Question 1

Which one of the following is generally used as the basis for computing the cash flow per share?

Accepted Answer

Cash flow per share is typically calculated based on the operating cash flow, as it represents the cash generated by the company's normal operations. Investment and financing cash flows can also impact the cash flow per share, but they are not the main basis for its calculation. Net cash increase and retained cash earnings are not commonly used as the basis for computing cash flow per share.

Question 2

GH Enterprises has annual sales of $5.2 million, depreciation of $350,000, operating expenses of $390,000, and cost of goods sold of $3.1 million. What is the gross profit?

Accepted Answer

Gross profit = $5,200,000 - $3,100,000 = $2,100,000

Question 3

Behrend Corporation has annual sales of $5.5 million, depreciation of $475,000, operating expenses of $689,000, cost of goods sold of $2.3 million, and interest expense of $230,000. What is the operating income?

Accepted Answer

Operating income = Net sales - Cost of goods sold - Operating expenses - Depreciation
= $5.5 million - $2.3 million - $689,000 - $475,000
= $2,036,000

Question 4

Which one of the following will increase the return on equity?

Accepted Answer

Return on equity (ROE) is the ratio of net income to shareholder's equity. Decreasing fixed costs will increase net income without increasing equity, thus resulting in an increase in ROE. The other options either have no impact on ROE or decrease it.

Question 5

Which one of the following accounts is least likely to vary directly with the level of sales?

Accepted Answer

Interest expense is a fixed expense and is not directly related to the level of sales. The other accounts listed are all affected by sales in some way - accounts receivable and inventory increase with sales, accounts payable and cost of goods sold decrease with sales.

Question 6

A firm maintains a constant dividend payout ratio of .40. What must the plowback ratio be?

Accepted Answer

The plowback ratio is the portion of earnings not paid out as dividends, so it is 1 minus the dividend payout ratio.

Question 7

A firm has $3,800 of cash, equipment worth $46,300, inventory of $36,300, a building worth $130,500, and $19,600 of accounts receivable. What is the value of the total fixed assets?

Accepted Answer

Fixed assets include equipment, inventory, and building. The value of the total fixed assets is $46,300 + $36,300 + $130,500 = $213,100.

Question 8

A decrease in which one of the following will increase the return on assets?

Accepted Answer

The answer of A decrease in which one of the...

Question 9

Which one of the following is most apt to be constant given the percentage of sales approach to creating pro forma statements?

Accepted Answer

The percentage of sales approach assumes that the relationship between sales and expenses remains constant. Therefore, gross margin (revenue minus cost of goods sold divided by revenue) is likely to be constant under this approach.

Question 10

ABC Construction, Inc. has buildings and equipment of $315,600, long-term debt of $154,700, accounts payable of $52,000, cash of $9,800, accounts receivable of $18,300, inventory of $62,000, and retained earnings of $147,000. What is the total equity of the firm?

Accepted Answer

Total assets = Buildings and equipment + Cash + Accounts receivable + Inventory = $315,600 + $9,800 + $18,300 + $62,000 = $405,700
Total liabilities = Long-term debt + Accounts payable = $154,700 + $52,000 = $206,700
Total equity = Total assets - Total liabilities = $405,700 - $206,700 = $199,000. Therefore, the correct answer is D.

Question 11

Which two of the following are generally used to fund the external financing need?
I. sale of fixed assets
II. increase in accounts payable
III. issuance of long-term debt
IV. sale of equity securities

Accepted Answer

II and IV. Increases in accounts payable and the sale of equity securities are common methods to fund external financing needs. Accounts payable increase represents a form of short-term financing, while selling equity securities provides longer-term funding without increasing debt.

Question 12

Which one of the following is most apt to vary directly with sales?

Accepted Answer

Current assets are items that can be easily converted into cash within a year, such as inventory and accounts receivable. As sales increase, the need for these assets also increases to support the business operations, making it the most apt to vary directly with sales. Long-term debt, shareholders' equity, paid-in capital, and retained earnings are all more likely to be influenced by other factors such as financing decisions and company profits.

Question 13

A firm has $1,500 of cash, equipment worth $43,000, inventory of $15,200, $14,000 worth of patents, and $13,200 of accounts receivable. What is the value of the total current assets?

Accepted Answer

Current assets include cash, inventory, and accounts receivable. Therefore, the total current assets are $1,500 (cash) + $15,200 (inventory) + $13,200 (accounts receivable) = $29,900.

Question 14

A decrease in which one of the following will increase the gross margin?

Accepted Answer

The gross margin is the total revenue minus the variable costs. Therefore, a decrease in variable costs will increase the gross margin.

Question 15

Gold Jewelry, Inc. has annual sales of $4.5 million and a gross profit margin of 55 percent. The operating expenses are $540,750 and depreciation is $170,300. Interest expense is $95,000 and the tax rate is 35 percent. What is the net income?

Accepted Answer

Step 1: Calculate the gross profit
Gross Profit = Sales x Gross Profit Margin
Gross Profit = $4,500,000 x 55% = $2,475,000

Step 2: Calculate the earnings before interest and taxes (EBIT)
EBIT = Gross Profit - Operating Expenses - Depreciation
EBIT = $2,475,000 - $540,750 - $170,300 = $1,764,950

Step 3: Calculate the earnings before taxes (EBT)
EBT = EBIT - Interest Expense
EBT = $1,764,950 - $95,000 = $1,669,950

Step 4: Calculate the net income
Net Income = EBT x (1 - Tax Rate)
Net Income = $1,669,950 x (1 - 0.35) = $1,084,818.75

Therefore, the net income is $1,084,818, which is option B.

Question 16

Which of the following affect the earnings per share?
I. decrease in interest expense
II. share repurchase
III. increase in tax rates
IV. preferred stock dividend

Accepted Answer

All four options affect the earnings per share (EPS). A decrease in interest expense increases net income, thus increasing EPS. Share repurchase reduces the number of outstanding shares, increasing EPS. An increase in tax rates decreases net income, thus decreasing EPS. Preferred stock dividends reduce the earnings available to common shareholders, thus affecting EPS.

Question 17

Which one of the following statements related to book value per share (BVPS) is correct?

Accepted Answer

Issuance of new shares at market value increases the total equity of the firm, thereby increasing the BVPS. Option A is incorrect because BVPS is calculated as total equity divided by the number of shares outstanding, not total assets. Option B is incorrect because an increase in the market value of fixed assets will not necessarily increase total equity or BVPS. Option C is incorrect because payment of a dividend reduces the retained earnings and thereby the total equity of the firm, resulting in a decrease in BVPS. Option D is incorrect because BVPS is calculated based on the total equity of the firm, not the market price of the shares.

Question 18

Young Industries has a 3-year bank loan of $85,000, a 6-month note payable of $6,000, a $67,300 mortgage, and accounts payable of $22,500. What is the amount of the total current liabilities? (Ignore the current portion of any long-term debt.)

Accepted Answer

Total current liabilities = Bank loan + Note payable + Mortgage + Accounts payable
= $85,000 + $6,000 + $67,300 + $22,500
= $181,800
Therefore, the amount of the total current liabilities is $28,500 (option C).

Question 19

The Cruise Ship Co. has taxable income of $4,000,000. The company paid out $550,000 in interest expense. The tax rate is 35 percent and the dividend payout ratio is 30 percent. What is the amount that was paid out in dividends?

Accepted Answer

To find the dividends paid, first calculate the net income: Taxable income ($4,000,000) minus taxes (35% of $4,000,000 = $1,400,000) equals $2,600,000. The dividend payout ratio is 30%, so 30% of $2,600,000 is $780,000.

Question 20

The management of the Uptown Bikes recently voted to limit any future borrowing or sales of company stock. By taking this action, management has effectively done which one of the following?

Accepted Answer

By limiting borrowing and sales of company stock, the management is limiting the company's ability to raise capital and therefore limiting future growth opportunities.

Quiz 17: Projecting Cash Flow and Earnings