CFIN CHAPTER 1 & 2 EXAMINATION
QUESTIONS WITH CORRECT
ANSWERS
statement of retained earning - Answer-a statement reporting the change in the firms
retained earning s a result of the income generated and retained during the year. The
balance sheet figure for retained earning is the sumner of the earnings retained for each
year that the firm has been in business.
liquid asset - Answer-an asset that can be easily converted to cash without significant
loss of the amount originally invested
liquidity ratios - Answer-ratios that show the relationship of a firms cash and other
current assets to its current liabilitys they provide an indication of the firms ability to
meet its current obligations
financial leverage - Answer-the use of debt financing
trend analysis - Answer-an evaluation of changes in a firms financial position over a
period of time
window-dressing technique - Answer-techniques employed by firms to make their
financial statements look better than they actually are
Harvey Supplies Inc. has a current ratio of 3.0, a quick ratio of 2.4, and an inventory
turnover ratio of 6. Harvey's total assets are $1 million and its debt ratio is 0.20. The firm
has no long-term debt. What is Harvey's sales figure if the total cost of goods sold is
75% of sales? - Answer-960,000
Which of the following statements is incorrect?
Large European firms generally have many more individual owners than large U.S.
firms.
One reason domestic firms "go global" is to sell products in new markets.
Often firms can avoid regulatory hurdles that apply to foreign manufacturers by
establishing operations in the country where the hurdles apply.
A difficulty associated with doing business in international markets is that not all
countries have the same currency.
, Cultural differences among countries make it difficult for a multinational firm to use the
same marketing strategy⎯that is, packaging, advertising, and so forth⎯in every country
in which it operates. - Answer-Large European firms generally have many more
individual owners than large U.S. firms.
Other things held constant, which of the following will not affect the current ratio,
assuming an initial current ratio greater than 1.0?
Fixed assets are sold for cash.
Long-term debt is issued to pay off current liabilities.
Accounts receivable are collected.
Cash is used to pay off accounts payable.
A bank loan is obtained, and the proceeds are credited to the firm's checking account. -
Answer-Accounts receivable are collected.
Aurillo Equipment Company (AEC) projected that its ROE for next year would be just
6%. However, the financial staff has determined that the firm can increase its ROE by
refinancing some high interest bonds currently outstanding. The firm's total debt will
remain at $200,000 and the debt ratio will hold constant at 80%, but the interest rate on
the refinanced debt will be 10%. The rate on the old debt is 14%. Refinancing will not
affect sales which are projected to be $300,000. EBIT will be 11% of sales, and the
firm's tax rate is 40%. If AEC refinances its high interest bonds, what will be its projected
new ROE? - Answer-15.6%
Determine the increase or decrease in cash for Rinky Supply Company for last year,
given the following information. (Assume no other changes occurred during the past
year.)
Decrease in marketable securities
=
$25
Increase in accounts receivables
=
$50
Increase in notes payable
=
$30
Decrease in accounts payable
=
$20
Increase in accrued wages and taxes
=
QUESTIONS WITH CORRECT
ANSWERS
statement of retained earning - Answer-a statement reporting the change in the firms
retained earning s a result of the income generated and retained during the year. The
balance sheet figure for retained earning is the sumner of the earnings retained for each
year that the firm has been in business.
liquid asset - Answer-an asset that can be easily converted to cash without significant
loss of the amount originally invested
liquidity ratios - Answer-ratios that show the relationship of a firms cash and other
current assets to its current liabilitys they provide an indication of the firms ability to
meet its current obligations
financial leverage - Answer-the use of debt financing
trend analysis - Answer-an evaluation of changes in a firms financial position over a
period of time
window-dressing technique - Answer-techniques employed by firms to make their
financial statements look better than they actually are
Harvey Supplies Inc. has a current ratio of 3.0, a quick ratio of 2.4, and an inventory
turnover ratio of 6. Harvey's total assets are $1 million and its debt ratio is 0.20. The firm
has no long-term debt. What is Harvey's sales figure if the total cost of goods sold is
75% of sales? - Answer-960,000
Which of the following statements is incorrect?
Large European firms generally have many more individual owners than large U.S.
firms.
One reason domestic firms "go global" is to sell products in new markets.
Often firms can avoid regulatory hurdles that apply to foreign manufacturers by
establishing operations in the country where the hurdles apply.
A difficulty associated with doing business in international markets is that not all
countries have the same currency.
, Cultural differences among countries make it difficult for a multinational firm to use the
same marketing strategy⎯that is, packaging, advertising, and so forth⎯in every country
in which it operates. - Answer-Large European firms generally have many more
individual owners than large U.S. firms.
Other things held constant, which of the following will not affect the current ratio,
assuming an initial current ratio greater than 1.0?
Fixed assets are sold for cash.
Long-term debt is issued to pay off current liabilities.
Accounts receivable are collected.
Cash is used to pay off accounts payable.
A bank loan is obtained, and the proceeds are credited to the firm's checking account. -
Answer-Accounts receivable are collected.
Aurillo Equipment Company (AEC) projected that its ROE for next year would be just
6%. However, the financial staff has determined that the firm can increase its ROE by
refinancing some high interest bonds currently outstanding. The firm's total debt will
remain at $200,000 and the debt ratio will hold constant at 80%, but the interest rate on
the refinanced debt will be 10%. The rate on the old debt is 14%. Refinancing will not
affect sales which are projected to be $300,000. EBIT will be 11% of sales, and the
firm's tax rate is 40%. If AEC refinances its high interest bonds, what will be its projected
new ROE? - Answer-15.6%
Determine the increase or decrease in cash for Rinky Supply Company for last year,
given the following information. (Assume no other changes occurred during the past
year.)
Decrease in marketable securities
=
$25
Increase in accounts receivables
=
$50
Increase in notes payable
=
$30
Decrease in accounts payable
=
$20
Increase in accrued wages and taxes
=
