Financial Management Review
Questions
Course Introduction
Financial Management is a foundational course that introduces students to the principles and practices of managing an organizations financial resources. The course covers a broad range of topics including financial statement analysis, budgeting, capital structure, risk and return, asset valuation, and working capital management. Emphasis is placed on decision-making processes that maximize shareholder value, funding strategies, and evaluating investment opportunities. Students will acquire analytical skills and practical tools necessary to assess financial performance, design effective financial policies, and make informed financial decisions in both corporate and personal finance contexts.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by
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Page 2
James M. Wahlen
Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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Sample Questions
Q1) How easily can customers switch to substitute products is a question one might ask when assessing the ___________________________________.
Answer: threat of substitutes
Q2) Extraordinary gains and losses arise from events that have all the following characteristics except:
A) They are unusual given the nature of the firm's activity.
B) They are nonrecurring.
C) They are material in amount.
D) They result from terminated involvement in a line of business.
Answer: D
Q3) Which of the following economic characteristics is consistent with a grocery store chain?
A) Low barriers to entry.
B) High levels of research and development.
C) High profit margins.
D) Low capital intensity.
Answer: A
Q4) Cash and cash equivalents are considered ____________________ assets.
Answer: Monetary
3
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Sample Questions
Q1) Plaxo Corporation has a tax rate of 35% and uses the straight-line method of depreciation for its equipment,which has a useful life of four years.Tax legislation requires the company to depreciate its equipment using the following schedule: year 150%,year 2 - 30%,year 3 - 15% and year 4 - 5%.In 2014 Plaxo purchases a piece of equipment with a four year life and an original cost of $100,000.What amount will Plaxo record as a deferred tax asset or liability in 2010?
A) Deferred tax asset of $25,000.
B) Deferred tax liability of $25,000.
C) Deferred tax asset of $8,750.
D) Deferred tax liability of $8,750.
Answer: D
Q2) Historical costs include all of the following except:
A) acquisition costs for assets
B) net realizable values for assets.
C) adjusted acquisition costs for assets.
D) initial present value for assets and liabilities
Answer: B
Q3) The amount initially paid to acquire an asset is called ______________________________.
Answer: acquisition cost
Page 4
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Chapter 3: Income Flows Versus Cash Flows:
Understanding the Statement of Cash Flows
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Sample Questions
Q1) Outback Corp.recorded sales of $1,300,000 in 2010,in addition the company's accounts receivable balance grew from $120,000 at the beginning of 2010 to $165,000 at the end of 2010.How much cash did Outback collect from customers in 2010?
A) $1,300,000
B) $1,345,000
C) $1,255,000
D) $1,135,000
Answer: C
Q2) When preparing the statement of cash flows using the indirect method,an increase in inventories would appear as
A) a decrease in the operating activities section
B) an increase in the operating activities section
C) a use of cash in the investing activities section
D) a source of cash in the investing activities section
Answer: A
Q3) The length of the operating cycle is another factor that may cause cash flow from operations to differ from
Answer: working capital from operations
Page 5
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Chapter 4: Profitability Analysis
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Q1) When calculating the return on fixed assets sales is divided by
Q2) Which of the following is the primary objective in most financial statement analysis?
A) to value a firm's equity securities.
B) to look for unrecorded liabilities.
C) to establish a firm's strategy within the industry.
D) to define markets for the firm.
Q3) Refer to the information for Extreme Sports Company and All Sports Corporation.
Compute the Asset Turnover for All Sports
A) 3.2%
B) 2.15
C) 8.9%
D) 1.1%
Q4) Sustainable earnings represent
A) the level of earnings expected to persist in the future.
B) the level of earnings and the growth in the levels of earnings expected to persist in the future.
C) the growth rate of future earnings.
D) retained earnings.
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Chapter 5: Risk Analysis
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Q1) One criticism of the interest and fixed charges coverage ratios as measures of long-term solvency risk is that they use earnings rather than cash flows in the numerator.Detail how the interest coverage ratio and fixed charges coverage ratio are calculated.In addition,discuss why using earnings in the numerator is a problem and what method could be used to alleviate this problem.
Q2) Working capital is defined as ______________________ minus _____________________.
Q3) Refer to the information for Mobile Company.Mobile's days receivables outstanding at the end of 2010 was
A) 43.20 days
B) 40.50 days
C) 45.25 days
D) 8.50 days
Q4) Marker's 2012 Liabilities to Shareholders' Equity ratio is
A) 100.0%
B) 170.9%
C) 63.1%
D) 129.3%
Q5) The current ratio is one of the measures of__________ of the firm.
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Chapter 6: Accounting Quality
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Q1) When evaluating the quality of accounting information the user should consider the ____________________ of the firm's disclosures.
Q2) When evaluating the quality of accounting information the user should consider the ____________________ of the measurements made.
Q3) The Orbus company has a 30,000 unrealized gain and a 10,000 unrealized loss.Where would Orbus company report these transactions?
A) only in non-current assets and liabilities.
B) in stockholders' equity.
C) other comprehensive income
D) on the balance sheet as a current asset
Q4) Which of the following is not considered a motive to manage earnings?
A) To create optimal manager compensation payments.
B) To create optimal job security for senior management.
C) To create optimal measures of assets and liabilities for balance sheet purposes.
D) To manage reported earnings in order to reduce industry-specific actions.
Q5) On the income statement the disposal of a segment of a business should be shown
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Chapter 7: Financing Activities
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Sample Questions
Q1) Under the fair value method of accounting for stock options,firms must value stock options on the
A) grant date.
B) intrinsic date.
C) measurement date.
D) fair value date.
Q2) Which kind of dividends typically pay dividends with additional shares of the corporation's stock?
A) property dividend
B) stock dividend
C) liquidating dividend
D) scrip dividend
Q3) Which kind of dividends have an interest-bearing promise to pay dividends?
A) property dividend
B) stock dividend
C) liquidating dividend
D) scrip dividend
Q4) The _________________________ is the date a firm gives a stock option to employees.
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Chapter 8: Investing Activities
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Q1) When a foreign entity operates as a relatively self-contained and integrated unit within a foreign country,normally,its functional currency is the
Q2) Which of the following would not be used to determine the cost of an asset?
A) cash paid
B) sales and excise taxes
C) cost incurred to get the asset ready for its intended use
D) depreciation method
Q3) Firms that capitalize routine maintenance and repair charges will end up with the result of having the current period's income being ____________________.
Q4) For some transactions U.S.GAAP requires that value changes are recognized on the balance sheet and the income statement when they occur,even if not realized.Discuss what types of transactions get this type of treatment and the logic behind this accounting.
Q5) A key characteristic of asset measurement is best described as:
A) average value based on all assets held by the company
B) disposal cost less depreciation
C) fair value at the acquisition date
D) fair value less depreciation
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Chapter 9: Operating Activities
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Sample Questions
Q1) All of the following are conditions for revenue recognition outlined by SAB 104 except:
A) There is pervasive evidence that an arrangement exists.
B) Delivery has occurred or services have been performed.
C) The seller's price to the buyer can be variable.
D) Collectability is reasonably assured.
Q2) Derivatives are financial instruments that derive their value from changes in any of the following underlying securitiesexcept:
A) Stock prices
B) Percentage discount on accounts receivable
C) Interest rates
D) Commodity prices
Q3) Accountants use reserve accounts for various reasons,for each of the scenarios below describe a specific account example that matches the scenario.
1.The use of a reserve account in order to match expense with revenues.
2.The use of a reserve account in order to keep expense out of the income statement.
3.The use of a reserve account in order to revalue an asset,but delay the income recognition effect.
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) In comparison of 2010 to 2009 performance,Watson Company's inventory turnover decreased substantially,although sales and inventory amounts were essentially unchanged.
Required:
During a corporate meeting you heard the following managers postulate why the decreased inventory turnover ratio happened.Which statement best explains the decreased inventory turnover ratio and why? a.The marketing manager said: The decreased inventory turnover ratio is due to an increase in the cost of goods sold.
b.The operations manager said: The decreased inventory turnover ratio is due to increased gross profit percentage.
c.The credit manager said: The decreased inventory turnover ratio is due to a decrease in the accounts receivable turnover.
d.The shipping manager said: The decreased inventory turnover ratio is due toinventory being shipped FOB destination point which keeps those items in inventory until they reach the purchasers warehouse.
Q2) In developing forecasts of expenses the analyst must take into consideration that expenses can be broken down into ________________________ or ______________________ components.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Why is the dividends valuation approach applicable to firms that do not pay periodic (quarterly or annual)dividends?
Q2) When deriving the equity value of a firm,an analyst forecasts the real dividends expected to be paid in the future.In this case,which discount rate should be used?
A) The nominal rate of return
B) The real rate of return
C) The risk free rate of return
D) The risk adjusted rate of return
Q3) Assume that Zonk is a potential leveraged buyout candidate.Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity.Compute the revised equity beta for Zonk based on the new capital structure.
A) 4.35
B) 4.77
C) 4.34
D) 3.91
Q4) Why are dividends value-relevant to common equity shareholders?
Q5) Provide the rationale for using expected dividends in a valuation model.
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) If an analyst wants to value a potential investment in the net operating assets of a division of another firm,the analyst should discount the projected free cash flows at the A) cost of debt capital
B) cost of equity capital
C) weighted average cost of capital
D) risk free rate
Q2) ________________ is an estimate of systematic risk based on the degree of covariation between a firm's stock returns and an index of stock returns for all firms in the market.
Q3) Starting with net cash flow from operations and adjusting for capital expenditures and dividends equals
A) free cash flows for all debt and equity capital stakeholders
B) free cash flow
C) free cash flows to common equity capital shareholders
D) free cash flow from operations
Q4) If cash flow projections include the effect of inflation then the discount rate used should be a ____________________ rate.
Q5) Provide the rationale for using expected free cash flow in valuation.
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Investors have invested $25,000 in common equity in a company.Given the risk inherent in the company the investors expect to earn a 15 percent return.In addition,the investors expect the company to return all income to investors in the form of dividends.The company is forecasted to earn $4,000 the first year,$5,000 the second year,$4,500 the third year and $3,750 each year after the third year.For this company determine the company's residual income valuation
Q2) Residual income will begreater than zero when
A) the firm's reported net income exactly equals the required level of earnings necessary to cover the cost of equity capital.
B) the firm's expected future income is greater than the required level of earnings necessary to cover the cost of equity capital.
C) the firm's expected future income exactly equals the required level of earnings necessary to cover the cost of equity capital.
D) the firm's expected future income is less than the required level of earnings necessary to cover the cost of equity capital.
Q3) Residual income valuation focuses on ____________________ as a periodic measure of shareholder wealth creation.
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Chapter 14: Valuation: Market-Based Approaches
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Q1) What information can a PEG ratio provide about a company's stock price? What does a PEG ratio greater than one mean? less than one?
Q2) Which of the following normally does not introduce measurement error into the calculation of P/E ratios?
A) differences in firm specific growth rates
B) restructuring losses
C) transitory gains
D) deferred taxes
Q3) Firms with low P/E ratios tend to have current residual income that is greater than A) future actual income.
B) future residual income.
C) past actual income.
D) past residual income.
Q4) The ______________________________ represents the value of the firm,based on book value of equity and forecasts of expected future earnings,in the absence of discounting for risk.
Q5) The value-to-book ratio reflects an analyst's expectation of the firm's ____________________ value to book value.
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