FIN 300 Study Guide - Cash Flow, Air Canada, Market (Place)

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sangriawombat306

6 Dec 2012

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Lo1 the sources and uses of a firm"s cash flows. Lo2 how to standardize financial statements for comparison purposes. Lo3 how to compute and, more importantly, interpret some common ratios. Lo5 some of the problems and pitfalls in financial statement analysis. Answers to concepts review and critical thinking questions. If inventory is purchased with cash, then there is no change in the current ratio. Thus, if debt is paid off with cash, the current ratio increases if it was initially greater than 1. 0. Inventory sold at cost reduces inventory and raises cash, so the current ratio is unchanged. If pressed by its short-term creditors and suppliers for immediate payment, the firm might have a difficult time meeting its obligations. A current ratio of 1. 50 means the firm has 50% more current assets than it does current liabilities. This probably represents an improvement in liquidity; short-term obligations can generally be met completely with a safety factor built in.

Related Questions

Felicia & Fred recently hired a new designer who has considerable experience in product development of handbags and small leather goods. The intent was for the designer to initially work with the companyâs innovation team to introduce a gift with purchase (GWP): a logo wristlet purse that can accommodate a Smartphone. This GWP will be offered as a limited edition during the holiday season and customers or recipients will be encouraged through social media to participate in a survey regarding the product to determine future potential demand for handbags and other small leather goods bearing the Felicia & Fred logo.

The potential inclusion of handbags as part of the companyâs product will require significant addition to the total value of Felicia & Fredâs working capital. The entire mix of assets and liabilities as part of the balance sheet might change.

Consider the following:

Question 1

Name three working capital elements that may change as a result of expansion into a new product line. Select one of these working capital elements and indicate why this element will change under the proposed program. Also within this selected element what are some of the issues Felicia and Fred can do to optimally manage? What are the risks of poor management of the element you selected?

Question 2

In order to maintain the companyâs debt covenants, it must maintain a current ratio of 1.5. Its current ratio is presently 1.75 and has been maintained at that level for some time. What happens to a companyâs current ratio if it takes on additional short-term debt or accounts payable to fund current assets when the current ratio is greater than one? Or Less than one?

Given your consideration of the part 2 result, should the company fund a working capital increase with short-term debt or long-term debt?

8. Your company issued bonds at a premium. Which of the following statements is NOT true?
A. The contra account, premium on bonds payable, is amortized each year by shifting part of its balance to interest expense.
B. On the date of issuance, the stated interest rate was greater than the market interest rate.
C. As the current date approaches the maturity date, the carrying value of the bond approaches the face value of the bond.
D. The account used to record the premium has a normal debit balance.

9. Which of the following would help a company improve its quick ratio without necessarily lowering the liability risk to a creditor?
A. Borrowing money on a long-term note just before the end of the accounting period.
B. Shifting resources from long-term assets to short-term assets such as supplies and inventory.
C. Shifting obligations from long-term liabilities to short-term liabilities.
D. Acquiring inventory by issuing a long-term note.

10. Which of the following is not used to calculate the times interest earned ratio?
A. Net income.
B. Income tax expense.
C. Interest earned on investments.
D. Interest expense.

11. Which of the following statements regarding treasury stock is true?
A. When a company reissues treasury stock for more than it originally paid for the stock, it does not report a gain.
B. When a company purchases treasury stock or pays a dividend, it increases total stockholders' equity.
C. Treasury stock is reported as an asset on the balance sheet.
D. Treasury stock is reported as issued and outstanding stock.

16. Typically, all other things equal, a profitable company that pays little or no dividends:
A. is a bad investment.
B. will reinvest profits which can lead to greater growth potential.
C. will experience relatively stable stock prices over time.
D. will appeal to investors who desire distributions of profit.

17. If a corporation declares and distributes a 10% stock dividend on its common shares, the account debited is:
A. Dividends Payable.
B. Common Stock.
C. Share Capital.
D. Retained Earnings.

20. Limited Liability Companies (LLCs) are like general partnerships in that:
A. income tax is not paid by the company itself.
B. the business has a separate legal identity.
C. liability is limited.
D. amounts paid to the owners are recorded as salaries expense.

21. Which of the following statements regarding financing activities is NOT true?
A. Cash dividends paid to a company's stockholders are reported as cash outflows from financing activities.
B. When a company issues stock for cash, it reports a cash inflow from financing activities.
C. When a company repurchases stock with cash, it reports a cash outflow for financing activities.
D. When a company repays a loan, it reports a cash outflow from investing activities.

22. Which of the following statements regarding quality of income ratio is NOT true?
A. A quality of income ratio will increase if a company's working capital management allows current assets such as inventory to increase out of control.
B. Variations in the ratio can be seasonal and are the result of sales fluctuations rather than reasons for alarm.
C. The quality of income ratio measures the portion of income that was generated in cash.
D. The quality of income ratio is useful when compared to industry competitors or to prior periods.

23. Which of the following types of information is not provided by the statement of cash flows?
A. Company management of current assets and liabilities.
B. Expenditures on long-term assets.
C. Current profitability as measured by specific revenues and expenses.
D. Reliance on external financing.

24. Cash and cash equivalents include:
A. assets that have stable long-term value.
B. assets that are short-term, highly liquid, and are purchased within three months of maturity.
C. assets that consistently grow in value over the long run.
D. assets that are expected to be used up within a year.

QUESTION 1

Determine the cost of sales for a firm with the following financial ratios and data:

Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times

	a.	$6,000,000
	b.	$3,000,000
	c.	$2,000,000
	d.	$1,000,000

8.3 points

QUESTION 2

What would be the times interest earned of a company, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.

	a.	2.65
	b.	2.1
	c.	1.1
	d.	1.2

8.3 points

QUESTION 3

A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?

	a.	$20,000
	b.	$ 5,000
	c.	$10,000
	d.	$15,000

8.3 points

QUESTION 4

If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must

	a.	increase its equity multiplier
	b.	increase sales and increase assets
	c.	decrease its equity multiplier
	d.	reduce sales and increase assets

8.3 points

QUESTION 5

The sales-to-inventory ratio:

	a.	is technically inferior to other commonly used ratios.
	b.	is superior to the inventory turnover ratio.
	c.	as a determination of financial performance, is good comparison tool.
	d.	was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole.

8.5 points

QUESTION 6

Primary sources of comparative financial data include

	a.	Dun and Bradstreet
	b.	Richard Moore, Inc.
	c.	Framingham Financial Library
	d.	New York Times

8.3 points

QUESTION 7

____ indicate the ability of the firm to meet its short-term financial obligations

	a.	Leverage ratios
	b.	Profitability ratios
	c.	Activity ratios
	d.	Liquidity ratios

8.3 points

QUESTION 8

If a firmâs common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:

	a.	on total assets as a percentage of long-term liabilities.
	b.	on cost of goods sold as a percentage of sales.
	c.	on taxes paid as a percentage of stockholdersâ equity.
	d.	on expenses as a percentage of current assets.

8.3 points

QUESTION 9

The ____ ratio indicates the percentage of a firm's earnings that are distributed as dividends.

	a.	payout
	b.	earnings
	c.	return on earnings
	d.	dividend yield

8.3 points

QUESTION 10

The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:

	a.	based on the company's accounting information system (AIS)
	b.	constructed in conformity with generally accepted accounting principles
	c.	developed using management's choice of accounting enhancement techniques
	d.	an accurate picture of the company's market position

8.3 points

QUESTION 11

The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.

	a.	liquidity
	b.	profitability
	c.	size
	d.	risk

8.3 points

QUESTION 12

The type of ratio that indicates the firmâs ability to provide adequate returns in the form of dividends and share price appreciation is:

	a.	Profitability ratios
	b.	Asset management ratios
	c.	Financial leverage management ratios
	d.	Liquidity ratios

8.5 points

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FIN 300 Study Guide - Cash Flow, Air Canada, Market (Place)

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