Question 1

Dewey Enterprises' capital structure consists of $2 million in debt and $1 million in equity.What is the firm's debt-to-equity ratio?
A).5
B)1
C)2
D)1.5

Accepted Answer

The debt-to-equity ratio is calculated by dividing the total debt by the total equity. Here, $2 million in debt divided by $1 million in equity equals a ratio of 2.

Question 2

What are two major projected financial statements developed during financial planning?
A)forecast balance sheet and forecast statement of cash flows
B)prototype retained earnings statement and prototype balance sheet
C)pro forma balance sheet and pro forma income statement
D)predicted statement of cash flows and predicted income statement

Accepted Answer

The two major projected financial statements developed during financial planning are a pro forma balance sheet and pro forma income statement. These statements help businesses estimate future financial performance based on assumptions and hypothetical scenarios. They are essential tools for decision-making, including budgeting, forecasting, and investment planning.

Question 3

The manager of Timmy's Timbers,the local landscape company,realizes that he runs a seasonal business.For example,although his sales do not start coming in until April and May,he needs to be well-stocked in March in anticipation of the spring sales.What should he create to help plan for when the firm will need to arrange for additional funds in order to avoid a cash crunch?
A)cash budget
B)pro forma income statement
C)pro forma balance sheet
D)set of leverage ratios

Accepted Answer

A cash budget is a tool that helps a business plan for its cash inflows and outflows. By creating a cash budget, the manager of Timmy's Timbers can forecast when the business will need additional funds to cover expenses during the offseason or prepare for the peak season. This will help avoid a cash crunch and ensure that the business has enough cash on hand to cover its operating expenses. A pro forma income statement and balance sheet are useful for forecasting future profits and financial position, but they do not address the timing of cash flows. Leverage ratios are not relevant for planning cash needs.

Question 4

Which of the following are short-term,very safe,and highly liquid assets firms include in the cash holdings they report on their balance sheet?
A)cash options
B)cash equivalents
C)marketable derivatives
D)intangible assets

Accepted Answer

Cash equivalents are short-term, very safe, and highly liquid assets that firms include in their cash holdings. Cash options and marketable derivatives are not typically included in cash holdings, while intangible assets are not short-term or highly liquid.

Question 5

As a financial manager,Leonard wants to know when his firm will need to arrange for short-term financing and when the firm is likely to have surplus cash available to pay off loans or to invest in short-term liquid assets.These concerns suggest that Leonard would want to develop which of the following?
A)cash budget
B)projected balance sheet
C)pro forma income statement
D)sales forecast

Accepted Answer

A cash budget is a schedule of expected cash receipts and disbursements, which helps in estimating when the firm will need short-term financing and when it will have surplus cash to pay off loans or invest in short-term liquid assets. It provides an estimate of the net cash flow for a specific period, which helps a financial manager like Leonard in planning and managing the firm's cash resources efficiently. Therefore, the best choice for Leonard to develop would be a cash budget. The other options listed, such as a projected balance sheet, pro forma income statement, and sales forecast, may provide relevant information, but are not as directly tied to Leonard's concerns about short-term financing and surplus cash.

Question 6

Which of the following projects the types and amounts of assets a firm will require to carry out its future plans and forecasts the amount of additional funds that will be needed to acquire those assets?
A)prototype operating budget
B)pro forma income sheet
C)pro forma balance sheet
D)statement of net working capital

Accepted Answer

A pro forma balance sheet projects the types and amounts of assets a firm will require to carry out its future plans and forecasts the amount of additional funds that will be needed to acquire those assets. A prototype operating budget outlines the expected revenues and expenses for a specific period of time, while a pro forma income sheet forecasts a company's revenue and expenses over a certain period of time. A statement of net working capital shows the difference between a company's current assets and current liabilities.

Question 7

Which of the following is used to predict when a firm will likely experience temporary shortages or surpluses of cash?
A)statement of cash flows
B)statement of projected revenue flows
C)pro forma balance sheet
D)cash budget

Accepted Answer

A cash budget is a financial plan that outlines a company's expected cash inflows and outflows over a specific period of time. By analyzing the projected inflows and outflows, a company can predict when it will likely experience temporary shortages or surpluses of cash. The statement of cash flows also provides information about a company's cash inflows and outflows, but it reports on past transactions rather than future projections. The statement of projected revenue flows and pro forma balance sheet are not specifically designed to predict cash shortages or surpluses.

Question 8

Although they may be prepared for a shorter time period,how often are cash budgets usually prepared?
A)weekly
B)monthly
C)daily
D)annually

Accepted Answer

Cash budgets are usually prepared on a monthly basis to ensure that the company has enough cash on hand to meet its short-term obligations. While some companies may prepare cash budgets more frequently, such as on a weekly or even daily basis, monthly cash budgets are a common practice. Annual cash budgets may also be prepared for long-term planning purposes, but they are less frequent than monthly budgets.

Question 9

As part of the financial planning process planners would create projected financial statements.What is another name for these statements?
A)pro forma
B)per capita
C)prescriptive
D)empirical

Accepted Answer

Pro forma statements are another term for projected financial statements. These statements project future financial performance based on assumptions and estimates.

Question 10

At Sips and Chips,a local cybercafé,a financial manager has calculated the debt to equity ratio and discovered it is equal to one.What does this indicate about Sips and Chips?
A)It is relying exclusively on debt financing to meet its long-term financing needs.
B)It is relying on equal amounts of debt and equity financing.
C)It has an equal amount of current assets and current liabilities.
D)It is at risk of being unable to pay its short-term debts when they come due.

Accepted Answer

A debt to equity ratio of one indicates that Sips and Chips is relying on equal amounts of debt and equity financing to meet its long-term financing needs.

Question 11

Snow International,a ski company in Canada,has 500 shares of outstanding common stock and has not issued any preferred stock.Net income is $27 500.What would be the earnings per share calculation?
A)$27 500 - 500 = $27 000
B)$27 500 ?6? 500 = $13 750 000
C)500/$27 500 = $.018
D)$27 500/500 = $55

Accepted Answer

To calculate earnings per share, we need to divide the net income by the number of outstanding shares of common stock. 
Therefore, earnings per share for Snow International would be $27,500/500 = $55.

Question 12

How are earnings per share calculated?
A)the net income of the firm, divided by the amount of capital invested by the owners
B)the number of shares outstanding, divided by the value of owners' equity
C)the net income of the firm less any preferred dividend payout, divided by the number of shares outstanding
D)the number of shares outstanding, divided by the net income of the firm

Accepted Answer

Earnings per share (EPS) is calculated by taking the net income of the firm and subtracting any preferred dividend payout. This number is then divided by the number of shares outstanding. This formula provides a measure of how much profit each share of common stock is earning.

Question 13

Two firms in the same industry are the same size and have very similar real-world financial results.Which of the following describes the profitability ratios of these firms?
A)They could be very different because ratios are based on projections of future performance rather than on actual real-world performance.
B)They should be identical because regulations require all firms in the same industry to use the same accounting methods to construct their financial statements and compute their key financial ratios.
C)They should be very similar because both firms must use exactly the same mathematical formulas to calculate their ratios.
D)They could be different if they used approved but dissimilar methods to construct their financial statements.

Accepted Answer

Profitability ratios are based on financial statements, which can be constructed using different methods even if they are approved. Therefore, two firms in the same industry with similar real-world financial results could have different profitability ratios if they used approved but dissimilar methods to construct their financial statements.

Question 14

Kendra Wright was recently hired by High Adventure Inc.to be a financial manager.She is surprised to learn that the company currently operates "by the seat of its pants." As she seeks to develop a more rigorous financial plan,what will she have to do?
A)make heavy use of a technique known as value mapping
B)work independently of others in the organization
C)avoid too much reliance on pro forma statements
D)seek input from the managers of the various functional units of the firm as well as the firm's accountants

Accepted Answer

Kendra will need to work collaboratively with the managers of different functional units of the firm as well as its accountants to develop a more rigorous financial plan. This ensures that the financial plan is based on accurate and relevant information from different parts of the organization, and takes into account the specific needs and goals of each unit. She should also avoid relying too heavily on pro forma statements, which may not accurately reflect the actual financial performance of the company. While value mapping may be a useful technique in certain situations, it is not specifically mentioned in the scenario as a tool that Kendra needs to use. Working independently would not be the best approach, as she needs to gather input and insights from different stakeholders within the organization.

Question 15

The finance managers collected the following information for their firm: Total Assets = $60 000; Current Assets = $10 000; Long-term Liabilities = $100 000; Current Liabilities = $8000.What is the current ratio?
A)2.00
B)1.25
C)1.00
D)2.50

Accepted Answer

Current ratio = Current Assets / Current Liabilities

Current assets = $10 000 
Current liabilities = $8000

Current ratio = $10 000 / $8000 = 1.25

Therefore, the current ratio is 1.25.

Question 16

At Sips and Chips,a local cybercafé,management is measuring the profit earned on each dollar invested by the shareholders.What are the managers measuring?
A)the firm's return on assets
B)the firm's degree of financial leverage
C)the firm's earnings per share
D)the firm's return on equity

Accepted Answer

The managers are measuring the profit earned on each dollar invested by the shareholders, which is a measure of the firm's return on equity.

Question 17

When financial managers are concerned about the ability to pay off debts that will come due in the next year,they are likely to focus on which of the following?
A)incremental analysis
B)liquidity ratios
C)capital budgets
D)leverage ratios

Accepted Answer

When financial managers are concerned about the ability to pay off debts that will come due in the next year, they are likely to focus on liquidity ratios. These ratios measure a company's ability to meet its short-term obligations and assess its liquidity. Examples of liquidity ratios include current ratio, quick ratio, and cash ratio. These ratios help managers understand the company's ability to meet its short-term obligations and make informed decisions to improve liquidity.

Question 18

Which of the following is the difference between a firm's current assets and current liabilities?
A)net present value
B)net income
C)net worth
D)net working capital

Accepted Answer

The difference between a firm's current assets (such as cash, inventory, and accounts receivable) and current liabilities (such as accounts payable and short-term debt) is referred to as net working capital. This measure represents the amount of funds that a firm has available to meet its short-term obligations and fund its daily operations. By tracking changes in net working capital over time, managers can gain insights into a firm's liquidity and ability to manage its cash flows effectively.

Question 19

Which of the following forecasts the sales,expenses,and net income for the firm in some future time period?
A)pro forma balance sheet
B)inventory turnover ratio
C)net working capital
D)pro forma income statement

Accepted Answer

A pro forma income statement is used to forecast future sales, expenses, and net income for a firm in a specific time period. The other options listed are not used to forecast financial performance in the future.

Question 20

At Chips and Dips,a local convenience market,an increase in the inventory turnover ratio would indicate which of the following?
A)It is at risk of holding too much inventory.
B)It is more likely to face a cash flow problem.
C)It is selling its stock of merchandise more quickly.
D)It is relying heavily on credit sales.

Accepted Answer

An increase in the inventory turnover ratio indicates that the store is selling its stock of merchandise more quickly. This means that items are not staying on the shelves for too long, which is a positive sign for the business. It also means that inventory is not staying in the store for too long, the business is able to replenish its stock quickly, and it is not at risk of holding too much inventory. An increase in the inventory turnover ratio does not necessarily indicate that the business is relying heavily on credit sales or is more likely to face a cash flow problem.

Quiz 8: Finance: Acquiring and Using Funds to Maximize Value

Dewey Enterprises' capital structure consists of $2 million in debt and $1 million in equity.What is the firm's debt-to-equity ratio?

What are two major projected financial statements developed during financial planning?

Which of the following are short-term,very safe,and highly liquid assets firms include in the cash holdings they report on their balance sheet?

Which of the following projects the types and amounts of assets a firm will require to carry out its future plans and forecasts the amount of additional funds that will be needed to acquire those assets?

Which of the following is used to predict when a firm will likely experience temporary shortages or surpluses of cash?

Although they may be prepared for a shorter time period,how often are cash budgets usually prepared?

As part of the financial planning process planners would create projected financial statements.What is another name for these statements?

At Sips and Chips,a local cybercafé,a financial manager has calculated the debt to equity ratio and discovered it is equal to one.What does this indicate about Sips and Chips?

Snow International,a ski company in Canada,has 500 shares of outstanding common stock and has not issued any preferred stock.Net income is $27 500.What would be the earnings per share calculation?

How are earnings per share calculated?

Two firms in the same industry are the same size and have very similar real-world financial results.Which of the following describes the profitability ratios of these firms?

Kendra Wright was recently hired by High Adventure Inc.to be a financial manager.She is surprised to learn that the company currently operates "by the seat of its pants." As she seeks to develop a more rigorous financial plan,what will she have to do?

The finance managers collected the following information for their firm: Total Assets = $60 000; Current Assets = $10 000; Long-term Liabilities = $100 000; Current Liabilities = $8000.What is the current ratio?

At Sips and Chips,a local cybercafé,management is measuring the profit earned on each dollar invested by the shareholders.What are the managers measuring?

When financial managers are concerned about the ability to pay off debts that will come due in the next year,they are likely to focus on which of the following?

Which of the following is the difference between a firm's current assets and current liabilities?

Which of the following forecasts the sales,expenses,and net income for the firm in some future time period?

At Chips and Dips,a local convenience market,an increase in the inventory turnover ratio would indicate which of the following?