Question 1

Common size financial statements convert figures to a common size by:

Accepted Answer

Common size financial statements convert figures to a common size by dividing balance sheet items by total assets and income statement items by sales. This allows for easier comparison between companies of different sizes or within the same company over time. Option A, B, D, and E are incorrect as they do not follow the correct methodology for creating common size financial statements.

Question 2

All of the following are sources of cash except:

Accepted Answer

A decrease in notes payable is not a source of cash because it represents a repayment of debt, which uses cash rather than providing it.

Question 3

A firm has the following financial statement data: Sales = $1,000, COGS = $400, Operating Expenses = $200, and Taxes = $200.What is the firm's profit margin?

Accepted Answer

The profit margin is calculated as (Net Income/Sales) x 100%. First, we need to calculate the net income. Net Income = Sales - COGS - Operating Expenses - Taxes, which is $200. Then, the profit margin is ($200/$1,000) x 100% = 20%. Therefore, the best choice is B) 20%.

Question 4

Which of the following is not one of the essential issues in evaluating commercial loan requests?

Accepted Answer

While a borrower's board of directors may be a factor in evaluating the overall strength of the borrower and their ability to repay the loan, it is not one of the essential issues in evaluating commercial loan requests. The character of the borrower, the use of the loan proceeds, the source of repayment for the loan, and the amount the customer needs to borrow are all key factors that lenders must consider.

Question 5

Term loans are generally repaid with funds from:

Accepted Answer

Term loans are usually long-term debt instruments whose repayments are made through cash flows generated from a company's operations. These cash flows include revenue from the sale of goods or services minus expenses, taxes, and interest payments. Therefore, the correct choice is D, i.e., cash flows from operations. The other options, such as investing cash flows, issuing new debt, reducing inventory and receivables, or redeeming marketable securities are not necessarily related to the repayment of term loans.

Question 6

Which of the following is not part of the four-stage process for evaluating the financial aspects of commercial loans?

Accepted Answer

Examining the backgrounds of the sales force is not part of the four-stage process for evaluating the financial aspects of commercial loans. The four stages include analyzing the firm's management, operations, and industry, performing financial ratio analysis, analyzing the firm's cash flow, and projecting the borrower's financial condition.

Question 7

Why is liquidating collateral not a preferred means of loan repayment?

Accepted Answer

Liquidating collateral is not preferred because it involves managing and selling the collateral, incurs high transaction costs, and can be delayed by bankruptcy laws.

Question 8

All of the following would be generally be considered acceptable commercial loan purposes except:

Accepted Answer

Paying off other bank debts is not considered an acceptable commercial loan purpose as it does not relate to the growth or expansion of the business. The other options listed (seasonal cash needs, purchasing new equipment, acquiring another firm, expanding plant capacity) are all acceptable loan purposes as they could lead to increased revenue or productivity for the business.

Question 9

Which of the following characteristics should collateral have?

Accepted Answer

Choice B (The collateral should be highly liquid) and choice C (The lender must be able to perfect a lien on the collateral) are both necessary characteristics of collateral. Choice A (The value of the collateral should not exceed the value of the loan) is not necessarily true, as sometimes lenders may accept collateral worth more than the loan amount. Therefore, choices B and C, or options B and C, are the correct answer.

Question 10

A firm's mix of debt and equity is measured by:

Accepted Answer

The mix of debt and equity is typically referred to as the firm's leverage, meaning the amount of debt used to finance its assets relative to its equity. Therefore, leverage ratios, which measure the extent to which a firm is using debt financing, are used to evaluate a firm's mix of debt and equity.

Question 11

Use the following information on Dylan Enterprises for questions 
  
-What were Dylan's cash receipts during the year?

Accepted Answer

The answer of Use the following information on Dylan Enterprises...

Question 12

Short-term working capital loans are generally repaid with funds from:

Accepted Answer

Short-term working capital loans are typically used to cover temporary cash flow gaps, such as seasonal fluctuations in inventory or collections from customers. As such, the loans are usually repaid with funds generated from reducing current assets, such as inventory and accounts receivable. These reductions increase cash on hand, which can then be used to repay the loan. Option A is incorrect because investing cash flows are typically used for longer-term investments in fixed assets, and not for short-term working capital needs. Option B may be used for repayment of the loans, but it will not be an appropriate answer. Option D is incorrect as issuing new equity is not typically used to repay debt. Option E is incorrect, as redeeming marketable securities may increase cash balances, but it may not be a reliable source of funds for short-term working capital loans.

Question 13

All of the following are basic sources of cash flows except:

Accepted Answer

Liquidating liabilities is not a source of cash flow; instead, it refers to using cash to pay down what is owed. The other options (liquidating assets, cash flows from operations, issuing new equity, and issuing new debt) are all ways a company can generate cash.

Question 14

Firms may need cash for all of the following except:

Accepted Answer

Firms do not typically need cash to liquidate fixed assets, as these assets are sold precisely for the purpose of generating cash. The other options (A, B, C, and D) all represent common reasons why a firm might need cash.

Question 15

A firm has the following financial statement data: Sales = $2,000, COGS = $800, Operating Expenses = $600, and Taxes = $400.What is the firm's profit margin?

Accepted Answer

The answer of A firm has the following financial statement...

Question 16

Which financial ratio measures a firm's ability to pay current interest and lease payments with current earnings?

Accepted Answer

The fixed charge coverage ratio measures the firm's ability to pay fixed charges (interest and lease payments) with its current earnings. A higher ratio indicates a better ability to meet these fixed obligations.

Question 17

A firm's ability to meet its short-term debt obligations is measured by:

Accepted Answer

Liquidity ratios are used to measure a firm's ability to meet its short-term debt obligations. These ratios include the current ratio, quick ratio, and cash ratio.

Question 18

Which of the following is not a use of cash?
a.A decrease in accounts payable
b.An increase in inventory
c.An increase in accounts receivable
d.The payment of cash dividends
e.An increase in wages payable

Accepted Answer

The answer of Which of the following is not a...

Question 19

How efficiently a firm is using its assets is measured by:

Accepted Answer

Activity ratios measure how efficiently a firm is using its assets. Liquidity ratios measure a firm's ability to meet short-term obligations, market value ratios relate a firm's stock price to its earnings or book value, profitability ratios measure a firm's ability to generate profits, and leverage ratios measure a firm's level of debt and the associated risks.

Question 20

Cash flows from a firm's normal business activities are reflected in:

Accepted Answer

Cash flows from operations represent the cash inflows and outflows directly related to a company's regular business activities, such as revenue from sales and payments to suppliers. Cash flows from investing reflect changes in cash from buying or selling assets, while cash flows from financing represent borrowing or paying back loans, issuing or buying back stock, and paying dividends. Cash flows from income is not a relevant category as income is recorded on the income statement and not reflected directly in the statement of cash flows. Cash flows from budgeting is not a valid category as it is not a type of cash flow.

Quiz 14: Evaluating Commercial Loan Requests and Managing Credit Risk