Practice Exam 1

Question 1

When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry, it is called trend analysis. True or False?

Answer 1

False

Question 2

A company with negative net income will also have negative operating cash flow. True or False?

Answer 2

False.

Question 3

The risk-return trade-off implies that the return on a riskless asset must be zero. True or False?

Answer 3

False

Question 4

An income statement reports a firm’s cumulative revenues and expenses from the inception of the firm through the income statement date. True or False?

Answer 4

False

Question 5

Borrowing money causes a corporation’s return on assets to decrease because of the interest that must be paid. True or False?

Answer 5

True

Question 6

If company A has lower days in inventory than company B, then company A will have a higher inventory turnover. True or False?

Answer 6

True

Question 7

Suppose two companies have the same operating income. In that case, their net incomes will still differ if one company finances its assets with more debt and the other with more equity. True or False?

Answer 7

True

Question 8

According to accrual accounting, revenues are recognized when earned, and expenses are recognized when incurred. True or False?

Answer 8

True

Question 9

Nishaa has been promoted and is now in charge of all external financing. In other words, she is in charge of:

A) Capital structure management.
B) Asset allocation.
C) Risk management.
D) Capital budgeting.
E) Working capital management.

Answer 9

Capital structure management.

Question 10

Vera opened a used bookstore and is both the 100 percent owner and the store’s manager. Which type of business entity does Vera own if she is personally liable for all the store’s debts?

A) Sole proprietorship
B) Limited partnership
C) Corporation
D) Joint stock company
E) General partnership

Answer 10

Sole proprietorship

Question 11

Which one of the following functions should be assigned to the corporate treasurer rather than to the controller?

A) Data processing.
B) Cost accounting.
C) Tax management.
D) Cash management.
E) Financial accounting.

Answer 11

Cash management.

Question 12

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners?

A) Sole proprietorship
B) General partnership
C) Limited partnership
D) Limited liability company
E) Corporation

Answer 12

Limited partnership

Question 13

The primary goal of financial management is most associated with increasing the:

A) Dollar amount of each sale.
B) Traffic flow within the firm’s stores.
C) Fixed costs while lowering the variable costs.
D) Firm’s liquidity.
E) Market value of the firm.

Answer 13

Market value of the firm.

Question 14

An agency issue is most apt to develop when:

A) A firm encounters a period of stagnant growth.
B) A firm downsizes.
C) The control of a firm is separated from the firm’s ownership. D) The firm’s owner is also its key manager.
E) A firm is structured as a general partnership.

Answer 14

The control of a firm is separated from the firm’s ownership.

Question 15

A firm has common stock of $100, paid-in surplus of $370, total liabilities of $460, current assets of $490, and net fixed assets of $700. What is the amount of the shareholders’ equity?

A) $580
B) $240
C) $1,190
D) $930
E) $730

Answer 15

$730

Question 16

At the beginning of the year, long-term debt of a firm is $298 and total debt is $334. At the end of the year, long-term debt is $264 and total debt is $344. The interest paid is $30. What is the amount of the cash flow to creditors?

A) $30
B) −$64
C) $34
D) −$34
E) $64

Answer 16

$64

Question 17

For the past year, Momsen Limited had sales of $45,017, interest expense of $3,308, cost of goods sold of $15,434, selling and administrative expense of $11,101, and depreciation of $5,400. If the tax rate was 22 percent, what was the company’s net income?

A) $16,283
B) $6,896
C) $9,774
D) $6,842
E) $7,624

Answer 17

$7,624

Question 18

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow?

A) Increase in depreciation
B) Increase in accounts receivable
C) Increase in accounts payable
D) Decrease in cost of goods sold
E) Increase in sales

Answer 18

Increase in accounts payable

Question 19

For the year, Bethalto Furniture had sales of $818,790, costs of $748,330, and interest paid of $24,450. The depreciation expense was $56,100 and the tax rate was 21 percent. At the beginning of the year, the firm had retained earnings of $172,270 and common stock of $260,000. At the end of the year, retained earnings was $158,713 and common stock was $280,000. Any tax losses can be used. What is the amount of the dividends paid for the year?

A) $5,586
B) $6,466
C) $7,566
D) $7,066
E) $6,898

Answer 19

$5,586

Question 20

Porter Jewelers, a sole proprietorship has a marginal tax rate of 32 percent and an average tax rate of 20.9 percent. If the firm owes $34,330 in taxes, how much taxable income did it earn?

A) $127,584
B) $116,649
C) $164,258
D) $157,500
E) $168,500

Answer 20

$164,258

Question 21

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

A) DuPont rate
B) External growth rate
C) Sustainable growth rate
D) Internal growth rate
E) Cash flow rate

Answer 21

Internal growth rate

Question 22

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is less than 1.0.

A) Cash purchase of inventory
B) Cash payment on an account receivable
C) Cash payment of an account payable
D) Credit sale of inventory

Answer 22

Credit sale of inventory

Question 23

A firm has total debt of $1,450 and a debt-equity ratio of .30. What is the value of the total assets?

A) $4,350.00
B) $3,000.00
C) $1,885.00
D) $4,833.33
E) $6,283.33

Answer 23

$6,283.33

Question 24

Mario’s Home Systems has sales of $2,870, costs of goods sold of $2,210, inventory of $514, and accounts receivable of $435. How many days, on average, does it take Mario’s to sell its inventory? Assume a 365-day year.

A) 83.73 days
B) 71.84 days
C) 65.37 days
D) 84.89 days
E) 55.32 days

Answer 24

84.89 days

Question 25

Quincy Real Estate pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage shown on a common-size income statement for the dividend account will:

A) Remain constant over time.
B) Be equal to the dividend amount divided by the net income.
C) Vary in direct relation to the net profit percentage.
D) Vary in direct relation to changes in the sales level.
E) Vary but not in direct relation to any other variable.

Answer 25

Vary in direct relation to the net profit percentage.

Question 26

Which one of the following will increase the profit margin of a firm, all else held constant?

A) Increase in interest paid
B) Increase in fixed costs
C) Increase in depreciation expense
D) Decrease in the tax rate
E) Decrease in sales

Answer 26

Decrease in the tax rate

Question 27

Mader’s Camping Supply reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios?

I. Profit margin
II. Return on assets
III. Total asset turnover
IV. Return on equity

A) I and II only
B) I and III only
C) II, III, and IV only
D) I, II, and IV only
E) I, II, III, and IV

Answer 27

I, II, and IV only

Question 28

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

A) Zero percent.
B) 100 percent.
C) Equal to the ROA.
D) Negative.
E) Infinite.

Answer 28

Zero percent.

Question 29

A firm has sales of $1,030, net income of $207, net fixed assets of $506, and current assets of $262. The firm has $82 in inventory. What is the common-size balance sheet value of inventory?

A) 16.21%
B) 7.96%
C) 10.68%
D) 39.61%
E) 31.30%

Answer 29

10.68%

Question 30

A firm can increase its sustainable rate of growth by decreasing its:

A) Profit margin.
B) Dividends.
C) Total asset turnover.
D) Target debt-equity ratio.
E) Equity multiplier.

Answer 30

Dividends.

Question 31

Coopers. Inc reports an operating income of $150,000 in 2022. The firm paid $33,812 in dividends and retained earnings were $53,000.

A. Assuming the firm’s earnings are taxed at 21%, how much income taxes does the firm pay in 2022?

Answer 31

Income tax is $23,077

Question 32

Coopers. Inc reports an operating income of $150,000 in 2022. The firm paid $33,812 in dividends and retained earnings were $53,000.

B. How much does the firm pay in interest payment, and what is the times interest earned ratio?

Answer 32

The interest payment is $40,111.
The times interest earned ratio is 3.74.

Question 33

Coopers. Inc reports an operating income of $150,000 in 2022. The firm paid $33,812 in dividends and retained earnings were $53,000.

C. Assume that the total equity Coopers has is $600,000. What is the profit retention rate and sustainable growth rate for Coopers. Inc.?

Answer 33

The profit retention rate is 61.05%
The sustainable growth rate is 8.83%