WGU C214 OA Q&A Checklist|2023 LATEST UPDATE|GUARANTEED SUCCESS

Which will be larger: accrual taxes payable or accounting income tax expense Accounting tax expense will be higher; actual taxes based on IRS rules will be lower Which financial ratios measure "efficiency"? Asset turnover and Fixed Asset turnover Which ratio is the best measure of a firm's ability to pay bills? Quick Ratio Which decision requires using subjective estimates? Economic life of a new asset What is the yield to maturity on a bond? The return earned from the purchase date to maturity If a firm buys a 30-day CD, where is it carried on the balance sheet? Cash and ST in current assets How does a "prudent investor" select investments? Seeks the highest return for "reasonable" amount of risk What is the difference between WACC and CAPM's required return? CAPM includes only equity required return; WACC includes debt and equity What do points on the Efficient Frontier measure? The maximum return for a given level of risk; maximum Return-to-risk ratio What is Beta? Measure of volatility of a stock's risk relative to the market Why are accurate forecasts important? Plan for resources to support sales Which leverage measure shows the impact of EBIT changes on pre-tax profit (EBT)? Financial leverage Which ratios are used in working capital management? Cash ratio, Current ratio - ratios containing current assets and/or current liabilities Which ratio is used for valuing a private company? Price-to-earnings (PE) ratio What are the 4 costs associated with holding inventory? Product, storage, holding, and opportunity What risk is eliminated by a diversified portfolio? Idiosyncratic risk - risk affecting a single firm What is the "secondary" market? Investors trading securities among themselves after initial issuance of securities What are impacts of outsourcing? Fewer jobs and lower priced products What are the impacts of tariffs? Protects inefficient firms and employees; higher product costs for consumers Which item is transferred from the income statement to the balance sheet? Depreciation expense If two companies use different inventory valuation methods, what is this called? An "accounting difference" What securities are exempt from federal income taxation? Municipal bonds Why would a firm prefer to issue debt rather than stock? Deb has a lower required return; debt interest is tax deductible; avoids dilution of ownership What happens to APY as the number of interest payment periods per year increase? APY increases What is the present value of future cash flows of a stock called? Intrinsic Value If market price is greater than intrinsic value, should you buy or sell? Sell In event of bankruptcy, what is the order of claims settlement? Secured debt, senior debt, subordinated debt, preferred stock, common stock What is a spontaneous account? One that changes with the level of sales - current assets & liabilities What is a discretionary account? One that changes due to the management decision- bonds outstanding If the financial ratios of 2 firms are compared, what is it called? Cross-sectional analysis How can a firm encourage customers to pay early? "Discounts" for early payment If a loan does not require collateral, what is it called? Unsecured loan What transaction do firms use to offset foreign exchange risk? Hedging If the debt ratio increases, what is the likely impact on ROE? It increases Why is an Annuity Due more valuable than an Ordinary Annuity? Cash payments are received earlier - beginning of the year rather than end of the year What discount rate is used to calculate net present value in capital budgeting? Weighted Average Cost of Capital (WACC) or the "required return" What financial structure causes profitability to be more volatile? Leverage If debt is cheaper than equity, why not all debt? Bankruptcy; equity is the cushion against bankruptcy The Degree of Financial Leverage reflects what? Firm's reliance on debt What is a leveraged buyout? A firm issues debt to buy another firm If interest rates increase, what is the impact on WACC? Required returns on both debt and equity increase - therefore WACC increases Why is the required return on stocks higher than bonds? Higher risk The DuPont formula expands the ROE definition into what 3 ratios? Net Margin, Total Asset Turnover, and Financial Leverage What cash balance supports daily operations, that is, spontaneous accounts? Operating balance, as opposed to Reserve balance Which cash flow statement reflects the daily operations of the firm? Cash flow operations What type of debt has lower claim than bonds in bankruptcy proceedings? Subordinated debentures, e.g. subordinated debt In a stock portfolio, why might the investor sell the "winners" and keep the "losers"? Aversion to realizing losses; prefer to gamble on recovery More recent research on Modigliani-Miller Theorem (MM) shows what? The debt-equity ratio does affect the WACC and the value of the firm The Prospectus contains what information? Audited financials, description of security being issued, & risk factors for investor If ROE is greater than ROA, why does that occur? The firm has debt (e.g. bonds) on the balance sheet What is APY for a savings account paying 6% APR on daily compounding? (1 + .06/365) ^ 365 = 1.0618 - 1 = .0618 What is the purpose of the Securities and Exchange Commission (SEC)? To ensure that US public companies are transparent to support efficient markets Why would totally domestic firms worry about global finance? Competition from foreign firm imports to US If a firm automates its production line, what ratio increases? Fixed Asset Turnover What balance sheet items would cause the Current Ratio to change? Cash, Inventory, Accounts Receivable, Accounts Payable, Accrued Expenses What is the term that refers to corporate managers acting in their own interests rather than the stockholders? Agency Cost