Question 1

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 in the Statement of Cash Flows shows the inflows and outflows of cash resulting from borrowing activities, such as issuing bonds or taking out loans. Therefore, this section would provide the best source for identifying the amount of funds borrowed by the firm during the preceding year.

Question 2

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 depreciation expense for the year (Option C). Both methods account for the addition of new fixed assets, with Option C adjusting for depreciation to isolate purchases.

Question 3

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 4

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 5

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 6

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 7

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

Accepted Answer

The use of debt to finance a firm's assets is known as financial leverage. The more debt a firm uses in relation to its total assets, the greater the financial leverage it uses. This increases the firm's risk, as the interest payments on debt must be made regardless of the firm's profitability. However, it also has the potential to increase the return on equity, as the firm is able to earn a higher return on its assets due to the lower cost of debt financing.

Question 8

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 an outflow of cash. Therefore, to accurately calculate a firm's free cash flow, we must add these expenses back to earnings before interest and taxes.

Question 9

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 10

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 provides information on a firm's sources and uses of cash flows over the year, categorized into operating activities, investing activities, and financing activities. The Income Statement shows the revenue, expenses, and net income of a company for a specific period but does not provide detailed information on cash flows. The Statement of Retained Earnings shows the changes in retained earnings balance over a period of time. The Balance Sheet provides information on a company's assets, liabilities, and equity at a specific point in time but does not provide information on cash flows over the year.

Question 11

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 12

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 represents the cash generated by the firm's operating activities, after accounting for tax liabilities and non-cash expenses like depreciation. Free cash flow, on the other hand, represents the cash available for distribution to investors after all expenses and investments have been made. Net cash flow refers to the difference between cash inflows and outflows, while gross cash flow is the total amount of cash generated by a business or investment.

Question 13

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 14

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 15

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 purchased goods or services on credit, which results in an increase in liabilities. This increase in liabilities is offset by a corresponding increase in the firm's current assets (inventory or cash). As a result, there is no effect on the equity of the firm, and it is considered an inflow of cash because the firm has more cash available to use for other purposes.

Question 16

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 17

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 18

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 19

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 20

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

Quiz 2: Financial Statement and Cash Flow Analysis