FINANCIAL MANAGEMENT
MIDTERM REVIEWER
Quiz 1
1. The accountant may be responsible for any of the following
EXCEPT
A. processing purchase orders and invoices
B. analyzing the mix of current to fixed assets
C. preparing the monthly income statement
D. ensuring accounts payable are paid on time
2. Statement 1: The financial manager prepares financial
statements that recognize revenue at the point of sale and the
expense when incurred.
Statement 2: Financial managers must look beyond financial
statements to obtain insight into developing or existing problems
since the accrual accounting data do not fully describe the
circumstances of a firm.
A. Both Statements are true
B. Only first statement is true
C. Only second statement is true
D. Both Statements are false
3. Statement 1: When analyzing revenue growth in trend analysis,
often the analyst will not only look at overall revenue growth
rates but also at revenue growth by business segment.
Statement 2: In cross-sectional analysis, we compare two or more
companies using financial ratios, and we may also compare the
companies’ ratios to an industry average.
A. Both Statements are false
B. Only second statement is true
C. Only first statement is true
D. Both Statements are true
4. Suppose you are comparing two firms in the steel industry.
One firm is large and the other is small. Which type of numbers
would be most meaningful for statement analysis?
A. Relative numbers would be most meaningful for the large firm;
absolute numbers would be most meaningful for the small firm.
B. Absolute numbers would be most meaningful for both the
large and small firm.
C. Relative numbers would be most meaningful for both the large
and small firm, especially for interfirm comparisons.
D. Absolute numbers would be most meaningful in the large firm;
relative numbers would be most meaningful in the small firm.
5. A limitation in calculating ratios in financial statement analysis
is that
A. some account balances may reflect atypical data at year end.
B. it requires a calculator.
C. they seldom identify problem areas in a company.
D. no one other than the management would be interested in
them.
6. Statement 1: Finance is concerned with the process institutions,
markets, and instruments involved in the transfer of money
among and between individuals, businesses and government.
Statement 2: Financial managers actively manage the financial
affairs of many types of business-financial and non-financial,
private and public, for-profit and not-for profit
A. Only first statement is true
B. Only second statement is true
C. Both Statements are true
D. Both Statements are false
7. Which of these statements is false?
A. A company comparison should not be made with industry
averages if the company does not clearly fit into any one
industry.
B. Many companies will not clearly fit into any one industry.
C. The analysis of an entity's financial statements can be more
meaningful if the results are compared with industry averages
and with results of competitors.
D. A financial service uses its best judgment as to which
industry the firm best fits.
8. In performing a vertical analysis, the base for prepaid
expenses is
A. prepaid expenses in a previous year.
B. total current assets.
C. total assets.
D. total liabilities.
9. By concentrating on cash flows within the firm, the financial
manager should be able to
A. control expenses
B. avoid insolvency
C. speak authoritatively to stockholders
D. prepare tax returns
10. Horizontal analysis is also known as
A. common size analysis.
B. linear analysis.
C. trend analysis.
D. vertical analysis
11. Finance can be defined as
A. the art of merchandising products and services
B. the system of debit and credits
C. the art and science of managing money
D. the science of the production, distribution, and
consumption of wealth
12. The percent of property, plant and equipment to total
assets is an example of:
A. vertical analysis
B. solvency analysis
C. profitability analysis
D. horizontal analysis
13. Vertical analysis is a technique that expresses each item in
a financial statement
A. starting with the highest value down to the lowest value.
B. in pesos and centavos.
C. as a percent of a base amount.
D. as a percent of the item in the previous year.
14. Statement 1: The purpose of financial statement analysis
is not only to understand the historical results of financial
statements but also to use that information to forecast the
future.
Statement 2: The revenue growth rate is a ratio that measures
the expansion or contraction of the business.
A. Only second statement is true
B. Both Statements are true
C. Both Statements are false
D. Only first statement is true
15. The primary emphasis of the financial manager is the use
of
A. organization charts
B. profit incentives
C. cash flow
D. accrued earnings
D. trend analysis
16. Which of the following does not represent a problem with
financial analysis?
A. Financial statement analysis is an art; it requires judgment
decisions on the part of the analyst.
B. There are as many ratios for financial analysis as there are pairs
of figures.
C. Some industry ratio formulas vary from source to source.
D. Financial analysis can be used to detect apparent liquidity
problems.
24.Statement 1: Financial analysis and planning is concerned
with analyzing the mix of assets and liabilities
Statement 2: Financing decisions deal with the left-hand side
of the firm's balance sheet and involve the most appropriate
mix of current and fixed assets.
A. Only first statement is true
B. Both Statements are true
C. Only second statement is true
D. Both Statements are false
17. In which of the following cases may a percentage change be
computed?
A. The trend of the amounts is decreasing but all amounts are
positive.
B. There is no amount in the base year.
C. There is a negative amount in the base year and a positive
amount in the subsequent year.
D. There is a negative amount in the base year and a negative
amount in the subsequent year.
25.Horizontal analysis is a technique for evaluating a series of
financial statement data over a period of time
A. that has been arranged from the highest number to the
lowest number.
B. to determine the amount and/or percentage increase or
decrease that has taken place.
C. to determine which items are in error.
D. that has been arranged from the lowest number to the
highest number.
18. Sales (in millions) for a three-year period are Year 1 P4, Year
2 P4.6, and Year 3 P5.0. Using Year 1 as the base year the
percentage increase in sales in Years 2 and 3 are, respectively
A. 87% and 80%
B. 115% and 125%
C. 115% and 109%
D. 115% and 130%
26.Statement 1: The benchmark used in cross-sectional
analysis is the prior performance of the firm currently
undergoing analysis.
Statement 2: The benchmark used in trend analysis is a given
firm’s performance over a period of time.
A. Both Statements are true
B. Only second statement is true
C. Only first statement is true
D. Both Statements are false
19. I The percentage analysis of increases and decreases in
individual items in comparative financial statements is called:
A. vertical analysis
B. horizontal analysis
C. solvency analysis
D. profitability analysis
20. The financial manager recognizes revenues and expenses
utilizing
A. the accrual method
B. the actual inflows and outflows of cash
C. the revenue method
D. the standardized, generally accepted, accounting principles
21. Management is a user of financial analysis. Which of the
following comments does not represent a fair statement as to the
management perspective?
A. Management is interested in the financial structure of the
entity.
B. Management is interested in the view of investors.
C. Management is always interested in maximum profitability.
D. Management is interested in the asset structure of the entity.
22. Which of the following is not a limitation of financial
stat*ement analysis?
A. The use of estimates.
B. The availability of information.
C. The diversification of firms.
D. The cost basis.
23.A ratio has little meaning until it is compared to a benchmark.
Financial analysts use several common benchmarks to help them
better understand and interpret financial ratios. The benchmark
in which ratios from several different companies or an industry
segment are analyzed is known as a:
A. cross-sectional analysis
B. cause-of-change analysis
C. cause-of-action analysis
27.The Financial manager is interested in the cash inflows and
outflows of the firm, rather than the accounting data, in order
to ensure
A. profitability
B. solvency
C. the ability to acquire new assets
D. the ability to pay dividends
28.Which of the following generally is the most useful in
analyzing companies of different sizes?
A. profitability index
B. price-level accounting
C. comparative statements
D. common-sized financial statements
29.The key role of the financial manager is
A. the preparation of data for future evaluation
B. the presentation of financial statements
C. the collection of financial data
D. the decision making
30.Trend analysis allows a firm to compare its performance to:
A. other firms in the industry
B. other time periods within the firm
C. none of the above
D. other industries
Quiz 2
1. Statement 1: Net revenues (sales) projections are often one
of the most important variables affecting value.
Statement 2: Revenue in the first year of the forecast does not
depend on actual revenue or an assumed growth rate
A. Only first statement is true
B. Both Statements are true
C. Both Statements are false
D. Only second statement is true
2. A general rule to use in assessing the average collection period
is
A. it can be any length as long as the customer continues to buy
merchandise.
B. that is should not exceed 30 days.
C. that it should not greatly exceed the discount period.
D. that it should not greatly exceed the credit term period.
3.
A. 600,000
B. 720,000
C. 550,000
D. 840,000
4. Net sales are P6,000,000, beginning total assets are P2,800,000,
and the asset turnover is 3.0. What is the ending total asset
balance?
A. P2,800,000.
B. P1,200,000.
C. P1,600,000.
D. P2,000,000.
5. Which of the following does not represent a problem with
financial analysis?
A. There are as many ratios for financial analysis as there are pairs
of figures.
B. Some industry ratio formulas vary from source to source.
C. Financial analysis can be used to detect apparent liquidity
problems.
D. Financial statement analysis is an art; it requires judgment
decisions on the part of the analyst.
6. Terizla Corporation had net income of P200,000 and paid
dividends to common stockholders of P40,000 in 2022. The
weighted-average number of shares outstanding in 2022 was
50,000 shares. Terizla Corporation’s common stock is selling for
P60 per share in the local stock exchange. Terizla Corporation’s
payout ratio for 2022 is
A. 20.0 percent
B. 25.0 percent
C. P4 per share
D. 12.5 percent
7. Which of the following would be considered a “source” of cash
for purposes of constructing a statement of cash flows?
A. dividends paid to the company's own shareholders.
B. an increase in accounts payable.
C. an increase in accounts receivable.
D. a decrease in accrued liabilities.
8. Statement 1: Because a forecast is forward looking, it is often a
good predictor of the future.
Statement 2: Net cash flow can be defined as the change in cash
that occurs over a period for a firm.
A. Both Statements are false
B. Both Statements are true
C. Only second statement is true
D. Only first statement is true
9. Statement 1: If there is essentially no difference between
capitalized interest for financial reporting and for tax, there is
no tax effect necessary in making this adjustment in the free
cash flow statement.
Statement 2: Unlike changes in interest payable, the
amortization of bond discount or premium is a difference
between interest expense recognized and cash paid.
A. Only first statement is true
B. Both Statements are true
C. Only second statement is true
D. Both Statements are false
10. Under the indirect method, which item would be
deducted from net income as part of the process of arriving
at cash provided by operating activities on the statement of
cash flows?
A. Patent amortization expense
B. Increase in accounts payable
C. Increase in prepaid expenses
D. Decrease in accounts receivable
11. Ratios are used as tools in financial analysis
A. because even single ratios by themselves are quite
meaningful.
B. because they are prescribed by GAAP.
C. instead of horizontal and vertical analyses.
D. because they can provide information that may not be
apparent from inspection of the individual components of a
particular ratio.
12. During 2022, Yin Company purchased P960,000 of
inventory. The cost of goods sold for 2022 was P900,000,
and the ending inventory at December 31, 2022 was
P180,000. What was the inventory turnover for 2022?
A. 5.3
B. 6.0
C. 5.0
D. 6.4
13. Which of the following should be least considered when
deciding whether to investigate a variance?
A. Whether the variance is favorable or unfavorable
B. Trend of the variances over time
C. Significance of the variance
D. Cost of investigating the variance
14. In a statement of cash flows, a change in accounts payable
account would be classified as:
A. an investing activity.
B. a noncash item that need not appear on the statement of
cash flows.
B. a financing activity.
D. an operating activity
15. Which of the following would be considered a “use” of
cash for purposes of constructing a statement of cash flows?
A. an increase in accounts payable.
B. an increase in common stock.
C. decrease in accounts receivable.
D. a decrease in bonds payable.
16. The company’s current ratio as of the balance sheet date is:
A. 2.67:1
B. 2.44:1
C. 1.95:1
D. 2.02:1
17. During the year the balance in the prepaid expenses account
increased by $6,000. In order to adjust the company's net income
to a cash basis using the direct method on the statement of cash
flows, it would be necessary to:
A. add the $6,000 to the cost of goods sold reported on the
income statement.
B. deduct the $6,000 from the cost of goods sold reported on the
income statement.
C. add the $6,000 to the operating expenses reported on the
income statement.
D. deduct the $6,000 from the operating expenses reported on
the income statement.
18.
A. P 672,000
B. P 480,000
C. P1,200,000
D. P 800,000
19. A company declared and paid a cash dividend. The dividend
would appear on the company's statement of cash flows as:
A. an addition to net income in order to arrive at net cash
provided by operating activities under the indirect method.
B. a deduction under investing activities.
C, a deduction under financing activities.
D, a deduction from net income in order to arrive at net cash
provided by operating activities under the indirect method.
20. In the near term, the important ratios that provide the
information critical to the short-run operation of the firm are:
A. activity, debt, and profitability
B. liquidity, activity, and profitability
C. liquidity, activity, and debt
D. liquidity, activity, and equity
21. In the statement of cash flows, the sum total of the net cash
provided by operating activities, investing activities, and financing
activities would be equal to:
A. zero.
B. the beginning balance of cash and cash equivalents.
C. the increase or decrease in cash and cash equivalents.
D. the ending balance of cash and cash equivalents.
22. The ratios that are used to determine a company’s short-term
debt paying ability are
A. times interest earned, acid-test ratio, current ratio, and
inventory turnover.
B. asset turnover, times interest earned, current ratio, and
receivables turnover.
C. times interest earned, inventory turnover, current ratio, and
receivables turnover.
D. current ratio, acid-test ratio, receivables turnover, and
inventory turnover.
23. Short-term creditors are usually most interested in
assessing
A. marketability.
B. solvency.
C. liquidity.
D. profitability.
24. Terizla Corporation had net income of P200,000 and paid
dividends to common stockholders of P40,000 in 2022. The
weighted-average number of shares outstanding in 2022 was
50,000 shares. Terizla Corporation’s common stock is selling
for P60 per share in the local stock exchange. Terizla
Corporation’s price-earnings ratio is
A. 3.8 times
B. 6 times
C. 18.8 times
D. 15 times
25. X Corporation prepares its statement of cash flows using
the indirect method. Which of the following would be
deducted from net income in the operating activities section
of the statement?
A. No effect
B. Increase in Taxes Payable and Increase in Dividends
Payable
C. Increase in Taxes Payable
D. Increase in Dividends Payable
26. Which of the following should be classified as an investing
activity on a statement of cash flows?
A. cash paid for dividends to stockholders.
B. cash paid to employees for services rendered.
C, cash paid for income taxes.
D. none of the above
27. Belerick Company reported the following on its income
statement:
Income before
taxes
P400,000
Income tax expense
Net income
100,000
P300,000
An analysis of the income statement revealed that interest
expense was P100,000. Belerick Company’s times interest
earned (TIE) was
A. 4 times
B. 3.5 times
C. 3 times
D. 5 times
28. Assume you are given the following relationships for the
Layla Company:
Sales/total assets
1.5X
Return on assets (ROA) 3%
Return on equity (ROE) 5%
The Layla Company’s debt ratio is
A. 40%
B. 65%
C. 60%
D. 35%
29. Which of the following should be classified as a financing
activity on a statement of cash flows?
A. cash used to retire bonds payable.
B. None
C. an increase in deferred income taxes.
D. cash dividends received on an investment in stock.
30. If a free cash flow equivalent such as the acquisition of a
machine in exchange for debt is not shown in a free cash flow
statement:
A. the cash balance from core operations will be understated and
the analyst would have an erroneous forecast
B. the capital expenditure will be understated by the amount that
the machine was paid for with debt
C. the add back for depreciation expense will be unaffected
D. the income tax expense will be unaffected
31. Statement 1: Historical relationships are not generally used for
setting forecast assumptions.
Statement 2: A valuation model is a way to quantify the valuation
implications of the assumptions an analyst makes about what the
future holds for a firm.
A. Both Statements are true
B. Only first statement is true
C. Both Statements are false
D. Only second statement is true
37, A free cash flow forecast must be both reasonable and
internally consistent. One of the elements of reasonableness
is that the forecasted numbers are:
A. good estimates of the future values of the forecasted items
B. None of the above answers are correct.
C. logical in relation to each other
D. good estimates of the present values of line items on the
firm’s financial statements
38, The amount of working capital for the company is
A. P 361, 000
B. P 351, 000
C. P 211, 000
D. P 336, 000
39,
32. Statement 1: When preparing a free cash flow statement, any
cash flow resulting from an item such as a non-operating net
asset must be moved into the free cash flow section of the
statement.
A. P300,000
B. P400,000
C. P200,000
D. P150,000
Statement 2: The analyst must know the firm’s federal and state
income tax rates to determine the amounts of tax effects on
various items in the free cash flow statement.
A. Both Statements are true
B. Both Statements are false
C. Only second statement is true
D. Only first statement is true
40,
33. Luella Corporation prepares its statement of cash flows using
the indirect method. Which of the following would be added to
net income in the operating activities section of the statement?
A. No effect
B. Loss on Sale of Equipment
C. Depreciation Expense and Loss on Sale of Equipment
D. Depreciation Expense
34. Asset turnover measures
A. how efficiently a company uses its assets to generate sales.
B. the overall rate of return on assets.
C. how often a company replaces its assets.
D. the portion of the assets that have been financed by creditors.
35, What is the market price of a share of stock for a firm with
100,000 shares outstanding, a book value of equity of P3,000,000,
and a market/book ratio of 3.5?
A. P30.00
B. P85.70
C. P8.57
D. P105.00
36, Ling Co. has a price earnings ratio of 10, earnings per share
of P2.20, and a pay out ratio of 75%. The dividend yield is
A. 22.0%
B. 10.0%
C. 25.0%
D. 7.5%
A. Both Current ratio and acid-test ratio will increase
B. Current ratio will increase but acid-test ratio will decrease
C. Both Current ratio and acid-test ratio will decrease
D. Current ratio will decrease but acid-test ratio will increase
41, Selected information from the accounting records of
Hanabi Manufacturing Company follows:
Net sales
P3,600,000
Cost of goods sold
2,400,000
Inventories at January 1
672,000
Inventories at December 31
576,000
What is the number of days’ sales in average inventories for
the year?
A. 94.9
B. 102.2
C. 68.1
D. 87.6
42,
A. P 80,000
B. P 54,000
C. P120,000
D. P 95,000
43, The free cash flow model values the free cash flows stream of
a firm. The value of other non-equity components is estimated
by:
A. discounting a forecast of the firm’s expected free cash flow for
the non-equity components
B. adding the value of core operations and subtracting the value
of debt and other capital claims
C, adding the value of debt and other capital claims minus the
value of core operations
D. direct observation of market values or estimating fair values in
other ways
44. The times interest earned ratio of Miya Company is 4.5
times. The interest expense for the year was P20,000, and the
company’s tax rate is 40%. The company’s net income is:
A. P22,000
B. P66,000
C. P54,000
D. P42,000
45. On a free cash flow statement, sales, cost of sales, and selling,
general, and administrative expenses:
A. all relate to the firm’s core operations, so these items are
classified as part of free cash flow
B. may not be identical to the items as presented on a GAAP
financial statement
C. must be presented using the GAAP standard of cash-basis
accounting
D. are considered free cash flow equivalents
46. Popol Hardware Store had net credit sales of P6,500,000 and
cost of goods sold of P5,000,000 for the year. The Accounts
Receivable balances at the beginning and end of the year were
P600,000 and P700,000, respectively. The receivables turnover
was
A. 10.8 times.
B. 7.7 times.
C. 10.0 times.
D. 9.3 times.
47. A decrease in the plant and equipment account of $100,000
over the course of a year would be shown on the company's
statement of cash flows prepared under the indirect method as:
A. an addition to net income of $100,000 in order to arrive at net
cash provided by operating activities.
B. a deduction of $100,000 under investing activities.
C. a deduction from net income of $100,000 in order to arrive at
net cash provided by operating activities.
D. an addition of $100,000 under investing activities.
C. Total debt ratio must increase by 5%
D. Total debt ratio must increase by .5
50, The return on assets ratio is affected by the
A. asset turnover ratio.
B. debt to total assets ratio.
C. asset turnover and profit margin ratios.
D. profit margin ratio
Quiz 3
1. What is the inventory period for a firm with an annual cost
of goods sold of P8 million, P1.5 million in average inventory,
and a cash conversion cycle of 75 days?
A. 67.50 days
B. 18.75 days
C. 6.56 days
D. 52.60 days
2. As a company becomes more conservative with respect to
working capital policy, it would tend to have a(n)
A. Increase in the ratio of current liabilities to noncurrent
liabilities.
B. Increase in the ratio of current assets to current liabilities.
C. Increase in the operating cycle.
D. Decrease in the operating cycle.
3. Cecilion Corporation estimates its total annual cash
disbursements of P3,251,250 which are to be paid uniformly.
Cecilion has the opportunity to invest the money at 9% per
annum. The company spends, on the average, P25 for every
cash conversion to marketable securities and vice versa.
What is the opportunity cost of keeping cash in the bank
account?
A. P1,912.50
B. P3,825.00
C. P 188.55
D. P4,190.00
4. As a firm's cash conversion cycle increases, the firm:
A. reduces its accounts payable period
B. incurs more shortage costs
C. increases its investment in working capital
C. becomes less profitable
5. The following practices will impact the cash flow of the
company:
1. Sales personnel are unequivocally responsible for collecting
their credit sales
48,
2. Sales commission are based on collected invoices
3. Statement of accounts receivable are reconciled with
customers and regularly sent for confirmation
A. 1.80:1
B. 1.76:1
C. 2.02:1
D. 2.40:1
49, The Board of Directors is dissatisfied with last year's ROE of
15%. If the profit margin and asset turnover remain unchanged at
8% and 1.25 respectively, by how much must the total debt ratio
increase to achieve 20% ROE?
A. Total debt ratio must increase by 5
B. Total debt ratio must increase by 50%
4. Automatic transfer of funds is arranged with banks
regarding deposits of branches
Of the above, which will result to better cash flow?
A. all statements
B. statements 3 and 4 only
C. statements 1, 3, and 4 only
D. statement 4 only
6. What are the expected annual savings from a lock-box
system that collects 150 checks per day averaging P500 each,
and reduces mailing and processing times by 2.5 and 1.5 days
respectively, if the annual interest rate is 7%?
A. P 13,125
B. P 21,000
C. P 5,250
D. P300,000
7. The difference between the cash balance on the firm's books
and the balance shown on the bank statement is called:
A. none of the above
B. the compensating balance
C. a safety cushion
D. float
8. Which of the following would increase risk?
A. Decrease the amount of inventory by formulating an effective
inventory policy.
B. Increase the amount of equity financing.
C. Increase the amount of short-term borrowing.
D. Raise the level of working capital.
9. A working capital technique that increases the payable float
and therefore delays the outflow of cash is
A. Electronic data interchange (EDI)
B. Concentration banking.
C. A lockbox system.
D. A draft.
10. The Angela Company has an inventory conversion period of
75 days, a receivables conversion period of 38 days, and a
payable payment period of 30 days. What is the length of the
firm’s cash conversion cycle?
A. 113 days
B. 67 days
C. 83 days
D. 45 days
11. Short-term financing plans with high liquidity have:
A. moderate return and moderate risk
B. low profit and low risk
C. high return and high risk
D. None
12. Carrie Company turns out 200 calculators a day at a cost of
P250 per calculator for materials and variable conversion cost. It
takes the firm 18 days to convert raw materials into
calculator. Carrie’s usual credit terms extended to its customers
is 30 days, and the firm generally pays its suppliers in 20 days.
If the foregoing cycles are constant, what amount of working
capital must Carrie Company finance?
A. P1,800,000
B. P2,400,000
C. P1,400,000
D. P 900,000
13. Tigreal Supplies, Inc. has P5 million in inventory and P2 million
in accounts receivable. Its average daily sales are P100,000. The
company has P1.5 million in accounts payable. Its average daily
purchases are P50,000. What is the length of the company’s cash
conversion period?
A. 50 days
B. 20 days
C. 40 days
D. 30 days
14. Which of the following actions would not be consistent with
good management?
A. Use of checks and drafts in disbursing funds.
B. Increased synchronization of cash flows.
C. Maintain an average cash balance equal to that required as
a compensating balance or that which minimizes total cost.
D. Minimize the use of float.
15. Assume that each day a company writes and received
checks totaling P10,000. If it takes 5 days for the checks to
clear and be deducted from the company’s account, and only
4 days for the deposits to clear, what is the float?
A. P0
B. P50,000
C. P10,000
D. P(10,000)
16.Which of the following statements is most correct? If a
company lowers its DSO, but no changes occur in sales or
operating costs, then:
A. the company's total asset turnover ratio would probably
decline.
B. the company would probably end up with a higher ROE.
C. the company might well end up with a lower debt ratio.
D. the company might well end up with a higher debt ratio.
17.Temporary working capital supports
A. acquisition of capital equipment.
B. payment of long term debt.
C. the cash needs of the company.
D. seasonal peaks.
18.A compensating balance
A. Compensates a financial institution for services rendered
by providing it with deposits of funds.
B. Is the amount of prepaid interest on a loan.
C. Is used to compensate for possible losses on a marketable
securities portfolio.
D. Is a level of inventory held to compensate for variations in
usage rate and lead time.
19.Fredrynn Company has an inventory conversion period of
60 days, a receivables conversion period of 45 days, and a
payments cycle of 30 days. What is the length of the firm’s
cash conversion cycle?
A. 75 days
B. 90 days
C. 105 days
D. 54 days
20.The transaction motive for holding cash is for:
A. a safety cushion
B. none of the above
C. compensating balance requirements
D. daily operating requirements
21.Working capital management involves investment and
financing decisions related to:
A. current assets and current liabilities.
B. plant and equipment and current liabilities.
C. sales and credit.
D. current assets and capital structure.
22.The difference between the cash balance on the firm's
books and the balance shown on the bank statement is
called:
A. a safety cushion
B. none of the above
C. float
D. the compensating balance
23.The Angela Company has a daily average collection of checks
of P250,000. It takes the company 4 days to convert the checks
to cash. Assume a lockbox system could be employed which
would reduce the cash conversion period to 3 days. The lockbox
system would have a net cost of P25,000 per year, but any
additional funds made available could be invested to net 8
percent per year. Should Angela adopt the lockbox system?
A. Yes; the benefits of the lock-box system exceed the costs.
B. Yes; the system would free P250,000 in funds
C. No; the benefit is only P10,000.
D. No; the firm would lose P5,000 per year if the system were
used.
30.Tigreal Inc. has a total annual cash requirement of
P9,075,000 which are to be paid uniformly. Tigreal has the
opportunity to invest the money at 24% per annum. The
company spends, on the average, P40 for every cash
conversion to marketable securities.
What is the optimal cash conversion size?
A. P55,000
B. P45,000
C. P72,500
D. P60,000
24.Martis Company needs to pay a suppliers invoice of P50,000
and wants to take a cash discount of 2/10, net 40. The firm can
borrow the money for 30 days at 12% per annum plus a 10%
compensating balance. The amount Martis Company must
borrow to pay the supplier within the discount period and cover
the compensating balance is
A. P55,556
B. P54,444.
C. P55,000
D, P55,056.
1. Tigreal Inc. has a total annual cash requirement of
P9,075,000 which are to be paid uniformly. Tigreal has the
opportunity to invest the money at 24% per annum. The
company spends, on the average, P40 for every cash
conversion to marketable securities.
What is the optimal cash conversion size?
A. P60,000
B. P55,000
C. P45,000
D. P72,500
25.Zilong Company follows an aggressive financing policy in its
working capital management while Nana Corporation follows a
conservative financing policy. Which one of the following
statements is correct?
A. Zilong has a low current ratio while Nana has a high current
ratio.
B. Zilong has less liquidity risk while Nana has more liquidity risk.
C. Zilong finances short-term assets with long-term debt while
Nana finances short-term assets with short-term debt.
D, Zilong has low ratio of short-term debt to total debt while
Nana has a high ratio of short-term debt to total debt.
2. Net sales are P6,000,000, beginning total assets are
P2,800,000, and the asset turnover is 3.0. What is the ending
total asset balance?
A. P1,200,000.
B. P1,600,000.
C. P2,000,000.
D. P2,800,000.
26.The longer the firm's accounts payable period, the:
A. shorter the firm's inventory period is.
B. less the firm must invest in working capital.
C. longer the firm's cash conversion cycle is.
D, more the delay in the accounts receivable period.
27.The length of time between payment for inventory and the
collection of cash is referred to as:
A. receivables conversion period
B. payables deferral period
C. operating cycle
D. cash conversion cycle
28.Harith Inc., has a total annual cash requirement of P14,700,000
which are to be paid uniformly. Harith has the opportunity to
invest the money at 24% per annum. The company spends, on
the average, P40 for every cash conversion to marketable
securities.
What is the optimal cash conversion size?
A. P62,500
B. P70,000
C. P60,000
D. P80,000
29.The average length of time a peso is tied up in current asset is
called the:
A. inventory conversion period.
B. receivables conversion period.
C. cash conversion period.
D. net working capital.
Mastery Exam
3. Selected information from the accounting records of
Hanabi Manufacturing Company follows:
Net sales
P3,600,000
Cost of goods sold
2,400,000
Inventories at January 1
672,000
Inventories at December 31
576,000
What is the number of days’ sales in average inventories for
the year?
A. 102.2
B, 68.1
C. 87.6
D. 94.9.
4. Sales (in millions) for a three-year period are Year 1 P4,
Year 2 P4.6, and Year 3 P5.0. Using Year 1 as the base year the
percentage increase in sales in Years 2 and 3 are, respectively.
A. 115% and 125%
B. 115% and 109%
C. 115% and 130%
D. 87% and 80%
5. Statement 1: The benchmark used in cross-sectional
analysis is the prior performance of the firm currently
undergoing analysis. Statement 2: The benchmark used in
trend analysis is a given firm’s performance over a period of
time.
A. Both Statements are false
B. Only first statement is true
C. Both Statements are true
D. Only second statement is true
6. Statement 1: Net revenues (sales) projections are often one
of the most important variables affecting value. Statement 2:
Revenue in the first year of the forecast does not depend on
actual revenue or an assumed growth rate.
A. Only second statement is true
B. Both Statements are false
C. Both Statements are true
D, Only first statement is true
7. The percentage analysis of increases and decreases in
individual items in comparative financial statements is called:
A. profitability analysis
B. solvency analysis
C. vertical analysis
D. horizontal analysis
8. On a free cash flow statement, sales, cost of sales, and selling,
general, and administrative expenses:
A. must be presented using the GAAP standard of cash-basis
accounting
B. are considered free cash flow equivalents
C. may not be identical to the items as presented on a GAAP
financial statement
D. all relate to the firm’s core operations, so these items are
classified as part of free cash flow
9. What is the market price of a share of stock for a firm with
100,000 shares outstanding, a book value of equity of P3,000,000,
and a market/book ratio of 3.5?
A. P8.57
B. P105.00
C. P30.00
D. P85.70
10. Ling Co. has a price earnings ratio of 10, earnings per share
of P2.20, and a pay out ratio of 75%. The dividend yield is
A. 10.0%
B. 22.0%
C. 7.5%
D. 25.0%
11. Statement 1: If there is essentially no difference between
capitalized interest for financial reporting and for tax, there is no
tax effect necessary in making this adjustment in the free cash
flow statement. Statement 2: Unlike changes in interest payable,
the amortization of bond discount or premium is a difference
between interest expense recognized and cash paid.
A. Both Statements are false
B. Only first statement is true
C. Only second statement is true
D. Both Statements are true
12. Which of the following statements is most correct? If a
company lowers its DSO, but no changes occur in sales or
operating costs, then:
A. the company would probably end up with a higher ROE.
B. the company's total asset turnover ratio would probably
decline.
C. the company might well end up with a lower debt ratio.
D. the company might well end up with a higher debt ratio.
13. Statement 1: Historical relationships are not generally used for
setting forecast assumptions. Statement 2: A valuation model is a
way to quantify the valuation implications of the assumptions an
analyst makes about what the future holds for a firm.
A. Both Statements are false
B. Only second statement is true
C. Both Statements are true
D. Only first statement is true
14. During 2022, Yin Company purchased P960,000 of
inventory. The cost of goods sold for 2022 was P900,000, and the
ending inventory at December 31, 2022 was P180,000. What
was the inventory turnover for 2022?
A. 6.0
B. 5.0
C. 5.3
D. 6.4
15. The company’s current ratio as of the balance sheet date
is:
A. 2.02:1
B. 2.67:1
C. 2.44:1
D. 1.95:1
16. The times interest earned ratio of Miya Company is 4.5
times. The interest expense for the year was P20,000, and the
company’s tax rate is 40%. The company’s net income is:
A. P54,000
B. P42,000
C. P66,000
D. P22,000
17. The company’s acid-test ratio as of the balance sheet date
is:
A. 2.44:1
B. 1.76:1
C. 1.80:1
D. 2.02:1
18. Which of the following should be least considered when
deciding whether to investigate a variance?
A. Whether the variance is favorable or unfavorable
B. Significance of the variance
C. Trend of the variances over time
C. Cost of investigating the variance
19. The amount of working capital for the company is:
A. P 361, 000
B. P 211, 000
C. P 351, 000
D. P 336, 000
20. Which of the following is not a limitation of financial
statement analysis?
A. The cost basis.
B. The use of estimates.
C. The diversification of firms.
D. The availability of information.
21. Vertical analysis is a technique that expresses each item in a
financial statement
A. starting with the highest value down to the lowest value.
B. as a percent of the item in the previous year.
C. as a percent of a base amount.
D. in pesos and centavos.
22. Assume you are given the following relationships for the Layla
Company:
Sales/total assets
1.5X
Return on assets (ROA) 3%
Return on equity (ROE) 5%
The Layla Company’s debt ratio is
A. 65%
B. 35%
C. 60%
D. 40%
23. Carrie Company turns out 200 calculators a day at a cost of
P250 per calculator for materials and variable conversion cost. It
takes the firm 18 days to convert raw materials into
calculator. Carrie’s usual credit terms extended to its customers
is 30 days, and the firm generally pays its suppliers in 20 days.
If the foregoing cycles are constant, what amount of working
capital must Carrie Company finance?
A. P2,400,000
B. P 900,000
C. P1,400,000
D. P1,800,000
24. Which of these statements is false?
A. A company comparison should not be made with industry
averages if the company does not clearly fit into any one
industry.
B. Many companies will not clearly fit into any one industry.
C. A financial service uses its best judgment as to which industry
the firm best fits.
D. The analysis of an entity's financial statements can be more
meaningful if the results are compared with industry averages
and with results of competitors.
25. A free cash flow forecast must be both reasonable and
internally consistent. One of the elements of reasonableness is
that the forecasted numbers are:
A. good estimates of the present values of line items on the firm’s
financial statements
B. good estimates of the future values of the forecasted items
C. logical in relation to each other
D. None of the above answers are correct.
26. Statement 1: When preparing a free cash flow statement, any
cash flow resulting from an item such as a non-operating net
asset must be moved into the free cash flow section of the
statement. Statement 2: The analyst must know the firm’s federal
and state income tax rates to determine the amounts of tax
effects on various items in the free cash flow statement.
A. Only first statement is true
B. Both Statements are true
C. Only second statement is true
D. Both Statements are false
27. Management is a user of financial analysis. Which of the
following comments does not represent a fair statement as to the
management perspective?
A. Management is interested in the asset structure of the entity.
B. Management is interested in the view of investors.
C. Management is always interested in maximum profitability.
D. Management is interested in the financial structure of the
entity.
28. If a free cash flow equivalent such as the acquisition of a
machine in exchange for debt is not shown in a free cash flow
statement:
A. the add back for depreciation expense will be unaffected
B. the cash balance from core operations will be understated
and the analyst would have an erroneous forecast
D. C. the income tax expense will be unaffected
the capital expenditure will be understated by the amount
that the machine was paid for with debt
29. Statement 1: The financial manager prepares financial
statements that recognize revenue at the point of sale and
the expense when incurred. Statement 2: Financial managers
must look beyond financial statements to obtain insight into
developing or existing problems since the accrual accounting
data do not fully describe the circumstances of a firm.
A. Both Statements are false
B. Both Statements are true
C. Only first statement is true
D. Only second statement is true
30. Statement 1: Finance is concerned with the process
institutions, markets, and instruments involved in the transfer
of money among and between individuals, businesses and
government. Statement 2: Financial managers actively
manage the financial affairs of many types of
business-financial and non-financial, private and public,
for-profit and not-for profit.
A. Both Statements are true
B. Both Statements are false
C. Only second statement is true
D. Only first statement is true
31. Suppose you are comparing two firms in the steel industry.
One firm is large and the other is small. Which type of
numbers would be most meaningful for statement analysis?
A. Relative numbers would be most meaningful for both the
large and small firm, especially for interfirm comparisons.
B. Absolute numbers would be most meaningful for both the
large and small firm.
C, Absolute numbers would be most meaningful in the large
firm; relative numbers would be most meaningful in the small
firm.
D. Relative numbers would be most meaningful for the large
firm; absolute numbers would be most meaningful for the
small firm.
32. The percent of property, plant and equipment to total
assets is an example of:
A. horizontal analysis
B. vertical analysis
C. profitability analysis
D. solvency analysis
33. Statement 1: Financial analysis and planning is concerned
with analyzing the mix of assets and liabilities. Statement 2:
Financing decisions deal with the left-hand side of the firm's
balance sheet and involve the most appropriate mix of
current and fixed assets.
A. Only first statement is true
B. Only second statement is true
C. Both Statements are true
D. Both Statements are false
34. In performing a vertical analysis, the base for prepaid
expenses is
A. total current assets.
B. total liabilities.
C. prepaid expenses in a previous year.
D. total assets.
35. The Financial manager is interested in the cash inflows and
outflows of the firm, rather than the accounting data, in order to
ensure
A. the ability to acquire new assets
B. profitability
C. solvency
D. the ability to pay dividends
36. The Board of Directors is dissatisfied with last year's ROE of
15%. If the profit margin and asset turnover remain unchanged at
8% and 1.25 respectively, by how much must the total debt ratio
increase to achieve 20% ROE?
A. Total debt ratio must increase by 5
B. Total debt ratio must increase by 50%
C. Total debt ratio must increase by .5
D, Total debt ratio must increase by 5%
37, Belerick Company reported the following on its income
statement:
Income before
taxes
P400,000
Income tax expense
Net income
100,000
P300,000
An analysis of the income statement revealed that interest
expense was P100,000. Belerick Company’s times interest earned
(TIE) was
A. 4 times
B. 3 times
C. 3.5 times
D. 5 times
38. Which of the following does not represent a problem with
financial analysis?
A. There are as many ratios for financial analysis as there are pairs
of figures.
B. Financial analysis can be used to detect apparent liquidity
problems.
C. Some industry ratio formulas vary from source to source.
D. Financial analysis can be used to detect apparent liquidity
problems.
39. Fredrynn Company has an inventory conversion period of 60
days, a receivables conversion period of 45 days, and a payments
cycle of 30 days. What is the length of the firm’s cash conversion
cycle?
A. 75 days
B. 90 days
C. 105 days
D. 54 days
40. The financial manager recognizes revenues and expenses
utilizing
A. the revenue method
B. the actual inflows and outflows of cash
C. the accrual method
D. the standardized, generally accepted, accounting principles
41. The Angela Company has a daily average collection of
checks of P250,000. It takes the company 4 days to convert
the checks to cash. Assume a lockbox system could be
employed which would reduce the cash conversion period to
3 days. The lockbox system would have a net cost of P25,000
per year, but any additional funds made available could be
invested to net 8 percent per year. Should Angela adopt the
lockbox system?
A. Yes; the system would free P250,000 in funds
B. Yes; the benefits of the lock-box system exceed the costs.
C. No; the firm would lose P5,000 per year if the system were
used.
D. No; the benefit is only P10,000.
42. What is the inventory period for a firm with an annual cost
of goods sold of P8 million, P1.5 million in average inventory,
and a cash conversion cycle of 75 days?
A. 52.60 days
B. 18.75 days
C. 6.56 days
D. 67.50 days
43. Harith Inc., has a total annual cash requirement of
P14,700,000 which are to be paid uniformly. Harith has the
opportunity to invest the money at 24% per annum. The
company spends, on the average, P40 for every cash
conversion to marketable securities.
What is the optimal cash conversion size?
A. P80,000
B. P62,500
C. P60,000
D. P70,000
44. Finance can be defined as
A. the system of debit and credits
B. the art and science of managing money
C. the art of merchandising products and services
D. the science of the production, distribution, and
consumption of wealth
45. Statement 1: When analyzing revenue growth in trend
analysis, often the analyst will not only look at overall revenue
growth rates but also at revenue growth by business segment.
Statement 2: In cross-sectional analysis, we compare two or
more companies using financial ratios, and we may also
compare the companies’ ratios to an industry average.
A. Only second statement is true
B. Both Statements are false
C. Both Statements are true
D. Only first statement is true
46. The accountant may be responsible for any of the
following EXCEPT
A. ensuring accounts payable are paid on time
B. processing purchase orders and invoices
C. analyzing the mix of current to fixed assets
D. preparing the monthly income statement
47. Terizla Corporation had net income of P200,000 and paid
dividends to common stockholders of P40,000 in 2022. The
weighted-average number of shares outstanding in 2022 was
50,000 shares. Terizla Corporation’s common stock is selling
for P60 per share in the local stock exchange. Terizla
Corporation’s payout ratio for 2022 is
A. 25.0 percent
B. P4 per share
C. 12.5 percent
D. 20.0 percent
48. The free cash flow model values the free cash flows stream of
a firm. The value of other non- equity components is estimated
by:
A. adding the value of debt and other capital claims minus the
value of core operations
B. adding the value of core operations and subtracting the value
of debt and other capital claims
C. direct observation of market values or estimating fair values in
other ways
D. discounting a forecast of the firm’s expected free cash flow for
the non-equity components
49. In which of the following cases may a percentage change be
computed?
A. The trend of the amounts is decreasing but all amounts are
positive.
B. There is a negative amount in the base year and a positive
amount in the subsequent year.
C. There is a negative amount in the base year and a negative
amount in the subsequent year.
D. There is no amount in the base year.
50. Statement 1: Because a forecast is forward looking, it is often
a good predictor of the future. Statement 2: Net cash flow can be
defined as the change in cash that occurs over a period for a firm.
A. Only first statement is true
B. Only second statement is true
C. Both Statements are true
D. Both Statements are false