Ch1: 1. In the past, the study of finance has included A) mergers and acquisitions. B) raising capital. C) bankruptcy. D) all of the above.2. One of the major disadvantages of a sole proprietorship is A) that there is unlimited liability to the owner. B) the simplicity of decision making. C) low organizational costs. D) low operating costs. 3. Many companies such as Tyco, Enron, WorldCom, etc. that suffered financial distress in the late 1990s and early 2000s,A) committed fraud. B) had failed corporate governance oversight. C) went bankrupt. D) all of the above are true.4. Agency theory would imply that conflicts are more likely to occur between management and shareholders whenA) the company is owned and operated by the same person. B) management acts in the best interests of maximizing shareholder wealth. C) the chairman of the board is also the chief executive officer (CEO). D) the board of directors exerts strong and involved oversight of management5. Maximization of shareholder wealth is a concept in which A) increased earnings is of primary importance. B) profits are maximized on a quarterly basis. C) virtually all earnings are paid as dividends to common stockholders. D) optimally increasing the long-term value of the firm is emphasized. 6. Money markets would include which of the following securities? A) common stock and corporate bonds. B) treasury bills and commercial paper. C) certificates of deposit and preferred stock. D) all of the above.7. The Internet has affected the financial markets by A) creating more competition between markets. B) pushing the cost of trading down. C) forcing brokerage companies to consolidate. D) all of the aboveCh. 21. A short-term creditor would be most interested in A) profitability ratios. B) asset utilization ratios. C) liquidity ratios. D) debt utilization ratios. 2. Given the balance sheet and income state for Simmons Maintenance Company, compute the ratios that are also shown for the industry average. The “right answer” refers to the question of whether a particular ratio for Simmons is better or worse than the industry average. SIMMONS MAINTENANCE COMPANYBalance SheetAssets Liabilities Cash $ 15,000 Accounts Payable $ 21,000Accts. Receivable 22,000 Notes Payable 20,000Inventory 30,000 Accrued Expenses 5,000 Current Assets 67,000 Current Liabilities 46,000Net Fixed Assets 73,000 Long-term Debt 30,000 Stockholders’ Equity 64,000Total Assets $140,000 Total Liabilities & Stockholders’ Equity $140,000Income StatementSales (80% credit) $120,000Less: Cost of Goods Sold 45,000Gross Profit 75,000Selling and Administrative Expense 20,000 Rent Expense (Lease) 8,000 28,000EBIT 47,000Interest Expense 5,000Earnings before taxes 42,000Taxes (@ 25%) 10,500Net Income $ 31,500 Common shares outstanding 15,000EPS $ 2.10?Ratio Ratios for Simmons Industry Average Better (B) or Worse (W)Profit margin 17.5% Return on assets 20.8% Return on equity 35% Receivables turnover 4.4x Avg. collection period 68.0 days Inventory turnover 3.5x Fixed asset turnover 2.4x Total asset turnover .76x Current ratio 1.28 Quick ratio .85 Debt to total assets .45 Times interest earned 12.0x Fixed charge coverage 3.6x Ch. 41. In developing the pro forma income statement we follow four important steps:1) compute other expenses, 2) determine a production schedule,3) establish a sales projection,4) determine profit by completing the actual pro forma statement. What is the correct order for these four steps? A) 1,2,3,4 B) 4,3,2,1 C) 2,1,3,4 D) 3,2,1,4 2. Ellis Sport Shop projects the following sales: April May June$75,000 $95,000 $110,000 Ninety percent of Ellis’ sales are on credit with 60 percent of receivables collected in the month after the sale and the rest of receivables collected in the second month after the sale. February sales were $60,000 and March sales were $70,000. In the past Ellis’ bad debt percentage has been 0 and is expected to continue. a) Prepare a monthly schedule of cash receipts for April-June.b) What is the balance of Receivables at the end of June.?Ch. 51. The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation. A) fixed costs B) variable costs C) marginal costs D) semi-variable costs2. At the break-even point, a firm’s profits are A) greater than zero. B) less than zero. C) equal to zero. D) Not enough information to tell3. 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.4. If a firm has a price of $4.00, variable cost per unit of $2.50 and a breakeven point of 20,000 units, fixed costs are equal to: A) $13,333 B) $10,000 C) $30,000 D) $50,0005. Combined leverage is concerned with the relationship between A) changes in EBIT and changes in EPS. B) changes in volume and changes in EPS. C) changes in volume and changes in EBIT. D) changes in EBIT and changes in net income.6. Use the table to answer following questions:Sales (75,000 units) $750,000Variable costs 225,000Contribution margin $525,000Fixed manufacturing costs 187,500Operating income $337,500Interest 75,000Earnings before taxes $262,500Taxes (at 31%) 81,375Net Income $181,125Shares outstanding 15,000 The Degree of Operating Leverage is The Degree of Financial Leverage is The Degree of Combined Leverage is 1. (TCO A) Which of the following is an advantage of the sole proprietorship relative to the corporate form of business organization? (Points : 5) Limited liability of investor Transferability of ownership Simple to establish Unlimited life2. (TCO A) Dividends _____. (Points : 5) represent an expense and are an operating activity represent an obligation and are an operating activity represent a distribution of earnings and are a financing activity represent an asset and are an investing activity3. (TCOs A, B) Below is a partial list of account balances for LBJ Company:Cash $15,000Prepaid insurance 5,000Accounts receivable 2,500Accounts payable 3,000Notes payable 6,000Common stock 10,000Dividends 500Revenues 15,000Expenses 13,000What did LBJ Company show as total debits? (Points : 5) $34,000 $36,000 $70,000 $31,0004. (TCOs B, E) Why is the accrual basis of accounting preferred by GAAP? (Points : 5) The Accrual basis is easier to use. The Accrual basis is also preferred by the Internal Revenue Service. The Accrual basis complies with the revenue recognition and matching principles. The Accrual basis requires fewer accounting resources.5. (TCO D) In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income?(Points : 5) LIFO The average cost method FIFO Income tax expense for the period will be the same under all assumptions.6. (TCOs A, E) Equipment was purchased for $75,000 on January 1, 2011. Freight charges of $3,200 were incurred and there was a cost of $6,000 for installation. It is estimated the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the straight-line method will be _____. (Points : 5) $13,800 $14,440 $12,600 $13,2407. (TCO D,G) Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____. (Points : 5) debit to Cash of $100,000 credit to Bonds Payable of $94,000 credit to Premium on Bonds Payable of $4,000 debit to Discount on Bonds Payable of $6,0008. (TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and $100,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $1,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____. (Points : 5) $20,000 $1,020,000 $1,000,000 $980,0009. (TCO F) If you are making comparisons within a company to detect changes in financial relationships and significant trends, you are performing what type of analysis? (Points : 5) Industry averages analysis Intercompany analysis Common-size analysis Intracompany analysis10. (TCO F) The formula for performing horizontal analysis is _____. (Points : 5) (Current Year Amount minus Base Year Amount) divided by Current Year Amount Base Year Amount divided by Current Year Amount Current Year Amount minus Base Year Amount (Current Year Amount minus Base Year Amount) divided by Base Year Amount11. (TCO F) Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time _____.(Points : 5) that has been arranged from the highest number to the lowest number that has been arranged from the lowest number to the highest number to determine which numbers are in error to determine the amount and/or percentage increase or decrease that has taken place12. (TCO F) A common measure of liquidity is _____. (Points : 5) debt-to-total-assets ratio cash debt coverage free cash flow working capital13. (TCO F) Short-term creditors would be most interested in which of the following ratios? (Points : 5) Average collection period Times interest earned Cash debt coverage Free cash flow14. (TCO G) To calculate the market value of a bond, we need to _____. (Points : 5) multiply the bond price times the interest rate calculate the present value of the principal only calculate the present value of the interest only calculate the present value of both the principal and1. (TCO A) Use the following partial financial statement information below to calculate the liquidity and profitability ratios. This information can be used to correctly solve each of the ratios below.Average common shares outstanding 35,000 Current liabilities $25,000Capital expenditures $20,000 Net income $50,000Cash provided by operations $77,000 Net sales $100,000Preferred stock dividends paid $30,000 Total liabilities $50,000Current assets $20,000 Total assets $80,000Instructions: Compute the following.a) Current ratio b) Working capital c) Earnings per shared) Debt-to-total-assets ratioe) Free cash flowTo earn full credit, you must show the formula you are using, show your computations, and explain the meaning of each of your ratio results. (Points : 30) 2. (TCOs D, E) Please prepare the following journal entries. Indicate which account should be debited with the abbreviation DR in front of the account name and which account should be credited with the abbreviation CR in front of the account name along with the dollar amount of the debit and credit. a) Investors invested $150,000 in exchange for 10,000 shares of common stock. b) Company made payment on account for $10,000 c) Company received $15,000 for services not yet performed d) Company purchased $7,500 worth of equipment e) Company billed $5,000 for services performed(Points : 30)
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