FINANCIAL MANAGEMENT – FIN 340 EXAM 1 COMPREHENSIVE PRACTICE
QUESTIONS AND FULLY UPDATED ANSWERS FOR THOROUGH
UNDERSTANDING OF FUNDAMENTAL FINANCIAL PRINCIPLES
What is the annual report, and what two types of information does it provide? -
ANSWER most important report that corporations issue to stockholders, verbal
section-letter from the chairperson, second - financial statements
What four financial statements are typically included in the annual report? -
ANSWER Balance Sheet
Income statement
Statement of cash flows
statement of stockholders equity
Why is the annual report of great interest to investors? - ANSWER tells what
happened to its assets and explains earnings for the year
How is the order in which items are shown on the balance sheet determined? -
ANSWER The left side is the assets, right is liabilities and equity
What is the balance sheet, and what information does it provide? - ANSWER a
"snapshot" of a firm's position at a specific point in time
Explain in words the difference between net working capital and net operating
working capital. - ANSWER
Explain in words the difference between total debt and total liabilities -
ANSWER
Why is earnings per share called "the bottom line"? What is EBIT, or operating
income? - ANSWER
What is EBITDA? - ANSWER Earnings before interest, taxes, depreciation,
and amortization
,which is more like a snapshot of the firm's operations - the balance sheet or the
income statement? - ANSWER Balance sheet
What is the statement of cash flows, and what are some questions it answers? -
ANSWER
Identify and briefly explain the four sections shown in the statement of cash
flows. - ANSWER
If during the year a company has high cash flows from its operations, does this
mean
that cash on its balance sheet will be higher at the end of the year than it was at
the
beginning of the year? Explain. - ANSWER
What information does the statement of stockholders' equity provide? -
ANSWER it shows how much a firm's equity changed during the year and why
it occurred
why do changes in retained earnings occur? - ANSWER It changes due to
shares the company issues, how much they cost, and retained earnings.
Explain why the following statement is true: The retained earnings account
reported on the balance sheet does not represent cash and is not "available" for
dividend payments or anything else. - ANSWER It represents a claim against
assets, not assets per se. It is reinvestment in the business. It isn't just cash piled
in a bank.
Why might different companies account for similar transactions in different
ways? - ANSWER
What is free cash flow (FCF)? - ANSWER the amount of cash that could be
withdrawn without harming a firm's ability to operate and to produce future
cash flows
Why is FCF an important determinant of a firm's value? - ANSWER
, Define the terms market value added (MVA) and economic value added (EVA).
- ANSWER
How does EVA differ from accounting net income? - ANSWER While
accounting income takes into account the cost of debt (the company's interest
expense), it does not deduct for the cost of equity capital. By contrast, EVA
takes into account the total dollar cost of all capital which includes both the cost
of debt and equity capital.
Are tax rates progressive - ANSWER
What's the difference between marginal and average tax rates - ANSWER A
taxpayer's average tax rate (or effective tax rate) is the share of income that they
pay in taxes. By contrast, a taxpayer's marginal tax rate is the tax rate imposed
on their last dollar of income
What's the AMT, and what is its purpose - ANSWER
What are long-term capital gains? Are they taxed like other income? -
ANSWER
How does our tax system influence the use of debt financing by corporations? -
ANSWER
Write the equations for four ratios that are used to measure how effectively a
firm manages its assets. - ANSWER
If one firm is growing rapidly and another is not, how might this distort a
comparison of their inventory turnover ratios? - ANSWER
If you wanted to evaluate a firm's DSO, with what could you compare it? -
ANSWER
How might the different ages of firms distort comparisons of their fixed assets
turnover ratios? - ANSWER
QUESTIONS AND FULLY UPDATED ANSWERS FOR THOROUGH
UNDERSTANDING OF FUNDAMENTAL FINANCIAL PRINCIPLES
What is the annual report, and what two types of information does it provide? -
ANSWER most important report that corporations issue to stockholders, verbal
section-letter from the chairperson, second - financial statements
What four financial statements are typically included in the annual report? -
ANSWER Balance Sheet
Income statement
Statement of cash flows
statement of stockholders equity
Why is the annual report of great interest to investors? - ANSWER tells what
happened to its assets and explains earnings for the year
How is the order in which items are shown on the balance sheet determined? -
ANSWER The left side is the assets, right is liabilities and equity
What is the balance sheet, and what information does it provide? - ANSWER a
"snapshot" of a firm's position at a specific point in time
Explain in words the difference between net working capital and net operating
working capital. - ANSWER
Explain in words the difference between total debt and total liabilities -
ANSWER
Why is earnings per share called "the bottom line"? What is EBIT, or operating
income? - ANSWER
What is EBITDA? - ANSWER Earnings before interest, taxes, depreciation,
and amortization
,which is more like a snapshot of the firm's operations - the balance sheet or the
income statement? - ANSWER Balance sheet
What is the statement of cash flows, and what are some questions it answers? -
ANSWER
Identify and briefly explain the four sections shown in the statement of cash
flows. - ANSWER
If during the year a company has high cash flows from its operations, does this
mean
that cash on its balance sheet will be higher at the end of the year than it was at
the
beginning of the year? Explain. - ANSWER
What information does the statement of stockholders' equity provide? -
ANSWER it shows how much a firm's equity changed during the year and why
it occurred
why do changes in retained earnings occur? - ANSWER It changes due to
shares the company issues, how much they cost, and retained earnings.
Explain why the following statement is true: The retained earnings account
reported on the balance sheet does not represent cash and is not "available" for
dividend payments or anything else. - ANSWER It represents a claim against
assets, not assets per se. It is reinvestment in the business. It isn't just cash piled
in a bank.
Why might different companies account for similar transactions in different
ways? - ANSWER
What is free cash flow (FCF)? - ANSWER the amount of cash that could be
withdrawn without harming a firm's ability to operate and to produce future
cash flows
Why is FCF an important determinant of a firm's value? - ANSWER
, Define the terms market value added (MVA) and economic value added (EVA).
- ANSWER
How does EVA differ from accounting net income? - ANSWER While
accounting income takes into account the cost of debt (the company's interest
expense), it does not deduct for the cost of equity capital. By contrast, EVA
takes into account the total dollar cost of all capital which includes both the cost
of debt and equity capital.
Are tax rates progressive - ANSWER
What's the difference between marginal and average tax rates - ANSWER A
taxpayer's average tax rate (or effective tax rate) is the share of income that they
pay in taxes. By contrast, a taxpayer's marginal tax rate is the tax rate imposed
on their last dollar of income
What's the AMT, and what is its purpose - ANSWER
What are long-term capital gains? Are they taxed like other income? -
ANSWER
How does our tax system influence the use of debt financing by corporations? -
ANSWER
Write the equations for four ratios that are used to measure how effectively a
firm manages its assets. - ANSWER
If one firm is growing rapidly and another is not, how might this distort a
comparison of their inventory turnover ratios? - ANSWER
If you wanted to evaluate a firm's DSO, with what could you compare it? -
ANSWER
How might the different ages of firms distort comparisons of their fixed assets
turnover ratios? - ANSWER
