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BUS 320 Study Guide - Accounts Payable, Retained Earnings, Promissory Note

Business Administration
Course Code
BUS 320
Amir Azaran

of 5
1) A firms financing and investment policy decisions cannot be made independently from one another.
a) True
b) False
The correct answer is a. Feedback: P89, third paragraph on this page.
2) Which of the following is not a basic element of financial planning?
a) Capital budgeting decision
b) Financing policy
c) Corporate structure decision
d) Dividends and dividend policy
e) Working capital management
The correct answer is c. Feedback:p89, the first paragraph.
3) The most important result of the financial planning process is probably
a) Showing the interactions between investing and financing decisions.
b) Exploring different investment and financing options available to the firm, and the effects these
options would have on market value of shareholders equity.
c) Identifying different scenarios that could occur, thus avoiding unpleasant surprises as much as
d) Forcing managers to think about and prioritize amongst the firms goals.
e) Communicating with investors and lenders.
The correct answer is d.
4) A good financial planning model must make assumptions about which of the following variables?
I. Asset requirements
II. Cash surplus or shortfall
III. Corporate tax rate
IV.Economic conditions
V.Pro-forma statements
VI. Sales forecasts
a) I, II, III, and IV
b) I, II, IV, and VI
c) II, III, IV, and VI
d) III, IV, and VI
e) I, II, III, IV, V, and VI
The correct answer is d. Feedback: 92-93
5) By assuming that fixed assets change proportionally with sales, we are essentially assuming that the
firms assets are operating at full capacity.
a) True
b) False
The correct answer is a. Feedback: pp92-93, second sentence under sub-sectionExcess capacity
6) In 2009, Jordan & Sons Company has sales of $700,000 and costs (inclusive of interest expenses and
depreciation) of $490,000. At the end of the year, the company has cash of $12,000, accounts receivable
of $40,000, inventory of $100,000, accounts payable of $85,000, notes payable of $90,000, long-term
debt of $400,000, book value of common stock of $200,000, and retained earnings of $125,000. The
company has a marginal tax rate of 40% and it pays out 60% of its net income in the form of cash
dividends. Assume that all costs, all assets, and accounts payable vary directly with sales. If the company
is operating at 100% capacity, and it expects its sales to grow by 25%, what is the companys external
financing needed using the percentage of sales approach?
a) $0
b) $63,000
c) $120,250
d) $140,750
e) $188,000
The correct answer is d.
From this question, we cannot have total asset directly, because we don’t have fixed asset yet. But we
have total liability and total equity, so we could have total asset.
Total liability=85000+90000+400000=575000
Total equity= 200000+125000=325000
Total asset=575000+325000=900000
Projected total asset=900,000*1.25=1,125,000
Net income=700000-490000-0.4*210000=126,000
Projected net income=126,000*1.25=157,500
Addition to retained earnings= 157500*0.4=63000
Retained earnings=125,000+63000=188,000
Projected account payable=85,000*1.25=106,250
Total equity and liability=188,000+200,000+106,250+90,000+400,000=984,250
7) It is reasonable for a firm to assume that all items on its income statement will change at the same rate
as sales.
a) True
b) False
The correct answer is b. interest and depreciation depends on total debt and net fixed assets respectively.
8) In 2009, Ross Inc., has sales of $5,000 and costs of $3,000. By the end of 2009, Ross Inc., has cash
on hand of $1,000, Accounts Receivable of $1,500, Accounts Payable of $2,000, and Inventory of $2,000.
The book values of its net fixed assets and common stock are $4,500 and $2,500, respectively. The
company owes $2,500 in long-term debt and $750 in short-term notes payable. The marginal tax rate is
40%, and Ross Inc., pays out 50% of its net income as cash dividends. What is the amount shown for
Retained Earnings account on the balance sheet? What is the capital intensity ratio?
a) $600; 0.9
b) $1,250; 1.8
c) $600; 1.8
d) $1,250; 0.9
e) $1,000; 1.8
The correct answer is b.
Retained earnings=1000+1500+2000+4500-2000-750-2500-2500=1250