Student name:__________

TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false.
1) As finance emerged as an analytical, decision-oriented discipline, the initial emphasis was
placed on capital acquisitions.
⊚ true
⊚ false

2) Inflation is assumed to be a temporary problem that does not affect financial decisions.
⊚ true
⊚ false

3) Timing is not a particularly important consideration in financial decisions.

⊚ true
⊚ false

4) Institutional investors have had increasing influence over corporations with their ability to
vote large blocks of stock and replace poor performing boards of directors.
⊚ true
⊚ false

5) Insider trading involves the use of information not available to the general public to make
profits from trading in a company's shares.
⊚ true
⊚ false

6) Agency theory assumes that corporate managers act to increase the wealth of corporate
shareholders.
⊚ true
⊚ false

7) Historically the field of finance as a discipline described capital preservation, liquidity,

reorganization, and bankruptcy through the 1930s depression.
⊚ true
⊚ false

8) The higher the profit of a firm, the higher the value the firm is assured of receiving in the
market.
⊚ true
⊚ false
9) Social responsibility and profit maximization are synonymous.
⊚ true
⊚ false

10) There is unlimited liability in a general partnership.

⊚ true
⊚ false

11) In the mid-1950s, finance began to change to a more analytical, decision-oriented approach.
⊚ true
⊚ false

12) There are some serious problems with the financial goal of maximizing the earnings of the
firm.
⊚ true
⊚ false

13) Maximizing the earnings of the firm is the goal of financial management.
⊚ true
⊚ false

14) Because socially desirable goals can impede profitability in many instances, managers should
not try to operate under the assumption of wealth maximization.
⊚ true
⊚ false

15) The sole proprietorship represents single-person ownership and offers the advantages of
simplicity of decision making and low organizational and operating costs.
⊚ true
⊚ false

16) Profits of sole proprietorships are taxed at corporate tax rates.

⊚ true
⊚ false

17) The primary market includes the sale of securities by way of initial public offerings.
⊚ true
⊚ false
18) The most common partnership arrangement carries limited liability to the partners.
⊚ true
⊚ false

19) A limited partnership limits the profits partners may receive.

⊚ true
⊚ false

20) In terms of size of revenues and profits, the corporation is by far the most important form of
business organization in Canada.
⊚ true
⊚ false
21) The income statement is the primary financial statement for measuring the profitability of a
firm over a period of time.
⊚ true
⊚ false

22) The income statement measures the increase in the assets of a firm over a period of time.
⊚ true
⊚ false

23) Accounting income is based on verifiably completed transactions.

⊚ true
⊚ false

24) For private companies, asset accounts are listed in order of their liquidity.
⊚ true
⊚ false

25) Book value per share and market value per share are usually the same dollar amount.
⊚ true
⊚ false

26) Book value per share is of greater concern to the financial manager than market value per
share.
⊚ true
⊚ false
27) Book value is equal to net worth.
⊚ true
⊚ false

28) Equity is a measure of the monetary contributions that have been made directly or indirectly
on behalf of the shareholders of the company.
⊚ true
⊚ false

29) Shareholders' equity is equal to liabilities plus assets.

⊚ true
⊚ false

30) Shareholders' equity is equal to assets minus liabilities.

⊚ true
⊚ false

31) Shareholders' equity minus preferred stock is the same thing as what is sometimes called net
worth or book value.
⊚ true
⊚ false

32) The statement of cash flows helps measure how the changes in a balance sheet are financed
between two time periods.
⊚ true
⊚ false

33) An increase in an asset represents a source of funds.

⊚ true
⊚ false

34) Accumulated amortization shows up in the income statement.

⊚ true
⊚ false

35) The change in accumulated amortization is usually equal to the amortization expense charged
in the income statement.
⊚ true
⊚ false
36) Net working capital is the difference between current assets and current liabilities.
⊚ true
⊚ false

37) Amortization is an accounting entry and does not involve a cash expense.
⊚ true
⊚ false

38) An advantage of the net working capital approach over the cash approach is that it looks at
the changes of every account of the statement of cash flows.
⊚ true
⊚ false

39) Cash flow is equal to earnings before taxes minus amortization.

⊚ true
⊚ false

40) The corporate tax rate is 25% on the first $200,000 of income and 50% on any amount over
$200,000.
⊚ true
⊚ false

41) Trend analysis is used to project the future performance of an industry.

⊚ true
⊚ false

42) Heavy use of long-term debt can be of benefit to a firm.

⊚ true
⊚ false

43) The stock market tends to move up when inflation goes up.
⊚ true
⊚ false

44) Under International Financial Reporting Standards, two companies with identical operating
results may not report identical net incomes.
⊚ true
⊚ false
45) A current ratio of 2 to 1 is always acceptable, for a company in any industry.
⊚ true
⊚ false

46) In analyzing ratios, the age of the firm's assets do not need to be considered.
⊚ true
⊚ false

47) If prices continue to rise faster than costs in an inflationary environment, reported profits will
generally continue to rise.
⊚ true
⊚ false

48) To compute the quick ratio, accounts receivable is not included in current assets.
⊚ true
⊚ false

49) Industries with cyclical products such as lumber and copper are more sensitive to inflation-
induced profits because many sales prices and/or expenses are set by the market.
⊚ true
⊚ false

50) Economists believe that prices of goods may rise before 2020 since the prices of most goods
fell during the 2008-2009 recession.
⊚ true
⊚ false

51) Asset utilization ratios describe how capital is being utilized to buy assets.
⊚ true
⊚ false

52) Return on equity will be higher than return on assets if there is debt in the capital structure.
⊚ true
⊚ false

53) The DuPont system of profitability analysis emphasizes that profit generated by assets can be
derived by various combinations of profit margins and asset turnover.
⊚ true
⊚ false
54) Although Apple Computers has a profit margin significantly greater than that of a long-time
industry giant such as IBM, IBM continues to have a higher return on equity than Apple. The
primary reason for this unusual condition is that IBM has a much greater equity than Apple.
⊚ true
⊚ false

55) Profitability ratios are distorted by inflation because profits are stated in current dollars and
assets and equity are stated in historical dollars.
⊚ true
⊚ false

56) Higher debt utilization ratios will always increase a firm's return on equity given a positive
return on assets.
⊚ true
⊚ false

57) The term "inventory profits" refers to profits made in the process of selling finished goods at
prices higher than their cost of goods sol
⊚ true
⊚ false

58) Profitability ratios allow one to measure the ability of the firm to earn an adequate return on
sales, total assets, and invested capital.
⊚ true
⊚ false

59) Asset utilization ratios measure the returns on various assets such as return on total assets.
⊚ true
⊚ false

60) A banker or trade creditor is most concerned about a firm's profitability ratios.
⊚ true
⊚ false

61) An increase in sales and/or profits means there is also an increase in cash on the balance
sheet.
⊚ true
⊚ false
62) An increase in sales and profits generates the necessary cash required for economic growth.
⊚ true
⊚ false

63) The longer the financial forecast (i.e. 5 to 10 years), the better for the company.
⊚ true
⊚ false

64) Growth in sales volume precludes a shortage of funds.

⊚ true
⊚ false

65) The primary purpose of the cash budget is to allow the firm to anticipate the need for outside
funding.
⊚ true
⊚ false

66) The primary purpose of the cash budget is to plan accounts payable payments.
⊚ true
⊚ false

67) Pro forma income statements follow a sales forecast and production plan.
⊚ true
⊚ false

68) Pro forma statements are generally prepared six months to a year into the future.
⊚ true
⊚ false

69) Internal analysis for sales projections involves examining economic and industry conditions.
⊚ true
⊚ false

70) Companies generally prefer to maintain some minimum cash balance.

⊚ true
⊚ false
71) The main consideration in constructing the pro forma income statement is the costs
specifically associated with the units sold during the period.
⊚ true
⊚ false

72) The value of ending inventory should be equal to beginning inventory plus total production
costs minus cost of goods sold.
⊚ true
⊚ false

73) If inventory turnover is equal to 3, that means that the company keeps a three-month supply
of inventory on hand.
⊚ true
⊚ false

74) The most significant purpose of the cash budget is to plan accounts payable payments.
⊚ true
⊚ false

75) The percent-of-sales method for financial forecasting assumes that balance sheet accounts
maintain a constant relationship to sales.
⊚ true
⊚ false

76) The percent-of-sales forecast is likely to be most accurate when used with cyclical
companies.
⊚ true
⊚ false

77) As the dividend payout ratio declines more external funds are required.
⊚ true
⊚ false

78) The percent-of-sales method would be more accurate under a steady sales assumption than
cyclical sales.
⊚ true
⊚ false
79) A cash budget is unnecessary under level production since we know how much will be
produced every month.
⊚ true
⊚ false

80) It is helpful to break down the income statement into smaller monthly periods to enable
evaluation of seasonal patterns of cash inflows and outflows.
⊚ true
⊚ false
81) With a higher CCA rate, the present value of tax savings increases.
⊚ true
⊚ false

82) Under capital rationing, a firm will maximize profitability.

⊚ true
⊚ false

83) The first administrative consideration in any capital budgeting process is collection of data.
⊚ true
⊚ false

84) It is the difference in the reinvestment assumptions that can be significant in determining
when to use the net present value or internal rate of return methods.
⊚ true
⊚ false

85) It is not unusual for a corporate president, who deals with security analysts, to be as sensitive
to after tax income as cash flow.
⊚ true
⊚ false

86) For high-internal rate of return investments, it is perfectly acceptable to assume that
reinvestment will occur at an equally high, if not higher, rate.
⊚ true
⊚ false

87) The payback period is not really a theoretically correct approach.

⊚ true
⊚ false
88) With non-mutually exclusive events and no capital rationing, we will usually arrive at the
same conclusions using either the net present value or internal rate of return methods.
⊚ true
⊚ false

89) Net present value (NPV) is considered a theoretically correct method and is also often the
preferred investment selection method in practice.
⊚ true
⊚ false

90) The internal rate of return (IRR) measures the profitability of investments as a return
percentage.
⊚ true
⊚ false

91) It is the difference in the discount rate assumptions that can be significant in determining
when to use the present value or internal rate of return methods.
⊚ true
⊚ false

92) Under the capital cost allowance system of amortization, cash flow tends to decline with the
passage of time.
⊚ true
⊚ false

93) In a replacement decision, a book loss on an old asset can be a valuable feature.
⊚ true
⊚ false

94) Capital budgeting decisions involve a minimum time horizon of five years.
⊚ true
⊚ false

95) A good capital budgeting program requires that several steps be taken in the decision-making
process. The first step is the explanation of data.
⊚ true
⊚ false
96) Possibly the most overlooked part of the capital budgeting process is the search for new
opportunities through innovation and creative thinking.
⊚ true
⊚ false

97) In most capital budgeting decisions, the emphasis is on reported earnings rather than cash
flows.
⊚ true
⊚ false

98) Even though one project may have superior cash flow, management may choose a project
that inflates earnings instead of cash flow.
⊚ true
⊚ false

99) The selection of a mutually exclusive project means that all other projects with a positive net
present value may also be selected.
⊚ true
⊚ false

100) A rapid payback may be important to firms having rapid technological development.
⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
101) What is the primary goal of financial management?
A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm

102) Proper risk-return management means that:

A) the firm should take as few risks as possible.
B) consistent with the objectives of the firm, an appropriate trade-off between risk and
return should be determined.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.
103) Which of the following is not a major area of concern and emphasis in modern financial
management and in this text?
A) Inflation and its effect on profits
B) Stable short-term interest rates
C) Changing international environment
D) Increased reliance on debt

104) Which of the following is not a major area of concern and emphasis in modern financial
management and in this text?
A) Marginal analysis
B) Risk-return trade-off
C) Commodity trading
D) Changing financial institutions

105) Some of the effects of high inflation are:

A) the gold standard was eliminated.
B) purchasing power increased.
C) interest rates fall.
D) Phantom profits and undervalued assets.

106) In the past, the study of finance has included:

A) operational efficiency.
B) employee relationships.
C) legal cases.
D) mergers and acquisitions.

107) A financial manager's goal of maximizing current or short-term earnings may not be
appropriate because:
A) it considers the timing of the benefits.
B) increased earnings may be accompanied by acceptably higher levels of risk.
C) share ownership is widely dispersed.
D) earnings are subjective; they can be defined in various ways such as accounting or
economic earnings.

108) One of the major disadvantages of a sole proprietorship is:

A) that there is unlimited liability to the owner.
B) the simplicity of decision making.
C) low organizational costs.
D) low operating costs.
109) The partnership form of organization:
A) avoids the double taxation of earnings and dividends found in the corporate form of
organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.

110) A corporation is not:

A) owned by shareholders who enjoy the privilege of limited liability.
B) easily divisible between owners.
C) a separate legal entity with perpetual life.
D) a separate legal entity with limited life.

111) Inflation:
A) increases corporations' reliance on debt for capital expansion needs.
B) creates larger asset values on the firm's historical balance sheet.
C) makes it cheaper (in terms of interest costs) for firms to borrow money.
D) creates stability for investors.

112) Which of the following securities is not included as part of the capital market?
A) Common stock
B) Commercial paper
C) Government bonds
D) Preferred stock

113) Maximization of shareholder wealth is a concept in which:

A) increased earnings are of primary importance.
B) profits are maximized on a quarterly basis.
C) virtually all earnings are paid as dividends to common shareholders.
D) optimally increasing the long-term value of the firm is emphasized.

114) The largest Canadian corporations are mainly:

A) widely held.
B) family controlled.
C) U.S. controlled.
D) Japanese controlled.
115) Which of the following is not a true statement about the goal of maximizing shareholder
wealth?
A) It takes into account the timing of cash-flows.
B) It is a short-run point of view which takes risk into account.
C) It considers risk as a factor.
D) It is a long-run point of view which takes risk into account.

116) Increased international competition can be seen as a motivator to emphasize:

A) asset diversification strategies.
B) the risk side of the risk-return relationship.
C) the return side of the risk-return relationship.
D) an increased investment in risky projects.

117) Corporations can reduce portfolio risk by:

A) narrowing their focus on one successful product.
B) merging with companies in unrelated industries.
C) repurchasing their own stock.
D) selling their own stock.

118) The shift to the return side of the risk-return relationship has occurred because there has
been:
A) a narrower focus on production.
B) an increase in the prevalence of stock splits.
C) a decrease in the use of advanced technology in the production process.
D) an increase in global competition.

119) A corporate buy-back, or the repurchasing of shares, is:

A) an example of balance sheet restructuring.
B) an excellent source of profits when the firm's stock is over-priced.
C) a method of reducing the debt-to-equity ratio.
D) shown as revenue on the income statement.

120) Which of the following is (are) a result of high inflation?

A) Loss from disposal of assets
B) Over-valued liabilities
C) Lower stock price
D) Under-valued assets
121) Which of the following is not one of the four basic financial statements required by
Accounting Standards for Private Enterprises (ASPE)?
A) Income Statement
B) Statement of Financial Position
C) Statement of Cash Flows
D) Balance Sheet

122) Which of the following would not be classified as a current asset?

A) Marketable securities
B) Long term Investments
C) Prepaid expenses
D) Inventory

123) An item that may be converted to cash within one year or one operating cycle of the firm
is classified as a:
A) current liability.
B) long-term asset.
C) current asset.
D) long-term liability.

124) Which of the following is not a primary source of capital to the firm?
A) Assets
B) Common stock
C) Preferred stock
D) Bonds

125) The residual income of the firm belongs to:

A) creditors.
B) preferred shareholders.
C) common shareholders.
D) bondholders.

126) Book value is the same as

A) stockholders' equity.
B) fixed assets minus long-term debt.
C) net worth.
D) current assets minus current debt.
127) Which account represents the cumulative earnings of the firm since its formation, minus
dividends paid?
A) Share price
B) Common stock
C) Retained earnings
D) Accumulated amortization

128) A firm has $3,500,000 in its common stock account and $2,500,000 in its retained
earnings account. The firm issued 100,000 shares of common stock. What was the original
issue price if only one stock issue has ever been sold?
A) $35 per share
B) $25 per share
C) $60 per share
D) Not enough information to tell

129) A firm has $2,000,000 in its common stock account and $20,000,000 in its retained
earnings account. The firm issued 500,000 shares of common stock. What are accumulated
earnings per share?
A) $4 per share
B) $44 per share
C) $40 per share
D) $5 per share

130) The major limitation of financial statements is:

A) in their complexity.
B) in their lack of comparability.
C) in their use of historical cost accounting.
D) in their lack of detail.

131) Inflation has its major impact on balance sheets in which of the following areas?
A) Inventory and accounts payable
B) Plant and equipment and long-term debt
C) Plant and equipment and inventory
D) Interest expense and earnings per share
132) "Inventory profits" are most likely to occur in an inflationary economy under which of
the following inventory cost assumptions?
A) Weighted average
B) Specific item
C) FIFO
D) Lower of cost or market

133) The orientation of book value per share is __________, while the orientation of market
value per share is ___________.
A) short term; long term
B) future; historical
C) historical; future
D) long term; short term

134) Which of the following factors do not influence the firm's P/E ratio?
A) Past earnings
B) Shares outstanding
C) Volatility in business performance
D) All of the options influence the firm's P/E ratio.

135) Earnings per share is:

A) operating profit divided by number of shares outstanding.
B) net income divided by number of shares outstanding.
C) net income divided by shareholders' equity.
D) net income minus preferred dividends divided by number of common shares
outstanding.

136) Which of the following is an outflow of cash?

A) Profitable operations
B) The sale of equipment
C) The sale of the company's common stock
D) The payment of cash dividends

137) Which of the following is an inflow of cash?

A) Funds spent in normal business operations
B) The purchase of a new factory
C) The sale of the firm's bonds
D) The retirement of the firm's bonds
138) Amortization is a source of cash inflow because:
A) it is a tax-deductible noncash expense.
B) it supplies cash for future asset purchases.
C) it is a tax-deductible cash expense.
D) it is a taxable expense.

139) Assuming a tax rate of 35%, amortization expenses of $400,000 will:

A) reduce income by $140,000.
B) reduce taxes by $140,000.
C) reduce taxes by $400,000.
D) have no effect on income or taxes, since amortization is not a cash expense.

140) Assuming a tax rate of 30%, the after-tax cost of interest expense of $200,000 is:
A) $60,000.
B) $140,000.
C) $200,000.
D) $120,000.

141) Which of the following is a potential problem of utilizing ratio analysis?

A) Trends and industry averages are historical in nature.
B) Financial data may be distorted due to price-level changes.
C) Firms within an industry may not use similar accounting methods.
D) All of the options

142) In addition to comparison with industry ratios, it is also helpful to analyze ratios using
A) future projections
B) historical data
C) only industry ratios provide valid comparisons.
D) trend analysis and historical comparisons.

143) Using ASPE, the ______________ method of inventory costing is most likely to lead to
inflation-induced profits.
A) FIFO
B) Specific item
C) Weighted average
D) Lower of cost or market
144) In addition to comparison with industry ratios, it is also helpful to analyze ratios using:
A) ethical behaviour.
B) comparison of industry benchmarks.
C) focus groups.
D) trend analysis.

145) All of the following are common examples of possible distortion in reported income
except
A) inflation.
B) treatment of nonrecurring items.
C) reporting of cash.
D) reporting of revenue.

146) If fixed lease payments are reduced and everything else remains constant,
A) times interest earned goes up.
B) fixed charge coverage goes up.
C) fixed charge coverage stays the same.
D) debt to total assets goes down.

147) A firm has total assets of $3,000,000 and stockholders equity is $1,000,000. What is the
debt-to-total asset ratio?
A) 45%
B) 75%
C) 55%
D) 67%

148) Ratio analysis can be useful for

A) historical trend analysis within a firm.
B) comparison of ratios within a single industry.
C) measuring the effects of debt or equity financing.
D) All of the options are true.

149) During inflation, replacement cost accounting will

A) increase the value of assets.
B) lower the debt-to-asset ratio.
C) reduce incomes.
D) All of the options
150) If a firm has both interest expense and lease payments:
A) times interest earned will be smaller than fixed charge coverage.
B) times interest earned will be greater than fixed charge coverage.
C) times interest earned will be the same as fixed charge coverage.
D) fixed charge coverage cannot be compute

151) ABC Co. has an average collection period of 60 days. Total credit sales for the year were
$3,285,000. What is the balance in accounts receivable at year-end? (Use 365 days in a year.)
A) $54,750
B) $109,500
C) $540,000
D) $547,500

152) A firm has operating profit of $120,000 after deducting lease payments of $20,000.
Interest expense is $40,000. What is the firm's fixed charge coverage?
A) 6.00x
B) 4.00x
C) 3.50x
D) 2.33x

153) Trend and industry analysis provide all of the following information except
A) benchmarking.
B) the progress of the company.
C) a basis for decision making about capital structure.
D) future information about the company.

154) A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are
$900,000. The firm's capital asset turnover is:
A) 3.0x.
B) 12.0x.
C) 2.4x.
D) 5.0x.

155) A firm only has current assets and fixed assets. Its current assets are $100,000 and total
assets are $300,000. The firm's sales are $900,000. The firm's fixed asset turnover is
A) 4.5x.
B) 12.0x.
C) 2.4x.
D) 5.0x.
156) Which of the following is a potential problem of utilizing ratio analysis?
A) Trends and industry averages are futuristic in nature
B) Financial data is identical due to price-level changes
C) Firms within an industry use similar accounting principles and application
D) Firms within an industry may not use similar accounting methods

157) Replacement cost accounting (current cost method) will usually:

A) increase assets, decrease net income before taxes, and lower the return on equity.
B) increase assets, increase net income before taxes, and increase the return on equity.
C) decrease assets, increase net income before taxes, and increase the return on equity.
D) increase assets, increase net income before taxes, and lower the return on equity.

158) Income can be distorted by factors other than inflation. The most important causes of
distortion for inter-industry comparisons are:
A) accounting trends.
B) application of IFRS.
C) timing of revenue receipts and nonrecurring gains or losses.
D) cash reinvestment.

159) Disinflation may cause:

A) an increase in the value of gold, silver, and gems.
B) a reduced required return demanded by investors on financial assets.
C) increased return demanded by investors on non-financial assets.
D) additional profits through rising inventory costs.

160) A quick ratio much smaller than the current ratio reflects:
A) a small portion of current assets is in inventory.
B) a large portion of current assets is in inventory.
C) that the firm will have a high inventory turnover.
D) that the firm will have a high return on assets.

161) In using a systems approach to financial planning, it is not necessary to develop a:

A) pro forma income statement.
B) cash budget.
C) pro forma balance sheet.
D) contingent liability plan.
162) When developing a pro forma income statement, which of the following steps are not
used?
A) Establish a marketing projection.
B) Determine a production schedule and the associated use of new material, direct labor
and overhead to arrive at gross profit.
C) Compute other expenses
D) Determine profit by completing the actual pro forma statement.

163) Ideally, sales projections should be derived from:

A) an external viewpoint.
B) an internal viewpoint.
C) both internal and external viewpoints.
D) the marketing department.

164) Required production during a planning period will depend on the:

A) cost of beginning inventory of products.
B) credit sales during the period.
C) desired level of beginning inventory.
D) desired level of ending inventory.

165) A firm has forecasted sales of $4,000 in January, $6,000 in February, and $5,500 in
March. All sales are on credit. 40% is collected the month of sale and the remainder the
following month. How much is collected from accounts receivable in February?
A) $5,400
B) $4,800
C) $6,000
D) $3,000

166) A firm has forecasted sales of $3,000 in April, $4,500 in May, and $6,500 in June. All
sales are on credit. 30% is collected the month of sale and the remainder the following
month. What will be the balance in accounts receivable at the end of June?
A) $1,950
B) $6,500
C) $4,550
D) $5,100
167) XYZ Co. has forecasted June sales of 600 units and July sales of 1000 units. The
company maintains ending inventory equal to 125% of next month's sales. June beginning
inventory reflects this policy. What is June's required production?
A) 1,100 units
B) -0- units
C) 500 units
D) 400 units

168) In the construction of the cash payments schedule, the major cash payment is generally:
A) the general and administrative expense.
B) costs associated with inventory manufactured.
C) interest and dividends.
D) payments for new plant and equipment.

169) A firm has beginning inventory of 300 units at a cost of $11 each. Production during the
period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold
(assume FIFO)?
A) $9,000
B) $8,000
C) $7,700
D) $8,100

170) A firm has beginning inventory of 300 units at a cost of $11 each. Production during the
period was 650 units at $12 each. If sales were 700 units, what is the value of the ending
inventory using FIFO?
A) $2,750
B) $3,000
C) $3,300
D) $2,550

171) Pro forma financial statements are

A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) All of the options are true.
172) The percent-of-sales method of financial forecasting:
A) is more detailed than a cash budget approach.
B) requires more time than a cash budget approach.
C) assumes that balance sheet accounts maintain a constant relationship to sales.
D) provides a month-to-month breakdown of data.

173) In the percent-of-sales method:

A) as the dividend payout ratio goes up, the required new funds also rise.
B) as the dividend payout ratio rises, required new funds decline.
C) the dividend payout ratio does not affect new funds.
D) a change to the ex-dividend date causes the required new funds to change.

174) In forecasting a firm's cash needs for some future period:

A) the percent-of-sales method is a detailed approach.
B) cash budgets are less exact than the percent-of-sales method.
C) a cash budget approach cannot deal effectively with both level and seasonal
production schedules.
D) a cash budget approach can deal effectively with both level and seasonal production
schedules.

175) When using the percent-of-sales method in forecasting funds needed, which of the
following is not true?
A) As the dividend payout ratio decreases, the required new funds also decrease.
B) Required new funds decrease as profits margins increase.
C) Required new funds increase as accumulated amortization increases.
D) As the tax rate increases, the required new funds increase.

176) BHS Inc. determines that sales will rise from $300,000 to $500,000 next year.
Spontaneous assets are 70% of sales and spontaneous liabilities are 30% of sales. BHS has a
10% profit margin and a 40% dividend payout ratio. What is the level of required new funds?
A) $50,000
B) $20,000
C) $100,000
D) BHS is in balance and no new funds are needed.
177) In developing the pro forma income statement, we follow four important steps: 1)
compute other expenses, 2) determine a production schedule, 3) establish a sales projection,
4) determine profit by completing the actual pro forma statement. What is the correct order
for these four steps?
A) 1, 2, 3, 4
B) 4, 3, 2, 1
C) 2, 1, 3, 4
D) 3, 2, 1, 4

178) To estimate production requirements, we:

A) add beginning inventory to projected sales in units and subtract desired ending
inventory.
B) add projected sales in units to desired ending inventory and subtract beginning
inventory.
C) add beginning inventory to desired ending inventory and divide by two.
D) add beginning inventory to desired ending inventory and subtract projected sales in
units.

179) In general, the larger the portion of a firm's sales that are on credit, the:
A) lower will be the firm's need to borrow.
B) higher will be the firm's need to borrow.
C) more rapidly credit sales will be paid off.
D) more the firm can buy raw materials on credit.

180) Pro forma financial statements are not:

A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) part of the year end filing with the securities regulator.

181) Which of the following is not a time-adjusted method for ranking investment proposals?
A) Net present value method
B) Payback period
C) Internal rate of return method
D) Profitability index
182) When using the internal rate of return method, it is assumed that cash flows can be
reinvested at:
A) the cost of equity.
B) the cost of capital.
C) the internal rate of return.
D) the prevailing interest rate.

183) Which of the following is not a step in the capital budgeting decision-making process?
A) Search for and discovery of investment opportunities.
B) Collection of data.
C) Evaluation and decision making.
D) All of these above are steps used in this process

184) Which of the following statements about the "payback period" is true?
A) The payback period considers cash flows after the payback has been reached.
B) The payback period does not consider the time value of money.
C) The payback period uses discounted cash-flow techniques.
D) The payback period generally leads to the same decision as other investment selection
methods.

185) Suppose that interest rates (and, therefore, the firm's weighted average cost of capital)
increase. This WOULD NOT CHANGE the capital budgeting choices a firm would make if
it
A) uses payback method analysis.
B) uses net present value analysis.
C) uses internal rate of return analysis.
D) uses profitability indices.

186) You require an internal rate of return of 8% to accept a project. If the project will yield
$10,000 per year for 10 years, what is the maximum amount that you would be willing to
invest in the project?
A) $51,400
B) $67,100
C) $100,000
D) $144,870
187) The _________ assumes returns are reinvested at the cost of capital.
A) payback period
B) internal rate of return
C) net present value
D) capital rationing

188) A firm may adopt capital rationing because

A) it is hesitant to use external sources of financing.
B) it wishes to maximize profits.
C) it wishes to maximize growth.
D) all of the options are true.

189) Using higher discount rates,

A) accelerated amortization is more valuable than straight line amortization.
B) straight-line amortization is more valuable than accelerated amortization.
C) amortization policy makes no difference.
D) later year amortization has a higher net present value.

190) Which of the following is not a step in creating the net present value profile?
A) Determining the net present value at a zero-discount rate.
B) Determining the net present value at a normal discount rate.
C) Determining the project's internal rate of return.
D) Determining the payback period for the project.

191) Which statement is true about amortization?

A) Amortization is a cash expense that provides tax shield benefits.
B) The greater the amortization expenses in earlier years, the lower the present value of
the project
C) The CCA amortization schedules supersede other methods for tax purposes
D) The cash inflow from amortization increases profit.

192) For acceptable investments, the discount rate assumption under the internal rate of return
is generally:
A) higher than under the net present-value method.
B) lower than under the net present-value method.
C) at the cost of capital.
D) below the cost of capital.
193) As the cost of capital increases:
A) fewer projects are accepted.
B) more projects are accepted.
C) project selection remains unchanged.
D) projects become more profitable.

194) Firm X is considering the replacement of an old machine with one that has a purchase
price of $70,000. The current market value of the old machine is $25,000 but the book value
is $32,000. What is the net cash outflow for the new machine with consideration for the sale
of the old machine?
A) $70,000
B) $45,000
C) $38,000
D) $32,000

195) A firm is selling an old asset below book value in a replacement decision. As the firm's
tax rate is raised, the net cash outflow (purchase price less proceeds from the sale of the old
asset plus CCA effects) would:
A) go up.
B) go down.
C) remain the same.
D) More information required.

196) The net present value profile:

A) doesn't work if projects have a negative net present value.
B) is a substitute for the IRR.
C) graphically portrays the relationship between the discount rate and the net present
value.
D) is determined by the cost of debt.

197) An appropriate capital budgeting process requires that the following steps be taken in
which order?
A) Collection of data
B) Reevaluation and adjustment
C) Evaluation and decision making
D) Search for and discovery of investment opportunities
E) d, a, c, b
F) d, a, b, c
G) d, b, a, c
H) b, d, a, c
198) How would the salvage value be treated in a net present value calculation?
A) Disregard the salvage
B) As a positive cash flow in the final year that the asset is used
C) As a negative cash flow in the final year that the asset is used
D) As a negative cash flow in the first year that the asset is used

199) The net present value method is a better method of evaluation than the internal rate of
return method because:
A) the NPV method discounts cash flows at the internal rate of return.
B) the NPV method is a more liberal method of analysis.
C) the NPV method discounts cash flows at the firm's more conservative cost of capital.
D) the NPV method includes accruals and other accounting discounts.

200) Under the capital cost allowance system:

A) the life span over which an asset may be amortized is fixed at five years.
B) all assets are amortized down to their salvage value.
C) recovery periods for different types of assets are broken down into categories.
D) the tax effect of accounting amortization is included.