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Date Posted: 16:17:47 06/29/01 Fri
Author: Charles Hodges
Subject: Re: Here are two sample Exam 1 from Hodges
In reply to: Charles Hodges 's message, "Here are two sample Exam 1 from Hodges" on 06:59:53 06/25/01 Mon

Here are answers to most of them.


>1. The goal of the financial manager should be to
>maximize earnings per share.
> B. False
>
>2. In which financial statement does one find the
>account “Additional Paid-in Capital” ? What would
>cause the amount listed in “Additional Paid-in
>Capital” to change from year to year?
>
Balance sheet, firm sells or redeems common stock.
>
>3. Suppose a profitable firm wants to maintain a
>specific TIE ratio. If the firm knows the level of
>its debt, the interest rate it will pay on that debt
>and the applicable tax rate, the firm can then
>calculate the Net Income level required to maintain
>its target TIE ratio.
> a. True, since this all the inputs needed to create the income statement.
>
>4. Which of the following would not be listed in a
>profitable firm’s income statement?
>
> B. Interest Paid, a trick question, Interest Expense is in the statement not Interest Paid.

>
>5. List the three basic methods of manipulating
>financial statements as discussed in class.
1. Conservative verus aggressive accounting pracatices.
2. delaying or accelerating sales and discretionary expenses near the and of the quarter.
3. Balance sheet transfers, especially among current assets, current liabilities, and long term liabilities.

> 6. (Fill in the blanks) Finance would suggest that
>(Future) (Cash Flows) are most important when valuing
>any investment.
>
>7. You have loaned money to a company. The company
>is supposed to repay the loan in 60 days. As a
>short-term creditor concerned only with a company's
>ability to meet its financial obligation to you, which
>one of the following combinations of ratios would you
>most likely prefer?
> Current Debt
> ratio TIE ratio
e. 2.5 0.5 0.71
>
>8. What is the purpose of the Income Statement?
>Does the Income Statement cover a period of time or a
>point in time?
To show the firm's Revenues and Expenses over a period of time.
>
>9. What are Asset Management ratios intended to
>measure? List one example of an Asset Management ratio.
>
How Efficient and Effective is the company's use of its assets. Inventory Turnover is an example.

>10. Your profitable, tax-paying firm is buying a
>machine to perform some task and will pay cash for the
>machine on the last day of the year. You are
>considering two machines that are completely equal
>(i.e., they have identical levels of performance,
>efficiency, expected maintenance costs, depreciation
>periods, etc.), except that one machine costs more
>than the other machine. Given this information, which
>of the following is true about next year’s financial
>statements?
> D. We will have lower net income and higher cash
>flow with the more expensive machine.

>
>11. We often look for “evidence” of a company’s
>positive (or negative) cash flow. List some things
>that an employee might see if a profitable firm was
>experiencing cash flow difficulties?
slow payment of you, vendors asking for cash up front, creditors calling the firm, firm selling off assets, firm not buying supplies or restocking shelves.

> 12. In the statement of cash flows, which of the
>following is a source of funds?
> C. Increase in notes payable.

>13. List the three areas of finance.
corporate, investments, and banking.
>
>14. According to the book, What is the purpose of
>Financial Forecasting?
>
to assure that the firm has required capital to fund growth in sales.
>
>15. For firms using accrual accounting, the financial
>statement that lists a firm’s investing cash flows and
>operating expenses over a period of time is the:
E. None of the above.
>
>16. What are three limitations of ratio analysis?
1. they are a snapshot of the firm, since the balance sheet is at a point in time.
2. ratios use accounting data not market value data.
3. the lack of a standard when judging ratios.

>17. Net Fixed Assets are always less than, or equal
>to, Gross fixed assets.
A.True
>
>18. A profitable firm that wants to know if it has
>enough cash to meet its bills would be most likely to
>use which kind of ratio?
> (a) liquidity.
>
> PART II. PROBLEMS
>1. Fill in the missing numbers for the Aboutt, Inc.
>1997 annual financial statements. Assume all balance
>sheet accounts are 1997 ending balances unless other
>wise noted. Missing numbers are worth 1 1/2 points
>unless otherwise noted.
>
>Profit before taxes $ 162 Accrued Wages $________
>Depreciation $90 Income tax $ ________
>Net income $ ________(3 points) Total current
>liabilities$ __________
>Long term debt $ 205 Net sales $ 907
>Total liabilities and owner's equity $_____ Beginning
>Retained Earnings $132
>Additional Paid-in Capital $94 Common stock ($.03
>par) $ 24
>Ending retained earnings $ 143 Cost of goods sold
>________
>Beginning Net Fixed Assets $351 Cash $
>____________
>Accounts payable $ 193 Accounts receivable $230
>Inventories $ 95
>Gross profit $ 467 Rent $70
>Total Assets $ ___________ Research and Development
>Expense $7
>Advertising $110 Operating Profit $
>_________
>Interest expense $8 Total Current assets $ 421
>Ending Net fixed assets $ 397 Dividends $74
>
We did this one on quiz 1.
>
>
>Fill in the blanks below:
>Purchase of Fixed Assets ________(3 points)
>Dividends per Share ________(3 points)
> 2. Use this information to answer the questions
>below. Assume all sales are credit sales.
>Balance Sheet 12/31/96 12/31/97
> Cash $ 315 $ 155
> Accounts Receivable 275 275
> Inventory 600 320
> Total Current Assets 1,190 750
> Plant and Equipment 1,648 2,313
> Less: Acc Depr (500) (730)
> Net plant and equipment 1,148 1,583
> Long Term Investments 52 27
> Total assets $2,390 $2,360
>
> Accounts payable $ 150 $ 315
> Notes payable 125 106
> Total Current liabilities 275 421
> Bonds 500 430
> Common Stock (.05 par) 175 165
> Paid-in-capital 775 644
> Retained earnings 665 700
> Total owners' equity 1,615 1,509
> Total liabilities and
> owners' equity $2,390 $2,360
>
>Income Statement (1996) (1997)
> Sales (100% credit) $1,100 $1,330
> Cost of Goods Sold 600 760
> Gross profit 500 570
> Operating expenses 20 170
> Depreciation 160 230
> Net operating income 320 170
> Interest expense 64 57
> Net income before taxes 256 113
> Taxes 87 66
> Net income $ 169 $ 47
>

SEE QUIZ 2
>2a. (2 points) For this firm, what was the smallest
>source of funds in 1997?
>SEE QUIZ 2
>2b. (2 points) What was the firm’s 1997 Net Cash
>Flow?
>SEE QUIZ 2
>2c. (2 points) Calculate the 1997 Gross Profit Margin?
>SEE QUIZ 2
>
>2d. (2 points) Calculate the 1997 Current Ratio?
>
>SEE QUIZ 2
>2e. (2 points) Calculate the 1997 Inventory Turnover
>Ratio?
>SEE QUIZ 2
>
>2f. (2 points) What is the firm’s Debt Ratio?
>SEE QUIZ 2
>2g. (3 points) Do a common size analysis on the 1997
>Balance Sheet.
SEE QUIZ 2
> ________________________________________________
>The following problems do not use the financial
>statements from the previous page.
>
>3. Last year your company had; sales = $150, Net
>Profit Margin = 12%, Assets = $80, and a
>debt-to-equity ratio=3. Calculate the Return on
>Assets (2 points) and Return on Equity (3 points).
>
>SEE QUIZ 2
>
>4. (4 points) The Atlanta Company has determined that
>it return on equity is 15%. You have the following
>information, debt ratio = 45% and Total Asset Turnover
>= 2.8. What is the firm’s profit margin?
>
>
>5. (4 points) Indicate how the following ratios match
>up to industry averages. (Interpret them in relation
>to the category in which they would be classified.)
> AAAAA Company Industry Interpretation
>Current ratio 2.0 WORSE 2.7
>Return on Assets 4% WORSE 8%
>Inventory turnover 17.5 BETTER 9.9
>Times interest
>earned 13.2 WORSE 15.4
>
>

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