Question 1

When assessing the sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources?

Accepted Answer

Cash flow from operating activities is the preferred source of sustainable cash growth as it reflects the cash generated by the company's core business operations. Cash flow from investment activities can be volatile and dependent on external factors, while cash flow from financing activities may indicate a lack of profitability or a reliance on external funding sources. Cash flow from extraordinary events is also not a reliable source of sustainable cash growth as it is not a recurring or predictable source of cash flow.

Question 2

What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets?

Accepted Answer

Asset turnover is the ratio of revenue generated to the average value of assets, and it indicates how efficiently a company is using its assets to generate revenue. When a firm increases its annual sales with no corresponding increase in assets, the asset turnover ratio will increase as there is a higher revenue generated per average value of assets. The other ratios mentioned (current ratio, liquidity ratio, and quick ratio) are all affected by changes in assets and liabilities and do not necessarily increase with an increase in sales.

Question 3

A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing?

Accepted Answer

Cash from financing = Cash raised by equity financing = $200

Question 4

The table below shows some data for Key Biscuit Company:

What must have caused the firm's ROE to drop?

Accepted Answer

Compound leverage ratio = (Interest burden)( Leverage ratio) < 1 each year and falling

Question 5

Use the following cash flow data of Haven Hardware for the year ended December 31, 2017.

What is the cash at the end of 2017 for Haven Hardware?

Accepted Answer

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Question 6

The tax burden of the firm is 0.4, the interest burden is 0.65, the return on sales is 0.05, the asset turnover is 0.90, and the leverage ratio is 1.35. What is the ROE of the firm?

Accepted Answer

ROE = 0.4 × 0.65 × 0.05 × 0.90 × 1.35 = 0.0158

Question 7

The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9%, and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS?

Accepted Answer

EVA = (ROA - k)(capital) = (0.09 - 0.15)$100 million = -$6 million

Question 8

The term quality of earnings refers to ________.

Accepted Answer

Quality of earnings refers to how realistic and sustainable the reported earnings are, which includes factors such as proper accounting practices and the company's ability to continue generating earnings over the long term. Option A refers to adherence to accounting standards, option C refers to earnings expectations, and option D refers to the trend of earnings growth, none of which fully capture the concept of quality of earnings.

Question 9

A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments?

Accepted Answer

Cash flow from investments = Cash spent on investment = $(180)

Question 10

Which of the following will result in an increase in cash to the firm?

Accepted Answer

An increase in accounts payable means the firm is delaying payment to its creditors, which results in an increase in cash to the firm. A, B, and C all result in a decrease in cash to the firm.

Question 11

Which of the following would result in a cash inflow under the heading "Cash flow from investing" in the statement of cash flows?

Accepted Answer

The sale of production machinery would result in a cash inflow under the heading "Cash flow from investing" in the statement of cash flows. The other options either involve cash outflows (purchase of capital equipment and payments to suppliers for inventory) or are classified under the heading "Cash flow from operations" (collections on receivables).

Question 12

The tax burden of the firm is 0.5, the interest burden is 0.55, the profit margin is 0.25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm?

Accepted Answer

ROE = 0.5 × 0.55 × 0.25 × 1.5 × 1.65 = 0.1702

Question 13

The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities?

Accepted Answer

Free cash flow = 120 + 15 + 20 - 40 + 110 = 225

Question 14

All of the following ratios are related to efficiency except ________.

Accepted Answer

Total asset turnover and fixed-asset turnover are both measures of how efficiently a company is using its assets to generate revenue. Average collection period measures how efficiently a company is collecting its accounts receivable. The cash ratio measures a company's ability to pay off its short-term debts, but it is not directly related to efficiency.

Question 15

Another term for EVA is ________.

Accepted Answer

EVA stands for Economic Value Added, which is a measure of a company's financial performance calculated by subtracting the cost of capital from its operating profit. Residual income is another term used to describe the amount of profit generated by a company after all expenses have been paid, including the cost of capital. Therefore, the best choice for another term for EVA would be C, residual income. The other answer choices (A, B, and D) are not related to EVA or its calculation.

Question 16

Which of the following transactions will result in a decrease in cash flow from investments?

Accepted Answer

Acquisition of another business involves the outflow of cash to pay for the acquisition, which results in a decrease in cash flow from investments.

Question 17

A firm's leverage ratio is 1.2, interest-burden ratio is 0.81, and profit margin is 0.25, and its asset turnover is 1.1. What is the firm's compound leverage factor?

Accepted Answer

Compound leverage factor = 1.20 × 0.81 = 0.972

Question 18

The practice of "selling" large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed ________.

Accepted Answer

The term used for the practice of "selling" large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is channel stuffing.

Question 19

A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations?

Accepted Answer

Cash from operations = 150 - 100 = 50 increase

Question 20

Which of the following transactions will result in a decrease in cash flow from operations?

Accepted Answer

An increase in accounts receivable indicates that a company has made sales on credit, which does not immediately result in cash inflow, thus reducing the cash flow from operations.

Quiz 14: Financial Statement Analysis