60 percent of receivables collected in the month after the sale and the rest of receivables collected in the second month after the sale.  February sales were $60,000 and March sales were $70,000.  In the past Ellis’ bad debt percentage has been 0 and is expected to continue.

 

a)Prepare a monthly schedule of cash receipts for April-June.

b)What is the balance of Receivables at the end of June. 

 

 

Ch. 5

1.The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation. 

 

A)fixed costs 

B)variable costs 

C)marginal costs 

D)semi-variable costs 

 

2.At the break-even point, a firm’s profits are 

A)greater than zero. 

B)less than zero. 

C)equal to zero. 

D)Not enough information to tell 

 

3.A highly automated plant would generally have 

A)more variable than fixed costs. 

B)more fixed than variable costs. 

C)all fixed costs. 

D)all variable costs. 

 

4.If a firm has a price of $4.00, variable cost per unit of $2.50 and a breakeven point of 20,000 units, fixed costs are equal to: 

A)$13,333 

B)$10,000 

C)$30,000 

D)   $50,000

 

5.Combined leverage is concerned with the relationship between 

A)changes in EBIT and changes in EPS. 

B)changes in volume and changes in EPS. 

C)changes in volume and changes in EBIT. 

D)changes in EBIT and changes in net income. 

 

6.Use the table to answer following questions:

 

Sales (75,000 units)$750,000

Variable costs  225,000

Contribution margin$525,000

Fixed manufacturing costs  187,500

Operating income$337,500

Interest    75,000

Earnings before taxes$262,500

Taxes (at 31%)    81,375

Net Income $181,125

Shares outstanding15,000

The Degree of Operating Leverage is 

The Degree of Financial Leverage is 

The Degree of Combined Leverage is 

1. (TCO A) Which of the following is an advantage of the sole proprietorship relative to the corporate form of business organization? (Points : 5)

        Limited liability of investor

        Transferability of ownership

        Simple to establish

        Unlimited life

 

 

2. (TCO A) Dividends _____. (Points : 5)

        represent an expense and are an operating activity

        represent an obligation and are an operating activity

        represent a distribution of earnings and are a financing activity

        represent an asset and are an investing activity

 

 

3. (TCOs A, B) Below is a partial list of account balances for LBJ Company:

 

Cash                       $15,000

Prepaid insurance        5,000

Accounts receivable     2,500

Accounts payable        3,000

Notes payable             6,000

Common stock          10,000

Dividends                       500

Revenues                  15,000

Expenses                 13,000

 

What did LBJ Company show as total debits? 

(Points : 5)

        $34,000

        $36,000

        $70,000

        $31,000

 

 

4. (TCOs B, E) Why is the accrual basis of accounting preferred by GAAP? (Points : 5)

 

        The Accrual basis is easier to use.

        The Accrual basis is also preferred by the Internal Revenue Service.

        The Accrual basis complies with the revenue recognition and matching principles.

        The Accrual basis requires fewer accounting resources.

 

 

5. (TCO D) In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income?(Points : 5)

        LIFO

        The average cost method

        FIFO

        Income tax expense for the period will be the same under all assumptions.

 

 

6. (TCOs A, E) Equipment was purchased for $75,000 on January 1, 2011. Freight charges of $3,200 were incurred and there was a cost of $6,000 for installation. It is estimated the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the straight-line method will be _____. (Points : 5)

        $13,800

        $14,440

        $12,600

        $13,240

 

 

7. (TCO D,G) Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____. (Points : 5)

        debit to Cash of $100,000

        credit to Bonds Payable of $94,000

        credit to Premium on Bonds Payable of $4,000

        debit to Discount on Bonds Payable of $6,000

 

 

8. (TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and $100,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $1,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____. (Points : 5)

        $20,000

        $1,020,000

        $1,000,000

        $980,000

 

 

9. (TCO F) If you are making comparisons within a company to detect changes in financial relationships and significant trends, you are performing what type of analysis? (Points : 5)

        Industry averages analysis

        Intercompany analysis

        Common-size analysis

        Intracompany analysis

 

 

10. (TCO F) The formula for performing horizontal analysis is _____. (Points : 5)

        (Current Year Amount minus Base Year Amount) divided by Current Year Amount

        Base Year Amount divided by Current Year Amount

        Current Year Amount minus Base Year Amount

        (Current Year Amount minus Base Year Amount) divided by Base Year Amount

 

 

11. (TCO F) Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time _____.(Points : 5)

        that has been arranged from the highest number to the lowest number

        that has been arranged from the lowest number to the highest number

        to determine which numbers are in error

        to determine the amount and/or percentage increase or decrease that has taken place

 

 

12. (TCO F) A common measure of liquidity is _____. (Points : 5)

        debt-to-total-assets ratio

        cash debt coverage

        free cash flow

        working capital

 

 

13. (TCO F) Short-term creditors would be most interested in which of the following ratios? (Points : 5)

        Average collection period

        Times interest earned

        Cash debt coverage

        Free cash flow

 

 

14. (TCO G) To calculate the market value of a bond, we need to _____. (Points : 5)

        multiply the bond price times the interest rate

        calculate the present value of the principal only

        calculate the present value of the interest only

        calculate the present value of both the principal and 

 

 

 

1. (TCO A) Use the following partial financial statement information below to calculate the liquidity and profitability ratios. This information can be used to correctly solve each of the ratios below.

Average common shares outstanding            35,000    Current liabilities         $25,000

Capital expenditures                                  $20,000     Net income                $50,000

Cash provided by operations                       $77,000     Net sales                 $100,000

Preferred stock dividends paid                    $30,000     Total liabilities            $50,000

Current assets                                          $20,000     Total assets               $80,000

Instructions: Compute the following.

a) Current ratio 

b) Working capital 

c) Earnings per share

d) Debt-to-total-assets ratio

e) Free cash flow

To earn full credit, you must show the formula you are using, show your computations, and explain the meaning of each of your ratio results. (Points : 30)

   

2. (TCOs D, E) Please prepare the following journal entries. Indicate which account should be debited with the abbreviation DR in front of the account name and which account should be credited with the abbreviation CR in front of the account name along with the dollar amount of the debit and credit. 

a) Investors invested $150,000 in exchange for 10,000 shares of common stock. 

b) Company made payment on account for $10,000 

c) Company received $15,000 for services not yet performed 

d) Company purchased $7,500 worth of equipment 

e) Company billed $5,000 for services performed

(Points : 30)