Name: Foundations of Financial Management 11Th Canadian Edition By Stanley B. Block - Test Bank - Eazyquizes
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Foundations of Financial Management 11Th Canadian Edition By Stanley B. Block – Test Bank

Sample Questions

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Chapter 02

Review of Accounting

Multiple Choice Questions

Which of the following is not one of the four basic financial statements required by Accounting Standards for Private Enterprises (ASPE)?
A.Income Statement
B. Statement of Financial Position
C. Statement of Cash Flows
D. Balance Sheet

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-01 Accounting for Information

Which of the following would not be classified as a current asset?
A.Marketable securities
B. Long term Investments
C. Prepaid expenses
D. Inventory

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-05 Identify the effects of IFRS (International Financial Reporting Standards) on financial analysis.
Topic: 02-08 Statement of Cash Flows

An item that may be converted to cash within one year or one operating cycle of the firm is classified as a:
A.current liability.
B. long-term asset.
C. current asset.
D. long-term liability.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-08 Statement of Cash Flows

Which of the following is not a primary source of capital to the firm?
A.Assets
B. Common stock
C. Preferred stock
D. Bonds

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-03 Return on Capital

The residual income of the firm belongs to:
A.creditors.
B. preferred shareholders.
C. common shareholders.
D. bondholders.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-05 Identify the effects of IFRS (International Financial Reporting Standards) on financial analysis.
Topic: 02-08 Statement of Cash Flows

The best indication of the operational efficiency of management is:
A.net income.
B. earnings per share.
C. earnings before interest and taxes (EBIT).
D. gross profit.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-02 Income Statement

Which account represents the cumulative earnings of the firm since its formation, minus dividends paid?
A.Share price
B. Common stock
C. Retained earnings
D. Accumulated amortization

A firm has $3,500,000 in its common stock account and $2,500,000 in its retained earnings account. The firm issued 100,000 shares of common stock. What was the original issue price if only one stock issue has ever been sold?
A.$35 per share
B. $25 per share
C. $60 per share
D. Not enough information to tell

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 02-05 Identify the effects of IFRS (International Financial Reporting Standards) on financial analysis.
Topic: 02-08 Statement of Cash Flows

A firm has $2,000,000 in its common stock account and $20,000,000 in its retained earnings account. The firm issued 500,000 shares of common stock. What are accumulated earnings per share?
A.$4 per share
B. $44 per share
C. $40 per share
D. $5 per share

The major limitation of financial statements is:
A.in their complexity.
B. in their lack of comparability.
C. in their use of historical cost accounting.
D. in their lack of detail.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firm’s financial position.
Topic: 02-10 Determining Cash Flows from Operating Activities

Inflation has its major impact on balance sheets in which of the following areas?
A.Inventory and accounts payable
B. Plant and equipment and long-term debt
C. Plant and equipment and inventory
D. Interest expense and earnings per share

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Hard
Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firm’s financial position.
Topic: 02-10 Determining Cash Flows from Operating Activities

“Inventory profits” are most likely to occur in an inflationary economy under which of the following inventory cost assumptions?
A.Weighted average
B. Specific item
C. FIFO
D. Lower of cost or market

The orientation of book value per share is __________, while the orientation of market value per share is ___________.
A.short term; long term
B. future; historical
C. historical; future
D. long term; short term

A firm with earnings per share of $5 and a price-earnings ratio of 15 will have a share price of?
A.$20.00
B. $75.00
C. $3.00
D. The market assigns a stock price independent of EPS and the P/E ratio

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-04 Valuation Basics from the Income Statement

Earnings per share is:
A.operating profit divided by number of shares outstanding.
B. net income divided by number of shares outstanding.
C. net income divided by shareholders’ equity.
D. net income minus preferred dividends divided by number of shares outstanding.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-04 Valuation Basics from the Income Statement

Which of the following is an outflow of cash?
A.Profitable operations
B. The sale of equipment
C. The sale of the company’s common stock
D. The payment of cash dividends

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows.
Topic: 02-13 Combining the Three Sections of the Statement

Which of the following is an inflow of cash?
A.Funds spent in normal business operations
B. The purchase of a new factory
C. The sale of the firm’s bonds
D. The retirement of the firm’s bonds

Amortization is a source of cash inflow because:
A.it is a tax-deductible noncash expense.
B. it supplies cash for future asset purchases.
C. it is a tax-deductible cash expense.
D. it is a taxable expense.

Assuming a tax rate of 35%, amortization expenses of $400,000 will:
A.reduce income by $140,000.
B. reduce taxes by $140,000.
C. reduce taxes by $400,000.
D. have no effect on income or taxes, since amortization is not a cash expense.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 02-08 Explain the concept of tax savings for companies.
Topic: 02-24 Amortization (Capital Cost Allowance) as a Tax Shield

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

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 02-08 Explain the concept of tax savings for companies.
Topic: 02-23 Cost of a Tax-deductible Expense

Gross profit is equal to:
A.sales minus cost of goods sold.
B. sales minus (selling and administrative expenses).
C. sales minus (cost of goods sold and selling and administrative expenses).
D. sales minus (cost of goods sold and amortization expense).

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-02 Income Statement

The firm’s price-earnings (P/E) ratio is not influenced by its:
A.capital structure.
B. earnings volatility.
C. sales, profit margins, and earnings.
D. Purchase of machinery.

Total shareholders’ equity consists of:
A.preferred stock and common stock.
B. common stock and retained earnings.
C. common stock and contributed surplus.
D. preferred stock, common stock, contributed surplus, and retained earnings.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-03 Return on Capital

The Balance Sheet cannot show:
A.the current ratio.
B. the value of common stock outstanding.
C. the change in retained earnings.
D. the price earnings relationship.

Well prepared accounting statements:
A.let management know if cash flow from internal operations is large enough to make necessary equipment replacements.
B. provide no new information to financial managers.
C. determine the market price of common stock.
D. eliminate the effects of inflation from decision making.

The Glorious Vander Built Denim Slacks Company has taxable income of $100,000. Assuming a 34% tax rate, what is the tax payable?
A.$34,000
B. $66,000
C. $100,000
D. $12,250

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow.
Topic: 02-20 Corporate Tax Rates

Book value of a firm:
A.is usually the same as the firm’s market value.
B. is based on current asset costs.
C. is the same as net worth.
D. none of the choices are correct.

A statement of cash flows allows a financial analyst to determine:
A.whether a cash dividend is affordable.
B. how increase in asset accounts have been financed.
C. whether long-term assets are being financed with long-term or short-term financing.
D. all of the choices are correct.

A firm has $200,000 in current assets, $400,000 in long-term assets, $80,000 in current liabilities, and $200,000 in long-term liabilities. What is its net working capital?
A.$120,000
B. $320,000
C. $520,000
D. None of the choices are correct

A firm has current assets of $25,000, long term assets of $100,000, long term liabilities of $50,000, and $50,000 in shareholders’ equity. What is its net working capital?
A.$0
B. $50,000
C. $100,000
D. $25,000

Assuming a tax rate of 40%, the after tax cost of a $200,000 dividend payment is:
A.$200,000.
B. $70,000.
C. $130,000.
D. None of the choices are correct

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors’ taxes payable.
Topic: 02-22 Personal Taxes

Which of the following would not be included in the balance sheet investment account?
A.Shares of other corporations
B. Long term government bonds
C. Marketable securities
D. Investments in other corporations

Which of the following is not true of current cost accounting?
A.The book value of equipment is near replacement value
B. The book value of the common stock equals market value
C. Dividends and income are adjusted for inflation
D. All of the choices are correct

The primary disadvantage of accrual accounting is that:
A.it does not match revenues and expenses in the period in which they are incurred.
B. it does not appropriately measure accounting profit.
C. it does not recognize the actual exchange of cash.
D. it does not adequately show the actual cash flow position of the firm.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-02 Income Statement

The statement of cash flows does not include which of the following sections?
A.Cash flows from operating activities
B. Cash flows from sales activities
C. Cash flows from investing activities
D. Cash flows from financing activities

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows.
Topic: 02-12 Determining Cash Flows from Financing Activities

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

Which of the following would represent a source of funds and, indirectly, an increase in cash balances?
A.A reduction in accounts receivable.
B. The repurchase of shares of the firm’s stock.
C. A decrease in net income.
D. A reduction in notes payable.

A firm’s purchase of plant and equipment would be considered as a:
A.use of cash for financing activities.
B. use of cash for operating activities.
C. source of cash for investment activities.
D. use of cash for investment activities.

Reinvested funds from retained earnings theoretically belong to:
A.bondholders.
B. common shareholders.
C. employees.
D. all of the choices are correct.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-03 Return on Capital

For private companies, asset accounts on the balance sheet are listed in the order of:
A.liquidity.
B. profitability.
C. size.
D. importance.

An increase in investments in long-term securities will:
A.increase cash flow from investing activities.
B. decrease cash flow from investing activities.
C. increase cash flow from financing activities.
D. decrease cash flow from financing activities.

Free cash flow is equal to cash flow from operating activities:
A.plus capital expenditures, minus dividends.
B. plus capital expenditures, plus dividends.
C. plus dividends, minus capital expenditures.
D. minus capital expenditures, minus dividends.

In the last decade, free cash flow has been associated with special financial activities such as:
A.leveraged buyouts.
B. Registered Retirement Savings Plan (RRSPs).
C. stock options.
D. golden parachutes.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Hard
Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows.
Topic: 02-18 Interpretation of Balance Sheet Items

Common stock dividends are __________ by preferred stock dividends.
A.increased
B. decreased
C. not effected
D. Not enough information to tell

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-02 Income Statement

Increasing interest expense will have what effect on EBIT?
A.Increase it
B. Decrease it
C. No effect
D. Not enough information to tell

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-02 Income Statement

When a firm’s earnings are falling more rapidly than its stock price, its P/E ratio will:
A.remain the same.
B. go up.
C. go down.
D. could go either up or down.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-04 Valuation Basics from the Income Statement

Net worth is equal to shareholders’ equity:
A.plus dividends.
B. minus preferred stock.
C. plus preferred stock.
D. minus liabilities.

Net worth for an individual is the same as _____ for a corporation.
A.shareholders’ equity
B. capital assets minus long-term debt
C. book value
D. current assets minus current debt

Amortization tends to:
A.increase cash flow and decrease income.
B. decrease cash flow and increase income.
C. affect only cash flow.
D. affect only income.

Accrual based accounting results in income and cash flow being:
A.the same.
B. different.
C. equal except for amortization.
D. equal except for dividends.

The P/E ratio is determined by:
A.net worth divided by earnings.
B. market capitalization divided by dividend.
C. net worth per share divided by earnings per share.
D. market value per share divided by earnings per share.

A balance sheet valuation measure is:
A.earnings per share.
B. the P/E ratio.
C. the dividend yield.
D. market value to book value.

Preferred share dividends ________ earnings available to common shareholders.
A.increase
B. decrease
C. due not effect
D. not enough information to tell

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-02 Income Statement

Which of the following is not subtracted to arrive at operating profit?
A.Interest expense
B. Cost of goods sold
C. Amortization
D. Selling and administration expense

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 Prepare and analyze the four basic financial statements.
Topic: 02-02 Income Statement

Given the following what is free cash flow?

Cash flow from operations	$175,000
Capital expenditures	35,000
dividends	25,000

$115,000
B. $235,000
C. $150,000
D. $140,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows.
Topic: 02-18 Interpretation of Balance Sheet Items

Chapter 04

Financial Forecasting

Multiple Choice Questions

In using a systems approach to financial planning, it is not necessary to develop a:
A.pro forma income statement.
B. cash budget.
C. pro forma balance sheet.
D. contingent liability plan.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-02 Prepare the four financial statements for forecasting the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet.
Topic: 04-03 Pro Forma Income Statement

The key initial element in developing pro forma statements is:
A.a cash budget.
B. an income statement.
C. a sales forecast.
D. a collections schedule.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method for forecasting on a less-precise basis.
Topic: 04-04 Establish a Sales Projection

Ideally, sales projections should be derived from:
A.an external viewpoint.
B. an internal viewpoint.
C. both internal and external viewpoints.
D. the marketing department.

Required production during a planning period will depend on the:
A.cost of beginning inventory of products.
B. credit sales during the period.
C. desired level of beginning inventory.
D. desired level of ending inventory.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method for forecasting on a less-precise basis.
Topic: 04-06 Other Expense Items

A firm has forecasted sales of $4,000 in January, $6,000 in February, and $5,500 in March. All sales are on credit. 40% is collected the month of sale and the remainder the following month. How much is collected from accounts receivable in February?
A.$5,400
B. $4,800
C. $6,000
D. $3,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-10 Cash Payments

A firm has forecasted sales of $3,000 in April, $4,500 in May, and $6,500 in June. All sales are on credit. 30% is collected the month of sale and the remainder the following month. What will be the balance in accounts receivable at the end of June?
A.$1,950
B. $6,500
C. $4,550
D. $5,100

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-10 Cash Payments

XYZ Co. has forecasted June sales of 600 units and July sales of 1000 units. The company maintains ending inventory equal to 125% of next month’s sales. June beginning inventory reflects this policy. What is June’s required production?
A.1,100 units
B. -0- units
C. 500 units
D. 400 units

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method for forecasting on a less-precise basis.
Topic: 04-06 Other Expense Items

In the construction of the cash payments schedule, the major cash payment is generally:
A.the general and administrative expense.
B. costs associated with inventory manufactured.
C. interest and dividends.
D. payments for new plant and equipment.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-11 Pro Forma Balance Sheet

A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?
A.$9,000
B. $8,000
C. $7,700
D. $8,100

A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the value of the ending inventory using FIFO?
A.$2,750
B. $3,000
C. $3,300
D. $2,550

The difference between total receipts and total payments is referred to as:
A.cumulative cash flow.
B. beginning cash flow.
C. net cash flow.
D. cash balance.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-12 Explanation of Pro Forma Balance Sheet

The percent-of-sales method of financial forecasting:
A.is more detailed than a cash budget approach.
B. requires more time than a cash budget approach.
C. assumes that balance sheet accounts maintain a constant relationship to sales.
D. provides a month-to-month breakdown of data.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-04 Determine the need for new funding resulting from sales growth; while giving consideration to seasonal and other effects on cash flow.
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-16 Sustainable Growth Rate

In the percent-of-sales method:
A.as the dividend payout ratio goes up, the required new funds also rise.
B. as the dividend payout ratio rises, required new funds decline.
C. the dividend payout ratio does not affect new funds.
D. a change to the ex-dividend date causes the required new funds to change.

In forecasting a firm’s cash needs for some future period:
A.the percent-of-sales method is a detailed approach.
B. cash budgets are less exact than the percent-of-sales method.
C. a cash budget approach cannot deal effectively with both level and seasonal production schedules.
D. a cash budget approach can deal effectively with both level and seasonal production schedules.

When using the percent-of-sales method in forecasting funds needed, which of the following is not true?
A.As the dividend payout ratio decreases, the required new funds also decrease.
B. Required new funds decrease as profits margins increase.
C. Required new funds increase as accumulated amortization increases.
D. As the tax rate increases, the required new funds increase.

BHS Inc. determines that sales will rise from $300,000 to $500,000 next year. Spontaneous assets are 70% of sales and spontaneous liabilities are 30% of sales. BHS has a 10% profit margin and a 40% dividend payout ratio. What is the level of required new funds?
A.$50,000
B. $20,000
C. $100,000
D. BHS is in balance and no new funds are needed.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 04-04 Determine the need for new funding resulting from sales growth; while giving consideration to seasonal and other effects on cash flow.
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-16 Sustainable Growth Rate

In developing the pro forma income statement we follow four important steps: 1) compute other expenses, 2) determine a production schedule, 3) establish a sales projection, 4) determine profit by completing the actual pro forma statement. What is the correct order for these four steps?
A.1, 2, 3, 4
B. 4, 3, 2, 1
C. 2, 1, 3, 4
D. 3, 2, 1, 4

In order to estimate production requirements, we:
A.add beginning inventory to projected sales in units and subtract desired ending inventory.
B. add projected sales in units to desired ending inventory and subtract beginning inventory.
C. add beginning inventory to desired ending inventory and divide by two.
D. add beginning inventory to desired ending inventory and subtract projected sales in units.

In general, the larger the portion of a firm’s sales that are on credit, the:
A.lower will be the firm’s need to borrow.
B. higher will be the firm’s need to borrow.
C. more rapidly credit sales will be paid off.
D. more the firm can buy raw materials on credit.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 04-03 Perform the specific accounts method and the percent-of-sales method for forecasting on a less-precise basis.
Topic: 04-15 Actual Budget

Pro forma financial statements are not:
A.the most comprehensive means of financial forecasting.
B. often required by prospective creditors.
C. projections of financial statements for a future period.
D. part of the year end filing with the securities regulator.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-02 Prepare the four financial statements for forecasting the pro forma income statement; the pro forma statement of retained earnings; the cash budget; and the pro forma balance sheet.
Topic: 04-03 Pro Forma Income Statement

The need for an increase or decrease in short-term borrowing can be predicted by:
A.ratio analysis.
B. trend analysis.
C. a cash budget.
D. an income statement.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-09 Cash Receipts

A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume that:
A.all sales were from current production.
B. all sales were from beginning inventory.
C. sales were from beginning inventory until it was depleted, and then use sales from current production.
D. all sales were for cash.

A firm has targeted a 40% growth in sales this year. Last year’s cash as a percent of sales was 15%, accounts receivable 30%, and inventory 35%. What percentage growth in current assets is required to support the growth in sales under the percent-of-sales forecasting method?
A.32%
B. 26%
C. 18%
D. Not enough information to tell.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 04-04 Determine the need for new funding resulting from sales growth; while giving consideration to seasonal and other effects on cash flow.
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-16 Sustainable Growth Rate

A rapid rate of growth in sales and profits may require:
A.higher dividend payments to shareholders.
B. increased borrowing by the firm to support the sales increase.
C. the firm to be less lenient with credit customers.
D. sales forecasts to be made less frequently.

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

In financial statements, the number of units shown in cost of goods sold as compared to the number of the units actually produced:
A.is always higher.
B. is always lower.
C. is always the same.
D. can be either higher or lower.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-09 Cash Receipts

The pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for:
A.change in retained earnings.
B. gross profit.
C. interest expense.
D. prepaid expenses.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-08 Cash Budget

Net cash flow is equal to:
A.income after taxes minus amortization.
B. income after taxes minus dividends.
C. cash receipts minus cash payments.
D. cash receipts minus cash payments minus amortization.

In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the:
A.pro forma income statement.
B. cash budget.
C. prior balance sheet.
D. statement of retained earnings.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-09 Cash Receipts

Which of the following is most likely to increase the final number for notes payable in the pro forma balance sheet?
A.Decrease in inventory.
B. Increase in retained earnings.
C. Decrease in accounts payable.
D. Decrease in accounts receivable.

In the development of the pro forma financial statements, the last step in the process is the development of the:
A.cash budget.
B. pro forma balance sheet.
C. pro forma income statement.
D. capital budget.

In a cash budget, the cumulative cash balance is equal to:
A.net cash flow minus the beginning cash balance.
B. net cash flow plus the beginning cash balance.
C. cumulative loan balance minus the ending cash balance.
D. cumulative loan balance plus the ending cash balance.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Hard
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-12 Explanation of Pro Forma Balance Sheet

In the percent-of-sales method, an increase in dividends:
A.will increase required new funds.
B. will decrease required new funds.
C. has no effect on required new funds.
D. more information is needed.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-04 Determine the need for new funding resulting from sales growth; while giving consideration to seasonal and other effects on cash flow.
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-16 Sustainable Growth Rate

In the percent-of-sales method if (A/S₁) and L/S₁) both increase, then:
A.RNF stays the same.
B. RNF goes down.
C. RNF goes up.
D. more information is needed.

In using a systems approach to financial planning, it is necessary to develop everything except:
A.pro forma income statement.
B. cash budget.
C. pro forma balance sheet.
D. a collection schedule.

A firm has forecasted sales of $8,000 in January, $12,000 in February, and $11,000 in March. All sales are on credit. 40% is collected the month of sale and the remainder the following month. How much is collected from accounts receivable in February?
A.$10,800
B. $9,600
C. $12,000
D. $6,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-09 Cash Receipts

A firm has forecasted sales of $3,000 in April, $4,500 in May, and $12,000 in June. All sales are on credit. 30% is collected the month of sale and the remainder the following month. What will be the balance in accounts receivable at the end of June?
A.$1,950
B. $6,500
C. $8,400
D. $5,100

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-09 Cash Receipts

ABC Co. has forecasted June sales of 600 units and July sales of 900 units. The company maintains ending inventory equal to 130% of next month’s sales. June beginning inventory reflects this policy. What is June’s required production?
A.990 units
B. -0- units
C. 1,000 units
D. 800 units

A firm has beginning inventory of 400 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?
A.$9,000
B. $8,000
C. $7,700
D. $8,100

A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 800 units, what is the value of the ending inventory using FIFO?
A.$1,800
B. $3,250
C. $3,600
D. $7,800

BHS Inc. determines that sales will rise from $300,000 to $700,000 next year. Spontaneous assets are 70% of sales and spontaneous liabilities are 30% of sales. BHS has a 10% profit margin and a 40% dividend payout ratio. What is the level of required new funds?
A.$118,000
B. $40,000
C. $70,000
D. BHS is in balance and no new funds are needed.

Firms that decrease their rates of inventory turnover will, among other things:
A.have to increase their borrowing needs.
B. be able to reduce their dividend payments to shareholders.
C. find it easier to be given credit by their resource suppliers.
D. have a lesser need for high balances in their cash accounts.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-12 Explanation of Pro Forma Balance Sheet

Which of the following is most likely to decrease the final number for notes payable in the pro forma balance sheet?
A.Increase in inventory.
B. Decrease in retained earnings.
C. Increase in accounts payable.
D. Increase in accounts receivable.

In the development of the pro forma financial statements, the second step in the process is the development of the:
A.cash budget.
B. pro forma balance sheet.
C. pro forma income statement.
D. capital budget.

In the percent-of-sales method, a decrease in dividends:
A.will increase required new funds.
B. will decrease required new funds.
C. has no effect on required new funds.
D. more information is needed.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 04-04 Determine the need for new funding resulting from sales growth; while giving consideration to seasonal and other effects on cash flow.
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-16 Sustainable Growth Rate

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

A/R Bal. End of March = A/R Beg. Bal. + A/R from March sales
= $12,000 + (40% of March credit sales)
= $12,000 + ($35,000 ´ .4) = $26,000.

If projected net cash flow for November is ($10,000); beginning cash balance is $4,000; minimum cash balance is $3,000; beginning loan balance is $8,000, what will be the cumulative loan balance at the end of November?
A.$14,000
B. $5,000
C. $17,000
D. $22,000

Net cash flow	($10,000)
+ Beginning cash balance	4,000
Cumulative cash balance	(6,000)
Loan (Repayment)	9,000
Cum. Loan Bal.	17,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-12 Explanation of Pro Forma Balance Sheet

If projected net cash flow for January is ($6,500); beginning cash balance is $16,000; minimum cash balance is $5,000; beginning loan balance is $4,500, what will be the cash balance on the pro forma cash budget at the end of January?
A.$5,000
B. $10,000
C. $12,000
D. $4,500

Net cash flow	($6,500)
+ Beginning cash balance	16,000
Cumulative cash balance	9,500
Loan (Repayment)	(4,500)
Cum. Loan Bal.	0
Ending Cash. Bal.	$5,000

True / False Questions

An increase in sales and/or profits means there is also an increase in cash on the balance sheet.
FALSE

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-12 Explanation of Pro Forma Balance Sheet

An increase in sales and profits generates the necessary cash required for economic growth.
FALSE

Profit is generally adequate to finance significant growth.
FALSE

Growth in sales volume precludes a shortage of funds.
FALSE

The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding.
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-05 Calculate the required new funds (RNF) and sustainable growth rate (SGR).
Topic: 04-09 Cash Receipts

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