Question: In computing the period’s net operating

> Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company’s financial statement

> Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company’s financial statement

> Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company’s financial statement

> The after-tax cost of interest expense is used in calculating which of the following? a. Times-interest-earned b. Return on assets c. Debt ratio d. Inventory turnover ratio e. All of these.

> A small pizza restaurant, founded and owned by the Martinelli sisters, would be expected to have which of the following? a. Low inventory turnover and high gross margin b. Low accounts receivable turnover and low gross margin c. High price-earnings rati

> Fred and Torrie Jones are a retired couple looking for income. They are currently rebalancing their portfolio of stocks to include more with high dividends. Fred and Torrie will be most interested in which of the following? a. Current ratio b. Dividend

> Profitability ratios are used by which of the following groups? a. Company managers b. Creditors c. Lenders d. Investors e. All of these.

> Etchey Company shows that 46% of its assets are financed by creditors. Which of the following shows this result? a. Current ratio b. Times-interest-earned ratio c. Debt ratio d. Inventory turnover in days e. Return on sales

> Pedee Company’s inventory turnover in days is 80 days. Which of the following actions could help to improve that ratio? a. Increase sales price. b. Increase manufacturing costs. c. Reduce cost of goods sold. d. Reduce average inventory. e. All of these.

> Austin Porter is a sophomore at a small Midwestern university (SMWU). He is considering whether to continue at this university or to transfer to one with a nationally recognized engineering program. Austin’s decision-making process included the following

> The measures of the ability of a company to meet its current obligations are called a. ratios. b. liquidity ratios. c. leverage ratios. d. profitability ratios. e. percentage changes.

> Fractions or percentages computed by dividing one account or line-item amount by another are called a. returns. b. industry averages. c. common-size statements. d. dividend yields. e. ratios.

> An advantage of common-size analysis is that a. the size of dollar amounts impacts the analysis. b. larger companies will have higher common-size percentages. c. it focuses only on vertical analysis. d. the effects of size are eliminated. e. it focuses

> In examining Luke Company’s current period income statement, you notice that Research and Development expenses are 62% of sales revenue. Luke has most likely provided a. a horizontal analysis. b. a vertical analysis using sales as the base. c. a horizon

> In a JIT manufacturing environment, the current ratio and the quick ratio are virtually the same. Do you agree? Why?

> Explain the significance of the inventory turnover ratio in a JIT manufacturing environment.

> Why would investors and creditors be interested in knowing the dilutive effects of convertible securities on earnings per share?

> Explain how an investor might use the price-earnings ratio to value the stock of a company.

> Assume that you have been given the responsibility to invest some funds in the stock market to provide an annuity to an individual who has just retired. Explain how you might use the dividend yield and the dividend payout ratio to help you with this inve

> Explain why an investor would be interested in a company’s debt ratio.

> Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last year’s results: Washington’s actual cost of capital was 12%. Required: 1. Calculate the

> A manager decided to acquire some expensive equipment through the use of an operating lease even though a capital budgeting analysis showed that it was more profitable to buy than to lease. However, the purchase alternative would have required the issuan

> A loan agreement between a bank and a customer specified that the debt ratio could not exceed 60%. Explain the purpose of this restrictive agreement.

> Suppose that the accounts receivable turnover ratio of a company is low when compared with other firms within its industry. How would this information be useful to the managers of a company?

> What information does the quick ratio supply that the current ratio does not?

> Identify two types of standards used in ratio analysis. Explain why it is desirable to use both types.

> What are liquidity ratios? Leverage ratios? Profitability ratios?

> Name the two major types of financial statement analysis discussed in this chapter.

> In a completed worksheet, a. the debit column contains the cash inflows. b. the debit column contains the cash outflows. c. the credit column contains the cash inflows. d. the credit column contains only operating cash flows. e. None of the above.

> A worksheet approach to preparing the statement of cash flows a. is a useful aid. b. uses a spreadsheet format. c. offers an efficient and logical way of organizing the data. d. allows an easy extraction of the needed data. e. All of these.

> Which method calculates operating cash flows by adjusting the income statement on a line-by-line basis? a. Direct method b. Indirect method c. Working paper approach d. Income method e. None of these.

> Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate

> Which of the following is a financing activity? a. Increase in inventories b. Purchase of land c. Increase in accounts receivable d. Issuance of a mortgage e. All of these.

> Which of the following is an investing activity? a. Issuance of a mortgage b. Increase in accounts receivable c. Purchase of land d. Increase in inventories e. All of these.

> The gain on sale of equipment is deducted from net income to arrive at operating cash flows because a. the sale of long-term assets is an operating activity. b. the gain reveals the total cash received. c. all of the cash received from the sale is repor

> An increase in inventories is deducted from net income to arrive at operating cash flow because a. cash payments to customers were larger than the purchases made during the period. b. purchases are larger than the cost of goods sold by the amount that i

> An increase in accounts receivable is deducted from net income to obtain operating cash flows because a. cash collections increased due to increasing sales. b. cash collections from customers were less than the revenues reported. c. cash collections dec

> Which of the following adjustments to net income is needed to obtain cash flows? a. Eliminate gains on sale of equipment. b. Deduct from net income all noncash expenses (e.g., depreciation and amortization). c. Deduct from net income any increases in cu

> Which of the following adjustments helps to convert accrual income to operating cash flows? a. Deduct from net income all noncash expenses. b. Add to net income a decrease in inventories. c. Add to net income a decrease in accounts payable. d. Deduct fr

> The difference between the beginning and ending cash balances shown on the balance sheet a. is added to net income to obtain total cash inflows. b. serves as a control figure for the statement of cash flows. c. is deducted from net income to obtain net

> Uses of cash include a. cash dividends. b. the sale of old equipment. c. the purchase of long-term assets. d. only a and b. e. only a and c.

> Sources of cash include a. profitable operations. b. the issuance of long-term debt. c. the sale of long-term assets. d. the issuance of capital stock. e. all of these.

> Jack’s Lumber Yard receives 8,000 large trees each period that it subsequently processes into rough logs by stripping off the tree bark and leaves (i.e., one tree equals one log). Jack’s then must decide whether to sell its rough logs (for use in log cab

> Raising cash by issuing capital stock is an example of a. a financing activity. b. an investing activity. c. an operating activity. d. a noncash transaction. e. none of these.

> Cash outflows from operating activities come from a. collection of sales revenues. b. payment for operating costs. c. acquisition of operating equipment. d. retirement of bonds. e. none of these.

> Cash inflows from operating activities come from a. payment for raw materials. b. gains on the sale of operating equipment. c. collection of sales revenues. d. issuing capital stock. e. issuing bonds.

> Consider the following independent events: a. Loss on sale of an asset b. Decrease in accounts receivable c. Increase in prepaid insurance d. Depreciation expense e. Decrease in accounts payable f. Uncollectible accounts expense g. Increase in wages paya

> Explain the reasoning for including the payment of dividends in the financing section of the statement of cash flows.

> In computing the period’s net operating cash flows, why are noncash expenses added back to net income?

> Explain how a company can report a loss and still have a positive net operating cash flow.

> Explain how a company can report a positive net income and yet still have a negative net operating cash flow.

> Why is it better to report the noncash investing and financing activities in a supplemental schedule rather than to include these activities on the body of the statement of cash flows?

> Shown below is a segmented income statement for Hickory Company’s three wooden flooring product lines: Relevant fixed costs associated with this line include 80% of parquet’s machine rent and all of parquetâ&#

> Explain the all-financial-resources approach to reporting financing and investing activities.

> Of the three categories on the statement of cash flows, which do you think provides the most useful information? Explain.

> The activity format calls for three categories on the statement of cash flows. Define each category.

> What are cash equivalents? How are cash equivalents treated in preparing a statement of cash flows?

> Assume that there are two competing projects, A and B. Project A has a NPV of $1,000 and an IRR of 15%. Project B has an NPV of $800 and an IRR of 20%. Which of the following is true? a. Project A should be chosen because it has a higher NPV. b. Project

> For competing projects, NPV is preferred to IRR because a. maximizing IRR maximizes the wealth of the owners. b. in the final analysis, relative profitability is what counts. c. choosing the project with the largest NPV maximizes the wealth of the share

> Post audits of capital projects are useful because a. they are not very costly. b. they have no significant limitations. c. the assumptions underlying the original analyses are often invalidated by changes in the actual working environment. d. they help

> A post audit a. is a follow-up analysis of a capital project, once implemented. b. compares the actual benefits with the estimated benefits. c. evaluates the overall outcome of the investment. d. proposes corrective action, if needed. e. does all of the

> Using IRR, a project is rejected if the IRR a. is equal to the required rate of return. b. is less than the required rate of return. c. is greater than the cost of capital. d. is greater than the required rate of return. e. produces an NPV equal to zero

> Which of the following is not true regarding the IRR? a. The IRR is the interest rate that sets the present value of a project’s cash inflows equal to the present value of the project’s cost. b. The IRR is the interest rate that sets the NPV equal to ze

> Elway Company provided the following income statement for the last year: Sales …………………………………………….. $1,040,000,000 Less: Variable expenses ……………………... 700,250,000 Contribution margin ………………………… $ 339,750,000 Less: Fixed expenses …………………………. 183,750,000 O

> Explain how creditors, investors, and managers can use common-size analysis as an aid in decision making.

> Assume that an investment of $1,000 produces a future cash flow of $1,000. The discount factor for this future cash flow is 0.80. The NPV is a. $0. b. $110. c. ($200). d. $911. e. none of these.

> If the present value of future cash flows is $4,200 for an investment that requires an outlay of $3,000, the NPV a. is $200. b. is $1,000. c. is $1,200. d. is $2,200. e. cannot be determined.

> Using NPV, a project is rejected if it is a. equal to zero. b. negative. c. positive. d. equal to the required rate of return. e. greater than the cost of capital.

> NPV is calculated by using a. the required rate of return. b. accounting income. c. the IRR. d. the future value of cash flows. e. none of these.

> NPV measures a. the profitability of an investment. b. the change in wealth. c. the change in firm value. d. the difference in present value of cash inflows and outflows. e. all of these.

> If the NPV is positive, it signals a. that the initial investment has been recovered. b. that the required rate of return has been earned. c. that the value of the firm has increased. d. all of these. e. both a and b.

> An investment of $2,000 provides an average net income of $400. Depreciation is $40 per year with zero salvage value. The ARR using the original investment is a. 44%. b. 22%. c. 20%. d. 40%. e. none of these.

> The ARR has one specific advantage not possessed by the payback period in that it a. considers the time value of money. b. measures the value added by a project. c. is always an accurate measure of profitability. d. is more widely accepted by financial

> The payback period suffers from which of the following deficiencies? a. It is a rough measure of the uncertainty of future cash flows. b. It helps control the risk of obsolescence. c. It ignores the uncertainty of future cash flows. d. It ignores the fi

> An investment of $1,000 produces a net cash inflow of $500 in the first year and $750 in the second year. What is the payback period? a. 1.67 years b. 0.50 year c. 2.00 years d. 1.20 years e. Cannot be determined.

> Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal produc

> An investment of $6,000 produces a net annual cash inflow of $2,000 for each of 5 years. What is the payback period? a. 2 years b. 1.5 year c. Unacceptable d. 3 years e. Cannot be determined.

> Mutually exclusive capital budgeting projects are those that a. if accepted or rejected do not affect the cash flows of other projects. b. if accepted will produce a negative NPV. c. if rejected preclude the acceptance of all other competing projects. d

> To make a capital investment decision, a manager must a. estimate the quantity and timing of cash flows. b. assess the risk of the investment. c. consider the impact of the investment on the firm’s profits. d. choose a decision criterion to assess viabi

> Capital investments should a. always produce an increase in market share. b. only be analyzed using the ARR. c. earn back their original capital outlay plus a reasonable return. d. always be done using a payback criterion. e. do none of these.

> Suppose that a firm must choose between two mutually exclusive projects, both of which have negative NPVs. Explain how a firm can legitimately choose between two such projects.

> Explain why NPV is generally preferred over IRR when choosing among competing or mutually exclusive projects. Why would managers continue to use IRR to choose among mutually exclusive projects?

> The IRR is the true or actual rate of return being earned by the project. Do you agree or disagree? Discuss.

> Explain how the NPV is used to determine whether a project should be accepted or rejected.

> What is the role that the required rate of return plays in the NPV model? In the IRR model?

> What is the cost of capital? What role does it play in capital investment decisions?

> Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate

> Explain the relationship between NPV and a firm’s value.

> The NPV is the same as the profit of a project expressed in present dollars. Do you agree? Explain.

> The time value of money is ignored by the payback period and the ARR. Explain why this is a major deficiency in these two models.

> Explain why the timing and quantity of cash flows are important in capital investment decisions.

> Explain the difference between independent projects and mutually exclusive projects.

> In the sell-or-process-further decision, a. joint costs are always relevant. b. total costs of joint processing and further processing are relevant. c. all costs incurred prior to the split-off point are relevant. d. the most profitable outcome may be t

> In the keep-or-drop decision, the company will find which of the following income statement formats most useful? a. A segmented income statement in the contribution margin format b. A segmented income statement in the full costing format that is used fo

> When a company faces a production constraint or scarce resource (e.g., only a certain number of machine hours are available), it is important to a. produce the product with the highest contribution margin in total. b. produce the product with the lowest

> Jennings Hardware Store marks up its merchandise by 30%. If a part costs $25.00, which of the following is true? a. The price is $7.50. b. The markup is $32.50. c. The price is $32.50. d. The markup is pure profit. e. All of the above.

> Carroll Company, a manufacturer of vitamins and minerals, has been asked by a large drugstore chain to provide bottles of vitamin E. The bottles would be labeled with the name of the drugstore chain, and the chain would pay Carroll $2.30 per bottle rathe

> Indy Company has the following data for one of its manufacturing plants: Maximum units produced in a quarter (3-month period): 250,000 units Actual units produced in a quarter (3-month period): 200,000 units Productive hours in one quarter: 25,000 hours.

> In a make-or-buy decision, a. the company must choose between expanding or dropping a product line. b. the company must choose between accepting or rejecting a special order. c. the company would consider the purchase price of the externally provided go

> Which of the following statements is false? a. Fixed costs are never relevant. b. Variable costs are never relevant. c. Usually, variable costs are irrelevant. d. Step costs are irrelevant when a decision alternative requires moving outside of the exist