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Principle of Finance Milestone 1 Sophia Course Answer
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1
When finalizing a pro forma income statement, what should be considered in addition to the sales forecast?
·
Forecasted market changes that may affect expenses
·
Forecasted changes to owner's equity
·
Forecasted target volume
·
Forecasted revenues
CONCEPT
Forecasting the Income Statement
2
Preparing a cash flow forecast helps a company to avoid __________.
·
higher financing costs
·
net losses
·
opportunity costs
·
liquidity
CONCEPT
Building a Cash Budget
3
If a balance sheet shows owner's equity of $10 million, current liabilities of $6 million and long-term liabilities of $15 million, then what are the total assets of the company?
·
$19 million
·
$25 million
·
$16 million
·
$31 million
CONCEPT
The Balance Sheet
4
The purpose of a pro forma balance sheet is to __________.
·
prepare for a financial audit
·
compare previous accounting periods
·
analyze the effects of a sales forecast
·
analyze historical data
CONCEPT
Forecasting the Balance Sheet
5
If Company A has a TIE ratio of 3 and Company B has a TIE ratio of 1.2, then Company A is more likely to __________ than Company B.
·
be able to honor its debt payments
·
default on its short-term debt
·
be able to repay its long-term debt
·
need to use cash on hand to meet its interest obligations
CONCEPT
Debt Management Ratios
6
What is the recent trend of algorithmic trading criticized for?
·
Increasing market volatility
·
Being too transparent
·
Improving market liquidity
·
Over-extending credit
CONCEPT
Trends and Issues in Finance
7
Why is it good for businesses when personal values and company values align?
·
Because companies are more likely to follow the law.
·
Because employees are more likely to uphold company values.
·
Because employees are more likely to have moral sensitivity.
·
Because managers can avoid having to deal with ethical questions.
CONCEPT
Ethics: An Overview
8
Select the true statement about the concept of agency cost.
·
An agency cost is one that is incurred when an agent's actions deviate from the principal's interests.
·
An agency cost is a cost to an organization that is inversely related to the organization's assumption of risk.
·
An agency cost is a variable cost to an organization that has yet to be approved by the principal.
·
An agency cost is one that is incurred when bondholders raise the interest rate on a bond.
CONCEPT
Agency and Conflicts of Interest
9
If equity is $2 million and total revenue is $1.3 million, then ROE is __________.
·
incalculable without EBIT data
·
35%
·
65%
·
incalculable without net profit data
CONCEPT
Profitability Ratios
10
Which of the following would explain a company’s inventory turnover ratio rising from 2.5 to 3.5?
·
The company's total sales has decreased while the average inventory has remained constant.
·
The company's total sales has decreased while the average inventory has increased.
·
The company's cost of goods sold has remained constant while the average inventory has decreased.
·
The company's cost of goods sold has decreased while the average inventory has remained constant.
CONCEPT
Asset Management Ratios
11
Finance is most concerned with __________.
·
determining how much assets and investments will be worth over time
·
determining how much assets and investments were worth in the past
·
determing the ratio of assets to investments
·
determining the current value of assets and investments
CONCEPT
Introducing Finance
12
In which scenario would benchmarking be least useful?
·
Comparing financial ratios of a company in a primary industry and an extractive industry
·
Comparing financial ratios of a company in a tertiary industry and a service industry
·
Comparing financial ratios of a company in a secondary industry and a manufacturing industry
·
Comparing financial ratios of a company in an extractive industry and a tertiary industry
CONCEPT
Using Financial Ratios for Analysis
13
Under GAAP, how would the sale of company-owned land be accounted for on the statement of cash flows?
·
As a decrease in cash flow from financing
·
As a decrease in cash flow from operations
·
As an increase in cash flow from operations
·
As an increase in cash flow from investment
CONCEPT
The Statement of Cash Flows
14
Which method of depreciation calculation gives a company an equal tax benefit from one year to the next?
·
Declining balance
·
Activity-based
·
Salvage
·
Straight line
CONCEPT
Tax Considerations
15
What is a question that should be asked about accounts receivable when forecasting?
·
Are we taking on too much debt?
·
What percentage of sales will likely be made on credit?
·
What is the lead time needed to replenish goods?
·
What do we anticipate owing to our suppliers?
CONCEPT
Analyzing Forecasts
16
Finn is interested in taking over a small business, but he wants to pay a fair price for it, so he consults their income statements.
Â
How can he determine the company's overall profitability in each quarter of the previous year?
·
Calculate total revenue minus operating expenses
·
Calculate total revenue minus taxes paid
·
Calculate operating revenue minus operating expenses
·
Calculate total revenue minus total expenses
CONCEPT
The Income Statement
17
Using the DuPont equation, how can a company determine if it has an acceptable ROE?
·
If it is at least 15%.
·
If it is over 50%.
·
If it is over 30%.
·
If it is between 2-3%.
CONCEPT
The DuPont Equation
18
In the United States, the role of corporate governance is to maximize __________.
·
market value and stakeholder value
·
shareholder value and stakeholder value
·
fundamental value and shareholder value
·
market value and shareholder value
CONCEPT
Goals of Financial Management
19
Strategic planning answers the question "__________"
·
How many people do we need?
·
How much money do we have?
·
Where are we going?
·
Who are we competing with?
CONCEPT
Financial Forecasting
20
Consider the price to book ratios of the following companies:
·Company A: 5.45
·Company B: 14.30
·Company C: 10.08
·Company D: 19.62
Which company do investors believe will create the most value from its assets?
·
Company A
·
Company D
·
Company B
·
Company C
CONCEPT
Market Value Ratios
21
Consider the following information:
Total current assets $78,632
Deferred income taxes $3,210
Inventories $9,823
Prepaid expenses $1,050
Other assets $3,890
Total current liabilities $32,043
Â
What is the quick ratio?
·
2.45
·
2.32
·
2.15
·
2.24
CONCEPT
Liquidity Ratios
22
What expenses typically come first in the "Expenses" section of an income statement?
·
Non-operating expenses
·
Tax expenses
·
Irregular expenses
·
Selling, general and administrative expenses
CONCEPT
Standardizing Financial Statements
23
After a significant economic recession, prices and investing activity in the stock market began trending consistently upward six years ago. In the last three months, this trend has reversed and prices have fallen steadily.
Â
How are the past three months of the stock market classified?
·
Primary bear market
·
Secular bull market
·
Primary bull market
·
Secular bear market
CONCEPT
Financial Markets
24
Haley is expanding her tax preparation business and wants to reorganize it. She wants to better protect her personal assets from any liabilities associated with the business, and she wants to pay a lower tax rate on her business income. She also believes her business will benefit from oversight from a board of directors.
Â
Which form of business structure would clearly meet Haley's needs?
·
Sole proprietorship
·
Corporation
·
Partnership
·
Limited liability partnership
CONCEPT
Types of Business Organizations
25
Lucas is worried about his company's short-term viability.
Â
What type of financial statement should he look at?
·
Cash flow statement
·
Balance sheet
·
Income statement
·
Statement of changes in equity
CONCEPT
Introducing Financial Statements
26
Ratios that measure the value of a company's stock are __________.
·
market ratios
·
leverage ratios
·
liquidity ratios
·
asset management ratios
CONCEPT
Overview of Ratio Analysis
27
What principle of corporate governance requires public clarification of the roles and responsibilities of board and management in order to provide stakeholders with a level of accountability?
·
Shareholder rights
·
Interests of other stakeholders
·
Integrity and ethical behavior
·
Disclosure and transparency
CONCEPT
1
What principle of corporate governance requires public clarification of the roles and responsibilities of board and management in order to provide stakeholders with a level of accountability?
·
Disclosure and transparency
·
Interests of other stakeholders
·
Integrity and ethical behavior
·
Shareholder rights
CONCEPT
Corporate Governance
2
What is finance?
·
The process of communicating financial information about a business
·
The social science that analyzes the production, distribution and consumption of goods and services
·
The study of how to allocate assets to maximize returns
·
The study of a business's past financial decisions
CONCEPT
Introducing Finance
3
Under GAAP, how would dividends paid to company stockholders be accounted for on the statement of cash flows?
·
As a decrease in cash flow from investment
·
As an increase in cash flow from financing
·
As an increase in cash flow from operations
·
As a decrease in cash flow from financing
CONCEPT
The Statement of Cash Flows
4
Consider the following information:
Total current assets $62,301
Deferred income taxes $1,345
Inventories $5,664
Prepaid expenses $2,034
Other assets $2,906
Total current liabilities $29,748
Â
 What is the quick ratio?
·
1.82
·
2.02
·
1.90
·
2.09
CONCEPT
Liquidity Ratios
5
If a company has a higher than usual cost of goods sold in a year, what potential effect does that have on its taxes?
·
It potentially reduces them as a tax deduction.
·
It potentially reduces them as a tax credit.
·
It potentially increases them through declining balance amortization.
·
Cost of goods sold does not affect corporate taxes.
CONCEPT
Tax Considerations
6
In the United States, the role of corporate governance is to maximize __________.
·
market value and stakeholder value
·
market value and shareholder value
·
shareholder value and stakeholder value
·
fundamental value and shareholder value
CONCEPT
Goals of Financial Management
7
Consider the P/E ratios of the following companies:
·Company A: 7.4
·Company B: 11.3
·Company C: 14.8
·Company D: 9.1
Among these four companies, Company C has the __________.
·
lowest relative value
·
highest relative value
·
highest dollar price
·
lowest net income
CONCEPT
Market Value Ratios
8
How are assets typically organized on a balance sheet?
·
In order of value, with least valuable assets first.
·
In order of liquidity, with least liquid assets first.
·
In order of value, with most valuable assets first.
·
In order of liquidity, with more liquid assets first.
CONCEPT
Standardizing Financial Statements
9
By appropriately preparing a forecast budget, a company can avoid __________.
·
inventory shortages
·
a net loss
·
insolvency
·
regulation
CONCEPT
Building a Cash Budget
10
Capacity planning answers the question "__________"
·
How can we be most efficient?
·
What will our revenue be?
·
How will we decide which direction to go?
·
How will we finance it?
CONCEPT
Financial Forecasting
11
Which of the following would explain a company’s day sales outstanding ratio rising from 32 to 41.25?
·
The company's accounts receivable has decreased while the average inventory has increased.
·
The company's accounts receivable has decreased while total sales has increased.
·
The company's accounts receivable has decreased while the average inventory has remained constant.
·
The company's accounts receivable has remained constant while total sales has decreased.
CONCEPT
Asset Management Ratios
12
If a sales increase is forecasted, how will it affect expenses on the pro forma income statement if market conditions are expected to remain stable?
·
It depends on the type of product being sold.
·
Expenses will increase.
·
Expenses will decrease.
·
There will be no effect on expenses.
CONCEPT
Forecasting the Income Statement
13
A potential investor in Cristian's company wants to know how much money was paid in dividends in the last reporting period.
Â
What type of financial statement should he look at?
·
Balance sheet
·
Cash flow statement
·
Statement of changes in equity
·
Income statement
CONCEPT
Introducing Financial Statements
14
Using the DuPont equation, how can a company determine if it has an acceptable ROE?
·
If it is between 2-3%.
·
If it is over 50%.
·
If it is at least 15%.
·
If it is over 30%.
CONCEPT
The DuPont Equation
15
The pro forma balance sheet shows how the __________ resulting from a strategic plan will be financed.
·
inventory
·
sales forecast
·
AFN
·
equity
CONCEPT
Forecasting the Balance Sheet
16
What is the recent trend of algorithmic trading criticized for?
·
Improving market liquidity
·
Over-extending credit
·
Increasing market volatility
·
Being too transparent
CONCEPT
Trends and Issues in Finance
17
Ratios that measure a company's ability to pay off short-term debt are _________.
·
market ratios
·
asset management ratios
·
liquidity ratios
·
leverage ratios
CONCEPT
Overview of Ratio Analysis
18
If a balance sheet shows owner's equity of $10 million, current liabilities of $6 million and long-term liabilities of $15 million, then what are the total assets of the company?
·
$25 million
·
$16 million
·
$19 million
·
$31 million
CONCEPT
The Balance Sheet
19
Why are ethical issues complicated for businesses that operate in the global economy?
·
Because they don't have as much moral character as small, local businesses.
·
Because they tend to have more employees.
·
Because different cultures have different norms and values.
·
Because their employees won't know what the laws are in other countries.
CONCEPT
Ethics: An Overview
20
Georgia is interested in selling her company. Before seeking a buyer, she wants her income statements to show a trend of increasing gross profits.
Â
How can she achieve her goal?
·
Reduce cost of goods sold
·
Reduce operating expense
·
Reduce taxes paid
·
Reduce net sales
CONCEPT
The Income Statement
21
Which of the following is an example of an agency conflict?
·
Shareholder voting rights
·
Managerial self-dealing
·
Board oversight
·
Manager's salary
CONCEPT
Agency and Conflicts of Interest
22
Tom and Wendy are launching a life coaching business. They plan to have an equal say in any managerial business decisions and they plan to share any profits or losses. They are concerned about their exposure to liability, so they have purchased some professional insurance policies. However, they are pleased with how simple it has been to organize their business.
Â
Which form of business structure have Tom and Wendy likely adopted?
·
Corporation
·
Sole proprietorship
·
Partnership
·
S corporation
CONCEPT
Types of Business Organizations
23
If Company A has a lower debt ratio than Company B, then Company A is likely to have __________ than Company B.
·
a higher level of financial risk
·
more total assets
·
a greater ability to borrow
·
less financial flexibility
CONCEPT
Debt Management Ratios
24
After a significant economic recession, prices and investing activity in the stock market began trending consistently upward six years ago. In the last three months, this trend has reversed and prices have fallen steadily.
Â
How are the past three months of the stock market classified?
·
Secular bear market
·
Primary bear market
·
Secular bull market
·
Primary bull market
CONCEPT
Financial Markets
25
In which scenario would benchmarking be least useful?
·
Comparing financial ratios of a company in a primary industry and an extractive industry
·
Comparing financial ratios of a company in a tertiary industry and a service industry
·
Comparing financial ratios of a company in an extractive industry and a tertiary industry
·
Comparing financial ratios of a company in a secondary industry and a manufacturing industry
CONCEPT
Using Financial Ratios for Analysis
26
If equity is $2 million and total revenue is $1.3 million, then ROE is __________.
·
incalculable without net profit data
·
incalculable without EBIT data
·
65%
·
35%
CONCEPT
Profitability Ratios
27
What is a question that should be asked about inventory when forecasting?
·
How quickly can we collect cash receipts?
·
What are the current storage costs?
·
What is the anticipated ratio of credit to cash sales?
·
Is the company's liquidity sufficient?
1
If a company has a higher than usual cost of goods sold in a year, what potential effect does that have on its taxes?
·
It potentially reduces them as a tax deduction.
·
It potentially reduces them as a tax credit.
·
It potentially increases them through declining balance amortization.
·
Cost of goods sold does not affect corporate taxes.
CONCEPT
Tax Considerations
2
Under GAAP, how would the sale of company-owned land be accounted for on the statement of cash flows?
·
As a decrease in cash flow from financing
·
As an increase in cash flow from investment
·
As an increase in cash flow from operations
·
As a decrease in cash flow from operations
CONCEPT
The Statement of Cash Flows
3
Xander is looking for ways to reduce his non-operating expenses to improve his company's overall financial performance, so he consults his most recent income statement.
Â
Which of the following should he focus on?
·
Amortization
·
Depreciation
·
Wages
·
Income taxes
CONCEPT
The Income Statement
4
Internet platforms have allowed for the greatest increase of what recent trend in finance?
·
Algorithmic trading
·
Microfinancing
·
Impact investing
·
Peer-to-peer lending
CONCEPT
Trends and Issues in Finance
5
When finalizing a pro forma income statement, what should be considered in addition to the sales forecast?
·
Forecasted target volume
·
Forecasted revenues
·
Forecasted market changes that may affect expenses
·
Forecasted changes to owner's equity
CONCEPT
Forecasting the Income Statement
6
If operating income is $155,000 and total revenue is $577,000, then the operating margin is __________.
·
72.20%
·
26.80%
·
incalculable without equity data
·
incalculable without net income data
CONCEPT
Profitability Ratios
7
Which of the following would explain a company’s day sales outstanding ratio rising from 32 to 41.25?
·
The company's accounts receivable has decreased while the average inventory has increased.
·
The company's accounts receivable has remained constant while total sales has decreased.
·
The company's accounts receivable has decreased while total sales has increased.
·
The company's accounts receivable has decreased while the average inventory has remained constant.
CONCEPT
Asset Management Ratios
8
Ratios that measure a company's ability to pay off short-term debt are _________.
·
market ratios
·
liquidity ratios
·
leverage ratios
·
asset management ratios
CONCEPT
Overview of Ratio Analysis
9
Why is it good for businesses when personal values and company values align?
·
Because employees are more likely to have moral sensitivity.
·
Because companies are more likely to follow the law.
·
Because managers can avoid having to deal with ethical questions.
·
Because employees are more likely to uphold company values.
CONCEPT
Ethics: An Overview
10
If Company A has a lower TIE ratio than Company B, then Company A has __________ than Company B.
·
less long-term debt
·
less likelihood of using cash on hand to meet its interest obligations
·
poorer interest coverage
·
a higher EBIT
CONCEPT
Debt Management Ratios
11
Consider the following information:
Total current assets $42,123
Deferred income taxes $2,638
Inventories $4,873
Prepaid expenses $1,554
Other assets $6,263
Total current liabilities $38,902
Â
What is the current ratio?
·
1.21
·
1.15
·
0.97
·
1.08
CONCEPT
Liquidity Ratios
12
The pro forma balance sheet shows how the __________ resulting from a strategic plan will be financed.
·
sales forecast
·
AFN
·
inventory
·
equity
CONCEPT
Forecasting the Balance Sheet
13
Using the DuPont equation, how can a company determine if it has an acceptable ROE?
·
If it is over 50%.
·
If it is over 30%.
·
If it is at least 15%.
·
If it is between 2-3%.
CONCEPT
The DuPont Equation
14
Over the last six years, prices and investing activity in the bond market rose for two years and then fell consistently for the next four years.
Â
How is this market classified?
·
Secular bull market
·
Secular bear market
·
Primary bull market
·
Primary bear market
CONCEPT
Financial Markets
15
Strategic planning answers the question "__________"
·
Where are we going?
·
How much money do we have?
·
How many people do we need?
·
Who are we competing with?
CONCEPT
Financial Forecasting
16
Betina is trying to convince a buyer to purchase her company. The buyer wants to know what the company's overall financial condition was on December 31, 2018.
Â
What type of financial statement should Betina provide?
·
Statement of changes in equity
·
Income statement
·
Balance sheet
·
Cash flow statement
CONCEPT
Introducing Financial Statements
17
Finance is most concerned with __________.
·
determining how much assets and investments were worth in the past
·
determining how much assets and investments will be worth over time
·
determining the current value of assets and investments
·
determing the ratio of assets to investments
CONCEPT
Introducing Finance
18
How are assets typically organized on a balance sheet?
·
In order of liquidity, with more liquid assets first.
·
In order of value, with most valuable assets first.
·
In order of value, with least valuable assets first.
·
In order of liquidity, with least liquid assets first.
CONCEPT
Standardizing Financial Statements
19
Roger is a graphic designer who is in the early phases of launching his own business. So far he has only a handful of employees, and he prefers to make all of the operational decisions for the business himself.
Â
Which form of business structure would clearly meet Roger's needs?
·
Matrix
·
Pre-bureaucratic
·
Functional
·
Divisional
CONCEPT
Types of Business Organizations
20
If a balance sheet shows $4 million in current assets, $7 million in long-term assets, $2 million in current liabilities and $6 million in long-term liabilities, what is the company's net working capital?
·
$3 million
·
$4 million
·
$1 million
·
$2 million
CONCEPT
The Balance Sheet
21
For which company can trend analysis be most useful?
·
A retail company that recently changed its accounting practices and its business model
·
A mining company that recently changed its business model, but not its accounting practices
·
A banking company that recently changed its accounting practices, but not its business model
·
A software company whose business model and accounting practices have remained stable over time
CONCEPT
Using Financial Ratios for Analysis
22
In the United States, the role of corporate governance is to maximize __________.
·
market value and stakeholder value
·
market value and shareholder value
·
fundamental value and shareholder value
·
shareholder value and stakeholder value
CONCEPT
Goals of Financial Management
23
Consider the P/E ratios of the following companies:
·Company A: 5.34
·Company B: 3.33
·Company C: 7.90
·Company D: 6.75
Which company has the lowest relative value among investors?
·
Company A
·
Company C
·
Company B
·
Company D
CONCEPT
Market Value Ratios
24
What is a question that should be asked about inventory when forecasting?
·
How quickly can we collect cash receipts?
·
What is the anticipated ratio of credit to cash sales?
·
Is the company's liquidity sufficient?
·
What are the current storage costs?
CONCEPT
Analyzing Forecasts
25
Which statement best characterizes the impact of regulatory changes on corporate governance since the 1990s?
·
Oversight by boards of directors and independent auditors has decreased, allowing for greater corporate flexibility.
·
New regulations require corporate managers to prioritize the interests of external stakeholders over those of shareholders.
·
Corporate transparency and accountability have increased through revised reporting and oversight requirements and stiffer penalties for fraud.
·
Corporate governance has become untenable due to requirements that all conflicts of interest be catalogued.
CONCEPT
Corporate Governance
26
By appropriately preparing a forecast budget, a company can avoid __________.
·
insolvency
·
inventory shortages
·
regulation
·
a net loss
CONCEPT
Building a Cash Budget
27
Under what circumstance would agency conflict be most likely to increase?
·
When oversight by the board is adequate.
·
When owners are very close to the business.
·
When the incentives of a manager align with those of owners.
·
When owners are separated from the business.
CONCEPT
Agency and Conflicts of Interest
Â
1
What is a question that should be asked about inventory when forecasting?
·
What are the current storage costs?
·
What is the anticipated ratio of credit to cash sales?
·
How quickly can we collect cash receipts?
·
Is the company's liquidity sufficient?
CONCEPT
Analyzing Forecasts
2
Which of the following is true of ethics and its application to the business environment?
·
The ethical norms and values of a business can have a powerful influence on its employees.
·
Personal values have no place in business, where decisions should be made according to organizational values and norms.
·
Employers prefer to hire individuals whose ethics conflict with that of the business organization.
·
Conflicts rarely occur between an individual's ethics and a business organization's ethics.
CONCEPT
Ethics: An Overview
3
For which company can trend analysis be most useful?
·
A retail company that recently changed its accounting practices and its business model
·
A mining company that recently changed its business model, but not its accounting practices
·
A banking company that recently changed its accounting practices, but not its business model
·
A software company whose business model and accounting practices have remained stable over time
CONCEPT
Using Financial Ratios for Analysis
4
If Company A has a lower TIE ratio than Company B, then Company A has __________ than Company B.
·
less likelihood of using cash on hand to meet its interest obligations
·
poorer interest coverage
·
less long-term debt
·
a higher EBIT
CONCEPT
Debt Management Ratios
5
Which of the following is an example of an agency conflict?
·
Manager's salary
·
Board oversight
·
Managerial self-dealing
·
Shareholder voting rights
CONCEPT
Agency and Conflicts of Interest
6
What was one outcome of the Sarbanes-Oxley Act of 2002?
·
CEOs are prohibited from earning bonuses tied to company stock performance.
·
Top management of U.S. companies must now individually and personally certify the accuracy of financial information.
·
Public corporations are no longer required to use independent auditors to review their accounting practices.
·
Expenses related to corporate compliance are now tax-deductible.
CONCEPT
Corporate Governance
7
Financial forecasting answers the question "__________"
·
Do we have enough production capacity?
·
When should we begin?
·
What will our sales be?
·
What are our goals?
CONCEPT
Financial Forecasting
8
Preparing a cash flow forecast helps a company to examine and manage its __________.
·
bottom line
·
profitability
·
float times
·
accounting practices
CONCEPT
Building a Cash Budget
9
Xander is looking for ways to reduce his non-operating expenses to improve his company's overall financial performance, so he consults his most recent income statement.
Â
Which of the following should he focus on?
·
Amortization
·
Income taxes
·
Wages
·
Depreciation
CONCEPT
The Income Statement
10
Which market is intended to benefit from the recent trend of microfinance?
·
Impoverished individuals
·
Venture capitalists
·
Corporations
·
Foreign governments
CONCEPT
Trends and Issues in Finance
11
Which organization most fully protects owners from personal liabilities and is taxed separately?
·
S Corp
·
LLC
·
Partnership
·
C Corp
CONCEPT
Tax Considerations
12
Consider the P/E ratios of the following companies:
·Company A: 5.34
·Company B: 3.33
·Company C: 7.90
·Company D: 6.75
Which company has the lowest relative value among investors?
·
Company C
·
Company A
·
Company B
·
Company D
CONCEPT
Market Value Ratios
13
One reason that ROE calculations are broken down into three components in the DuPont equation is that __________.
·
it shows management where ROE improvements can be made
·
the numbers are more difficult to falsify
·
it highlights exceptional financial planning
·
it hides problem areas from analysts
CONCEPT
The DuPont Equation
14
If net income is $90 million and total assets are $480 million, then the ROA is __________.
·
incalculable without gross profit data
·
incalculable without EBIT data
·
18.75%
·
25.00%
CONCEPT
Profitability Ratios
15
A potential investor in Cristian's company wants to know how much money was paid in dividends in the last reporting period.
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What type of financial statement should he look at?
·
Income statement
·
Balance sheet
·
Cash flow statement
·
Statement of changes in equity
CONCEPT
Introducing Financial Statements
16
Under GAAP, how would dividends paid to company stockholders be accounted for on the statement of cash flows?
·
As a decrease in cash flow from financing
·
As a decrease in cash flow from investment
·
As an increase in cash flow from operations
·
As an increase in cash flow from financing
CONCEPT
The Statement of Cash Flows
17
Tom and Wendy are launching a life coaching business. They plan to have an equal say in any managerial business decisions and they plan to share any profits or losses. They are concerned about their exposure to liability, so they have purchased some professional insurance policies. However, they are pleased with how simple it has been to organize their business.
Â
Which form of business structure have Tom and Wendy likely adopted?
·
S corporation
·
Sole proprietorship
·
Partnership
·
Corporation
CONCEPT
Types of Business Organizations
18
Ratios that measure a company's ability to manage its long-term debt are _________.
·
leverage ratios
·
efficiency ratios
·
profitability ratios
·
liquidity ratios
CONCEPT
Overview of Ratio Analysis
19
The pro forma balance sheet reflects the impact of a company's strategic plan on its __________.
·
revenue and expenses
·
share price
·
assets and liabilities
·
revenue and expenses
CONCEPT
Forecasting the Balance Sheet
20
Which of the following would explain a company’s day sales outstanding ratio rising from 32 to 41.25?
·
The company's accounts receivable has decreased while the average inventory has increased.
·
The company's accounts receivable has decreased while the average inventory has remained constant.
·
The company's accounts receivable has remained constant while total sales has decreased.
·
The company's accounts receivable has decreased while total sales has increased.
CONCEPT
Asset Management Ratios
21
Over the last six years, prices and investing activity in the bond market rose for two years and then fell consistently for the next four years.
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How is this market classified?
·
Secular bear market
·
Secular bull market
·
Primary bull market
·
Primary bear market
CONCEPT
Financial Markets
22
If a sales increase is forecasted, how will it affect expenses on the pro forma income statement if market conditions are expected to remain stable?
·
Expenses will increase.
·
Expenses will decrease.
·
There will be no effect on expenses.
·
It depends on the type of product being sold.
CONCEPT
Forecasting the Income Statement
23
If a balance sheet shows $4 million in current assets, $7 million in long-term assets, $2 million in current liabilities and $6 million in long-term liabilities, what is the company's net working capital?
·
$2 million
·
$3 million
·
$1 million
·
$4 million
CONCEPT
The Balance Sheet
24
The primary factor behind all of finance is __________.
·
debt
·
equity
·
money
·
time
CONCEPT
Introducing Finance
25
Consider the following information:
Total current assets $42,123
Deferred income taxes $2,638
Inventories $4,873
Prepaid expenses $1,554
Other assets $6,263
Total current liabilities $38,902
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What is the current ratio?
·
1.08
·
1.21
·
0.97
·
1.15
CONCEPT
Liquidity Ratios
26
Select the option that reflects how revenue is typically organized on an income statement.
·
§Sales
§Cost of goods sold
§Other revenue
·
§Sales
§Other revenue
§Cost of goods sold
·
§Cost of goods sold
§Sales
§Other revenue
·
§Cost of goods sold
§Other revenue
§Sales
CONCEPT
Standardizing Financial Statements
27
Valuation of a business relies on __________.
·
keeping accurate financial statements
·
maximizing shareholder value
·
strengthening corporate governance
·
maximizing market value
CONCEPT
Â
1
The pro forma balance sheet reflects the impact of a company's strategic plan on its __________.
·
revenue and expenses
·
share price
·
revenue and expenses
·
assets and liabilities
CONCEPT
Forecasting the Balance Sheet
2
Which method of depreciation calculation gives a company an equal tax benefit from one year to the next?
·
Activity-based
·
Declining balance
·
Straight line
·
Salvage
CONCEPT
Tax Considerations
3
One reason that ROE calculations are broken down into three components in the DuPont equation is that __________.
·
it hides problem areas from analysts
·
it shows management where ROE improvements can be made
·
the numbers are more difficult to falsify
·
it highlights exceptional financial planning
CONCEPT
The DuPont Equation
4
Why are ethical issues complicated for businesses that operate in the global economy?
·
Because they tend to have more employees.
·
Because they don't have as much moral character as small, local businesses.
·
Because their employees won't know what the laws are in other countries.
·
Because different cultures have different norms and values.
CONCEPT
Ethics: An Overview
5
If equity is $2 million and total revenue is $1.3 million, then ROE is __________.
·
incalculable without net profit data
·
incalculable without EBIT data
·
65%
·
35%
CONCEPT
Profitability Ratios
6
What expenses typically come first in the "Expenses" section of an income statement?
·
Irregular expenses
·
Non-operating expenses
·
Tax expenses
·
Selling, general and administrative expenses
CONCEPT
Standardizing Financial Statements
7
Under GAAP, how would dividends paid to company stockholders be accounted for on the statement of cash flows?
·
As a decrease in cash flow from financing
·
As a decrease in cash flow from investment
·
As an increase in cash flow from financing
·
As an increase in cash flow from operations
CONCEPT
The Statement of Cash Flows
8
The primary factor behind all of finance is __________.
·
money
·
time
·
equity
·
debt
CONCEPT
Introducing Finance
9
If Company A has a TIE ratio of 3 and Company B has a TIE ratio of 1.2, then Company A is more likely to __________ than Company B.
·
need to use cash on hand to meet its interest obligations
·
default on its short-term debt
·
be able to repay its long-term debt
·
be able to honor its debt payments
CONCEPT
Debt Management Ratios
10
If a sales increase is forecasted, how will it affect expenses on the pro forma income statement if market conditions are expected to remain stable?
·
Expenses will increase.
·
There will be no effect on expenses.
·
Expenses will decrease.
·
It depends on the type of product being sold.
CONCEPT
Forecasting the Income Statement
11
Which of the following would explain a company’s inventory turnover ratio rising from 2.5 to 3.5?
·
The company's total sales has decreased while the average inventory has increased.
·
The company's cost of goods sold has remained constant while the average inventory has decreased.
·
The company's cost of goods sold has decreased while the average inventory has remained constant.
·
The company's total sales has decreased while the average inventory has remained constant.
CONCEPT
Asset Management Ratios
12
Which market is intended to benefit from the recent trend of microfinance?
·
Venture capitalists
·
Foreign governments
·
Impoverished individuals
·
Corporations
CONCEPT
Trends and Issues in Finance
13
Tom and Wendy are launching a life coaching business. They plan to have an equal say in any managerial business decisions and they plan to share any profits or losses. They are concerned about their exposure to liability, so they have purchased some professional insurance policies. However, they are pleased with how simple it has been to organize their business.
Â
Which form of business structure have Tom and Wendy likely adopted?
·
S corporation
·
Partnership
·
Corporation
·
Sole proprietorship
CONCEPT
Types of Business Organizations
14
The process of predicting what the market would pay for a company's investments and bonds is __________.
·
appraisal
·
assessment
·
financial management
·
valuation
CONCEPT
Goals of Financial Management
15
A potential investor in Cristian's company wants to know how much money was paid in dividends in the last reporting period.
Â
What type of financial statement should he look at?
·
Cash flow statement
·
Statement of changes in equity
·
Balance sheet
·
Income statement
CONCEPT
Introducing Financial Statements
16
If a balance sheet shows owner's equity of $10 million, current liabilities of $6 million and long-term liabilities of $15 million, then what are the total assets of the company?
·
$25 million
·
$16 million
·
$31 million
·
$19 million
CONCEPT
The Balance Sheet
17
Capacity planning answers the question "__________"
·
What will our revenue be?
·
How can we be most efficient?
·
How will we decide which direction to go?
·
How will we finance it?
CONCEPT
Financial Forecasting
18
For which company can trend analysis be most useful?
·
An established hotel company that has made very few changes to its business model
·
A ride-sharing company whose business model has been rapidly adapting to market conditions
·
An insurance company that has recently been subject to new accounting laws
·
A manufacturing company that has recently expanded into mining as well
CONCEPT
Using Financial Ratios for Analysis
19
What is a question that should be asked about accounts payable when forecasting?
·
What is the cash conversion cycle?
·
How much product on hand is too much?
·
How will our cash inflows be affected?
·
How quickly can we replenish goods?
CONCEPT
Analyzing Forecasts
20
What was one outcome of the Sarbanes-Oxley Act of 2002?
·
CEOs are prohibited from earning bonuses tied to company stock performance.
·
Expenses related to corporate compliance are now tax-deductible.
·
Public corporations are no longer required to use independent auditors to review their accounting practices.
·
Top management of U.S. companies must now individually and personally certify the accuracy of financial information.
CONCEPT
Corporate Governance
21
A software company issues shares of stock to the public for the first time in order to raise funds for a planned product expansion.
Â
What financial market is the company participating in?
·
Secondary capital market
·
Primary money market
·
Secondary money market
·
Primary capital market
CONCEPT
Financial Markets
22
Ratios that measure the value of a company's stock are __________.
·
asset management ratios
·
market ratios
·
liquidity ratios
·
leverage ratios
CONCEPT
Overview of Ratio Analysis
23
Which of the following is an example of an agency conflict?
·
Board oversight
·
Shareholder voting rights
·
Manager's salary
·
Managerial self-dealing
CONCEPT
Agency and Conflicts of Interest
24
Consider the following information:
Total current assets $62,301
Deferred income taxes $1,345
Inventories $5,664
Prepaid expenses $2,034
Other assets $2,906
Total current liabilities $29,748
Â
 What is the quick ratio?
·
2.09
·
1.82
·
1.90
·
2.02
CONCEPT
Liquidity Ratios
25
Consider the P/E ratios of the following companies:
·Company A: 7.4
·Company B: 11.3
·Company C: 14.8
·Company D: 9.1
Among these four companies, Company C has the __________.
·
highest dollar price
·
lowest net income
·
lowest relative value
·
highest relative value
CONCEPT
Market Value Ratios
26
Georgia is interested in selling her company. Before seeking a buyer, she wants her income statements to show a trend of increasing gross profits.
Â
How can she achieve her goal?
·
Reduce operating expense
·
Reduce net sales
·
Reduce cost of goods sold
·
Reduce taxes paid
CONCEPT
The Income Statement
27
Preparing a cash flow forecast helps a company to avoid __________.
·
liquidity
·
opportunity costs
·
higher financing costs
·
net losses
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What is one significance of the DuPont equation?
·
It allows a company to increase its stock price.
·
It tells a company whether its share price is correctly valued.
·
It allows a company to compare itself to companies in unrelated industries.
·
It tells a company how well it uses investment funds to generate earnings growth.
Â
Which of the following would explain a company’s day sales outstanding ratio falling from 37.3 to 25?
·
The company's cost of goods sold has decreased while total sales has increased.
·
The company's accounts receivable has decreased while total sales has increased.
·
The company's accounts receivable has remained constant while total sales has decreased.
·
The company's cost of goods sold has decreased while total sales has remained constant.
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