WGU C214 UNDERSTANDING FINANCIAL STATEMENTS AND RATIOS: A COMPREHENSIVE TEST QUESTIONS AND ANSWERS UPDATE

WGU C214 UNDERSTANDING FINANCIAL STATEMENTS AND RATIOS: A COMPREHENSIVE TEST QUESTIONS AND ANSWERS UPDATE How do you calculate the change in retained earnings? Correct Answer: - Net Income-Dividends Which of the following is generally true? Correct Answer: - Operating income and EBIT are the same *EBIT=Earnings before interest and taxes. Used to measure a firms operating income. Which components are part of total assets? Correct Answer: - Cash accounts receivable, inventory, long-term assets Which components are part of current assets? Correct Answer: - Inventory, cash, accounts receivable, short-term investments Which components are part of total liabilities? Correct Answer: - Bonds, accounts payable, mortgage Why is the balance sheet known as a permanent statement? Correct Answer: - Because the other statements reset at the end of the fiscal year A basic equation for the balance sheet is? Correct Answer: - Equity = Assets – liabilities When fixed assets increase, what happens to cash? Correct Answer: - Cash decreases Which is the purpose of the statement of cash flows? Correct Answer: - Explains the change in cash balance for a period of time. The OIROI (Operating Income Return on Investment) uses what elements on the income statement? Correct Answer: - EBIT, Total Assets Why would a company be interested in the TAT (Total Asset Turnover) ratio? Correct Answer: - How efficient assets are at producing sales Which of the following gives the largest effective rate (APY-annual percentage yield)? Correct Answer: - 18.6% compounded daily What does the beta coefficient represent? Correct Answer: - It is a statistically-derived measure of volatility Why is depreciation expense taken out of the net income calculation, yet added back at the end? Correct Answer: - Because depreciation expense is tax deductible Why is the NPV preferred over the IRR? Correct Answer: - It measures the dollar value. It is more reliable. What does the degree of Financial leverage indicate? Correct Answer: - The reliance on debt If a company has a high degree of financial leverage, what does that tell us about the firm’s risk profile? Correct Answer: - Higher profits to shareholders What is the cash cycle? Correct Answer: - The amount of time to regenerate cash Why is float important to understand? Correct Answer: - The time cash expenditures What should a company do to manage its working capital? Correct Answer: - Collect quickly and pay slowly What would be a source of information to determine replacement cost? Correct Answer: - Building Appraisal What does Sarbanes-Oxley Act require companies to do? Have internal control audits FINRA (Financial Industry Regulatory Authority) does the following: Correct Answer: - Prosecutes naughty stockbrokers If a product is made 100% domestically, what can affect its domestic market? Correct Answer: - International competition If a company makes its product in a foreign country where labor costs are much lower, what happens? Correct Answer: - Profits go up and domestic employment decreases If the value of a dollar increases, the price of imports: Correct Answer: - Decreases Why would a farmer buy a hedge when he signs a contract to sell produce overseas? To reduce currency risk Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? Correct Answer: - The firm has too little inventory resulting in lost sales or stock-outs If the company wishes to obtain a bank loan, will it want to have higher current ratio or a lower current ratio? Correct Answer: - Higher If an investor knows the idiosyncratic risk, the investor knows the: Correct Answer: - Beta coefficient Why would we reject a project based on the NPV (Net present value)? Correct Answer: - The NPV is a negative number Why would we reject a project based on the IRR (internal rate of return)? Correct Answer: - The discount rate is higher than the IRR Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements apply? Correct Answer: - Company B invests in more working current assets Company A offers trade credit of 2% 10/ net 30 and company B offers trade credit at net 30. What can be said about the credit policies of each company? Correct Answer: - Company A can attract more customers Which of the following characterizes collection float? Correct Answer: - Increased float indicates slower processing time Company A’s inventory is larger than Company B. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint? Correct Answer: - Company B might have higher inventory turnover In regards to Accounts payable balances, which of the following is true? Correct Answer: - Paying off A/P on the last day due is a good policy. If two companies have earnings of $2,000,000 and company X has a multiple of 1.2 and Company Z has a multiple of 2.0, what can we estimate about the value of each company? Correct Answer: - The value of company Z is higher Dodd-Frank regulates which segment of the US economy? Correct Answer: - Banking industry The SEC (securities and exchange commission) requires companies to do the following: Correct Answer: - Register all public offerings. Regulate stock sales Economics is a subfield of finance: True or False? Correct Answer: - False Capital is defined as financial asset: True or False? Correct Answer: - True Stocks and bonds are 2 types of financial instruments: True or False? Correct Answer: - True Primary financial markets are markets where issuers place new securities with investors: True or False? Correct Answer: - True