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Finance: Profitability, Ratios, Budgets, and Taxes

1. Profitability and solvency objectives in business are:
a. secondary to the objective of growth
b. complementary objectives
c. of primary importance in most businesses.
d. generally ignored by established businesses.

2. As a company's prospects change over time, the ratings of its outstanding bonds:
a. would tend to decrease if the company's ability to pay the principal and interest increases
b. would tend to decrease if the company's ability to pay the principal and interest decreases
c. would never change once established
d. would tend to decline in a severe recession which negatively impacted the company's prospects for future profits

3. Favorable financial leverage means that the:
a. preferred shareholders receive more earnings per share than otherwise
b. company has more accounts receivable than accounts payable
c. company is able to pay its short-term debts
d. common shareholders receive higher earnings per share than otherwise

4. In preparing a statement of cash flows under the indirect method, a decrease in accounts receivable would be reported or included as a (n):
a. investing activity
b. financing activity
c. deduction from net income
d. addition to net income

5. In the statement of cash flows, cash paid for operating activities would include:
a. cash dividends paid
b. interest on bonds payable
c. repayment of a bank loan
d. purchase of productive assets

6. Which statement is false? Ratios:
a. are basically logical relationships
b. can be based on either a single financial statement or several financial statements
c. are never used in financial statement analysis
d. can be used to perform trend analysis

7/8 Pizza Inc. sells uncooked pizzas that can be heated at home and taste delicious. An income statement for a typical month is given below:

Sales [ 5,000 pizzas] $45,000
Ingredients $12,000
Direct Labor 6,000
Overhead [ 25% of variable] 16,000 34,000
-------- ---------
Before tax income $11,000
A local car dealer who loves pizzas has offered to buy 200 pizzas for an upcoming promotion to launch the new ZIP line of sports cars he will carry. While the normal selling price is $9 per pizza, the dealer has offered $6 each citing the large volume of the order as the reason for cutting the price.

7. If Pizza Inc. accepts this order, the effect on the company's income, assuming regular sales are unaffected is a
a. $ 160 decrease, b.$160 increase, c $320 decrease d$ 320 increase e. None of the above

8. The fixed overhead of $2.40 per pizza is
a. is irrelevant in making the decision because the total fixed costs are unaffected
b. is irrelevant in making the decision because the fixed costs per unit are unaffected
c. will increase to above $3 per pizza if the order is accepted
d. will increase to above $3 per pizza if the order is not accepted

9. Edgar Automobile Manufacturing Co [ EAM] produces cars for both American and Japanese car companies. It currently manufactures the transmission that go into the cars . X Corp [X] has offered to provide the transmissions to EAM for $400 each. EAM produces 5,000 cars per month and has the following costs for the manufacture of transmissions:
Direct materials $150, direct labor $50, variable overhead of $100 and fixed overhead of $150 for a total cost of $450.

If the transmissions are purchased from X Corp, $300,000 of fixed overhead costs per month [ supervisor's salaries, insurance, etc.] could be eliminated. Given that the quality of the X Corp transmissions is equivalent to that of EAM, it should:
a. buy transmissions from X Corp. to save $200,000 per month.
b. make transmissions to save $200,000 over the cost of buying them
c. buy transmissions from X Corp to save $250,000 per month
d. Make transmissions to save $250,000 over the cost of buying them
e. None of the above

10. A current ratio of 6 is usually an indication that the firm:
a. has a low degree of liquidity
b. has a reasonable degree of liquidity
c. has not made the most productive use of its assets
d. has made the most productive use of its assets

11. Where does a "convertible bond" get its name?
a. the option of converting into shares of common stock
b. the option of increasing its coupon payments when interest rates increase
c. the option of converting from zero coupon to coupon paying bond.
d. the option of increasing yield without decreasing price

12. A line of credit would be considered:
a. an agreement to borrow up to a specific total amount on demand from a bank.
b. a short term unsecured loan with minimum interest expense.
c. a secured loan to be amortized over three to five years.
d. a long-term, permanent source of funding

13-15. Projected sales for T Company for the next month and beginning and ending inventory data are as follows: sales 30,000 units, beginning inventory 1,000 units and targeted ending inventory 5,000 units. The selling price is $25 per unit. Each unit requires 3 pounds of material which costs $5 per pound. The beginning inventory of raw material is 15,000 pounds. The company wants to have 20,000 pounds of material in inventory at the end of the month.

13. Budgeted sales would be:
a. $600,000 b. $625,000 c. $650,000 d. $ 750,000

14. According to the production budget, how many units should be produced?
a. 26,000 units, b, 29,000 units c. 30,000 units d 34,000 units

15 Pounds of material to be purchased would be:
a. 78,000 pounds b. 102,000 pounds c 107,000 pound d. 117,000 pounds

Solution Summary

This solution is comprised of a detailed explanation and calculation to answer finance multiple choice questions.