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Questions and Answers of Finance

Why is it important to use ratios to analyze financial statements?
What does management want to achieve when it tries to “ensure liquidity” and “maintain solvency”?
Differentiate between the current ratio and the quick ratio.
Is the inventory ratio more important to a grocery store than to a hardware store? Why or why not?
What is the purpose of the debt/coverage ratios?
What is the purpose of the times-interest-earned ratio?
What is the purpose of the asset-management ratios?
What is a financial benchmark and what is it used for?
What is the difference between a soft financial benchmark and a hard financial benchmark?
Explain what the DuPont financial system tries to reveal.
What grouping of financial statement accounts are used to calculate the ROA ratio by using the DuPont financial system?
Financial ratios are analyzed by four groups of individuals: managers, short-term lenders, long-term lenders, and equity investors. What is the primary emphasis of each group in evaluating ratios?
What is the purpose of vertical analysis and horizontal analysis?
What does vertical analysis try to reveal?
Explain the purpose of the inventory turnover ratio.
What are the limitations of financial ratios?
Explain why some companies can influence many of their ratios simply by choosing their fiscal year-end. In what type of industries do you think this might be a particular problem?
Ian Stoddart was reviewing his company’s 2013 year-end financial estimates, and he was not satisfied with the overall performance. He asked his management team to prepare their detailed operational
Fauquier Resources Inc.’s current revenue is $20 million, and the sales and marketing department expects that it will reach $30 million by next year. At the moment, trade receivables are $3.5
Helen Wiseman, owner of a convenience store, is meeting her banker and hopes to increase her working capital loan. She figures that an additional loan would increase her finance costs by an extra
After being in business for six years, Graham Mason, owner of a small retail store, is considering buying a new information system that would provide him with better operating and financial
Mary Pascal is having some problems with her cash flow. She asks her accountant to find a way to generate more cash from her working capital. The accountant says that if Mary were to manage her trade
The following accounts are included in Eva’s retail store financial statements:Cost of sales ……………………………………...$2,300,000Administrative expenses
Jaclyn Hargrove is the owner of six Pickwick Restaurants. For the past 10 years, she has always relied on her accountant to analyze her financial statements. Jaclyn feels that if she were able to
Imperial Electronics Ltd. is a publicly owned company with 100,000 common shares outstanding. At the last executive committee meeting, Sandra Redgrave, CEO of the company, informed the board members
Albert Ellis owns a small plumbing and heating business. His main activities consist of installing and repairing piping systems, plumbing fixtures, and equipment, such as water heaters, particularly
Why do fixed costs create an element of the unknown in the decision-making process?
In what types of decisions can break-even analysis help managers?
What is the relevance of break-even analysis?
Explain the meaning and significance of the contribution margin.
Draw a hypothetical break-even chart.
Why would someone use the PV ratio instead of the unit contribution margin?
Why should managers be interested in calculating the profit break-even point?
“The major factor that will underlie the cost structure of a business is the level of risk that managers are prepared to take and the level of expected sales volume.” Explain.
How can break-even analysis help managers make pricing decisions? Give an example.
Differentiate between committed fixed costs and discretionary fixed costs.
What is the difference between direct costs and indirect costs? Give an example of each.
For this exercise, use the following information:• Total fixed costs are estimated at $100,000.• Total units expected to be sold are 50,000.• Total variable costs are $300,000.• Unit selling
Using the information in Exercise 1, if rent were increased by $25,000 and variable costs and unit selling price remained unchanged, what would be the new PV ratio and break-even point in units and
A company expects to sell 75,000 widgets at a price of $10.00. The unit variable costs are estimated at $8.00, and the fixed costs are estimated at $125,000. On the basis of this information,
Parkway Travel Tours is organizing a five-day trip from Toronto to Branson, Missouri, a family town with all types of attractions and theatres. Although it is a small town (around 10,000 people),
With the following information, calculate the break-even point in sales dollars for a retail store:• RevenueProduct line A......$ 100,000Product line B......$ 200,000Product line C......$
With the information outlined below, calculate the following:1. Profit2. Break-even point in revenue3. Cash break-even pointDepreciation .......................................... $ 30,000Plant
The owner/manager of a beverage and food retail outlet intends to invest $400,000 in another retail store. He wants to make at least $75,000 in profit before taxes, or 18.75% return on his
Company A and Company B are both selling $2.5 million worth of goods. Company A’s PV ratio is 0.40 while B’s is 0.60. Company B’s fixed costs are $1 million, which puts the business at a
Tony Kasabian was ready to put the finishing touches on a business plan he wanted to present to a local banker for financing for his new venture, Quick Photo Ltd. The investment proposal contained a
In March 2003, Vincent and Anne-Marie Finney started their carpet-cleaning services business in Toronto. The business was geared primarily at young couples; a market that they felt was growing
Who is responsible for managing the working capital accounts? Discuss.
What does the DWC measure? Why is it important?
What does the CCE ratio measure? Why is it important?
What do we mean by the cash conversion cycle? Explain how it works.
With an example, differentiate between cash flow and profit.
Explain how the economic ordering quantity method works.
Differentiate between “average collection period” and “aging of trade receivables.”
How can accelerating the flow of cash improve ROI?
Why is it more difficult to manage working capital accounts than capital asset accounts?
Explain the various types of inventories that a company has to carry.
Identify several ordering costs and several holding costs.
Comment on the different functions of the credit manager.
Differentiate between the process related to the traditional payment system and the post office box system.
Explain the various strategies related to managing marketable securities.
From the information below,1. List of the working capital accounts.2. Calculate the net working capital.Buildings ……………………………… $100,000Cash
With the following information, calculate the company's DWC for 2012 and2013.
With the information from Exercise 2, calculate the company's CCE ratio for 2012 and 2013. Assume that in 2011 the company's net working capital was$350,000.
A firm sells goods with an average retail price of $550.00. Customers usually pay 60 days after the date of purchase. The per unit cost of producing the goods is $125.00. Assume the cost of borrowing
A company is planning to change its credit policy. The details are as follows:Current selling price ...........................$5.00 per unitAverage cost .......................................$4.50
A company’s trade and other payables amount to $500,000, and annual purchasing costs for materials from suppliers are $10,000,000. A new purchasing policy states that they should be paid in 30
A company decides to market its products more aggressively. Current sales are 60,000 units per year and are expected to increase by 20%. Carrying costs are $0.50 per unit, and order costs are $10.00.
A company has decided to market its products more aggressively. Current sales are 30,000 units per year and are expected to increase by 50% next year. Carrying costs are $0.20 per unit, and order
A company sells on terms of net 30 days and is considering a change to net 60 days. The firm wants to invest in projects that generate an ROA greater than 20%. The expected effect of the change in
A business can make 15% by investing its money in bonds. If the treasurer receives $20,000 30 days sooner, how much would the company make?
A company buys $2 million of goods each year. The treasurer of the company thinks it can delay paying bills up to 45 days without jeopardizing its relationship with suppliers. The company’s
Albert Cunningham began his career as a manufacturer’s representative in the medical equipment business. Included in his lines were products imported from several European manufacturers. Albert’s
What is the connection between SWOT analysis and planning assumptions?
What is planning and why is it so important?
What is the purpose of SWOT analysis?
Explain budgeting in terms of planning as a whole.
Differentiate between incremental budgeting and zero-based budgeting.
List the more important rules of sound budgeting.
What are the benefits of a business plan for a company?
Explain Altman’s financial health formula.
Contrast control as a “policing activity” and control as a “steering activity.”
Explain the various steps involved in the control system.
Comment on the various types of performance standards.
Differentiate between preventive controls and screening controls.
Identify efficiency and effectiveness indicators for the following organizational units, individuals, or organizations:1. Sales department2. Telephone-answering service3. Purchasing department4.
Nick Strizzi owns and operates a pizza delivery and take-out restaurant. In 2013, he sold 100,000 pizzas at an average selling price of $15.00. The cost to make each pizza is $3.00 for cheese, $2.50
Identify the factors that you would consider when using zero-based budgeting to determine the level of services for the following organizational units:1. Sanitation department2. Training department3.
With the following information about Quantum Plastics Ltd., prepare a cash budget for the months of January to April 2014.The marketing department’s sales forecast follows:November (2013)
List the key parts of a typical business plan.
Using Eagle Electronics Inc.'s financial statements below, calculate the following:1. Eagle Electronics Inc.'s sustainable growth rate2. Eagle Electronics Inc.'sZ-score
Seabridge Distributors Inc. is a distributor of central air conditioners, purifiers, humidifiers, and dehumidifiers. It has the franchise for the distribution, installation, and servicing of products
One day in March 2013, John Sutherland, industrial commissioner for the city of South Elk, received a telephone call from Nick Faranda, president of Anderson Equipment Ltd., who wanted to see him as
Encourage students to use the accompanying financial spreadsheets to analyze this case.With the financial objectives and assumptions presented below, prepare the following for the company:a)
Differentiate between internal and external financing. Give several examples.
Discuss the concepts of business risk, financial risk, and instrument risk.
Explain the significance of capacity.
How can a company become more creditworthy?
Differentiate between shareholder collective rights and specific rights. Identify three of each type of right.
What types of capital investments do risk capitalist firms invest in?

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