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Finance Flashcards

Finance Ch. 8

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? The investment is mutually exclusive with another investment of a different size.
Which one of the following statements is correct? The payback period ignores the time value of money.
Which one of the following is most closely related to the net present value profile? internal rate of return
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? mutually exclusive
If an investment is producing a return that is equal to the required return, the investment’s net present value will be: IRR = RR = NPV zero zero
The net present value: decreases as the required rate of return increases.
Which one of the following statements is correct? If the internal rate of return equals the required return, the net present value will equal zero.
Which one of the following indicates that a project is expected to create value for its owners? Positive net present value
Which one of the following statements is correct? Assume cash flows are conventional. When the internal rate of return is greater than the required return, the net present value is positive.
The internal rate of return is the: discount rate that results in a zero net present value for the project.
NPV present value of all future cash inflows less the initial cash outlay. net value of the project in todays dollars+:-considers timing-considers risk-comparison of diff cash flows of levels of risk-gives absolute dollars-:based on estimates
Payback method provides the length of time required to “payback” or recover the firms initial outlay in a new project+:-easy to calc-screening method, good for small projects-May allow to see if cash flows are accurate-:-ignores time value and risk-biased against long-term projects
IRR rate of return of a project must earn so that the present value of future cash flows just equals the projects initial outlay+:-used by investores -easy to understand-able to compare diff cash flows and levels of risk-provides the max rr that will make the project accetable-easy comparison with rr-often usted with npv-:-possible multiple rates with unconventional cash flows-diff size projects may conflict with NPV-if projects are mutually exclusive may conflict with NPV
PI (profitability index) ratio of the present value benefits associated with the project to its cost. That is PI is the ratio of PV benefits the initial cost+:-consistent with TVM-incorporates risk with NPV-allow for the comparison of projects with different cash flows and levels of risk-allos the ranking of projects based on the PV of benefit per dollar upfront-: -difficult to accurately forecast the cash flows and the correct discount rate-problems of scale. may give conflicting results with mutually exclusive projects
if RR changes will IRR no because IRR is based off of cash flow not RR
NPV future is built in with cash flow and rr
NPV increases RR decreases
Capital rationing does not support the goal of the firm-firm is unable to raise the required financing-firm does not have enough qualified managers-company management may be pessimistic about economy-intangible reasons like managers fear debt
special issues with ranking 1. problem of scale (size disparity)2. Reinvestment decision and assumptions3. Unequal lives (projects with diff EUL)
Risk Adjusted Discount Rate (RADR) 1. Previously we assumed that we would use the same discount rate to evaluate all projects2. unrealistic: one discount rate does not fit all3. Each project should be evaluated on the basis of its individual risk
independent can choose all that have NPV greater than 0
mutually exclusive choose one
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Finance Flashcards

FINANCE 3716- CH 2

false In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.
false Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firmʹs assets and the financing of those assets, and a prediction of the firmʹs future performance.
false International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty -first century.
It makes it easier to compare the financial results of different firms What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?
to provide a means for interested outside parties such as creditors to obtain informationabout a firm, with an overview of the short- and long-term financial condition of abusiness Which of the following best describes why a firm produces financial statements?
United States The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board?
the statement of activities Which of the following is NOT one of the financial statements that must be produced by a public company?
10-K U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?
statement of sources and uses of cash Which of the following is NOT a financial statement that every public company is required to produce?
auditor The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.
What is the role of an auditor in financial statement analysis? 1. to ensure that the annual financial statements are prepared accurately2. to ensure that the annual financial statements are prepared according to GenerallyAccepted Accounting Principles (GAAP)3. to verify that the information used in preparing the annual financial statements is reliable
balance sheet, income statement, statement of cash flows, statement of stockholder’s equity four financial statements that all public companies must product
false The balance sheet shows the assets, liabilities, and stockholdersʹ equity of a firm over a given length of time
true Stockholdersʹ equity is the difference between a firmʹs assets and liabilities, as shown on the balance sheet
the amount of deferred tax liability held by the company Which of the following amounts would be included on the right side of a balance sheet?
The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities Which of the following best describes why the left and right sides of a balance sheet are equal?
a patent for a drug held by the company A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?
revenue received for the delivery of items that have not yet been delivered A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?
Since net working capital is negative, the company will not have enough funds to meet its obligations A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?
Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity?
common stock, paid in surplus, and retained earnings The major components of stockholdersʹ equity are ________.
Assets – Current liabilities = Long-term liabilities Which of the following balance sheet equations is INCORRECT?
current asset Cash is a ________.
current liability Accounts payable is a ________.
long-term liability A 30-year mortgage loan is a ________.
The balance sheet reports liabilities on the left-hand side Which of the following statements regarding the balance sheet is INCORRECT?
true In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.
Investors believe the companyʹs assets are not likely to be profitable since its market valueis worth less than its book value A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?
1.35 GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio?
$3.8 billion A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?
2.35 Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?
debt-equity or equity multiplier ratio Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage?
Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?
The balance sheet is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. How does a firm select the date for preparation of its balance sheet?
The Assets side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the Liabilities side will correspondingly show the new debt that was incurred in paying for the plant. What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?
true
a firm’s net income the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period, the last or “bottom” line of the income statement, a measure of the firm’s profitability over a given period
firm’s gross profit the difference between sales revenues and the costs
corporate taxes Which of the following is NOT considered to be an operating expense on the income statement?
operating expenses on the income statement administrative expenses and overhead, salaries, depreciation and amortization
total sales – cost of sales gross profit is calculates as ________.
interest expense which of the following is NOT an operating expense?
operating expense depreciation and amortization, selling, general, and administrative expenses, research and development
The income statement is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. Typically the income statement spans the flow between two adjacent balance sheets. How does a firm select the dates for preparation of its income statement?
The effect on the income statement will be in the form of a depreciation expense for the first year on the new processing plant. What will be the effect on the income statement if a firm buys a new processing plant through a new loan?
true Price-earnings ratios tend to be high for fast-growing firms.
$330,000 In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?
the firm is growing Which of the following is the LEAST likely explanation for a firmʹs high ROE?
a grocery store chain that has very high turnover, selling many multiples of its assets per year Which of the following firms would be expected to have a high ROE?
a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability?
1.59% Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0 .Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7 .How much asset turnover should manufacturer B have to match manufacturer Aʹs ROE?
Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm. Why must care be taken when comparing a firmʹs share price to its operating income?
true A firmʹs statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.
It includes cash inflows from services rendered Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?
It adds all non-cash entries related to a firmʹs operating activities Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?
It would be an addition to property, plant and equipment so it would be an investing activity Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?
The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?
It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?
as an outflow under investment activities A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?
The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets How can we cross check the statement of cash flows?
The new loan entry should show as a cash inflow for the firm, while the payment for the new processing plant will be entered as a cash outflow What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?
false The management of public companies is not legally required to disclose any off-balance sheettransactions.
that the company has lost a class action suit brought against the firm by its employees andis expected to have to pay a large amount of damages A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firmʹs management discussion and analysis (MD&A)?
to disclose the financial implications of any off-balance sheet transactions The notes to the financial statements would LEAST likely be used for which of the following purposes?
Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off balance sheet transactions, which have to be reported through notes to the financial statements What is the need for the notes to the financial statements when a firmʹs operations are already documented in the financial statements?
false Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements
The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?
by raising its reported earnings WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors?
by forcing companies to audit financial statements they release Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?
It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process What are the requirements of section 404 of SOX?
Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?
As the name implies, external auditors act as third party monitors to a firmʹs financial reporting process What role do external auditors play in a firmʹs financial reporting process?
All firms quoted on a U.S. exchange are required to use GAAP in their financial reporting process. This standardization process makes it easier to adjust and/or compare the financial figures across different firms What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?
Examples of some firms that had practiced inaccurate reporting are Enron and WorldCom State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial statements
Many of the problems of Enron and WorldCom were kept hidden from boards and shareholders, until it was too late. People felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of the company According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?
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Finance Flashcards

Business & Finance Review

Which environment is NOT an important dimension of a business organization externalenvironment? The corporate cultural environment
What is profit? Difference between revenues and expenses
What is the environment where a firm conducts business known as? Domestic business environment
Factors such as international trade agreements, economic conditions, and political unrest will have the greatest impact on what type of business environment? Global business environment
Which type of business environment can reduce or replace the need for traditional working methods,physical equipment, and other platforms needed to conduct business? Technological environment
The pursuit of profits is how a business differs from organizations such as public universities, public hospitals, and government agencies. T/F TRUE
An organizations external environment consists of everything that might affect it.T/F TRUE
What is the general term for resources used by a business to produce a good or service referred to as? Factors of Proudction
What term denotes a nation’s basis for allocating its resources among its citizens? Economic system
What is the process for converting government enterprises into individually owned firms known as? Privatization
What is the term for the physical and intellectual contributions of people while engaged in the production of goods and services? Human resources
Who is the person who accepts the risks and opportunities inherent in a new business opportunity? Entrepreneurs
What factor of production is used to generate forecasts based on specialized knowledge and economic data? Information resources
When making decisions about production and allocation, which type of system depends on individual producers and consumers to create a combination of supply and demand? Market economy
The idea that individuals would contribute according to their abilities and receive benefitsaccording to their needs supports which type of economy? Communist based economy
Which of the following best explains the difference between a market economy and a planned economy? In a planned economy, consumers have little choice in where they work or what they purchase or pay.
What type of economy is the United States reflective of? Mixed
What does a planned economy rely on a centralized government to do? Allocate all or most factors of production
Which economic system emphasizes the private ownership of most factors of production? Capitalism
In which type of economy do the individual producer and consumer control production through supply and demand? Market economy
The customs, values, and demographic characteristics of the society in which an organization functions are the principal elements of the political-legal environment. T/F? FALSE
Physical resources include the data and other information used by businesses. T/F FALSE
The technological environment includes only electronics and telecommunications used to perform business activities. T/F FALSE
In a market system, individuals are limited as to what they can buy and in how they can spend their money. T/F FALSE
In a market economy, there is a centralized government that controls factors of production and decision making. FALSE
What is the point at which the supply curve and the demand curve intersect on a graph? equilibrium
What is the price at which the quantity of goods demanded and the quantity of goods supplied are equal? Market price
What occurs when the quantity demanded exceeds the quantity supplied? Shortage
What marks the key difference between economic systems? The way the factors of production are managed
What is the primary force that determines what a firm buys and sells? Laws of supply and demand
What is the willingness and ability of producers to offer a good for sale referred to as? Supply
What takes place when buyers purchase more of a product when the price drops, and less when the price increases? Laws of demand
What can be used to determine relationships among different levels of demand and supply, based on price? Demand and supply curves
Graphically, what has been achieved when price of goods demanded is equal to the quantity of goods supplied? Equilibrium price
What are individual beliefs about what is right and wrong or good and bad referred to as? Ethics
Which of the following should be the first step in assessing ethical behavior in a certain situation? Collect facts related to the situation.
What is likely the single MOST effective step that a company can take to set ethical standards? Demonstrate support from top management
How do top managers BEST demonstrate a commitment to ethical business practices? By adopting and enforcing written codes of ethics
What category of ethics relates to matters such as hiring, firing, working conditions, privacy and respect? Behavior toward employees
When an activity benefits an individual but not the employer, what ethical dilemma has been created? Conflict of interest
What do ethical norms that ensure an action is consistent with what’s fair entail? Justice
Which ethical norm considers whether a particular act optimizes the benefits to those who are affected by it? Utility
When evaluating a decision based on the ethical norm of rights, a manager is MOST likely to consider which of the following questions? Does the decision respect the individuals involved?
Which of the following is the BEST description of organizational stakeholders? Individuals and groups that are directly affected by the practices of a company
Standards that help to shape behaviors towards employees, the organization, and other economic agents are Managerial ethics
Ethics are beliefs about what is right and wrong. TRUE
Business ethics refers to ethical or unethical behaviors by employees in the context of theirpersonal lives. FALSE
A conflict of interest occurs when an activity may benefit the individual to the detriment of his or her employer. TRUE
What is the term given to the groups, individuals, and organizations that are directly affected bythe practices of an organization? organizational stakeholders
Which entity is defined as independent and has little influence on its market? Small business
The U.S. Department of Commerce considers a business “small” if it has fewer than how manyemployees? 500
Which of the following industry groups is the fastest growing segment of small business enterprise? Services
Which of the following types of venue is favored by small-business retailers? specialty shop
Why is it difficult to compare relative job growth for different-sized businesses? It is hard to determine the cutoff point at which a small business becomes a large business.
Why do attitudes about entrepreneurship vary internationally? Attitudes towards risk-taking in business are culturally determined.
When an investor is not interested in owning their own business, why do they need to understand entrepreneurship? To determine the key characteristics of success
In a small business, who determines prices for wholesalers and customers? Market forces
Small businesses impact key aspects of the U.S. economy including Job creation and innovation
The Small Business Administration is the government agency charged with owning small businesses. FALSE
Small businesses produce more patents per employee than large patenting firms. TRUE
Most businesses in the United States are large businesses with more than 500 employees. FALSE
Major innovations are most likely to come from large corporations. FALSE
The Small Business Administration (SBA) may consider a business with many employees to be small as long as it has low annual revenues.
What are products that are created domestically and transported for sale abroad? Exports
What are products that are created abroad and then transported and sold domestically? Imports
Which country is the world’s largest marketplace and most stable economy? The United States
Which country in the Pacific Asia region has one of the world’s largest economies? China
Which organization was developed to promote economic and cultural cooperation among Asian countries? ASEAN
Which organization created the classification of countries based on per capita income? The World Bank
Under which of the following treaties are Canada, the United States, and Mexico gradually eliminating tariffs and all other trade barriers? The North American Free Trade Agreement
What organization was founded in 1967 for economic, political, social, and cultural cooperation in the Asia Pacific region? ASEAN
What is the primary force that determines what a firm buys and sells? Laws of supply and demand
Which of the following treaties sought to eliminate trade barriers such as tariffs and quotas? General Agreement on Tariffs and Trade
How does globalization of business benefit shareholders of an organization? Through increased and improved profitability
What caused manufacturing jobs to move from Mexico to China in the late 1990s? Increases in Mexico’s cost of living and wages
Where is the world’s largest free marketplace? Europe
An import is a product made or grown abroad but sold domestically TRUE
The World Trade Organization (WTO) was created to encourage international trade TRUE
Globalization refers to the process by which countries around the world are becoming more self-sufficient. FALSE
Which business constituents analyze their competitive environments and plan, organize, direct, and control the operations of their organizations? Managers
Which aspect of the management process involves determining what the organization needs to do and how best to get it done? Planning
What function of the management process is used to monitor and ensure the organization is meeting its goals? Controlling
The first step in the planning process is determining goals. What is the next step? Developing a comprehensive strategy
Which description defines the planning function of the management process? Determining what an organization needs to do and how best to get it done
Which description identifies the organizing function of the management process? Determining how best to arrange an organization’s resources into a coherent structure
Which function in the management process is being utilized when a firm elects to move towards a more centralized structure? Organizing
Which description identifies the controlling function of the management process? Monitoring a firm’s performance to ensure that it is meeting its goals
Comparing actual performance against standards is an example of which function of the management process? Controlling
What type of management process function is being used when a manager motivates the workforce by rewarding them with additional vacation when standards are achieved? Leading
When a sales manager compares actual sales to the quarterly sales quota, he or she is performing the controlling function of management. TRUE
The first step in the control process is to compare actual performance to standards FALSE
Which type of manager is responsible for implementing the strategies, policies, and decisions made by top managers? Middle manager
Which type of manager spends most of their time working with and supervising the employees who report to them? First-line managers
Which type of business constituent has titles such as President and CEO? top managers
Which level of management is responsible for the overall performance and effectiveness of the firm? Top managers
CFO and controller are titles associated with what type of manager? Financial
Which level of management sets general policies, formulates strategies, approves all significant decisions, and represents the company in dealings with other firms and with government bodies? Top managers
Titles such as plant manager, operations manager, and division manager designate which level of management? Middle managers
The titles of supervisor, office manager, and group leader are examples of which level of management? First-line management
Which of the following are responsible for production and quality control? operations managers
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Finance Flashcards

Personal Finance – Exam 1

Why should you care about the power of compounding and the time value of money?A. You may outlive you Social Security and employer’s retirement plan.B. It is possible to build a large estate for yourself, spouse, and children.C. The sooner you start saving for retirement, the less you have to save each year.D. It is critical to obtaining your future financial goals.E. all of the above E. All of the above
The earlier you begin saving for your retirement, the easier it will be to reach your financial goals for retirement. True
A debit card is something of a cross between a credit card and a checking account. True
One’s ________ is found by dividing total debt or liabilities by total assets. A. Debt ratio
The purpose of using financial ratios is to: E. Both C and D above (better understand how you are managing your financial resources and help to analyze your raw data to compare how well you are doing)
Contributing $2,000 into a tax-deferred retirement plan in a 28% tax bracket will save D. $560
Which one of the following is not one of the five basic steps in personal financial planning? D. Let an accountant review your plan
If he sticks to this plan, Arnold’s savings will have grown to approximately ______ by age 62. D. $116,723
Personal financial planning can help you to:A. deal with unplanned health issuesB. minimize your chances of personal bankruptcyC. have enough money for a comfortable retirementD. minimize you tax payments to uncle SamE. all of the above E. All of the above
Your net worth, or your general level of financial worth, is found by E. Subtracting your liabilities from your assets
Which of the following would offset your tax liability in a direct dollar for dollar manner and may actually increase your tax refund beyond the amount paid during the tax year? B. Tax Credit
Suppose that Cheryl’s only assets are an automobile worth $10,000 and a checking account with a $5,000 balance. Her only liabilities are a student loan balance of $2,000 and a balance of $8,000 on her car loan. What is her net worth? C. $5,000
Which indicates the correct order to completing your tax returns? C. Determine gross income, subtract adjustments, subtract deductions, claim exemptions, calculate total tax
What is the name for an automatic loan made to your checking account whenever your account doe not contain enough cash to cover the checks that you have written against it? B. Overdraft Protection
Practical used of an income statement include:A. determining whether you are earning more than you spendB. knowing where your money is goingC. Spotting problem areas of overspendingD. determining if money is available for saving or investmentE. all of the above E. All of the above
Which of the following is not a disadvantage of credit cards? A. They allow the consumer the ability to rent cars and make online reservations.
The term that considers having money readily available when your need it is the concept of liquidity.
Which of the following is not a single-purpose credit card?A. Toys R UsB. Macy’sC. Shell OilD. SearsE. Bank of America Visa E. Bank of America Visa
A solid understanding of personal finance will:A. allow you to take advantage of changes in the economyB. enable you to protect yourself from an incompetent investment advisorC. give you the ability to make intelligent investmentsD. help you understand the importance of planning for you financial futureE. all of the above E. All of the above
One of the following lists constitutes the five Cs of credit. Select the correct one. E. Character, capacity, capital, collateral, conditions
How do you compare cash management alternatives to determine which is best for you?A. Consider their safety or riskB. Take into account their tax statusC. Compare returns using comparable interest ratesD. All of the above D. All of the Above
Being financially secure involves balancing what you earn with D. what you spend
Suppose that you are not able to complete you tax returns by April 15. Which of the following statements is most accurate? A. You can apply for an automatic extension – no questions asked, but you must enclose a check in payment for estimated taxes due.
Assuming the APR on your credit card if 18% and your average daily balance this month was $10,000, what will your interest or finance charges for the month be? B. $150
Cash and investments that can be easily converted into cash are termed C. Liquid Assets
The amount of income taxes that you actually pay is based upon your D. Taxable income
John Madrid put $1,000 into a mutual fund yielding an 18% Annual Rate of Return. Using the Rule of 72 calculate approximately how long will it take to double in value. C. Four years
The ___ Principle states that a dollar today is worth more than a dollar in the future. B. Time Value of Money
What advice would you give to Monty concerning his use of credit cards?A. seek out a non-profit credit counseling companyB. learn the difference between a want and a need- gambling in Vegas is not a need.C. learn to live within your means.D. all of the above D. All of the above
A savings alternative that pays a fixed rate of interest while keeping your funds of deposit for a contracted period of time that can range from 30 days to several years is called a C. Certificate of deposit
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Finance Flashcards

Personal Finance Chapter 3

pre-tax means the government allows you to invest money after taxes are taken out false
ESAs are a good way to save for college true
the Roth IRA is an after-tax investment that grows tax free true
once you have a fully funded emergency fund, put 10% of your income into retirement plans false
the contribution amount for a Roth IRA in 2008 is $5,000 true
457 plans are designed for employees of non-profit organizations such as hospitals and schools false
if your money is in a pre-tax retirement plan, you will pay taxes on it when you cash it out true
never roll over your 401(k) when you leave a company false
you should save for college using saving bonds false
pension plans only work if you participate in them. If you put nothing in, you will get nothing out. false
a retirement plan for self-employed people SEPP
a deferred compensation plan 457
typical retirement plan found in most companies 401(k)
retirement plan found in non-profit groups (schools, hospitals) 403(b)
save for college by first using this type of account educational savings
used after you max out the ESA UTMA
movement of tax-deferred retirement money from one plan to another rollover
invest 15% of income for retirement Baby Step 4
manager of a child’s UTMA account until he or she reaches age 21 custodian
college funding Baby Step 5
the company Jason works for matches his 401(k) contribution up to 5%. Jason takes advantage of this and contributes $200 per month. At the end of one year, how much money will be in his account? $4,800
If your company does not provide any type of 401(k) match, what is the best investment option? Invest the maximum amount allowed in a Roth IRA, and then go back and fund the 401(k) to complete 15% of your income
what definition best explains an IRA? the tax treatment on virtually any type of investment
which is an advantage of a Roth IRA? All of the above: offers more choices, grows tax free, higher bracket at retirement
the primary difference between the roth IRA and a traditional IRA is: The Roth IRA grows tax free; the traditional IRA doesn’t
Under which condition are you not able to make a tax-free withdrawal from your Roth IRA? major career change and temporary drop of income
what is the best option for your retirement plan when you leave a company? Do a direct transfer into an IRA
If you borrow against your retirement plan, under which conditions must you pay it back? All of the above: if you leave the company voluntarily, if you are forced to leave the company, you die
if you have $3,000 invested in a Roth IRA, what is true about your contribution? You have already paid taxes on the money, so it will grow tax free
which of the following are good ideas to save for college? ESA
order the following investment steps according to priority 1) Fully funded emergency fund2) 15% income into Roth IRAs and pre-tax retirement3) ESA4) Build wealth
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Finance Flashcards

FINANCE CHa 3-4

Question 2The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders’ claims against the firm’s existing assets. Put another way retained earnings are stockholders’ reinvested earnings.True/False True
Question 3The amount shown on the December 31, 2012, balance sheet as “retained earnings” is equal to the firm’s net income for 2012 minus any dividends it paid.True/False False
Question 7Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.True/False True
Question 10Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.True/False True
Question 12Free cash flow is the amount of cash that if withdrawn would harm the firm’s ability to operate and to produce future cash flows.True/False False
Question 14Two metrics that are used to measure a company’s financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.True/False True
Question 15EBITDA stands for earnings before interest, taxes, debt, and assets. True/False False
Question 17If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.True/False FalseQuestion 18The current and quick ratios both help us measure a firm’s liquidity. The current ratio measures the relationship of the firm’s current assets to its current liabilities, while the quick ratio measures the firm’s ability to pay off short-term obligations without relying on the sale of inventories.True/False True
Question 19The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.False/True True
Question 20The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.True/False True
Question 21Since the ROA measures the firm’s effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.False/True False
Question 22 The operating margin measures operating income per dollar of assets.False/True False
Question 23The profit margin measures net income per dollar of sales. False/True False
Question 40The more conservative a firm’s management is, the higher its debt ratio is likely to be.False/True False
Typically, the statement of stockholders’ equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet. True/False True
Question 2Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.False/True True
Question 3On the balance sheet, total assets must always equal the sum of total liabilities plus equity.True/False True
Question 5Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.True/False True
Question 7The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.- False Question 8If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.- False
Question 9The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders’ equity.True/False True
Question 11If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.False/True False
Question 13An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows.False/True True
Question 17 If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.False/True False
Question 18Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm’s liquidity position.True/False True
Question 19In general, it’s better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. True/False False
Question 20The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.True/False True
Question 21Other things held constant, the more debt a firm uses, the lower its return on total assets will be. False/True True
Question 23 Other things held constant, the more debt a firm uses, the lower its profit margin will be. False/True True
Question 22Other things held constant, the more debt a firm uses, the lower its operating margin will be.False/True False
Question 40The times-interest-earned ratio is one, but not the only, indication of a firm’s ability to meet its long-term and short-term debt obligations. False/True True
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Finance Flashcards

Foundations of Business Finance

A company’s balance sheet shows the value of assets, liabilities, and stockholders’ equity at a specific point in time.
On a balance sheet, retained earnings are not “unspent cash” because they have been used to finance the firm’s assets.
For both managers and external financial analysts, ______ is the single most important accounting number found on the income statement. net income (net profit after tax)
Earnings per share (EPS) is calculated by dividing earnings available for common stockholders by the number of shares of common stock outstanding.
Net working capital is a measure of a firm’s overall liquidity.
Why is the quick ratio a more appropriate measure of liquidity than the current ratio for a large-airplane manufacturer? It excludes inventory from the numerator of the ratio because it is difficult to convert inventory to cash and most sales are made on a credit basis.
The one fixed asset that is not depreciated is ________. land.
Return on total assets (ROA) is equal to _________. net profit margin x total asset turnover.the product of the components of the DuPont System.earnings available for common stockholders / total assets.all of the above.
When a firm has no “other income,” its operating profit and blank_____ are equal. EBIT
The firm’s _______ are primarily interested in ratios that measure the short-term liquidity of the company and its ability to make principal and interest payments. creditors
When evaluating financial ratios, analysts typically examine a firm’s ratio values compared to the firm’s previous years’ ratios
_______ ratios would provide the best information regarding total return to common stockholders. Profitability
The firm’s managers use ratios to ______________. generate an overall picture of the company’s financial health.monitor the firm’s performance from period to period.isolate developing problems.all of the above
The _________ flows result from debt and equity financing transactions. financing
Which of the following is an inflow of corporate cash? Depreciation charges
The bottom-up method for forecasting sales relies on the ability of sales personnel to assess future demand, usually without the aid of statistical models.
Following _______ financing strategy takes advantage of short-term interest rates but also increases refinancing risk. Following ______ financing strategy minimizes the risk of a liquidity crisis, but generally increases borrowing costs. Following _______ financing strategy results in the use of long-term funding for permanent assets and short-term financing for temporary or seasonal requirements. none of the above
The sustainable growth model gives managers a kind of shorthand projection that ties together blank_____ and _____. growth objectives; financial needs
The key input required to build a cash budget is ________. the firm’s sales forecast.
Which of the following are common cash disbursements? rent and lease paymentsinterest payments and taxespayments of accounts payable and wagesall of the above
Most pro forma statements begin with a sales forecast. One approach to deriving a sales forecast is the top-down approach. Top-down sales forecasts rely heavily on macroeconomic and industry forecasts.
A firm that employs an aggressive strategy to finance assets will finance a portion of long-term (permanent) growth in assets with short-term financing.
A strategic plan is a long-term guide driven by competitive forces.
A cash budget is a statement of a firm’s planned inflows and outflows of cash used to ensure that a firm has available cash to meet short-term financial obligations.
A speedup in _____ should _____ a firm’s financing needs; whereas, a slowdown in ______ should ______ financing needs for a firm. payments; increase; collections; increase
_________ are often used as the plug figure in pro forma projections. Cash balances
“Required total financing” figures in a cash budget show the additional amount a firm must borrow at the end of each month.
A long-term financial plan begins with blank___________. strategy.
When generating pro forma statements, most firms rely on a __________ approach to sales forecasts. blended
Most firms when planning for growth focus on meeting sales target growth rates.
The terms and conditions to which a bond is subject are set forth in its Indenture.
The preemptive right is important to shareholders because it Protects the current shareholders against dilution of ownership interests.
Companies can issue different classes of common stock. Which of the following statements concerning stock classes is correct? None of the above statements is necessarily true.
Pure options are instruments that are Created by investors outside the firm.Bought and sold primarily by investors and speculators.Of greater importance to investors than to financial managers.All of the above.
Your Aunt Agatha purchased a call option a few months ago. Today is the expiration date, so she must decide whether to exercise the option. Which of the following statements is correct? Do not consider brokers’ commissions in your answer. Aunt Agatha should exercise the option if the price of the stock is greater than the exercise, or strike, price.
Which of the following are generally considered advantages of term loans over publicly issued bonds? Lower flotation costs.Speed, or how long it takes to bring the issue to market.Flexibility, or the ability to adjust the bond’s terms after it has been issued.All of the above.
Eurodebt is the term used to designate Debt that is denominated in a currency that is different than the currency of the country in which it is sold.
An American Depository Receipt (ADR) represents Certificates representing ownership in stocks of foreign companies that are held in trust by a bank located in the country the stock is traded.
Which of the following statements is correct? Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a company and this makes them riskier to investors than regular bonds.
Which of the following statements concerning common stock and the investment banking process is false? Stockholders have the right to elect the firm’s directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management’s performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a margin call.
Which of the following statements is false? The term Eurobond specifically applies to any foreign bonds denominated in U.S. currency.
A(n) ____ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal. term loan
A(n) ____ is a bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation. zero coupon bond
A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what? cumulative dividends
A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period. put option
Which of the following is NOT an example of a financial asset? inventory
Which of the following is NOT a source of equity on a firm’s balance sheet? property, plant, and equipment
A ____ is an agreement between two firms where one firm agrees to sell some of its financial assets to another and then buy the financial assets back from that firm at a later time repurchase agreement
Bond ratings of ____ and higher are considered investment grade BBB
Which of the following statements is most correct? Other things held constant, the “liquidity preference theory” would generally lead to an upward sloping yield curve.
Your uncle would like to restrict his interest rate risk and his default risk, but he still would like to invest in corporate bonds. Which of the possible bonds listed below best satisfies your uncle’s criteria? AAA bond with 5 years to maturity.
If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond? The yield on the 10-year bond is less than the yield on a 1-year bond.
An inverted yield curve Exists when short-term rates exceed long-term rates.
If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement? Investors expect short-term rates to decrease in the future.
Which of the following statements is most correct? If the maturity risk premium were zero and the rate of inflation were expected to increase in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.
Which of the following statements is correct? Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
Which of the following is not one of the fundamental factors that affect the cost of money? Exchange rates
Most experts think that in the United States the real risk-free rate fluctuates between two to four percent.
Which of the following assets is the most liquid? Cash
During recessions the demand for funds typically ____. decreases
As the demand for funds increase, the demand curve will shift to the ____ resulting in ____ market clearing interest rate. right; higher
The ____ premium is compensation for possibility that the borrower will not be able to pay the debt’s interest and principal on time. default risk
When a project’s NPV exceeds zero, The project should be accepted without any further consideration, assuming we are confident that the cash flows and the required rate of return have been properly estimated.
The underlying cause of ranking conflicts between the NPV and IRR methods is differing Reinvestment rate assumption.
Which of the following statements is correct? The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the IRR.
Which of the following statements is most correct? Sunk costs should be ignored in capital budgeting.
Which of the following statements is correct? The incremental operating cash flow for capital budgeting includes return on invested capital, which is net income, and return of part of invested capital, which is depreciation.
Which of the following statements is correct? In estimating incremental operating cash flows for the purpose of capital budgeting, interest payments should not be included since the effects of these payments are already included in the rate of return the firm is required to earn from its investments.
A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should Increase the required rate of return used to evaluate the project to reflect the higher risk of the project.
Which of the following statements is correct? The NPV and IRR methods use the same basic equation, but in the NPV method the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found.
Which of the following statements is correct? Large costs occur at the end of nuclear power plants’ lives because these plants have to be closed down, and shutdown costs are high due to the difficulty of handling radioactive materials. For this reason, it is possible that a nuclear plant project could have two IRRs.
Which of the following rules are essential to successful cash flow estimates, and ultimately, to successful capital budgeting? Only incremental cash flows are relevant to the accept/reject decision.
Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project? Pure play method.
Which of the following statements is correct? Capital budgeting has long-term effects on a firm leading the firm to lose some decision-making flexibility.Because asset expansion is fundamentally related to future sales, the decision to buy an asset involves an implicit sales forecast.Timing is important in capital budgeting. All of the above are correct.
____ are decisions about whether to purchase capital projects and add them to existing assets so as to increase existing operations. Expansion decisions
____ projects are a set of projects where the acceptance of one project means that other projects cannot be accepted. Mutually exclusive
A(n) ____ is a cash outlay that already has been incurred and that cannot be recovered regardless of whether the project is accepted or rejected. sunk cost
Which of the following capital budgeting techniques does not adjust for the riskiness of the cash flows? Payback
Uncertainty regarding the domestic flows that result from converting foreign cash flows is what type of risk? Exchange Rate
Categories
Finance Flashcards

personal finance

Opportunity cost the best option you give up when you make a choice
types of risks you face when putting your money somewhere (3 main types) Inflation, Market /ValuePrice, Liquidity
Rule of 72 how long it will take for something to double 72/interest rate
Career More than a job, like requires training, long term commitment and likely includes benefits
tax deduction an amount subtracted from adjusted from income to arrive at taxable income
itemized deductions expenses a taxpayer is allowed to deduct from adjusted gross income
exemption a deduction from adjusted gross income for yourself, your spouse, and qualified dependents
form 1040EZ single or married filing a joint return, under 65 no dependents, do not itemize your deduction
credit is is an arrangement to receive cash, goods, or services now and pay for them later
Why is credit necessary for consumers to buy large items, for entrepreneurs to invest in their business
character your attitude toward your credit obligations
capacity your ability to meet your credit obligations
capital assets or net worth the value of them
collateral an asset that is pledge to insure the loan
savings Placing money somewhere that it will be safe but likely not grow
investment placing money somewhere in hopes that it grows over time, involves some risk but has chance at some reward
deficit amount spent over taken in in a given time period (year)
debt total amount owed
surplus money taken in as revenues over what is spent in a given time period
revenues money taken in
expenses money paid
withholdings money taken out of paycheck during the year so employee doesn’t get a large tax bill at the end of the year
risk vs reward Low risk is savings but offers no chance at rewardHigh risk is investing and has chance of earning returns
stocks partial ownership of a company; if the company’s value grows over time then so does the stockholders share in it
bonds loan to a company or government that the holder of the certificate is entitled to
Savings/Checking account typically earns little to no interest but is a safe place to keep money and convenient way to pay
CD Certificate of Deposit low risk low reward saving; it is for a set amount of time and pays more interest than a savings/checking account, but there’s a penalty if you withdraw funds early
social security number, credit card number, bank account information Information that people committing fraud are trying to get
Name 6 thngs on a credit report Name, SSN, credit score, current previous jobs/addresses, current open accounts, their maximum limit and current balance, any late payments (30, 60, 90 days late?), who has inquired into your report
Name some big tax deductions mortgage interest, student loan interest, college fees, 401k investments, charity
why is time the investors best friend compound interest: as you earn more interest, you earn interest not only on initial deposit but also on interest already earned….it adds up over time
What does a contract include rights and responsibilities of both parties
binding contract the binding means it is legally binding!
Ways that someone committing fraud may contact you TV commercial, internet pop up/site, phone, door to door, mail
Why it hurts to not pay debts/have bad credit cannot get home/auto loan or have to pay more, higher car insurance, cell phone bills, may have to pay utilities deposit, may hurt employment., may not be able to rent
credit card companies make most of their money off of __________________ People with bad credit
mortgage home loan, usually paid over 30 years
APR Interest rate that you’re paying
What is the difference between a credit card and a debit card? Credit card is a loan that you have to pay interest on, a debit card deducts payment right for your checking account
types of insurance homeowners, car, renters, life, boaters, specialty, health insurance….
benefits that an employer might offer dental health and vision insurance, vacation days (paid or unpaid?), 401k (contribution matching?), tuition/travel/resettle reinbursement,
deductable or co-pay amount you have to pay before insurance covers the rest
why buy insurance it spreads risk out amongst many people; protection for you in case you get sick, injured, or suffer loss of property
real estate investment that also provides a place to live, it can grow over time
liquidity ability to turn savings/investment into cash
inflation risk risk that your money’s value will decline over period of time as prices go up
market risk risk that your investment will lose value
diversification “Don’t put all your eggs in one basket” Investment strategy that says to put money in various sectors/investments so no one loss will greatly effect investments
3 Factors that affect how savings grows Time, amount invested, interest rate
How long will it take an investment earning 12% to double? 6 years (not bad!!!!)
Why should you not put money in a savings account long term? inflation risk: The value of money will go down more quickly then amount of money will grow
mutual fund collection of stocks selected by fund manager, meant to diversify and allow people to invest in stocks without having to research specific companies
budget statement/plan of how much one will make (revenue) and spend (expanses)
opportunity cost the best option you give up on whenever you make a decision
benefit the pleasure/good that you get out of a decision
cost what you give up when you make a decision
trade-offs giving up something to get something….every time you make a decision you are giving up on something
scarcity there is not enough to go around to satisfy our unlimited wants, this is why we have economics
Categories
Finance Flashcards

Finance 326 chap 2

Net working capital is defined as: E. current assets minus current liabilities.
The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the: B. income statement.
The financial statement that summarizes a firm’s accounting value as of a particular date is called the: D. balance sheet.
Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year? C. Noncash item
Which one of the following terms is defined as the total tax paid divided by the total taxable income? A. Average tax rate
Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns? C. Marginal tax rate
Cash flow from assets is defined as: C. operating cash flow minus the change in net working capital minus net capital spending.
Operating cash flow is defined as: B. the cash that a firm generates from its normal business activities.
Which one of the following has nearly the same meaning as free cash flow? B. Cash flow from assets
Cash flow to creditors is defined as: A. interest paid minus net new borrowing.
Cash flow to stockholders is defined as: D. dividends paid minus net new equity raised.
Which one of the following is an intangible fixed asset? C. Copyright
Delivery trucks are classified as: D. tangible fixed assets.
Which one of the following is included in net working capital? B. Accounts payable
Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm’s net working capital: B. had to decrease.
Which one of the following is included in net working capital? E. Invoice from a supplier for inventory purchased
Shareholders’ equity is equal to: C. net fixed assets minus long-term debt plus net working capital.
Which one of the following is an equity account? A. Paid-in surplus
Which one of the following statements is correct? A. Shareholders’ equity is the residual value of a firm.
All else equal, an increase in which one of the following will decrease owners’ equity? B. Increase in accounts payable
Which one of the following will decrease the net working capital of a firm? E. Making a payment on a long-term debt
Which one of the following will decrease the liquidity level of a firm? A. Cash purchase of inventory
Highly liquid assets: D. can be sold quickly at close to full value.
Financial leverage: E. increases the potential return to the shareholders.
Which one of the following statements concerning market and book values is correct? B. The market value tends to provide a better guide to the actual worth of an asset than does the book value.
Which one of the following is included in the market value of a firm but not in the book value? D. Reputation of the firm
The market value of a firm’s fixed assets: E. is equal to the estimated current cash value of those assets.
Which one of the following statements is correct concerning a firm’s fixed assets? A. The market value is the expected selling price in today’s economy.
Which one of the following statements concerning the balance sheet is correct? C. Assets are listed in descending order of liquidity.
An income statement prepared according to GAAP: E. records expenses based on the matching principle.
An increase in which one of the following will increase net income D. Revenue
Which two of the following determine when revenue is recorded on the financial statements based on the recognition principle?I. Payment is collected for the sale of a good or service.II. The earnings process is virtually complete.III. The value of a sale can be reliably determined.IV. The product is physically delivered to the buyer. C. II and III only
Depreciation does which one of the following for a profitable firm? D. Lowers taxes
The recognition principle states that: E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.
The matching principle states that: C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue.
Which one of the following statements related to the income statement is correct D. Net income is distributed either to dividends or retained earnings.
Firms that compile financial statements according to GAAP: D. can still manipulate their earnings to some degree.
The concept of marginal taxation is best exemplified by which one of the following? C. Mitchell’s Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.
The corporate tax structure in the U.S. is based on a: E. modified flat-rate tax.
Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant? C. An increase in depreciation
A negative cash flow to stockholders indicates a firm: E. received more from selling stock than it paid out to shareholders.
If a firm has a negative cash flow from assets every year for several years, the firm: A. may be continually increasing in size.
An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm? E. Depreciation
Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued? E. Positive cash flow to stockholders
Net capital spending is equal to: A. ending net fixed assets minus beginning net fixed assets plus depreciation.
Which one of the following relates to a negative change in net working capital E. Increase in current liabilities with no change in current assets for the period
Which one of the following will increase cash flow from assets but not affect the operating cash flow? C. Sale of a fixed asset
Cash flow to creditors is equal to: C. beginning long-term debt minus ending long-term debt plus interest paid.
Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? E. Positive cash flow from assets
Kroeger Exporters has total assets of $74,300, net working capital of $22,900, owners’ equity of $38,600, and long-term debt of $23,900. What is the value of the current assets? D. $34,700Current liabilities = $74,300 – $38,600 – $23,900 = $11,800; Current assets = $11,800 + $22,900 = $34,700
Morgantown Movers has net working capital of $11,300, current assets of $31,200, equity of $53,400, and long-term debt of $11,600. What is the amount of the net fixed assets? E. $53,700Net fixed assets = $11,600 + $53,400 – $11,300 = $53,700
The Draiman, Inc. currently has $3,600 in cash. The company owes $41,800 to suppliers for merchandise and $21,500 to the bank for a long-term loan. Customers owe The Draiman $18,000 for their purchases. The inventory has a book value of $53,300 and an estimated market value of $61,200. If the store compiled a balance sheet as of today, what would be the book value of the current assets? D. $74,900Current assets = $3,600 + $18,000 + $53,300 = $74,900
Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners’ equity of $21,100. What is the value of the net working capital? B. $10,400Net working capital = $21,100 + $8,600 – $19,300 = $10,400
Early Works had $87,600 in net fixed assets at the beginning of the year. During the year, the company purchased $6,400 in new equipment. It also sold, at a price of $2,300, some old equipment with a book value of $1,100. The depreciation expense for the year was $3,700. What is the net fixed asset balance at the end of the year? D. $87,200Ending net fixed assets = $87,600 + $6,400 – $1,100 – $3,700 = $87,200
Plato’s Foods has ending net fixed assets of $84,400 and beginning net fixed assets of $79,900. During the year, the firm sold assets with a total book value of $13,600 and also recorded $14,800 in depreciation expense. How much did the company spend to buy new fixed assets? C. $32,900New fixed asset purchases = $84,400 – $79,900 + $13,600 + $14,800 = $32,900
Red Roofs, Inc. has current liabilities of $24,300 and accounts receivable of $7,800. The firm has total assets of $43,100 and net fixed assets of $23,700. The owners’ equity has a book value of $21,400. What is the amount of the net working capital? B. -$4,900Net working capital = $43,100 – $23,700 – $24,300 = -$4,900
Pete’s Warehouse has net working capital of $2,400, total assets of $19,300, and net fixed assets of $10,200. What is the value of the current liabilities? D. $6,700Current liabilities = $19,300 – $10,200 – $2,400 = $6,700
Baugh and Essary reports the following account balances: inventory of $17,600, equipment of $128,300, accounts payable of $24,700, cash of $11,900, and accounts receivable of $31,900. What is the amount of the current assets? C. $61,400Current assets = $17,600 + $11,900 + $31,900 = $61,400
Donner United has total owners’ equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt? A. $5,400Long-term debt = $36,400 – $18,800 – $12,200 = $5,400
The Braxton Co. has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt? D. $63,300Ending long-term debt = $64,500 – $16,300 + $4,100 + $11,000 = $63,300
The Toy Store has beginning retained earnings of $28,975. For the year, the company earned net income of $4,680 and paid dividends of $1,600. The company also issued $3,000 worth of new stock. What is the value of the retained earnings account at the end of the year? D. $32,055Retained earnings = $28,975 + $4,680 – $1,600 = $32,055
Leslie Printing has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm does not pay dividends. What is the amount of the net new equity raised during the year? A. $1,500Net new equity = $142,430 – $26,310 – $55,000 – $11,200 – $48,420 = $1,500
The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the retained earnings balance at the end of the year? A. $21,883.25Net income = ($83,490 – $68,407 – $8,200 – $478) × (1 – 0.35) = $4,163.25; Ending retained earnings = $18,670 + $4,163.25 – $950 = $21,883.25
The owners’ equity for The Deer Store was $58,900 at the beginning of the year. During the year, the company had aftertax income of $4,200, of which $3,200 was paid in dividends. Also during the year, the company repurchased $6,500 of stock from one of the shareholders. What is the value of the owners’ equity at year end? A. $53,400Ending owners’ equity = $58,900 + $4,200 – $3,200 – $6,500 = $53,400
Gino’s Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners’ equity? C. $71,600Owners’ equity = $29,800 + $64,800 – $23,000 = $71,600
The Pier Import Store has cash of $34,600 and accounts receivable of $54,200. The inventory cost $92,300 and can be sold today for $146,900. The fixed assets were purchased at a cost of $234,500 of which $107,900 has been depreciated. The fixed assets can be sold today for $199,000. What is the total book value of the firm’s assets? B. $307,700Total book value = $34,600 + $54,200 + $92,300 + $234,500 – $107,900 = $307,700
Lester’s Fried Chick’n purchased its building 11 years ago at a cost of $139,000. The building is currently valued at $179,000. The firm has other fixed assets that cost $66,000 and are currently valued at $58,000. To date, the firm has recorded a total of $79,000 in depreciation on the various assets. The company has current liabilities of $36,600 and net working capital of $18,400. What is the total book value of the firm’s assets? A. $181,000Book value = $139,000 + $66,000 – $79,000 + $18,400 + $36,600 = $181,000
The financial statements of Jame’s Auto Repair reflect cash of $14,600, accounts receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $35,000 and the fixed assets for $49,000. The firm could also collect 100 percent of its receivables. What is the market value of the assets? E. $110,100Market value = $14,600 + $11,500 + $35,000 + $49,000 = $110,100
The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is the net income? A. $2,904Net income = ($79,600 – $48,200 – $18,700 – $8,300)(1 – 0.34) = $2,904
Chevelle, Inc. has sales of $487,000 and costs of $394,500. The depreciation expense is $43,800. Interest paid equals $18,200 and dividends paid equal $6,500. The tax rate is 35 percent. What is the addition to retained earnings? D. $13,325Addition to retained earnings = [($487,000 – $394,500 – $43,800 – $18,200)(1 – 0.35)] – $6,500 = $13,325
Last year, The Pizza Joint added $4,100 to retained earnings from sales of $93,600. The company had costs of $74,400, dividends of $2,500, and interest paid of $1,400. The tax rate was 34 percent. What was the amount of the depreciation expense? C. $7,800Earnings before interest and taxes = [($4,100 + $2,500)/(1 – 0.34)] + $1,400 = $11,400; Depreciation = $93,600 – $74,400 – $11,400 = $7,800
Holly Farms has sales of $581,600, costs of $479,700, depreciation expense of $32,100, and interest paid of $8,400. The tax rate is 42 percent. How much net income did the firm earn for the period? B. 35,612Net income = ($581,600 – $479,700 – $32,100 – $8,400)(1 – 0.42) = $35,612
For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid? C. $7,600Dividends paid = $31,800 – $24,200 = $7,600
ACE, Inc. incurred depreciation expenses of $21,900 last year. The sales were $811,400 and the addition to retained earnings was $14,680. The firm paid interest of $9,700 and dividends of $10,100. The tax rate was 40 percent. What was the amount of the costs incurred by the firm? D. $738,500.00Earnings before interest and taxes = [($14,680 + $10,100)/(1 – 0.40)] + $9,700 = $51,000; Costs = $811,400 – $21,900 – $51,000 = $738,500
Bridgewater Furniture has sales of $811,000, costs of $658,000, and interest paid of $21,800. The depreciation expense is $56,100 and the tax rate is 34 percent. At the beginning of the year, the firm had retained earnings of $318,300 and common stock of $250,000. At the end of the year, the firm has retained earnings of $322,500 and common stock of $280,000. What is the amount of the dividends paid for the year? E. $45,366Dividends paid = [($811,000 – $658,000 – $56,100 – $21,800)(1 – 0.34)] – ($322,500 – $318,300) = $45,366
Bama & Co. owes a total of $21,684 in taxes for this year. The taxable income is $61,509. If the firm earns $100 more in income, it will owe an additional $56 in taxes. What is the average tax rate on income of $71,609? E. 35.29 percentAverage tax rate = ($21,684 + $56)/$61,609 = 35.29 percent
Paddle Fans & More has a marginal tax rate of 34 percent and an average tax rate of 23.7 percent. If the firm earns $138,500 in taxable income, how much will it owe in taxes? C. $32,824.50Tax = ($138,500)(0.237) = $32,824.50
Redneck Farm Equipment owes $48,329 in tax on a taxable income of $549,600. The company has determined that it will owe $56,211 in tax if its taxable income rises to $565,000. What is the marginal tax rate at this level of income? E. 51.18 percentMarginal tax = ($56,211 – $48,329)/($565,000 – $549,600) = 51.18 percent
Tax Income Tax Rate0- 50,000 15%50,001- 75,000 25% 75,001- 100,000 34%100,001- 335,000 39%335,001- 10,000,000 34%Bait and Tackle has taxable income of $411,562. How much does it owe in taxes? D. $139,931.08Total tax = ($50,000)(0.15) + ($25,000)(0.25) + ($25,000)(0.34) + ($235,000)(0.39) + ($411,562 – $335,000)(0.34) = $139,931.08
Tax Income Tax Rate0- 50,000 15%50,001- 75,000 25% 75,001- 100,000 34%100,001- 335,000 39%335,001- 10,000,000 34%The Holiday Inn earned $177,284 in taxable income for the year. How much tax does the company owe on this income? C. $52,390.76Total tax = ($50,000)(0.15) + ($25,000)(0.25) + ($25,000)(0.34) + ($177,284 – $100,000)(0.39) = $52,390.76
The Plaza Cafe has an operating cash flow of $78,460, depreciation expense of $8,960, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows: Begining Ending Balance BalanceCurrent assets $141,680 $138,509Net Fixed assets $687,810 $703,411current liabilities $87,340 $91,516Long-term debt $267,000 $248,000What is the amount of the cash flow from assets? B. $61,246Cash flow from assets = $78,460 – ($703,411 – $687,810 + $8,960) – [($138,509 – $91,516) – ($141,680 – $87,340)] = $61,246
Miser Materials paid $27,500 in dividends and $28,311 in interest over the past year while net working capital increased from $13,506 to $18,219. The company purchased $42,000 in net new fixed assets and had depreciation expenses of $16,805. During the year, the firm issued $25,000 in net new equity and paid off $21,000 in long-term debt. What is the amount of the cash flow from assets? E. 51,811Cash flow from assets = ($28,311 + $21,000) + ($27,500 – $25,000) = $51,811
The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm’s operating cash flow if the tax rate is 34 percent? D. $93,560EBIT = $821,300 – $698,500 – $28,400 = $94,400; Tax = ($94,400 – $8,400) × 0.34 = $29,240; OCF = $94,400 + $28,400 – $29,240 = $93,560
The Paint Ball Range, Inc. paid $30,500 in dividends and $7,600 in interest over the past year. Sales totaled $211,800 with costs of $167,900. The depreciation expense was $16,500. The applicable tax rate is 34 percent. What is the amount of the operating cash flow? D. $37,168EBIT = $211,800 – $167,900 – $16,500 = $27,400; Tax = ($27,400 – $7,600) × 0.34 = $6.732; OCF = $27,400 + $16,500 – $6,732 = $37,168
The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending? E. $69,800Net capital spending = $371,920 – $348,200 + $46,080 = $69,800
The financial statements of Backwater Marina reflect depreciation expenses of $41,600 and interest expenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assets increased by $28,600. What is the amount of the net capital spending for the year? E. $70,200Net capital spending = $28,600 + $41,600 = $70,200
Andre’s Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital? C. $1,400Change in net working capital = ($82,600 – $85,100) – ($67,200 – $71,100) = $1,400
The balance sheet of Binger, Inc. has the following balances: Begining Ending Balance BalanceCash $21,400 $16,800Accounts Recei $47,400 $52,300Inventory $83,800 $77,400Net fixed assets $211,600 $203,800Accounts payable $54,900 $56,900Long-term debt $170,000 $185,000 What is the amount of the change in net working capital? A. -$8,100Change in net working capital = ($16,800 + $52,300 + $77,400 – $56,900) – ($21,400 + $47,400 + $83,800 – $54,900) = -$8,100
During the past year, Arther Anderson Services paid $360,800 in interest along with $48,000 in dividends. The company issued $230,000 of stock and $200,000 of new debt. The company reduced the balance due on the old debt by $225,000. What is the amount of the cash flow to creditors? D. $385,800Cash flow to creditors = $360,800 – $200,000 + $225,000 = $385,800
A firm has earnings before interest and taxes of $25,380 with a net income of $14,220. The taxes amounted to $5,400 for the year. During the year, the firm paid out $43,800 to pay off existing debt and then later borrowed an additional $24,000. What is the amount of the cash flow to creditors? C. $25,560Interest = $25,380 – $14,220 – $5,400 = $5,760; Cash flow to creditors = $5,760 + $43,800 – $24,000 = $25,560
The balance sheet of a firm shows current liabilities of $56,300 and long-term debt of $289,200 as of last year. Current liabilities are $76,900 and long-term debt is $248,750 as of today, which is the end of the current year. The financial statements for the current year reflect an interest paid amount of $29,700 and dividends of $19,000. What is the amount of the net new borrowing? A. -$40,450Net new borrowing = $248,750 – $289,200 = -$40,450
For the past year, LP Gas, Inc. had cash flow from assets of $38,100 of which $21,500 flowed to the firm’s stockholders. The interest paid was $2,300. What is the amount of the net new borrowing? A. -$14,300Cash flow to creditors = $38,100 – $21,500 = $16,600; Net new borrowing = $2,300 – $16,600 = -$14,300
Six months ago, Benders Gym repurchased $20,000 of its common stock. The company pays regular quarterly dividends totaling $8,500 per quarter. What is the amount of the cash flow to stockholders for the past year if no additional shares were issued? E. $54,000Cash flow to stockholders = ($8,500 × 4) + $20,000 = $54,000
The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400 for the past year. During that time, the firm invested $28,000 in net working capital and incurred net capital spending of $47,900. What is the amount of the cash flow to stockholders for the last year? D. $39,700Cash flow to stockholders = ($187,000 – $28,000 – $47,900) – $71,400 = $39,700
The Brown Jug has compiled the following information: 2013 2014 sales $312,400 $198,500interest paid $18,720 $16,480long-term debt $225,000 $187,000 owners’ equity $134,600 $128,700depreciation $21,600 $20,200accounts receivable $15,600 $18,900 other costs $32,400 $27,100inventory $36,800 $32,800account payable $12,800 $21,900cost of goods sold $186,200 $128,300cash $36,500 $12,700taxes $18,200 $1,000What is the operating cash flow for 2014? C. $42,1002014 operating cash flow = $198,500 – $27,100 – $128,300 – $1,000 = $42,100
Home Supply, Inc. has compiled the following information: 2013 2014Sales $427,400 $511,500Interest paid $19,800 $21,600Long-term debt $260,000 $295,000Common stock $150,000 $160,000depreciation $24,600 $23,500accounts receivable $38,200 $34,900other costs $58,400 $34,900inventory $58,400 $61,100accounts payable $36,800 $32,900costs of goods sold $274,200 $289,300cash $41,500 $36,700taxes $11,400 $39,400net fixed assets $336,900 $392,200retained earnings $28,600 $32,700For 2014, the cash flow from assets is _____ and the cash flow to shareholders is ______. A. $49,100; $62,5002014 operating cash flow = $511,500 – $61,100 – $289,300 – $39,400 = $121,700; Change in net working capital = ($34,900 + $56,800 – $32,900 + $36,700) – ($38,200 + $58,800 – $36,800 + $41,500) = -$6,200; Net capital spending = $392,200 – $336,900 + $23,500 = $78,800; Cash flow from assets = $121,700 – (-$6,200) – $78,800 = $49,100; Cash flow to creditors = $21,600 – ($295,000 – $260,000) = -$13,400; Addition to retained earnings = $32,700 – $28,600 = $4,100; Net income = $511,500 – $289,300 – $61,100 – $23,500 – $21,600 – $39,400 = $76,600; Dividends paid = $76,600 – $4,100 = $72,500; Cash flow to stockholders = $72,500 – ($160,000 – $150,000) = $62,500; Cash flow from assets = -$13,400 + $62,500 = $49,100
The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense of $26,400, interest expense of $1,600, and a tax rate of 34 percent. What is the net income for this firm? D. $76,428Net income = ($398,600 – $254,800 – $26,400 – $1,600) (1 – 0.34) = $76,428
Andersen’s Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 34 percent. The firm paid out $16,500 in dividends. What is the addition to retained earnings? B. $42,438Addition to retained earnings = [($318,400 – $199,400 – $28,600 – $1,100)(1 – 0.34)] – $16,500 = $42,438
Roscoe’s purchased new machinery three years ago for $1.8 million. The machinery can be sold to Stewart’s today for $1.2 million. Roscoe’s current balance sheet shows net fixed assets of $960,000, current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated today, the company would receive $518,000 cash. The book value of the firm’s assets today is _____ and the market value is ____. E. $1,429,000; $1,718,000Book value = $960,000 + $348,000 + $121,000 = $1,429,000; Market value = $1,200,000 + $518,000 = $1,718,000
Daniel’s Market has sales of $36,600, costs of $28,400, depreciation expense of $3,100, and interest expense of $1,500. If the tax rate is 34 percent, what is the operating cash flow, OCF? D. $6,976EBIT = $36,600 – $28,400 – $3,100 = $5,100; Tax = ($5,100 – $1,500) × 0.34 = $1,224; OCF = $5,100 + $3,100 – $1,224 = $6,976
The Play House’s December 31, 2013, balance sheet showed net fixed assets of $1,238,000 and the December 31, 2014, balance sheet showed net fixed assets of $1,416,000. The company’s 2014 income statement showed a depreciation expense of $214,600. What was the firm’s net capital spending for 2014? C. $392,600Net capital spending = $1,416,000 – $1,238,000 + $214,600 = $392,600
The December 31, 2013, balance sheet of Suzette’s Market showed long-term debt of $638,100 and the December 31, 2014, balance sheet showed long-term debt of $574,600. The 2010 income statement showed an interest expense of $42,300. What was the firm’s cash flow to creditors during 2014? E. $105,800Cash flow to creditors = $42,300 – ($574,600 – $638,100) = $105,800
Gorman Distributors shows the following information on its 2014 income statement: sales = $317,800; costs = $211,400; other expenses = $18,500; depreciation expense = $31,200; interest expense = $2,100; taxes = $18,600; dividends = $12,000. In addition, you’re told that the firm issued $4,500 in new equity during 2014, and redeemed $6,500 in outstanding long-term debt. If net fixed assets increased by $7,400 during the year, what was the addition to net working capital? B. $14,600OCF – $317,800 – $211,400 – $18,500 – $18,600 = $69,300; NCS = $7,400 + $31,200 = $38,600; CFA = CFC + CFS = [$2,100 – (-$6,500)] + [$12,000 – $4,500] = $16,100; Add to NWC = OCF – NCS – CFA = $69,300 – $38,600 – $16,100 = $14,600
Able Co. has $218,000 in taxable income and Bravo Co. has $5,600,000 in taxable income. Suppose both firms have identified a new project that will increase taxable income by $12,000. The additional project will increase Able Co.’s taxes by _____ and Bravo Co.’s taxes by ____.Tax Income Tax Rate0- 50,000 15%50,001- 75,000 25% 75,001- 100,000 34%100,001- 335,000 39%335,001- 10,000,000 34% D. $4,680; $4,080Able Co. marginal tax = $12,000 × 0.39 = $4,680; Bravo Co. marginal tax = $12,000 × 0.34 = $4,080
During the year, The Dalton Firm had sales of $3,210,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $2,540,000, $389,000, and $112,000, respectively. In addition, the company had an interest expense of $118,000 and a tax rate of 34 percent. (Ignore any tax loss carryback or carryforward provisions.) What is its operating cash flow? A. $263,660EBIT = [($3,210,000 – $2,540,000 – $389,000 – $112,000 = $169,000; Tax = ($169,000 – $118,000) × 0.34 = $17,340; OCF = $169,000 + $112,000 – $17,340 = $263,660
Precision Manufacturing had the following operating results for 2014: sales = $38,900; cost of goods sold = $24,600; depreciation expense = $1,700; interest expense = $1,400; dividends paid = $1,000. At the beginning of the year, net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400. The tax rate for 2014 was 34 percent. What is the cash flow from assets for 2014? D. $9,492OCF = [($38,900 – $24,600 – $1,700 – $1,400) (1 – 0.34)] + $1,700 + $1,400 = $10,492; CFA = $10,492 – ($13,900 – $14,300 + $1,700) – [($9,200 – $7,400) – $8,700 – $6,600)] = $9,492
Categories
Finance Flashcards

Real Estate Finance

All of the following may be used as collateral for a loan EXCEPTa. tenant’s leasehold rights. b. lender’s receivable mortgage rights. c. farmer’s unharvested crops. d. unsecured personal property. Unsecured property
Which of the following is NOT a primary market financial institution?a. Commercial bank b. Savings association c. Credit union d. Ginnie Mae Ginnie May
Double-digit interest rates in the 1980s led to all of the following EXCEPTa. eliminating many participants in the real estate market. b. creating broad range of creative financing tools. c. encouraging participation financing between lenders and borrowers. d. reducing capital gains tax rate. reducing capital gains tax rate
The focus of lenders shifted in the 1990s toa. jumbo loans. b. adjustable-rate mortgages. c. refinancing existing mortgage loans. d. variable-payment loans. refinancing existing mortgage loans
Money can be viewed as all of the following EXCEPTa. as a medium of exchange. b. storehouse of purchasing power. c. standard of value. d. measure of personal worth. measure of personal worth
The federal agencies empowered to control the supply and cost of money include all of the following EXCEPTa. the Federal Reserve. b. the Department of the Treasury. (US treasury) c. the Office Thrift Supervision. d. the Federal Home Loan Bank. the Office of Thrift Supervision
Nationally chartered commercial banks must join the Federal Reserve System and are required to do all of the following EXCEPTa. purchase capital stock in a Federal Reserve district bank. b. maintain required monetary reserves. c. clear all checks through the system. d. sell mortgage-backed securities to the Fed. d. sell mortgage-backed securities to the FED
Member banks often borrow on a short-term basis from each other without requiring collateral. The interest charged is called thea. prime rate. b. discount rate. c. federal funds rate. d. open-market rate. Federal funds rate
Which of the following is NOT one of the primary activities of HUD?a. Overseeing Ginnie Mae b. Enforcing the Fair Housing Act c. Regulating thrifts d. Managing the Indian Housing Act Regulating Thrifts
The Office of Federal Housing Finance Agency (FHFA) is responsible for regulatinga. HUD. b. Fannie Mae and Freddie Mac. c. Housing Choice Voucher Program. d. Real Estate Settlement Procedures Act (RESPA) regulations. b. Fannie May and Freddie Mac
A developer in Mississippi planning to market residential building lots throughout the mid-Atlantic states must submit which of the following to the buyer?a. Good-faith estimate of all costs involved b. Statement of record describing plans for future services to be provided c. Complete property report d. Truth in lending statement Complete Property Report
A small city in Oklahoma might apply for funding from HUD for all of the following EXCEPTa. the demolition of uninhabitable buildings in a slum-clearance project. b. the acquisition and rehabilitation of an apartment building to be used for public housing. c. a Community Development Block Grant program to improve water facilities to a depressed area. d. a major renovation of City Hall. A major Renovation of Ciity Hall
When Fannie Mae was reorganized in 1954 to include financing by private investors, mortgage loans could be purchased ata. par. b. a premium. c. a discount. d. face value. a discount
A jumbo loan is a mortgage loan thata. covers multiple properties. b. exceeds $500,000. c. exceeds the FHA maximum loan limit. d. exceeds the current Fannie/Freddie maximum loan limit. exceeds the current FannieMay/Freddie Mac max loan limit
Which of the following is NOT one of the national credit repositories most used today to obtain credit scores for prospective borrowers?a. FICO b. Experian c. Equifax d. TransUnion FICO
Freddie Mac is currentlya. a government agency. b. under conservatorship. c. a subsidiary of the Federal Home Loan Bank System. d. a company under control of the Federal Home Loan Bank Board. under conservatorship
All bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to the amount ofa. $50,000. b. $100,000. c. $200,000. d. $250,000. $250,000
A bank’s trust department would probably agree to provide any of the following services EXCEPTa. act as executor of a widow’s estate. b. serve as a guardian for a six-year-old. c. manage a man’s small individual retirement account (IRA) account. d. act as trustee for the bond portfolio of the largest business in town. c. Manage a man’s small individual retirement account (IRA)
Under the FY2009 Omnibus Appropriations Bill, commercial banks are NOT allowed to perform which of the following services for their customers?a. Market annuities b. Sell title insurance c. Sell stocks and bonds d. Act as real estate brokers Act as Real Estate Brokers
A new federally chartered savings bank will come under the regulation of thea. Federal Home Loan Bank Board. b. Office of the Comptroller of the Currency. c. Federal Reserve System. d. FDIC. b. Office of the Comptroller of the currency
Which of the following is NOT an example of a physical encumbrance?a. Mortgage lien b. Public utility easement c. Private deed restriction d. Driveway encroachment Mortgage lien
The system whereby the lender holds title to the property and may dispossess the borrower without notice upon any default of the loan agreement is calleda. equitable rights. b. title theory. c. lien theory. d. intermediate theory. title theory
Although many types of interests in real property may be used as security for a real estate loan, the MOST common is aa. leasehold interest. b. life-estate interest. c. fee simple interest d. trade fixture. fee simple interest
A statutory period of redemption gives the borrower the opportunity toa. make up the outstanding balance prior to the foreclosure sale. b. make up the outstanding balance after the foreclosure sale. c. receive a moratorium on payments. d. be released of all payments. make up the outstanding balance after the foreclosure sale
Fixed-rate loans may be designed in all the following ways EXCEPTa. amortized over 30 years. b. amortized over 15 years. c. interest only with a balloon payment. d. with gradual increases in the interest rate.
A 15-year fixed-rate mortgage provides all the following benefits EXCEPTa. the borrower pays less interest. b. it provides greater tax deduction. c. it is at below market rate. d. it builds equity faster. b. provides greater tax deduction
Private mortgage insurance is issued for the protection of thea. borrower. b. lender. c. title insurer. d. trustee. lender
The MOST common way of financing private mortgage insurance today is toa. pay the entire premium at settlement. b. pay a portion of the premium up front and finance the rest. c. add the premium to the loan amount. d. divide the annual premium by 12 and add to the principal, interest, taxes, and insurance (PITI) payment d. divide annual premium by 12 and add to the principal, interest, taxes and insurance (PITI) payment
The Federal Housing Administration (FHA) was organized in 1934 to do all the following EXCEPTa. stimulate new jobs in the construction industry. b. stabilize the real estate mortgage market. c. provide direct funding for mortgage loans. d. facilitate financing for repairs and sales of existing homes. c. Provide direct funding for mortgage loans
Rules and regulations for FHA appraisers require appraisers to do all the following EXCEPTa. pay detailed attention to physical defects. b. guarantee that the property is free of defects. c. complete a “valuation condition” disclosure package. d. recommend additional inspections where indicated. b. guarantee that the property is free of defects
An FHA section 203(k) loan would provide a loan fora. purchase of a condominium. b. a one-year adjustable-rate plan. c. the purchase and rehabilitation of a property. d. a graduated-payment plan. c. the purchase and rehabilitation of a property
A couple will need to have 3.5 percent of the sales price to qualify for their FHA loan. They may NOT obtain the funds from which of the following sources?a. Borrower’s own funds b. Unsecured loan c. Gift from parents d. Grant from housing assistance program unsecured loan
Processing a mortgage loan includes all the following procedures EXCEPTa. determining the ability of the borrower to repay the loan. b. estimating the value of the property. c. analyzing the marketability of the collateral’s title. d. checking the Dun and Bradstreet listing for the lender checking Dun and Bradstreet listing for the lender
. The biggest change in mortgage financing procedures has been thea. switch to 15-year amortized loans. b. the average age of a real estate loan. c. emphasis on the risk assessment of the purchaser. d. regular payments of principal and interest. emphasis on the risk assessment of the purchaser.
The assets listed on a loan application may include all the following EXCEPTa. $1,200 in a checking account. b. $5,000 in a savings account. c. 1,100 shares of IBM stock. d. a loan on a $50,000 life insurance policy. a loan on a $50,000 life insurance policy.
A loan applicant provides data to Fannie Mae. The automatic underwriting system that is used to analyze the data is calleda. FICO. b. Loan Prospector®. c. AUS. d. Desktop Underwriter®. Desktop Underwriter®.
A couple has been notified that they are in default on their mortgage payments and that the entire amount of the loan is now due. Their loan contract likely includeda. a due-on-sale clause. b. an acceleration clause. c. an alienation clause. d. a delinquency clause. An acceleration clause
Homeowners should only consider foreclosure if the house is wortha. more than they owe but they cannot afford the payments. b. more than they owe and they can afford the payments. c. less than they owe and they cannot afford the payments. d. less than they owe and they can afford the payments. less than they owe and they cannot afford the payments.
Depending on the circumstances of the default, a lender may be willing to give delinquent homeowners any of the following options EXCEPTa. waive the principal portion of the payment for some period. b. recast the entire loan to lower the payments. c. accept a deed in lieu of foreclosure. d. forgive six months worth of payments. waive 6 months worth of payments
Old English law established an equitable redemption period that allowed for thea. lender to immediately take possession of property on a defaulted loan. b. borrower to have a specified amount of time to clear the default. c. lender to sell the property. d. borrower to remain in the property after it was sold. b.
Financial leverage is described as use of borrowed money to finance the purchase of an investment
Under regulation z, a consumer who obtains financing for a remodeling project ( or refinancing or equity) has a right to rescind the transaction up to how many business days after the loan application three days
The Housing and economy recovery act (HERA) of 2008 is a government program to help first time home buyers by providing a refundable tax credit equal to 10 percent of the purchase price of a principalresidence, up to $7,500, which buyers were subsequently required to repay in 15 annual installments as a surcharge on their income taxes.
One of the primary duties of the FHFA is regulate Freddie M and Fanny M
The primary activity that distinguishes a mortgage broker from a mortgage banker is that a mortgage banker will prepare the loan for underwriting
Specific lien differs from a general lien as specific lien apply to only a single property of the debtor
a drwback of balloon loan financing is that the borrower might have difficulty meeting the final payment (not amortized) when it becomes due, and if necessary, refinancing at that time.
FHA is under direct administration of HUD- department of housing and urban development
The impact of a foreclosure on a borrower does not include higher tax rates for future car loans
Under the vetrans home improvement program, the VLB will lend eleigible texas veterans upto $10000 on a fixed rate note to make substantial repairs to an existing primary residence. What is the term on this type of loan 10 yrs
In an 80-15-5 loan scenario the 15 stands for second loan. 5% down payment. The first loan is 80% or less of the purchase price or value of the home and the second loan covers the difference after taking into account your down payment or home equity. This strategy can also be used to avoid a jumbo loan amount.
Open market operations (OMO) refers to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system, facilitated by the Federal Reserve (Fed). Securities are primarily US treasuries, but also include securities issued by federal home loan banking system, FHA, Ginnie May, etc
Loans created using the underwriting guidelines of Fannie May or Freddie Mac are called conforming loans
Lenders would be required to fund a loan for all of the following except a. single parent who uses public assistance to qualifyb. an unmarried couple who meet the underwriters standardsc. a married couple with poor credit who uses public assistance to qualifyd. a single parent with good credit and a full-time job who also receives daycare vouchers c. a married couple with poor credit
FHA allows debt to income ratios 31/43 FHA’s maximum qualifying debt ratios for borrowers in 2015 are 31% and 43%. This means the monthly housing payments should not exceed 31% of gross monthly income, while the total debt burden should not exceed 43% of monthly income.
A foreclosure sale in texas is conducted in the vicinity of the courthouse where the property is located
If a buyer offered $110000 for a property apparaised at $105000 all of the following options would be valid EXCEPTa. negotiate the price down to appraised priceb. make up the differencec. order a new apparisal and request that it come in for the sales priced. terminate the contract c. order a new appraisal and request it come in for the sales price
ECOA: The Equal Credit Opportunity Act (ECOA) is a United States law (codified at 15 U.S.C. § 1691 et seq.), enacted 28 October 1974,[1] that makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract);[2] to the fact that all or part of the applicant’s income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. sexual orientation
A primary indicator of real estate market rebounding is a. increase in new home constructions
Fed Open market operations include a. buying and selling of treasuries b. buying and selling securities issued by fedrally sponsored agenciesc.
Interim financing (construction financing) open-ended mortgage loan, usually for a short term, obtained to finance the actual construction of a building on a property
A release clause is found in a Deed of trust
According to Fanny May and Freddie Mac guidelines the monthly debt of a borrower should not exceed 36% 28% of this would includePrincipal, interest, taxes, property insurance, private mortgage insurance, homeowner association fees.
Home buyers can avoid paying PMI by putting a. 3.5% down on a FHA loan with a 16.5% secondary loanb. 10% down on a FHA loanc. 10% down on Fanny Mae loand. 20% down on a Freddie Mac loan d.
The primary activity that distinguishes a mortgage broker from a mortgage banker is that a mortgage Broker will bring borrowers with lenders but do not fund the loan
a balloon note is one in which last payment is greater than other payments
FICO credit score is between 300 to 850
The underwriter generally uses the borrowers middle credit score
Pools of loans are originated in the primary market and sold in secondary market
ARM stands for adjustable-rate mortgage
An undersritwer can consider income from all the following except a part-time job that will likely end soon
RESPA requires at the beginning of loan process the mortgage lendder must provide a. a special information bookletb. Good Faith Estimate (GFE) of settlement costsc. mortgage servicing disclosure statement
The primary function of the Federal Home Loan Bank today is to
Real estate mortgage trusts REMT derives income from mortgage interest, loan origination fees, and profits earned from buying and selling mortgages
Aspect of FHA loans that attracts lenders is the government insured the full amount of loan, lenders were willing to make loans with low down payments
A seller is willing to allow a purchaser to assume his current conventional loan but the lender will not allow it. The lender was exercising his rights under the release clause