Multiple Choice question

1. The income statement measures the increase in the assets of a firm over a period of time.
True False

2. Retained earnings represent the firm's cumulative earnings since inception, minus dividends and other adjustments.
True False

3. Free cash flow is equal to cash flow from operating activities plus depreciation.
True False

4. For corporations with low taxable income (less than $100,000), the effective tax rate can be as much as 40%.
True False

5. Interest expense is deductible before taxes and therefore has an after-tax cost equal to the interest paid times (1 tax rate).
True False

6. Allen Lumber Company had earnings after taxes of $580,000 in the year 2006 with 400,000 shares outstanding on December 31, 2006. On January 1, 2007, the firm issued 35,000 new shares. Because of the proceeds from these new shares and other operating improvements, 2007 earnings after taxes were 25 percent higher than in 2006. Earnings per share for the year-end 2007 was
A. $1.67
B. $1.45
C. $1.81
D. None of these

7. Earnings per share is
A. operating profit divided by number of shares outstanding.
B. net income divided by number of shares outstanding.
C. net income divided by stockholders' equity.
D. net income minus preferred dividends divided by number of shares outstanding.

8. Net worth is equal to stockholders' equity
A. plus dividends.
B. minus preferred stock.
C. plus preferred stock.
D. minus liabilities.

9. Which of the following would represent a use of funds and, indirectly, a reduction in cash balances?
A. an increase in inventories
B. a decrease in marketable securities
C. an increase in accounts payable
D. the sale of new bonds by the firm

10. Assuming a tax rate of 30%, the after-tax cost of interest expense of $200,000 is
A. $60,000
B. $140,000
C. $200,000
D. $120,000

11. In examining the liquidity ratios, the primary emphasis is the firm's
A. ability to effectively employ its resources.
B. overall debt position.
C. ability to pay short-term obligations on time.
D. ability to earn an adequate return.

12. Refer to the figure above. Times interest earned for Megaframe Computer is
A. 4.5x
B. 9x
C. 11x
D. 10x

13. Refer to the figure above. The firm's debt to asset ratio is
A. 58%.
B. 33%.
C. 25%.
D. 48%.

14. Refer to the figure above. Using the DuPont method, return on assets (investment) for Marni is approximately
A. 200%
B. 7.5%
C. 3.75%
D. None of these.

15. Trend and industry analysis provide all of the following information except
A. benchmarking
B. the progress of the company
C. basis for decision-making about capital structure
D. future information about the company

16. If accounts receivable stays the same, and credit sales go up
A. the average collection period will go up.
B. the average collection period will go down.
C. accounts receivable turnover will decrease.
D. B and C.

17. In addition to comparison with industry ratios, it is also helpful to analyze ratios using
A. trend analysis.
B. historical comparisons.
C. neither; only industry ratios provide valid comparisons.
D. both a and b.

18. Disinflation may cause
A. an increase in the value of gold, silver, and gems.
B. a reduced required return demanded by investors on financial assets.
C. additional profits through falling inventory costs.
D. None of these.

19. If the company's accounts receivable turnover is increasing, the average collection period:
A. is going up slightly
B. is going down
C. could be moving in either direction
D. is going up by a significant amount

20. Refer to the figure above. What is Megaframe Computer's total asset turnover?
A. 4.50x
B. 3.6x
C. 2x
D. 1.76x

21. The percent-of-sales method would be more accurate under a steady sales assumption than cyclical sales.
True False

22. Compared to a firm operating at 100% of capacity, firms that are operating at less than full capacity will require greater new external funds when sales increase.
True False

23. The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a constant relationship to cash.
True False

24. A firm's cash borrowing needs can be reduced if its inventory turnover rate can be increased.
True False

25. The calculation of cash receipts requires a breakout of cash and credit sales and collections history.
True False

26. MG Lighting had sales of 1,000 units at $100 per unit last year. The marketing manager projects a 10 percent decrease in unit volume this year because a 20 percent price increase is needed to pass rising costs through to customers. Returned merchandise will represent 2 percent of total sales. What is your net dollar sales projection for this year?
A. $206,976
B. $169,344
C. $172,800
D. None of these

27. A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the value of the ending inventory using LIFO?
A. $2,750
B. $3,250
C. $3,300
D. $2,550

28. In forecasting a firm's cash needs for some future period
A. the percent-of-sales method is a "broad-brush" approach.
B. cash budgets are more exact than the percent-of-sales method.
C. a cash budget approach can deal effectively with both level and seasonal production schedules.
D. all of these.

29. Firms that successfully increase their rates of inventory turnover will, among other things,
A. be able to reduce their borrowing needs.
B. be able to reduce their dividend payments to stockholders.
C. find it more difficult to be given credit by their resource suppliers.
D. have a greater need for high balances in their cash accounts.

30. If the actual December 31st A/R balance was $12,000; projected sales in March are $50,000; 70% of sales are on credit; 60% of credit sales are collected in the month of sale and 40% are collected in the month after the sale, what is the projected A/R balance on the proforma balance sheet for the end of March?
A. $26,000
B. $14,000
C. $20,000
D. $35,000

31. A highly automated plant would generally have
A. more variable than fixed costs.
B. more fixed than variable costs.
C. all fixed costs.
D. all variable costs.

32. If the price per unit decreases because of competition but the cost structure remains the same
A. the breakeven point rises.
B. the degree of combined leverage declines.
C. the degree of financial leverage declines.
D. All of these

33. A high DOL means:
A. there are high labor costs.
B. there is high debt.
C. there is a large amount of equity.
D. there are high fixed costs.

34. A firm's earnings per share is not impacted by its financing plan at the point when
A. debt is equal to equity.
B. return on assets equals return on equity.
C. the cost of borrowed funds equals the return on equity.
D. the cost of borrowed funds equals the return on assets.

35. Refer to the figure above. The Degree of Operating Leverage is
A. 1.43x
B. 1.56x
C. 3.33x
D. 2.22x

36. The contribution margin is equal to price per unit minus total costs per unit.
True False

37. Degree of operating leverage should be computed only over a profitable range of operations.
True False

38. Operating leverage primarily affects the left hand side of the balance sheet while financial leverage affects the right hand side of the balance sheet.
True False

39. The degree of financial leverage measures the percentage change in EPS for every 1 percent move in EBIT.
True False

40. The interwoven boundaries of banks and different trading companies in Japan make it easier to acquire credit in Japan than in the U.S.
True False

41. Many companies such as McDonalds have embraced supply chain management using web-based procedures.
True False

42. Firms with highly volatile and perishable inventory should assume relatively low levels of risk.
True False

43. Generally a downward sloping yield curve indicates an eminent economic boom.
True False

44. Tinbergen Cans expects sales next year to be $30,000,000. Inventory and accounts receivable (combined) will increase $4,000,000 to accommodate this sales level. The company has a profit margin of 10 percent and a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing
A. No external financing will be needed.
B. Less than $1,000,000 of external financing is needed.
C. Between $1,000,000 and $2,000,000 of external financing is needed.
D. More than $2,000,000 of external financing is needed.

45. Publishing companies are characterized by
A. fluctuating production to match sales.
B. seasonal sales.
C. low inventories due to computer inventory management.
D. a and b.

46. The use of cash budgeting procedures
A. helps the firm plan its current asset levels for a given production plan.
B. makes managing inventory easier under seasonal production.
C. illustrates fluctuating levels of current assets for a given production plan.
D. all of these are correct.

47. Financial managers can accurately predict future interest rates by
A. calculating the anticipated inflation rate
B. the Fed's decision regarding the target federal funds rate
C. measuring investor sentiment and consumer confidence indices
D. none of these

48. Yield curves change daily to reflect
A. changing conditions in the money and capital markets.
B. new inflation expectations.
C. changing conditions in the overall economy.
D. all of these.

49. The theory of the term structure of interest rates which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the
A. expectations hypothesis.
B. segmentation theory.
C. liquidity premium theory.
D. market average rate theory.

50. An aggressive, risk-oriented firm will likely
A. borrow long-term and carry low levels of liquidity.
B. borrow short-term and carry low levels of liquidity.
C. borrow long-term and carry high levels of liquidity.
D. borrow short-term and carry high levels of liquidity.

51. "Float" is the name given for a short-term loan between suppliers and buyers.
True False

52. A lock-box is used by the selling corporation to speed up the check collection and check-clearing process.
True False

53. Small-denomination certificates of deposit are usually more liquid than large-denomination CDs.
True False

54. Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.
True False

55. Seasonal production allows for maximum efficiency in machinery and manpower use.
True False

56. When a potential customer has a mediocre credit history, a firm should not consider allowing them to become a customer.
True False

57. International cash management is more complex than domestic based cash management because of
A. difficult liquidity management.
B. different banking systems.
C. currency risk fluctuations.
D. all of these.

58. A banker's acceptance
A. is a draft drawn on a bank and paid by that bank when presented to it.
B. may be accepted by the bank for future payment.
C. is traded in a relatively liquid market until maturity.
D. all of these.

59. The three primary policy variables to consider when extending credit include all of the following except
A. credit standards.
B. the level of inflation.
C. the terms of trade.
D. collection policy.

60. When developing a credit scoring report, many variables would be considered. Which of the following best represent the major factors Dun & Bradstreet would examine?
A. The age of the management team, the dollar amount of sales, net profits, and long-term debt.
B. The age of the company, the number of employees, the level of current assets.
C. The financial statements, satisfactory or slow payment experiences, negative public records (suits, liens, judgments, bankruptcies).
D. The company's cash balances, return on equity, and its average tax rates.

Solution Summary

The solution explains some multiple choice questions in accounting and finance