Question 1

The effect of an increase in a firm's accounts payable during the year,assuming that the current asset portion of the balance sheet remains the same,is

Accepted Answer

An increase in accounts payable means that the firm has extended its payment period to suppliers, resulting in an increase in the amount of cash available in the short term. This is because accounts payable represent amounts owed by the firm to its suppliers for goods or services that have been received but not yet paid for. Therefore, an increase in accounts payable is considered an inflow of cash.

Question 2

NARRBEGIN: Cold Weather Sports
Cold Weather Sports,Inc.(CWS)
Cold Weather Sports,Inc.(CWS)just completed its 2012 fiscal year.During the year,CWS had sales of $10,000 and total expenses (no interest expenses were incurred)of $6,000.Assume that CWS pays 30% of its EBIT in taxes and that depreciation expense of $1,200 is included in the total expense number listed above.A list of some balance sheet items for CWS for end of fiscal year 2011 and 2012 is as below.
   No fixed assets were disposed of during the year.
-What was the dollar amount of fixed assets purchased during the year for Cold Weather Sports?

Accepted Answer

5,600 - 5,000 + 1,200 = 1,800

Question 3

Emma Corp.had earnings before interest and taxes of $500,000 and had a depreciation expense of $200,000 this last year.If the firm was subject to an average tax rate of 30%,what was Emma's operating cash flow for the year? If you need to,assume that Emma's interest expense was zero for the year.

Accepted Answer

(75k*.7)+(100k*.3)=82,500

Question 4

BadBanna Co.has an average age of inventory equal to 25 days.If its end of year inventory level is $8,500,then what does that imply for the cost of goods sold during the year? (round to the nearest dollar)

Accepted Answer

25 = (365 / inventory turnover)
inventory turnover = 14.6
Inv.turn = (CGS/ inventory)
14.6 = (CGS/8500)
CGS = 21,250

Question 5

If you are looking to review a firm's sources and uses of cash flows over the year,the easiest place to find that information is

Accepted Answer

The Statement of Cash Flows is specifically designed to provide information about a firm's sources and uses of cash flows over the year, making it the easiest place to find this information. The Income Statement shows a firm's revenues and expenses over a period of time, but doesn't provide detail on where the cash came from or how it was used. The Statement of Retained Earnings shows changes in a firm's retained earnings account, but again, doesn't provide source and use details. The Balance Sheet shows a firm's assets, liabilities and equity at a specific point in time, and while it can provide some information about cash flows, it doesn't provide as much detail as the Statement of Cash Flows.

Question 6

Wunder Boy Bat Co.has an average age of inventory equal to 121.67 days.If its end of year inventory level is $4,000,then what does that imply for the cost of goods sold during the year? (round to the nearest dollar)

Accepted Answer

121.67 = (365 / inventory turnover)===> inventory turnover = 2.9992
2.9992 = (CGS/ inventory)===> 2.992 = (CGS/4,000)====> CGS = 11,999.67 ===> 12,000

Question 7

Edison Bagels had operating cash flow equal to $850 for 2012.If its earnings before interest and taxes was $1,000 while its tax bill was $300,what was Edison's depreciation expense for the year?

Accepted Answer

OCF = EBIT - Taxes + Depreciation
850 = 1,000 - 300 + Depreciation
150 = Depreciation

Question 8

Roxy Corp has an operating profit of $15,000 produced from $12,000 in sales.If Roxy has no interest expense and currently pays 35% of its operating profits in taxes,what is Roxy's net profit margin?

Accepted Answer

[15,000 - (.35 ´ 15,000)] / 12,000 = 81.25%

Question 9

If you start with earnings before interest and taxes and then subtract a firm's tax expense while adding back the amount of depreciation expense for the firm during the year,the resulting figure is called

Accepted Answer

The resulting figure is called operating cash flow. It is a measure of the cash generated by a company's normal business operations, after deducting operating expenses, but before accounting for non-operating expenses such as interest, taxes, and investments. Adding back depreciation reflects the fact that it is a non-cash expense, meaning that it does not directly affect a company's cash flow.

Question 10

The firm that you work for had credit sales of $3,500,000 last year and on average had $33,000 in its accounts receivable during the year.What is its average collection period?

Accepted Answer

3,500,000 / 365 = 9,589.04 average sales per day ====>
average collection period = 33,000 / 9,589.04 = 3.44 days

Question 11

Roxy Corp.has total current liabilities of $22,000 and an inventory of $7,000.If its current ratio is 1.2,then what is Rocy's quick ratio?

Accepted Answer

1.2 = CA/ 22,000
CA = 26,400
quick ratio = (CA - Inv)/CL
quick ratio = (26,4000 - 7,000)/22,000 = 2.0

Question 12

Devil Inc.has total liabilities equal to $3,500 and total assets equal to $5,000.What is Devil's asset-to-equity ratio?

Accepted Answer

TA = 5,000 ====> Equity = 5,000 - 3,500 = 1,500
asset-to-equity = 5,000/ 1,500 = 3.33

Question 13

Emma Corp.had credit sales of $300,000 last year and on average had $25,000 in its accounts receivable during the year.What is its average collection period?

Accepted Answer

300,000 / 365 = 821.92 average sales per day
average collection period = 25,000 / 821.92 = 30.41 days

Question 14

Granny's Jug Herbal Shop has total current liabilities of $2,000 and an inventory of $1,000.If its current ratio is 2.5,then what is its quick ratio?

Accepted Answer

2.5 = CA/ 2,000 ====> CA = 5,000
quick ratio = (CA - Inv)/CL = (5,000 - 1,000)/2,000 = 2.0

Question 15

NARRBEGIN: Cold Weather Sports
Cold Weather Sports,Inc.(CWS)
Cold Weather Sports,Inc.(CWS)just completed its 2012 fiscal year.During the year,CWS had sales of $10,000 and total expenses (no interest expenses were incurred)of $6,000.Assume that CWS pays 30% of its EBIT in taxes and that depreciation expense of $1,200 is included in the total expense number listed above.A list of some balance sheet items for CWS for end of fiscal year 2011 and 2012 is as below.
   No fixed assets were disposed of during the year.
-What is the amount of free cash flow generated by Cold Weather Sports in 2012?

Accepted Answer

Change in CA = 1,200 - 1,000 = 200
Change in AP = 800 - 600 = 200
Change in Accrued = 600 - 500 = 100
OCF = 10,000 sales - 6,000 expense - 1,200 tax + 1,200 depreciation expense = 4,000
Change in FA = 5,600 - 5,000 + 1,200
FCF = OCF - Change FA - (Change in CA - Change in AP - Change in Accrued)
= 4,000 - 1,800 - (200 - 200 - 100)= 2,300

Question 16

In general,the more debt a firm uses in relation to its total assets

Accepted Answer

The more debt a firm uses in relation to its total assets, the greater the financial leverage it uses. Financial leverage refers to the use of debt to finance assets. When a firm uses debt to finance its assets, it can magnify the returns for equity holders during profitable periods, but it also increases the risk to equity holders during unprofitable periods. Therefore, higher financial leverage can increase the potential return for equity holders but also increases their risk.

Question 17

NARRBEGIN: Cold Weather Sports
Cold Weather Sports,Inc.(CWS)
Cold Weather Sports,Inc.(CWS)just completed its 2012 fiscal year.During the year,CWS had sales of $10,000 and total expenses (no interest expenses were incurred)of $6,000.Assume that CWS pays 30% of its EBIT in taxes and that depreciation expense of $1,200 is included in the total expense number listed above.A list of some balance sheet items for CWS for end of fiscal year 2011 and 2012 is as below.
   No fixed assets were disposed of during the year.
-What is Cold Weather Sports' operating cash flow for 2012?

Accepted Answer

10,000 sales - 6,000 expense = 4,000 EBIT
4,000 EBIT - 1,200 tax + 1,200 depreciation expense = 4,000

Question 18

When calculating a firm's free cash flow from earnings before interest and taxes we must add back depreciation,amortization and depletion expense and allowances because

Accepted Answer

Depreciation, amortization, and depletion expense and allowances are non-cash expenditures, meaning they do not involve actual cash payments. Therefore, to calculate the firm's free cash flow from earnings before interest and taxes, we need to add these expenses back as they do not represent actual cash outflows. Adding back these expenses gives a better indication of the firm's ability to generate cash from its operations.

Question 19

In order to identify the amount of funds that a firm borrowed during the preceding year,what section is the best source within the Statement of Cash Flows?

Accepted Answer

The financing flows section of the Statement of Cash Flows reports the inflows and outflows of cash resulting from transactions with lenders, such as borrowing funds. Therefore, this section is the best source to identify the amount of funds that a firm borrowed during the preceding year.

Question 20

When calculating the dollar amount of fixed assets purchased during the year what information is required? Assume that no fixed assets were disposed of during the year.

Accepted Answer

To calculate the dollar amount of fixed assets purchased during the year, you can use either the change in gross fixed assets (option A) or the change in net fixed assets plus the depreciation expense for the year (option C). Both methods account for the addition of new fixed assets, with option C adjusting for the depreciation to give an accurate purchase figure.

Quiz 2: Financial Statement and Cash Flow Analysis