D076 Finance Skills for Managers ASSESSMENT ALREADY passed

A company calculated variances of a budget and actual cash flows that indicate the firm's strengths and weaknesses in cash flows and its budgeting process. Which major use of cash budgeting is this an example of? Standardization Performance evaluation Assessment of future needs Corrective action - Performance evaluation A company is developing a financial forecast for the next year. The company plans to implement a new factory that will increase production and resulting sales by 20%. Since the company's assets are increasing significantly, what else must increase? Profit turnover Financing You Selected Gross margin Accounts receivable turnover - Financing A company's officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? A) Agency problem due to conflicting interests B) Maximizing shareholder value C) The conflict between work and personal affairs Pursuing individual interest over client interests - A) Agency problem due to conflicting interests Correct! Accounting manipulation by management in pursuit of higher stock-related compensation is an example of an agency problem. A financial analyst for the company Bobby's Books has been asked to evaluate a potential investment using a method that considers the time value of money. Is there more than one way to do this? A) Yes, the analyst could use both the NPV and the IRR. B) No, there are no valuation methods that take into account the time value of money. C) Yes, the analyst could use the current ratio and could compare cost of capital rates. D) No, the analyst could only use cash budgeting to evaluate the project. - A) Yes, the analyst could use both the NPV and the IRR. Correct! Both NPV and IRR take into account the time value of money. A financial manager at a company is trying to determine whether to issue new stocks or new bonds to cover the costs of a project the company is doing the next year. Which main task in business finance is this situation an example of? Managing working capital Managing interdepartmental loans Making investment decisions Making financing decisions - Making financing decisions A firm had sales of $100,000 this month. However, the firm received only $90,000 in cash from sales. Why would the firm receive $10,000 less cash than its monthly sales? A) Because the firm paid cash for inventory purchased B) Because the firm purchased inventory on credit this month C) Because the firm paid down $10,000 on a loan D) Because the firm did not make all sales on cash - D) Because the firm did not make all sales on cash Correct! Some sales are made on credit rather than cash, and a portion of credit sales are collected in the following months after the sales. A firm is currently operating at 75% capacity with current sales of $34 million. Will the firm need to acquire additional fixed assets if its sales are predicted to increase by $6 million next year? No, because the increase in sales will exceed the firm's sales capacity. Correct No, because the increase in sales will not exceed the firm's sales capacity. Yes, because the increase in sales will not exceed the firm's sales capacity. You Selected Yes, because the increase in sales will exceed the firm's sales capacity. - No, because the increase in sales will not exceed the firm's sales capacity. A pharmaceutical company recently spent $2 million developing a new drug. The company then conducts capital budgeting analysis to determine if it should produce the newly developed drug. The net present value (NPV) of the project is $1.5 million. Why should this company produce the drug? Because the losses due to cannibalization are less than the value of the project Because the project will provide a total value of $3.5 million to the company Because the NPV is greater than zero Because the development costs are greater than the value of the project - Because the NPV is greater than zero A sign company is planning to have an initial public offering (IPO). In which type of market will its stock first be sold to the public? Efficient market Money market Primary market Secondary market - Primary market Accounts Receivable Turnover - How often receivables turn over in a year. Net credit sales/average net accounts receivable Activity ratio - Also known as efficiency ratios. It's how well a company uses it's assets to generate sales or cash. Evaluates operational efficiency by analyzing inventories, fixed assets and accounts receivable. Example; a companies sales increase dramatically but the amount of assets stays the same. You might ask how this will effect the profits and wonder is we have enough inventory so customers do not need to wait. Advantages of NPV - TVM Calculates added value to firm