Question;1.Which of the following statements is CORRECT?AnswerThe primary difference between EVA and accounting net income is that when net income iscalculated, a deduction is made to account for the cost of common equity, whereas EVArepresents net income before deducting the cost of the equity capital the firm uses.MVA gives us an idea about how much value a firm's management has added during the lastyear.MVA stands for market value added, and it is defined as follows:MVA = (Shares outstanding)(Stock price) + Book value of common equity.EVA stands for economic value added, and it is defined as follows:EVA = EBIT(1 - T) - (Investor-supplied op. capital) x (A - T cost of capital).EVA gives us an idea about how much value a firm's management has added over the firm'slife.2.Which of the following statements is CORRECT?AnswerAll corporations other than non-profit corporations are subject to corporate income taxes,which are 15% for the lowest amounts of income and 35% for the highest amounts ofincome.The income of certain small corporations that qualify under the Tax Code is completelyexempt from corporate income taxes. Thus, the federal government receives no tax revenuefrom these businesses.All businesses, regardless of their legal form of organization, are taxed under the BusinessTax Provisions of the Internal Revenue Code.Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, butthen their owners must report their pro rata shares of the firm's income as personal incomeand pay taxes on that income.Congress recently changed the tax laws to make dividend income received by individualsexempt from income taxes. Prior to the enactment of that law, corporate income was subjectto double taxation, where the firm was first taxed on the income and stockholders weretaxed again on the income when it was paid to them as dividends.3.Which of the following statements is CORRECT?AnswerThe statement of cash flows shows how much the firm's cash total of currency, bankthedeposits, and short-term liquid securities (or cash equivalents)increased or decreasedduring a given year.The statement of cash flows reflects cash flows from operations, but it does not reflect theeffects of buying or selling fixed assets.The statement of cash flows shows where the firm's cash is located, indeed, it provides alisting of all banks and brokerage houses where cash is on deposit.The statement of cash flows reflects cash flows from continuing operations, but it does notreflect the effects of changes in working capital.The statement of cash flows reflects cash flows from operations and from borrowings, but itdoes not reflect cash obtained by selling new common stock.4.Which of the following statements is CORRECT?AnswerIf a company pays more in dividends than it generates in net income, its retained earnings asreported on the balance sheet will decline from the previous year's balance.Dividends paid reduce the net income that is reported on a company's income statement.If a company uses some of its bank deposits to buy short-term, highly liquid marketablesecurities, this will cause a decline in its current assets as shown on the balance sheet.If a company issues new long-term bonds during the current year, this will increase itsreported current liabilities at the end of the year.Accounts receivable are reported as a current liability on the balance sheet.5.Assume that Congress recently passed a provision that will enable Barton's Rare Books(BRB) to double its depreciation expense for the upcoming year but will have no effecton its sales revenue or tax rate. Prior to the new provision, BRB's net income after taxeswas forecasted to be $4 million. Which of the following best describes the impact of thenew provision on BRB's financial statements versus the statements without theprovision? Assume that the company uses the same depreciation method for tax andstockholder reporting purposes.AnswerNet fixed assets on the balance sheet will decrease.The provision will reduce the company's net cash flow.The provision will increase the company's tax payments.Net fixed assets on the balance sheet will increase.The provision will increase the company's net income.6.DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping anew manufacturing facility. Assume that currently its equipment must be depreciated ona straight-line basis over 10 years, but Congress is considering legislation that wouldrequire the firm to depreciate the equipment over 7 years. If the legislation becomeslaw, which of the following would occur in the year following the change?AnswerThe firm's reported net income would increase.The firm's operating income (EBIT) would increase.The firm's taxable income would increase.The firm's net cash flow would increase.The firm's tax payments would increase.7.Which of the following items cannot be found on a firm's balance sheet under currentliabilities?AnswerAccrued payroll taxes.Accounts payable.Short-term notes payable to the bank.Accrued wages.Cost of goods sold.8.Other things held constant, which of the following actions would increase the amount ofcash on a company's balance sheet?AnswerThe company purchases a new piece of equipment.The company repurchases common stock.The company pays a dividend.The company issues new common stock.The company gives customers more time to pay their bills.9.Which of the following statements is CORRECT?AnswerThe statement of cash needs tells us how much cash the firm will require during some futureperiod, generally a month or a year.The four most important financial statements provided in the annual report are the balancesheet, income statement, cash budget, and the statement of stockholders' equity.The balance sheet gives us a picture of the firm's financial position at a point in time.The income statement gives us a picture of the firm's financial position at a point in time.The statement of cash flows tells us how much cash the firm has in the form of currency anddemand deposits.10.Which of the following statements is CORRECT?AnswerThe income statement for a given year, say 2012, is designed to give us an idea of howmuch the firm earned during that year.The focal point of the income statement is the cash account, because that account cannot bemanipulated by "accounting tricks."The reported income of two otherwise identical firms cannot be manipulated by differentaccounting procedures provided the firms follow Generally Accepted Accounting Principles(GAAP).The reported income of two otherwise identical firms must be identical if the firms arepublicly owned, provided they follow procedures that are permitted by the Securities andExchange Commission (SEC).If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported netincome will be identical to its reported net cash flow.11.Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) anegative free cash flow, and (3) an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?AnswerThe company had a sharp increase in its depreciation and amortization expenses.The company had a sharp increase in its inventories.The company had a sharp increase in its accrued liabilities.The company sold a new issue of common stock.The company made a large capital investment early in the year12.Which of the following factors could explain why Regal Industrial Fixtures had anegative net cash flow last year, even though the cash on its balance sheet increased?AnswerThe company repurchased 20% of its common stock.The company sold a new issue of bonds.The company made a large investment in new plant and equipment.The company paid a large dividend.The company had high amortization expenses.13.Which of the following statements is CORRECT?AnswerIf a firm reports a loss on its income statement, then the retained earnings account as shownon the balance sheet will be negative.Since depreciation is a source of funds, the more depreciation a company has, the larger itsretained earnings will be, other things held constant.A firm can show a large amount of retained earnings on its balance sheet yet need to borrowcash to make required payments.Common equity includes common stock and retained earnings, less accumulateddepreciation.The retained earnings account as shown on the balance sheet shows the amount of cash thatis available for paying dividends.14.Which of the following statements is CORRECT?AnswerA typical industrial company's balance sheet lists the firm's assets that will be converted tocash first, and then goes on down to list the firm's longest lived assets last.The balance sheet for a given year, say 2012, is designed to give us an idea of whathappened to the firm during that year.The balance sheet for a given year, say 2012, tells us how much money the company earnedduring that year.The difference between the total assets reported on the balance sheet and the debts reportedon this statement tells us the current market value of the stockholders' equity, assuming thestatements are prepared in accordance with generally accepted accounting principles(GAAP).For most companies, the market value of the stock equals the book value of the stock asreported on the balance sheet.15.Analysts following Armstrong Products recently noted that the company's operating netcash flow increased over the prior year, yet cash as reported on the balance sheetdecreased. Which of the following factors could explain this situation?AnswerThe company issued new long-term debt.The company cut its dividend.The company made a large investment in a profitable new plant.The company sold a division and received cash in return.The company issued new common stock.16.Cordelion Communications is considering issuing new common stock and using theproceeds to reduce its outstanding debt. The stock issue would have no effect on totalassets, the interest rate Cordelion pays, EBIT, or the tax rate. Which of the following islikely to occur if the company goes ahead with the stock issue?AnswerThe times interest earned ratio will decrease.The ROA will decline.Taxable income will decrease.The tax bill will increase.Net income will decrease.17.Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. Whatwas its total assets turnover ratio (TATO)?Answer2.032.132.252.362.4818.Which of the following statements is CORRECT?AnswerAll else equal, increasing the debt ratio will increase the ROA.The use of debt financing will tend to lower the basic earning power ratio, other things heldconstant.A firm that employs financial leverage will have a higher equity multiplier than anotherwise identical firm that has no debt in its capital structure.If two firms have identical sales, interest rates paid, operating costs, and assets, but differ inthe way they are financed, the firm with less debt will generally have the higher expectedROE.Holding bonds is better than holding stock for investors because income from bonds istaxed on a more favorable basis than income from stock.19.A firm wants to strengthen its financial position. Which of the following actions wouldincrease its current ratio?AnswerUse cash to increase inventory holdings.Reduce the company's days' sales outstanding to the industry average and use the resultingcash savings to purchase plant and equipment.Use cash to repurchase some of the company's own stock.Borrow using short-term debt and use the proceeds to repay debt that has a maturity of morethan one year.Issue new stock and then use some of the proceeds to purchase additional inventory andhold the remainder as cash.20.If the CEO of a large, diversified, firm were filling out a fitness report on a divisionmanager (i.e., "grading" the manager), which of the following situations would be likelyto cause the manager to receive a better grade? In all cases, assume that other thingsare held constant.AnswerThe division's DSO (days' sales outstanding) is 40, whereas the average for its competitorsis 30.The division's basic earning power ratio is above the average of other firms in its industry.The division's total assets turnover ratio is below the average for other firms in its industry.The division's debt ratio is above the average for other firms in the industry.The division's inventory turnover is 6, whereas the average for its competitors is 8.21.Which of the following statements is CORRECT?Answer"Window dressing" is any action that improves a firm's fundamental, long-run position andthus increases its intrinsic value.Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who paywith cash rather than buy on credit and then using the funds that come in quicker topurchase additional inventories is another example of "window dressing."Borrowing on a long-term basis and using the proceeds to retire short-term debt wouldimprove the current ratio and thus could be considered to be an example of "windowdressing."Offering discounts to customers who pay with cash rather than buy on credit and then usingthe funds that come in quicker to purchase additional inventories is an example of "windowdressing."Using some of the firm's cash to reduce long-term debt is an example of "window dressing."22.You observe that a firm's ROE is above the industry average, but its profit margin anddebt ratio are both below the industry average. Which of the following statements isCORRECT?AnswerIts total assets turnover must equal the industry average.Its total assets turnover must be above the industry average.Its return on assets must equal the industry average.Its TIE ratio must be below the industry average.Its total assets turnover must be below the industry average.23.Which of the following would indicate an improvement in a company's financial position,holding other things constant?AnswerThe current and quick ratios both increase.The inventory and total assets turnover ratios bothdecline.The debt ratio increases.The profit margin declines.The EBITDA coverage ratio declines.24.A firm's new president wants to strengthen the company's financial position. Which ofthe following actions would make it financially stronger?AnswerIncrease inventories while holding sales and cost of goods sold constant.Increase accounts receivable while holding sales constant.Increase EBIT while holding sales constant.Increase accounts payable while holding sales constant.Increase notes payable while holding sales constant.25.Companies Heidee and Leaudy are virtually identical in that they are both profitable,and they have the same total assets (TA), Sales (S), return on assets (ROA), and profitmargin (PM). However, Company Heidee has the higher debt ratio. Which of thefollowing statements is CORRECT?AnswerCompany Heidee has a lower operating income (EBIT) than Company LD.Company Heidee has a lower total assets turnover than Company Leaudy.Company Heidee has a lower equity multiplier than Company Leaudy.Company Heidee has a higher fixed assets turnover than Company Leaudy.Company Heidee has a higher ROE than Company Leaudy.26.Which of the following statements is CORRECT?AnswerIf a firm has the highest price/earnings ratio of any firm in its industry, then, other thingsheld constant, this suggests that the board of directors should fire the president.If a firm has the highest market/book ratio of any firm in its industry, then, other things heldconstant, this suggests that the board of directors should fire the president.Other things held constant, the higher a firm's expected future growth rate, the lower its P/Eratio is likely to be.The higher the market/book ratio, then, other things held constant, the higher one wouldexpect to find the Market Value Added (MVA).If a firm has a history of high Economic Value Added (EVA) numbers each year, and ifinvestors expect this situation to continue, then its market/book ratio and MVA are bothlikely to be below average.27.Which of the following would, generally, indicate an improvement in a company'sfinancial position, holding other things constant?AnswerThe total assets turnover decreases.The TIE declines.The DSO increases.The EBITDA coverage ratio increases.The current and quick ratios both decline.28.Considered alone, which of the following would increase a company's current ratio?AnswerAn increase in accounts payable.An increase in net fixed assets.An increase in accrued liabilities.An increase in notes payable.An increase in accounts receivable.29.If a bank loan officer were considering a company's request for a loan, which of thefollowing statements would you consider to be CORRECT?AnswerOther things held constant, the lower the current ratio, the lower the interest rate the bankwould charge the firm.The lower the company's EBITDA coverage ratio, other things held constant, the lower theinterest rate the bank would charge the firm.Other things held constant, the higher the debt ratio, the lower the interest rate the bankwould charge the firm.Other things held constant, the lower the debt ratio, the lower the interest rate the bankwould charge the firm.The lower the company's TIE ratio, other things held constant, the lower the interest rate thebank would charge the firm.30.The Cavendish Company recently issued new common stock and used the proceeds topay off some of its short-term notes payable. This action had no effect on the company'stotal assets or operating income. Which of the following effects would occur as a resultof this action?AnswerThe company's debt ratio increased.The company's current ratio increased.The company's times interest earned ratio decreased.The company's basic earning power ratio increased.The company's equity multiplier increased.
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