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practical finance

Questions and Answers of Practical Finance

Firm A operates in a make-to-order operations environment. Firm B operates in a make-to-stock operations environment. Which firm is likely to have lower inventory as a percentage of its COGS?
Firm A operates as a brick-and-mortar retailer. Firm B is a e-commerce retailer. Which firm is likely to have lower operating working capital?
Firm A faces more demand uncertainty than Firm B. As far as demand uncertainty is concerned, which firm is likely to have a higher average level of cash during the year?
Calculate the annual rate equivalent to the sales discount given by the terms 1/10, 30/net.
What might be an issue with having small or even negative OWC?
A firm buys a key manufacturing part from a supplier. Lot size is one hundred units, worth one week of (steady) production on average. In order to save transportation costs, the firm is considering
Given the following historic levels of cash (actual and forecast) of a firm:a. Calculate the standard deviation of the forecasting errors.b. Calculate the safety cash needed to cope with cash flows
If the marginal cost of debt is 15 percent, what payment extension terms of a trade credit offer would make use of trade credit preferable over a 2 percent / ten-day payment discount?
A firm is considering outsourcing its domestic production from the United States to a third-party manufacturer located in Asia. What is the impact of offshoring on the firm’s provisions (including
HydroPure manufactures several models of water purifiers in its company-owned factory in the state of Tennessee in the United States. Due to plant capacity limitations, the company considers
In early March 2018, US President Trump announced a 25 percent tariff on all steel imports, and 10 percent on aluminum. How will this move affect the supply chains of US companies—such as from the
Suppose that due to global pressure, there is a possibility that China will appreciate its currency by 10 percent by 2020. What implications will this move have on global trade? Do you think that
A boutique cosmetics manufacturer is considering reducing the assortment in one of its product families to decrease complexity in its operations. The following table shows the mean and standard
Returning to problem 5, now assume that the products to be removed are strategic—in the sense that they drive sales from some key customers—and also that their wholesale price is \($70\) (instead
Please follow the logic of section 15.5 (push versus pull) to compare GM with Toyota. What do their financial ratios say about the two firms’ operational strategies? 15.5 Push versus Pull In
Table 15.7 shows BeerCo’s pro forma income statement and balance sheet if the firm adopts a level production strategy (by incorporating the assumptions associated with this strategy).Assuming that
In the BeerCo case discussed in section 15.6, the company’s pro forma statements that correspondto the current chase production strategy are compared to the level strategy ones. Now assume that
Benchmark the performance of Inditex, H&M, and Gap on the supply chain trade-off triangle for the years 2015–2018. To do so, you may construct three two-dimensional plots on the following metrics:
What is the main goal of accounting?
Name four types of stakeholders who may be interested in knowing a firm’s financial information.
What is the main difference between a stock and a flow?
Are these stocks or flows?a. The amount of water stored in a containerb. The amount of monthly rain fallen in Mawsynram, Indiac. An employee’s annual salaryd. The money you keep in your wallete.
A firm faces fluctuating sales (in thousands of dollars) following the monthly pattern: 100, 80, 100, 80, …, 100, 80.Compare the risk the firm faces in the following two scenarios:a. Costs vary
Is a major disruption of components supply an example of industry risk or operational risk?
What accounting principles does allow for the surveillance services bill not to be divided among the three months to which it applies?
A manufacturer of catalytic converters holds large amounts of palladium as raw material. If the price of palladium suddenly surges by 15 percent, what accounting principle prevents the manufacturer
State the accounting identity.
On October 2, a book retailer decides to place an order for five hundred books at \($100\) each from a supplier for the purpose of resale to its customers. On October 5, the retailer actually orders
Why is inventory less liquid than accounts receivable?
Explain the accounts that are modified by the following transactions.a. The purchase of office equipment for the sales teamb. The payment of a supplier invoice at due datec. The reception of raw
Can you think of one example where total assets is larger than total equities (that is, the sum of liabilities plus equity)?
If a company buys and sells construction land plots on a regular basis, in which account of the balance sheet should the value of these appear?
Does equity in the balance sheet coincide with the market value of a firm (that is, the price of each share times the number of shares)?
Indicate which accounts in the balance sheet usually change when the following events are recorded:a. A batch of raw material from the supplier is receivedb. A contract to build a new warehouse is
Explain how Sharon feels (happy, sad, even) and by how much as far as these transactions are concerned:a. Inventory worth $8,000 is bought for cashb. A car that costs $10,000 is sold on accountc. A
What are the elements of a seven-item balance sheet on the assets side? What about the equities side?
Which accounts of a seven-item balance sheet, if any, may be negative?
Some people claim that by increasing depreciation, firms may save corporate taxes. Do you agree?Why, or why not?
If the very same asset is depreciated by firm A in four years and by firm B in five years, either firm A or B are not following accounting best practices. Do you agree? Why, or why not?
What do liabilities and equity have in common? What is the key difference between them?
On September 1, Adolfo Banderas was working as an accountant for Life Is Wine Co. The firm had just received a new machine for labeling wine bottles that was supposed to start working in a couple of
Calculate the level of interests accrued in a year if a loan of $200,000 is taken at the beginning of the year and of it is repaid on September1.The cost of the debt is 12 percent per year.
What is the equivalent monthly rate to an annual rate of 24 percent?a. Using a simple interest approximationb. Using exact compound interest
Explain how shareholders feel (happy, sad, even) as far as these transactions are concerned:a. A brand-new machine is bought for cash and installed in the factory.b. That machine is depreciated at
In which of the items in the previous exercise does cash change? Do shareholders’ happiness and cash move simultaneously (that is, shareholders are happy if cash increases and vice versa)?Previous
How is accrual accounting different from cash accounting?
Which firm does better meet the prudence principle in each of the following situations?a. Firm A assumes fixed assets will last longer than firm B.b. Firm A assumes lower salvage values for fixed
What are the elements that conform OWC?
What is the relationship between WC and OWC?
Equation 5.4 claims that working capital is equity plus long-term debt less fixed assets. Show that this expression is equivalent to the initial definition of working capital—the difference between
Give conditions for OWC to be negative.
Can WC be larger than OWC? If so, under which circumstances? If not, why not?
When are WC and OWC identical?
Why is OWC undesirable from a financial point of view?
What is the operations cycle? Which financial stocks from the balance sheet are directly involved in the operations cycle?
Other things equal, which of the following stocks in the balance sheet—payables, inventory, receivables, if any—will increase/decrease when:a. Inventory in units is reduced.b. Payments to
Give conditions for OWC to approximately be receivables plus inventory less payables.
Indicate whether each of the following statements is true or false.a. OWC is only made of receivables+, inventory, and payables+.b. The amounts needed to compute a firm’s OWC come only from the
Following is the detail of all current assets and liabilities on a firm’s balance sheet but inventory and short-term debt. Find the levels of inventory and short-term debt if working capital is
Name the three main financial statements.
Does the income statement provide a static or dynamic view of a firm? If static, what are the stocks? If dynamic, what are the flows?
Give two additional names for the income statement.
What are the seven elements of the seven-item income statement?
What does EBITDA mean?
Which function in a firm is mainly accountable for EBITDA?
Are these magnitudes stocks or flows? increasing equity, dividends, net profit, issued shares.Connect them algebraically in an single identity assuming they refer to the same accounting period.
Transportation firm A owns its fleet of trucks. Transportation firm B rents an identical fleet of trucks through a leasing contract. As long as the fleet of trucks is concerned:a. Which firm has most
Depreciation is said to be a noncash item in the income statement. What does it mean? Is this really the case?
Depreciation is considered after operating profit is calculated. Is this reasonable? Should depreciation have an impact on a firm’s operating profit instead?
Name three items in the income statement that may be subjective—that is, contingent upon managers’ opinion.
Can EBIT be larger than EBITDA in a given period?
True or false?a. The income statement is composed of cash flows.b. EBITDA and operating profit represent the same accounting concept.c. If depreciation increases, other things equal, EBITDA will
What are the seven elements of the seven-item statement of cash flows?
Does the statement of cash flows give a static or a dynamic perspective of a firm? If static, how is it different from the balance sheet? If dynamic, how is it different from the income statement?
Indicate whether each of he following items is a source or a use of cash:a. A decrease in inventoryb. An increase in accounts payablec. A decrease in accounts receivabled. An increase in
Given the following balance sheets:cash is zero:a. Prepare the seven-item statement of cash flows for year 2020.b. What can you infer from the statement of cash flows? Year 2019 2020 Assets Cash 100
Which of these two magnitudes, FFO (funds from operations) or CGO (cash generated from operations), is most important to control when it comes to liquidity?
True or false? If inventory obsolescence is very high in a given year, FFO will most likely be larger than CGO.
What are the main costs types associated with holding inventory at firms—manufacturers and retailers alike?
Why does sourcing lead-time have a major impact on a manufacturing firm’s inventory level?
Name a couple of industries that could potentially benefit from shifting focus the way Zara did.
Browse the internet to find examples of companies whose stock price changed by more than 5 percent right after a relevant announcement was made to the media.a. Which area of the firm is mostly

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