FINANCE (FI) 3300 FINAL EXAM 2
WITH OBJECTIVELY CORRECT
QUESTIONS AND ANSWERS
1. Which of the following should be subtracted to net income +
depreciation when constructing a statement of cash flows using the
indirect method? Choose ALL that apply (this is an all or nothing
question - you must correctly choose all correct answers to receive
any credit for this question). - ANSWERS-a. Increase in an asset
account that is related to an account on the income statement.. d.
Decrease in a liability account that is related to an account on the
income statement.
2. In conducting a common-size income statement analysis, every
balance sheet item is divided by __________ - ANSWERS-a. its
corresponding base year balance sheet item. b. its corresponding base
year income statement item. c. net sales or revenues. d. total assets. e.
total liabilities. f. None of the above (correct), For a common size
income statement, every income statement (not balance sheet) account
is divided by net sales or revenues.
3. In conducting a common-size balance sheet analysis, every account
on the balance sheet is divided by __________ - ANSWERS-total
assets.
, 4. The liability created by a business when it purchases coffee beans
and coffee cups on credit from suppliers is termed a(n) - ANSWERS-
account payable.
5. Which group of ratios measure a firm's ability to meet short-term
obligations? - ANSWERS-Liquidity ratios.
6. Which of the following would increase a company's current ratio
(note assume that the company's current ratio is presently equal to
2.0)? Choose ALL that apply (this is an all or nothing question - you
must correctly choose all correct answers to receive any credit for this
question). - ANSWERS-b. Issue long-term debt to buy inventory. c.
Sell common stock to pay off the company's notes payable balance. d.
Sell fixed assets to reduce accounts payable. e. Implement a "just-in-
time" inventory policy that reduces the company's average inventory
balance by 50 percent. The reduction in inventory will be matched
with an equal decrease in accounts payable. Reasoning, Assume that
initially current ratio = CA/CL = 200/100 = 2. For a, CL will increase
(say by 20) and there will be no change in CA, so new CA/CL =
200/120 = 1.67. For b, CA will increase (say by 20) and there will be
no change in CL, so new CA/CL = 220/100 = 2.2. For c, CL will
decrease (say by 20) and there will be no change in CA, so new
CA/CL = 200/80 = 2.5. For d, CL will decrease (say by 20) and there
will be no change in CA, so new CA/CL = 200/80 = 2.5. For e, both
CA and CL will decrease by the same amount (say by 20), so new
CA/CL = 180/80 = 2.25. For f, both CA and CL will increase by the
same amount (say by 20), so new CA/CL = 220/120 = 1.83.
7. Assume that for a given firm, the gross profit margin in 2021 was
equal to the gross profit margin in 2020, but the net profit margin in
WITH OBJECTIVELY CORRECT
QUESTIONS AND ANSWERS
1. Which of the following should be subtracted to net income +
depreciation when constructing a statement of cash flows using the
indirect method? Choose ALL that apply (this is an all or nothing
question - you must correctly choose all correct answers to receive
any credit for this question). - ANSWERS-a. Increase in an asset
account that is related to an account on the income statement.. d.
Decrease in a liability account that is related to an account on the
income statement.
2. In conducting a common-size income statement analysis, every
balance sheet item is divided by __________ - ANSWERS-a. its
corresponding base year balance sheet item. b. its corresponding base
year income statement item. c. net sales or revenues. d. total assets. e.
total liabilities. f. None of the above (correct), For a common size
income statement, every income statement (not balance sheet) account
is divided by net sales or revenues.
3. In conducting a common-size balance sheet analysis, every account
on the balance sheet is divided by __________ - ANSWERS-total
assets.
, 4. The liability created by a business when it purchases coffee beans
and coffee cups on credit from suppliers is termed a(n) - ANSWERS-
account payable.
5. Which group of ratios measure a firm's ability to meet short-term
obligations? - ANSWERS-Liquidity ratios.
6. Which of the following would increase a company's current ratio
(note assume that the company's current ratio is presently equal to
2.0)? Choose ALL that apply (this is an all or nothing question - you
must correctly choose all correct answers to receive any credit for this
question). - ANSWERS-b. Issue long-term debt to buy inventory. c.
Sell common stock to pay off the company's notes payable balance. d.
Sell fixed assets to reduce accounts payable. e. Implement a "just-in-
time" inventory policy that reduces the company's average inventory
balance by 50 percent. The reduction in inventory will be matched
with an equal decrease in accounts payable. Reasoning, Assume that
initially current ratio = CA/CL = 200/100 = 2. For a, CL will increase
(say by 20) and there will be no change in CA, so new CA/CL =
200/120 = 1.67. For b, CA will increase (say by 20) and there will be
no change in CL, so new CA/CL = 220/100 = 2.2. For c, CL will
decrease (say by 20) and there will be no change in CA, so new
CA/CL = 200/80 = 2.5. For d, CL will decrease (say by 20) and there
will be no change in CA, so new CA/CL = 200/80 = 2.5. For e, both
CA and CL will decrease by the same amount (say by 20), so new
CA/CL = 180/80 = 2.25. For f, both CA and CL will increase by the
same amount (say by 20), so new CA/CL = 220/120 = 1.83.
7. Assume that for a given firm, the gross profit margin in 2021 was
equal to the gross profit margin in 2020, but the net profit margin in
