The Islamic University of Gaza
Financial Management
Faculty of Commerce
Ramadan Al-Omari
Department of Accounting
Time : One hour
Mid Term Second Semester 2011/2012
Student Name…….…………………………
Student No…………………………
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Question No. 1:
(10 Marks)
The following is an extract from the financial statements of Moon Light Inc., a company that
deals in electrical appliances. (All figures are in US$’000)
Income Statement for the year ended 31 December 2011
Sales revenue
10,000
Cost of goods sold
7,500
Total operating expenses
1,200
Interest expense
200
Taxes
400
Balance Sheet as at 31 December 2011
Assets
Liabilities
Cash
500
Accounts payable
1,000
Accounts Receivable
600
10-year Bank Loan
1,500
Inventories
300
Common Stock
3,500
Plant
5,000
Retained Earnings
400
Total Assets
6,400
Total Liabilities
6,400
You are also given the following additional information:
 Purchases during the year are estimated at 70% of the total sales revenue.
 The credit period allowed to customers extends to 30 days.
 The Company’s common stock consists of 350,000 shares.
You are required to calculate and to explain the meaning of the following ratios respectively:
Current ratio, Quick ratio, Inventory Turnover, Average age of inventory, Average collection
period, Debt ratio, Gross profit margin, Times interest earned, Return on total assets, and
Earnings per share; and to explain the meaning of each of the above ratios.
Question No. 2
(10 marks)
Choose the correct answer
A firm’s Operating Cash Flow (OCF) is the cash flow a firm
a. Generates from the production and sale of its goods and services.
b. Makes available for the payment of taxes.
c. Borrows from local banks.
d. Raises through contributions from its customers.
Ratio analysis involves methods of
a. Preparing the financial statements.
b. Responding to the stock exchange requirements.
c. Preparing the stockholders report.
d. Calculating and interpreting ratios to assess a firm’s financial condition and performance.
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Which of the following is the false statement?
a. Financial planning involves guiding, coordinating, and controlling the firm’s actions to
achieve its objectives.
b. Cash planning involves the preparation of the firm’s cash budget.
c. Profit planning involves the preparation of pro forma financial statements.
d. Long term financial plans specify short-term financial actions and the anticipated impact
of those actions for one to two years.
Free Cash Flow (FCF) is the amount of cash flow available
a. To creditors and short term bank loans.
b. To debt and equity holders after meeting all operating needs and paying for investments.
c. From production and sale of goods and services.
d. For distribution to company employees.
Ethics is the
a. Accounting standards.
b. Good labour relations.
c. Standards of conduct or moral judgment.
d. All of the above.
Corporate Governance is the
a. System used to direct and control a corporation.
b. Accounting system used in a corporation.
c. Financial and accounting functions applied in a firm
d. Company’s chairman and managing director.
To adjust the income statement to show cash flows from operations
a. All non-cash charges should be added back to net profit after taxes.
b. All non-cash charges should be deducted from net profit after taxes.
c. A cash budget should be prepared.
d. Long term strategic plans should be prepared.
An inventory turnover ratio of 4.0 may not be suitable for a firm that deals in
a. Grocery supplies.
c. Construction supplies.
b. Electrical supplies.
d. Car manufacturing.
Ratio analysis used to compare a firm’s financial performance to the industry’s average
performance is called:
a. Cross sectional analysis.
c. Industry analysis.
b. Trend analysis.
d. Single ratio analysis.
Which of the following is the incorrect statement?
a. Ratio analysis is of interest to shareholders, creditors, and the firm’s own management.
b. Trend or time-series analysis is used to evaluate a firm’s performance over time.
c. Cross-sectional analysis is used to compare a firm’s current performance with its
previous performance.
d. Benchmarking is a type of cross sectional analysis of a firm’s main competitors.
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Question No. 3
(10 marks)
Real Madrid, a Sports Company, had sales of Euro 50,000 in March and Euro 60,000 in April.
Forecast sales for May, June, and July are Euro 70,000, 80,000, and 100,000 respectively. The
firm has a cash balance of Euro 5,000 on May 1st and wishes to maintain a minimum cash
balance of Euro 5,000. Given the following data prepare a cash budget for the months of May,
June and July.
1. The firm makes 20% of sales for cash, 60% are collected in the next month, and the
remaining 20% are collected in the second month following sale.
2. The firm receives other income of Euro 2,000 per month.
3. The firm’s actual or expected purchases for the months April through July are Euro
40,000, 50,000, 70,000, and 80,000 respectively. Purchases are paid for in full in the
month following the purchase,
4. Rent payable is Euro 3,000 per month.
5. Wages and salaries are 10% of the previous month’s sales.
6. Cash dividends of Euro 3,000 will be paid in June.
7. Payment of principal and interest of Euro 4,000 is due in June.
8. A cash purchase of equipment costing Euro 6,000 is scheduled in July.
9. Taxes of Euro 6,000 are due in June.
Good luck
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