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ch 1 Student: ___________________________________________________________________________

Which of the following statements concerning the cash flow production cycle is true? A. The profits reported in a given time period equal the cash flows generated. B. A company's operations and finances are independent of each other. C. Financial statements have nothing to do with reality. D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle. E. A profitable company will always have sufficient cash to meet its obligations.

Which of the following statements concerning a firm's cash flows and profits is false? A. Managers must be at least as concerned with cash flows as with profits. B A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows . required for continued production. C. The cash flows generated in a given time period can differ from the profits reported. D. Profits are no assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets? A. income statement B. creditor's statement C. balance sheet D. cash flow statement E. sources and uses statement

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. cash flow statement D. sources and uses statement E. market value statement

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time? A. income statement B. balance sheet C. cash flow statement D. shareholders' equity statement E. market value statement

The sources and uses of cash over a stated period of time are reflected on the: A. income statement. B. balance sheet. C. shareholders' equity statement. D. cash flow statement. E. statement of operating position.

Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in notes payable C. decrease in common stock D. increase in inventory E. increase in accounts payable

Which one of the following is a use of cash? A. increase in notes payable B. increase in inventory C. increase in long-term debt D. decrease in accounts receivable E. increase in common stock

Which one of the following is a source of cash? A. decrease in accounts receivable B. decrease in common stock C. decrease in long-term debt D. decrease in accounts payable E. increase in inventory

10. Noncash items refer to: A. sales which are made on a credit basis. B. inventory items purchased using credit. C. intangible assets such as patents. D. expenses, like depreciation, which do not directly affect cash flows. E. administrative expenses. 11. Which of the following tends to cause differences between market values and book values? I. Accounting often creates a dichotomy between realized and unrealized income. II. Accountants allocate goodwill when a firm is acquired for more than book value. III. Many accounting values are transactions-based and hence backward-looking. IV. The use of fair-value accounting. V. Accountants refuse to assign a cost to equity capital. A. I and II only B. I and III only C. II and IV only D. I, III, and IV only E. I, III, and V only F. I, III, IV, and V only 12. The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value. 13. Depreciation expense: A. reduces both taxes and net income. B. increases the net fixed assets as shown on the balance sheet. C. reduces both the net fixed assets and the costs of a firm. D. is a noncash item that increases net income. E. decreases current assets, net income, and operating cash flows.

Selected information about South, Inc., a restaurant chain, follows.

14. During 2011, how much cash (in $ millions) did South collect from sales? A. 364 B. 277 C. 404 D. 324 E. 451 F. None of the above. 15. During 2011, what was the cost of goods (in $ millions) produced by the company? A. 223 B. 194 C. 252 D. 228 E. 218 F. None of the above. 16. Assuming the company neither sold nor salvaged any assets during the year, what were the company's capital expenditures during 2011? A. 482 B. 78 C. 421 D. 61 E. 139 F. None of the above. 17. Assuming that there were no financing cash flows during 2011 and basing your answer solely on the information provided, what were the cash flows from operations (in $ millions) for 2011? A. 45 B. 106 C. 15 D. 76 E. 31 F. None of the above. 18. JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share? A. $3.50 B. $5 C. $10 D. $25 E. $50 F. None of the above.

19. JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share? A. $3.50 B. $5 C. $10 D. $25 E. $50 F. None of the above. 20. JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same? A. $750,000 B. $1,250,000 C. $1,000,000 D. $1,400,000 E. $4,000,000 F. None of the above. 21. JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market and there are no taxes or transactions costs and all else remains the same, what should the market value of the firm be after the repurchase? A. $1,000,000 B. $1,750,000 C. $3,250,000 D. $4,000,000 E. $5,000,000 F. None of the above. 22. The book value of Little Statistic's total assets is $400,000. Suppose Number Crunching Inc. acquires Little Statistic's assets for $1 million and finances the purchase by selling $600,000 in new stock, $300,000 in new debt, and reducing cash by $100,000. Describe how the acquisition affects Number Crunching's balance sheet.

23. Playdough Products earned net income of $400,000 in 2011. The firm increased its accounts receivable during the year by $250,000. The book value of its assets declined by the year's depreciation charge, which was $180,000, and the market value of its assets increased by $20,000. Based only on this information, how much cash did Playdough Products generate during the year? Please ignore taxes for this problem.

24. During 2011, Lele Design earned net income of $250,000. The firm neither bought nor sold any capital assets. The book value of its assets declined by the year's depreciation charge of $200,000. The firm's operating cash flow for the year was $450,000. The market value of its assets increased by $300,000. What was Lele Design's economic income for the year? Why is this figure different from its accounting income? Please ignore taxes for this problem.

ch 1 Key 1. A 2. B 3. C 4. A 5. C 6. D 7. E 8. B 9. A 10. D 11. E 12. B 13. A 14. D 15. E 16. E 17. D 18. C 19. A 20. A 21. D 22. First, let us account for Number Crunching's $1 million expenditure. Cash will fall $100,000, liabilities will rise $300,000, and owners' equity will rise $600,000. Next, let us account for the assets acquired. The accountants will write up the value of fixed assets and possibly inventory to their estimated replacement value; they will then add the difference between the acquisition price and the replacement value of the assets acquired to a goodwill account appearing in the long-term assets section of Number Crunching's balance sheet; and lastly, they will consolidate the two companies' balance sheets by adding like accounts together.

23. Playdough Products generated $330,000 of cash during the year. The $400,000 net income ignores the fact that accounts receivable rose $250,000, a use of cash. It also treats $180,000 depreciation as an expense, whereas it is a noncash charge. The $20,000 increase in market value of assets adds to the value of the business, but is not a cash flow. Summary:

24. Lele Design generated economic income equal to $750,000, comprised of $450,000 in operating cash flow plus a $300,000 increase in the market value of its assets. The $500,000 difference between economic income and accounting income consists of the $200,000 noncash charge of depreciation, and the $300,000 appreciation in the market value of assets, which accounting income does not include.

ch 1 Summary Category Difficulty: 1 Easy Difficulty: 2 Medium Difficulty: 3 Hard Higgins - Chapter 01

# of Questions 12 10 2 25

ch 2 Student: ___________________________________________________________________________

The most popular yardstick of financial performance among investors and senior managers is the: A. profit margin. B. return on equity. C. return on assets. D. times burden covered ratio. E. earnings yield. F. None of the above.

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover A. I and IV only B. II and IV only C. I, II, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. A. asset turnover and control B. financial leverage C. coverage D. profitability E. None of the above.

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. I, III, and IV only

Ptarmigan Travelers had sales of $420,000 in 2010 and $480,000 in 2011. The firm's current accounts remained constant. Given this information, which one of the following statements must be true? A. The total asset turnover rate increased. B. The days' sales in receivables increased. C. The inventory turnover rate increased. D. The fixed asset turnover decreased. E. The collection period decreased.

Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales? A. current ratio B. debt-to-equity C. retention D. asset turnover E. return on assets

Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan? A. current ratio B. debt-to-equity ratio C. times interest earned ratio D. times burden covered ratio E. None of the above.

Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm's financial ratios? A. decrease in the fixed asset turnover rate B. decrease in the financial leverage ratio C. increase in the inventory turnover rate D. increase in the day's sales in inventory E. no change in the total asset turnover rate

Which one of the following statements is correct? A. If the debt-to-assets ratio is greater than 0.50, then the debt-to-equity ratio must be less than 1.0. B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. C. The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio. D. To realize the best risk and reward profile, financial leverage should be maximized. E. None of the above is correct.

10. On a common-size balance sheet, all accounts are expressed as a percentage of: A. sales for the period. B. the base year sales. C. total equity for the base year. D. total assets for the current year. E. total assets for the base year. 11. Which one of the following statements does NOT describe a problem with using ROE as a performance measure? A. ROE measures return on accounting book value, and this problem is not solved by using market value. B. ROE is a forward-looking, one-period measure, while business decisions span the past and present. C. ROE measures only return, while financial decisions involve balancing risk against return. D. None of these describe problems with ROE. E. All of these describe problems with ROE.

Selected financial data for Link, Inc. follows: ($ in thousands)

12. The current ratio at the end of 2012 is: A. 10.21 B. 2.31 C. 2.76 D. 10.30 E. None of the above. 13. Which of the following statements best describes how the company's short-term liquidity changed from 2011 to 2012? A. Link's short-run liquidity has improved modestly. B. Link's short-run liquidity has deteriorated very little, but from a low initial base. C. Link's short-run liquidity has improved considerably, but from a low initial base. D. Link's short-run liquidity has deteriorated considerably, but from a high initial base. E. None of the above. 14. Assume a 365-day year for your calculations. The collection period in days, based on sales, at the end of 2012 is: A. 24.3 B. 219.6 C. 35.7 D. 28.8 E. None of the above. 15. Assume a 365-day year for your calculations. The inventory turnover, based on cost of goods sold, at the end of 2012 is: A. 5.2 B. 24.3 C. 28.8 D. 35.7 E. None of the above. 16. Assume a 365-day year for your calculations. The payables period in days, based on cost of goods sold, at the end of 2012 is: A. 5.2 B. 24.3 C. 28.8 D. 35.7 E. None of the above.

17. Assume a 365-day year for your calculations. The days' sales in cash at the end of 2012 is: A. 24.3 B. 28.8 C. 35.7 D. 219.6 E. None of the above. 18. The gross margin for 2012 is: A. -94% B. 13% C. 26% D. 31% E. None of the above. 19. The profit margin for 2012 is: A. -94% B. -57% C. 13% D. 31% E. None of the above. 20. Answer the questions below based on the following information. Taxes are 35% and all dollars are in millions.

a) Calculate each company's ROE, ROA, and ROIC. b) Why is Runrun's ROE so much higher than Suunto's? Does this mean Runrun is a better company? Why or why not? c) Why is Suunto's ROA higher than Runrun's? What does this tell you about the two companies? d) How do the two companies' ROICs compare? What does this suggest about the two companies?

The financial statements for Limited Brands, Inc. follow (fiscal years ending January):

21. Use Limited Brands, Inc.'s financial statements, above, to answer the following question. Use the company's operating profit as an approximation of its EBIT, and assume a 40% tax rate for your calculations. For the fiscal years ending in January of 2006 and 2007, calculate: a) Limited Brands' total liabilities-to-equity ratio; b) Times interest earned ratio; and c) Times burden covered.

22. Use Limited Brands, Inc.'s financial statements, above, to answer the following question. Use the company's operating profit as an approximation of its EBIT, and assume a 40% tax rate for your calculations. What percentage decline in earnings before interest and taxes could Limited Brands have sustained in fiscal years 2006 and 2007 before failing to cover: a) Interest and principal repayment requirements; b) Interest, principal and common dividend payments?

23. Use Limited Brands, Inc.'s financial statements, above, to prepare common-size financial statements for Limited Brands, Inc. for 2006 - 2007.

ch 2 Key 1. B 2. C 3. A 4. B 5. E 6. D 7. D 8. C 9. C 10. D 11. B 12. C 13. D 14. D 15. A 16. B 17. D 18. E 19. A d. ROIC abstracts from differences in leverage to provide a direct comparison of the earning power of the two companies' assets. On this metric, Suunto is the superior performer. Before drawing any firm conclusions, however, it is important to ask how the business risks faced by the companies compare and whether the observed ratios reflect long-run capabilities or transitory events. c. This is also due to Runrun's higher leverage. ROA penalizes levered companies by comparing the net income available to equity to the capital provided by owners and creditors. It does not mean that Runrun is a worse company than Suunto. b. Runrun's higher ROE is a natural reflection of its higher financial leverage. It does not mean that Runrun is the better company.

20. a.

21.

(Note that principal payment in year t equals current portion of long-term debt in year t-1.)

22.

23.

ch 2 Summary Category Difficulty: 1 Easy Difficulty: 2 Medium Higgins - Chapter 02

# of Questions 9 14 25