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FIN 325 > Chapter 1 & 2 > Flashcards

Chapter 1 & 2 Flashcards

1
Q

Which one of the following statements concerning net working capital is correct?

A. Net working capital increases when inventory is purchased with cash.

B. Net working capital may be a negative value.

C. Total assets must increase if net working capital increases.

D. Net working capital excludes inventory.

E. Net working capital is the amount of cash a firm currently has available for spending.

A

B. Net working capital may be a negative value.

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2
Q

Which one of the following accounts is the most liquid?
A. Inventory

B. Building

C. Accounts Receivable

D. Equipment

E. Land

A

C. Accounts Receivable

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3
Q

Which one of the following financial statements summarizes a firm’s revenue and expenses during a period of time?

A. Income statement

B. Balance sheet

C. Statement of cash flows

D. Tax reconciliation statement

E. Market value report

A

A. Income statement

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4
Q

The cash flow that is available for distribution to a corporation’s creditors and stockholders is called the:

A. operating cash flow.

B. net capital spending.

C. net working capital.

D. cash flow from assets.

E. cash flow to stockholders.

A

D. cash flow from assets.

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5
Q

Which one of the following is excluded from the cash flow from assets?

A. Accounts payable

B. Inventory

C. Sales

D. Interest expense

E. Cost of goods sold

A

D. Interest expense

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6
Q

Griffin’s Goat Farm, Incorporated, has sales of $614,000, costs of $265,000, depreciation expense of $42,000, interest expense of $30,000, and a tax rate of 22 percent. What is the net income for this firm?

A. $288,060

B. $258,060

C. $141,920

D. $216,060

E. $246,060

A

D. $216,060

The income statement for the company is:

Income Statement
Sales $ 614,000
Costs 265,000
Depreciation 42,000
__________
EBIT $ 307,000
Interest 30,000
__________
EBT $ 277,000
Taxes (22%) 60,940
__________
Net income $ 216,060

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7
Q

Logano Driving School’s 2017 balance sheet showed net fixed assets of $4.3 million, and the 2018 balance sheet showed net fixed assets of $6.1 million. The company’s 2018 income statement showed a depreciation expense of $835,000. What was net capital spending for 2018?

A. $965,000

B. $-1,800,000

C. $-965,000

D. $1,800,000

E. $2,635,000

A

E. $2,635,000

Explanation

Net capital spending =
NFAend
− NFAbeg
+ Depreciation
Net capital spending =
$6,100,000
− 4,300,000
+ 835,000
Net capital spending = $2,635,000

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8
Q

The 2017 balance sheet of Dream, Incorporated, showed current assets of $1,230 and current liabilities of $880. The 2018 balance sheet showed current assets of $1,660 and current liabilities of $1,140. What was the company’s 2018 change in net working capital, or NWC?

A. $170

B. $-690

C. $2,190

D. $-280

E. $690

A

A. $170

Explanation

Change in NWC =
($1,660 − 1,140) − ($1,230 − 880)
Change in NWC = $520 − 350 = $170

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9
Q

The 2017 balance sheet of Kerber’s Tennis Shop, Incorporated, showed long-term debt of $2.1 million, and the 2018 balance sheet showed long-term debt of $3.75 million. The 2018 income statement showed an interest expense of $290,000. What was the firm’s cash flow to creditors during 2018?

A. $-1,360,000

B. $1,650,290

C. $-288,350

D. $1,650,000

E. $-291,650

A

A. $-1,360,000

Cash flow to creditors =
$290,000 − ($3,750,000 − 2,100,000)
Cash flow to creditors = $-1,360,000

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10
Q

Your firm has net income of $395 on total sales of $1,400. Costs are $770 and depreciation is $130. The tax rate is 21 percent. The firm does not have interest expenses. What is the operating cash flow?
A. $395
B. $895
C. $630
D. $525
E. $500

A

D. $525

EBIT = (Earnings Before Interest & Taxes)
$1,400 – 770 – 130 = $500
(Sales – Costs – Depreciation)

Taxes = .21 × $500 = $105
(Tax rate × EBIT)

OCF =
$500 + 130 – 105 = $525
(EBIT + Depreciation – Taxes)

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11
Q

A balance sheet reflects a firm’s Blank______ value on a particular date.
A. market
B. hidden
C. accounting
D. fundamental

A

C. accounting

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12
Q

What is the purpose of an Income Statement?

A. To measure performance over a set period of time

B. To identify the cash inflows and outflows

C. To show the accumulation of assets and liabilities

D. To identify the amount of cash spent on various expenses

A

A. To measure performance over a set period of time

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13
Q

An official accounting statement that helps to explain the change in cash and cash equivalents is called the _____.

A. statement of cash flows

B. cash and equivalents report

C. balance sheet

D. income statement

A

A. statement of cash flows

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14
Q

Operating cash flow includes capital spending and working capital requirements.
True or False?

A

False
Reason: Operating cash flow is the cash flow generated by business activities, excluding financing, capital spending, or changes in net working capital.

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15
Q

If a firm’s net working capital goes from $150 in 2020 to $130 in 2021, then the change in net working capital is:
A. +$20

B. $130

C. $150

D. −$20

A

D. −$20

Reason: Change in NWC =
$130 − 150 = −$20

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16
Q

Which of these questions can be answered by reviewing a firm’s balance sheet?

What is the total amount of assets the firm owns?

How much debt is used to finance the firm?

How much of the firm’s net income was paid out in dividends?

How much net income has the firm earned this period?

A

What is the total amount of assets the firm owns?

How much debt is used to finance the firm?

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17
Q

Cash flow to stockholders is dividends paid (minus/plus) net new equity raised.

A

minus

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18
Q

The purpose of a(n) ______ is to measure performance over a set period of time.

A

income statement

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19
Q

The statement of cash flow explains changes in _____.

cash and equivalents

non-cash items

net income

retained earnings

A

cash and equivalents

The statement of cash flow explains changes in cash and equivalents. Non-cash items are added back to net income to start the process.

20
Q

Cash generated from a firm’s normal business activities is called _____.

operating cash flow

cash flow from assets

cash flow to creditors

A

operating cash flow

21
Q

On which side of the balance sheet do liabilities appear?

The right side

The left side

Neither side

A

The right side

22
Q

______ budgeting is the process of making and managing expenditures on long-term assets.

Conventional

Optional

Performance-based

Capital

A

Capital

23
Q

The financial manager acts in the shareholders’ best interests by making decisions that increase the value of _____.

the stock

managers’ salaries

pensions

A

the stock

24
Q

Which term applies to the mixture of debt and equity maintained by a firm?

Capital structure

Cash management

Net working capital

Capital budget

A

Capital structure

25
Q

The term __________________
costs refers to the costs of the conflict of interest between stockholders and management.

A

agency

26
Q

Capital budgeting is concerned with planning and managing a firm’s _____.

long-term liabilities

current assets

long-term investments

current liabilities

A

long-term investments

27
Q

What is the main goal of financial management?

To maximize profits

To maximize current value per share of existing stock

To minimize expenses

To maximize share of the stock holdings of managers of the company

A

To maximize current value per share of existing stock

28
Q

The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.

A

agency

29
Q

______ budgeting is the process of making and managing expenditures on long-term assets.

A

capital

30
Q

Which term applies to the mixture of debt and equity maintained by a firm?

Net working capital

Cash management

Capital budget

Capital structure

A

Capital structure

31
Q

Which of the following is included in working capital?

Current (short-term) assets

Accounts receivable

Accounts payable

Retained earnings

Long-term debt

A

Current (short-term) assets

Accounts receivable

Accounts payable

Reason: Working capital includes all short-term assets and liabilities.

32
Q

Which one of the following is a working capital management decision?

Determining the amount of equipment needed to complete a job.

Determining whether to pay cash for a purchase or use the credit offered by the supplier.

Determining the amount of long-term debt required to complete a project.

Determining the number of shares of stock to issue to fund an acquisition.

Determining whether or not a project should be accepted.

A

Determining whether to pay cash for a purchase or use the credit offered by the supplier.

33
Q

Decisions made by financial managers should primarily focus on increasing which one of the following?

Size of the firm.

Growth rate of the firm.

Gross profit per unit produced.

Market value per share of outstanding stock.

Total sales.

A

Market value per share of outstanding stock.

34
Q

Financial managers should primarily focus on the interests of:

Stakeholders.

The vice president of finance.

Their immediate supervisor.

Shareholders.

The board of directors.

A

Shareholders.

35
Q

Which one of the following questions involves a capital budgeting decision?

How many shares of stock should the firm issue?
Should the firm purchase a new machine for the production line?
Should the firm borrow money to acquire new equipment?
How much inventory should the firm keep on hand?
How much money should be kept in the checking account?

A

Should the firm purchase a new machine for the production line?

36
Q

Determining the number of shares of stock to issue is an example of a ______ decision.

capital rationing

net working capital

capital budgeting

capital allocation

capital structure

A

capital structure

37
Q

Which one of the following questions is a working capital management decision?

Should the company issue new shares of stock or borrow money?

Should the company refurbish its equipment or replace it?

How much inventory should the company keep on hand?

Should the company close one of its current stores?

How much money should the company borrow to buy a new building?

A

How much inventory should the company keep on hand?

38
Q

Deciding which long-term investment a firm should make is a ______ decision.

working capital management

capital constraints
cost of capital

capital budgeting

capital structure

A

capital budgeting

39
Q

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

An increase in the amount of the quarterly dividend

A decrease in the per unit production costs

An increase in the number of shares outstanding

A decrease in the net working capital

An increase in the market value per share

A

An increase in the market value per share

40
Q

Financial managers should strive to maximize the current value per share of the existing stock to:

ensure the company will grow in size at the maximum possible rate.

provide the greatest opportunity for employees to earn high salaries.

best represent the interests of the current owners of the firm.

increase the current dividends per share.

create the possibility of rewarding high-performing managers with shares of stock.

A

best represent the interests of the current owners of the firm.

41
Q

Which of the following actions would be considered an agency problem?

An owner of a sole proprietorship takes company office supplies for personal use
Both partners in a general partnership close the office early one day to go skiing
A manager in a corporation buys shares of the company’s stock when the price falls
A manager in a corporation makes online personal travel arrangements during work hours
A shareholder in a corporation sells shares of the company’s stock when the price rises

A

A manager in a corporation makes online personal travel arrangements during work hours

42
Q

Cash flow to stockholders is defined as:

operating cash flow minus the cash flow to creditors.

dividend payments less net new equity raised.

the total amount of interest and dividends paid during the past year.

cash flow from assets plus the cash flow to creditors.

the change in total equity over the past year.

A

dividend payments less net new equity raised.

43
Q

Griffin’s Goat Farm, Incorporated, has sales of $634,000, costs of $395,000, depreciation expense of $39,000, interest expense of $21,000, and a tax rate of 24 percent. What is the net income for this firm?

$136,040

$26,840

$196,040

$157,040

$175,040

A

$136,040

The income statement for the company is:
Income Statement
Sales $ 634,000
Costs 395,000
Depreciation 39,000

EBIT $ 200,000
Interest 21,000

EBT $ 179,000
Taxes (24%) 42,960

Net income $ 136,040

44
Q

The 2017 balance sheet of Dream, Incorporated, showed current assets of $1,220 and current liabilities of $940. The 2018 balance sheet showed current assets of $1,640 and current liabilities of $1,200. What was the company’s 2018 change in net working capital, or NWC?

Multiple Choice

$160

$-270

$2,300

$-680

$680

A

$160

Change in NWC = NWCend − NWCbeg
Change in NWC = (CAend − CLend) − (CAbeg − CLbeg)
Change in NWC = ($1,640 − 1,200) − ($1,220 − 940)
Change in NWC = $440 − 280 = $160

45
Q

Which one of the following best states the primary goal of financial management?

Maximize the current value per share.

Increase cash flow and avoid financial distress.

Minimize operational costs while maximizing firm efficiency.

Maximize current dividends per share.

Maintain steady growth while increasing current profits.

A

Maximize the current value per share.

46
Q

An increase in which one of the following will increase a firm’s quick ratio without affecting its cash ratio?

Inventory

Accounts receivable

Correct

Cash

Fixed assets

Accounts payable

A

Accounts receivable

FIN 325 (7 decks)

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