Question 1

A company has revenues of $700,000; invested capital of $3,000,000; total debt of $ 1,500,000 of which it pays 2.5% interest; current,long-term,and other assets totalling $4,000,000; and total expenses of $550,000.What is the company's financial leverage?

Accepted Answer

The answer of A company has revenues of $700,000; invested...

Question 2

A company's manager of finance and administration is sorting assets to create a category of those that will be consumed or used up within one year.Which of the following will be part of this category?

Accepted Answer

Inventories are goods that are intended for sale or used in production and are expected to be consumed within one year. Land, equipment, and buildings are long-term assets that are not consumed within a year.

Question 3

A company's president identifies an opportunity to expand globally but will require cash flow on short notice.He requests a list of assets that can be converted into cash in less than one year.Which category provides this information?

Accepted Answer

Current assets are assets that can be converted into cash within one year, such as cash, accounts receivable, and inventory. Fixed assets cannot be easily converted into cash and are used for long-term purposes. Short-term assets and other assets are not commonly used accounting terms. Therefore, the best choice to provide information on assets that can be converted into cash in less than one year is current assets.

Question 4

A company has revenues of $700,000; invested capital of $3,000,000; total debt of $ 1,500,000 of which it pays 2.5% interest; current,long-term,and other assets totalling $4,000,000; and total expenses of $550,000.What is the company's total asset turnover?

Accepted Answer

Total asset turnover = Revenues / Total assets = $700,000 / $4,000,000 = 0.1750

Question 5

A company has cash of $350,000,common shares of $500,000,net income of $125,000,and sales of $400,000.What is the company's return on equity?

Accepted Answer

Return on Equity (ROE) is calculated as Net Income divided by Shareholder's Equity. Here, Net Income is $125,000 and Shareholder's Equity is $500,000 (common shares). So, ROE = $125,000 / $500,000 = 0.25.

Question 6

A company has revenues of $700,000; invested capital of $3,000,000; total debt of $ 1,500,000 of which it pays 2.5% interest; current,long-term,and other assets totalling $4,000,000; and total expenses of $550,000.What is the company's debt ratio?

Accepted Answer

The debt ratio is calculated as total debt divided by total assets. Here, total debt is $1,500,000 and total assets are $4,000,000. So, the debt ratio = $1,500,000 / $4,000,000 = 0.3750.

Question 7

A financial manager reviews the firm's cash statement and realizes the company's current account at the bank does not go below a balance of $125,000.What should the financial manager do?

Accepted Answer

Investing any excess cash is a prudent financial strategy. It allows the company to earn a return on idle funds, rather than leaving them in a checking account where they typically earn little to no interest. This can enhance the company's profitability and financial position over time.

Question 8

Which statement best describes cash budgets?

Accepted Answer

Cash budgets treat income and expenses differently than they are treated on an income statement. While income statements focus on revenue and expenses over a period of time, cash budgets focus on the inflow and outflow of cash over a specific period of time. Cash budgets are important tools for managing cash flow and ensuring a business has enough cash on hand to cover expenses.

Question 9

Michael's company purchases special equipment from Switzerland that can produce very thin plastic parts with very low rejections.Michael forecasts a continual increase in sales.According to the Asset-to-Sales Financing Relationship,what will be the result of Michael's forecast?

Accepted Answer

According to the Asset-to-Sales Financing Relationship, as sales increase, the need for additional assets also increases. Therefore, Michael's forecast of a continual increase in sales would result in the need for more equipment to be purchased to meet the demand.

Question 10

What does working capital include?

Accepted Answer

Working capital includes accounts receivable, which are amounts owed to the business by customers for goods or services already provided. Leased property, shareholders' equity, and equipment are not considered working capital.

Question 11

Carol underestimated how many roses she would sell on Mother's Day.She was able to find a local grower willing to open his greenhouse and she arranged with the bank to increase her credit limit to purchase more roses.What is this an example of?

Accepted Answer

This is an example of spontaneous debt financing, as Carol arranged with the bank to increase her credit limit in order to purchase more roses to meet the unexpected demand on Mother's Day.

Question 12

A company's bank would like information about the amount of money owed to creditors.Which financial statement will the company give to the bank?

Accepted Answer

The balance sheet provides a snapshot of a company's financial position at a specific point in time, including its assets, liabilities, and equity. The amount owed to creditors would be listed under liabilities on the balance sheet, making it the best choice for providing this information to the bank. The income statement shows a company's revenue and expenses over a period of time, the statement of cash flows shows the flow of cash in and out of a business, and operating income is a measure of a company's profitability from its core operations. While these statements may provide some information about a company's debt obligations, the balance sheet is specifically designed to provide a full picture of a company's financial position, making it the best choice for answering the bank's request for information about the amount owed to creditors.

Question 13

Which of the following is an intangible asset?

Accepted Answer

Goodwill is an example of an intangible asset. It refers to the reputation, brand, and other intangible factors that give a company its value. Land and machinery are tangible assets, while contingency funds are typically classified as a liability or equity.

Question 14

Which of the following is a current asset?

Accepted Answer

Accounts receivable is a current asset because it is money that is owed to a company and is expected to be received within a year. Equipment is a long-term asset, while land and leased property are both fixed assets.

Question 15

What is included on a cash flow statement?

Accepted Answer

A cash flow statement includes collections from customers along with other cash inflows and outflows from operating, investing, and financing activities. Current assets and owner's equity are typically included on a balance sheet and owner's capital is typically included on a statement of changes in equity, not a cash flow statement.

Question 16

Which statement best describes a firm's liquidity?

Accepted Answer

Liquidity refers to a company's ability to meet its short-term financial obligations. The best way to measure liquidity is by using a ratio of current assets to current liabilities. A high ratio indicates a company has enough current assets to meet its current liabilities, which is an indication of good liquidity.

Question 17

Diana is a painter.She finishes work for a client in May.The client pays Diana for the job in August and that is when Diana records the sale.Which method of accounting is Diana using?

Accepted Answer

Diana is using the cash basis of accounting because she records the sale when she actually receives the payment from the client, which is in August, regardless of when the work was completed.

Question 18

What does working-capital management focus on?

Accepted Answer

Working-capital management focuses on managing the company's cash, accounts receivable, and inventory to ensure that it has enough liquidity to meet its short-term obligations and maintain its operations. Fixed assets and long-term investments are not usually part of working-capital management.

Question 19

What is return on equity?

Accepted Answer

Return on equity (ROE) is a financial ratio that represents the rate of return that owners earn on their investment in the company. It is derived by dividing net income by shareholder's equity. ROE measures how efficiently a company is using equity to generate profits.

Question 20

An entrepreneur of a custom sign company is reviewing reports showing the cost of printing machines,supplies,and labour so that she can make comparisons to the revenue being generated.What reports are being reviewed?

Accepted Answer

Financial statements typically include information on costs such as supplies and labor, as well as the cost of equipment such as printing machines. By comparing these costs to revenue, the entrepreneur can determine the profitability of the business. Customer records, asset reports, and operation schedules may provide useful information, but are not specifically related to comparing costs and revenue.

Quiz 13: Understanding Financial Statements and Forecasting