implying that more of the firm's suppliers are being paid on time. a. True b. False ANSWER: False DIFFICULTY: Easy TOPICS: Days sales outstanding (DSO) 25. supplied by common stockholders mainly includes capital stock, paid-in capital, and retained earnings, while total equity is comprised of common equity plus preferred stock. a. True b. False ANSWER: True DIFFICULTY: Medium TOPICS: Total equity 26. Retained earnings is the cash that has been generated by the firm through its operations which has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm. a. True b. ANSWER: False DIFFICULTY: Medium TOPICS: Retained earnings 27. The financial position of companies whose business is seasonal can be dramatically different depending upon the time of year chosen to construct financial statements. This time sensitivity is especially true with respect to the firm's balance sheet. a. True b. False ANSWER: True DIFFICULTY: Medium TOPICS: Balance changes 28. In order to accurately estimate cash flow from operations, depreciation must be added back to net income. The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge. a. True b. ANSWER: True DIFFICULTY: Medium TOPICS: Cash 29. In accounting, emphasis is placed on determining net income. In finance, the primary emphasis also is on net income because that is what investors use to value the firm. However, a secondary consideration is cash flow because that's what is used to run the business.
41. All of the following represent cash outflows to the firm except a. Taxes. b. Interest payments. c. Dividends. d. Purchase of plant and equipment. e. Depreciation. ANSWER: e DIFFICULTY: Easy TOPICS: Cash flows 42. Other things held constant, if a firm holds cash balances in excess of their optimal level in a non-interest bearing account, this will tend to lower the firm's a. Profit margin. b. asset turnover. c. Return on equity. d. All of the above. e. Answers b and c above. ANSWER: e DIFFICULTY: Easy TOPICS: Excessive cash balances 43. Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0? a. Fixed assets are sold for cash. b. Long-term debt is issued to pay off current liabilities. c. Accounts receivable are collected. d. Cash is used to pay off accounts payable. e. A bank loan is obtained, and the proceeds are credited to the firm's checking account. ANSWER: c DIFFICULTY: Easy TOPICS: Current ratio
44. The annual report contains all of the following financial statements except a. income statement. b. statement of changes in long-term financing. c. statement of cash flows. d. balance sheet. e. statement of retained earnings. ANSWER: b DIFFICULTY: Easy TOPICS: Annual report 45. Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time? a. balance sheet b. income statement c. statement of retained earnings d. statement of cash flows e. proxy statement ANSWER: d DIFFICULTY: Easy TOPICS: Financial statements 46. Which of the following statements shows the portion of the firm's earnings that has been saved rather than paid out as dividends? a. balance b. income statement c. statement of retained earnings d. statement of cash flows e. proxy statement ANSWER: c DIFFICULTY: Easy TOPICS: Financial statements
78. Assume Corporation is 100 percent equity financed. Calculate the return on equity, given the following information: (1) Earnings before taxes = $1,500; (2) Sales = $5,000; (3) Dividend payout ratio = 60%; (4) Total assets turnover = 2.0; (5) Applicable tax rate = 30%. a. 25% b. 30% c. 35% d. 42% e. 50% ANSWER: d RATIONALE: NI = $1,500(1 − 0.3) = $1,050. Total assets turnover = Sales/TA = 2.0. TA = Sales/2.0 = $5,000/2.0 = $2,500 = Equity. ROE = NI/Equity = $1,050/$2,500 = 42%. DIFFICULTY: Medium TOPICS: ROE
79. The Amer Company has the following characteristics: Sales: $1,000 Total Assets: $1,000 Debt/Total Assets: 35% EBIT: $ 200 Tax rate: 40% Interest rate on total debt: 4.57% What is Amer's ROE? a. 11.04% b. 12.31% c. 16.99% d. 28.31% e. 30.77% ANSWER: c RATIONALE: Calculate debt and equity: Debt = D/A × TA = 0.35($1,000) = $350. Equity = TA − Debt = $1,000− $350 = $650. Calculate net income and ROE: Net income = (EBIT − I)(1 − T) = [$200 − 0.0457($350)](0.6) = $110.4. ROE = $110.4/$650 = 16.99%. DIFFICULTY: Medium TOPICS: ROE