1. The reliability of a short-term cash forecast depends most heavily on the quality of: a. Cost of goods sold forecast b. Current ratio forecast c. Sales forecast d. Shares outstanding forecast 2. What is the correct order of the following steps in preparing a projected income statement (not all steps may be show)? i. Project future net sales ii. Project future net income iii. Project future cost of goods sold iv. Project future interest expense Choose one answer. a. i, ii, iii, iv b. ii, iv, iii, i c. i, iii, ii, iv d. I, iii, iv, ii 3. What is the correct order of the following steps in preparing a projected balance sheet (not all steps may be shown)? i. Project future cash ii. Project future accounts receivable iii. Project future accounts payable iv. Project future property plant and equipment Choose one answer. a. i, ii, iv, iii b. ii, iv, iii, i c. I, iii, ii, iv d. I, iii, iv, ii 4. Which of the following is the most useful in assessing short-term liquidity of a company? Choose one answer. a. Taxes payable b. Working Capital c. Next periods sales d. Prospective cash flows 5. The residual income model defines stock price as book value plus the present value of residual income. What is the effect on stock price in a given period if the firms cost of capital is greater than its return on equity? a. Cannot be determined b. No effect c. Stock price increases d. Stock price decreases 6. Over time, what observation(s) best characterizes how ROE for a given firm should behave? i. ROE will increase, because the firm becomes more efficient ii. ROE will decrease, because competition will erode profitability iii. The answer depends on how conservative the firms accounting policies are, which affects its reported earnings. a. i and ii b. ii and iii c. i, ii, and iii are all possibilities d. None of the above 7. The reasonableness and feasibility of short-term cash forecasts can be evaluated by preparing a. A bank reconciliation b. Pro forma financial statements c. A statement of Cash Flows d. Interest coverage computations 8. If a company is to successfully remain in business over the long haul, which of the following statements is most correct? a. Total cash flow from operations, measured over an extended period, must be greater than zero b. Total cash flow from investing, measured over an extended period, must be positive c. Total cash flow from financing, measured over an extended period, should be negative d. Total cash flow from financing plus total cash flow from investing, measured over an extended period, must be positive 9. Which of the following statement is incorrect? a. The quicker a company collects money from its customers the greater its liquidity, all else equal b. The more quickly a company turns over its inventory, the greater its liquidity, all else equal c. The lower a companys depreciation the greater its liquidity, all else equal d. The greater a companys profit margin the greater its liquidity, all else equal 10. Which of the following statement is incorrect? a. It is possible for a profitable company to go out of business because of short-term liquidity problems b. If a company has a current ratio greater than 2, it will never go out of business because of liquidity problems c. The current ratio is always greater than or equal to the quick ratio d. The accuracy of a cash flow forecast is inversely related to the forecast horizon. 11. Which of the following best describes the current ratio? a. debt ratio b. operating performance ratio c. liquidity ratio d. efficiency ratio 12. Which of the following is NOT likely to be used to measure a companys liquidity? a. working capital b. financial leverage c. current ratio d. acid-test (quick) ratio 13. Which of the following will NOT affect the calculation of leverage ratios? a. existence of non-capitalized operating leases b. existence of assets where market value is much higher than book value c. existence of significant debt covenants d. existence of pension liabilities where projected benefit liability is much greater than plan assets and accumulated benefit obligation 14. An analyst should treat preferred stock on a firms balance sheet as debt when calculating leverage ratios if the preferred stock is: a. redeemable by shareholders b. convertible into common stock c. issued at a variable dividend rate d. callable by the issuer 15. The short-term liquidity of a company a. is only of concern to creditors of a company b. is determinable by looking at current ratio c. depends largely upon prospective cash flows d. is determinable by calculating cash to current liabilities ratio 16. A company wishes to increase its financial leverage. Which of the following actions, all other things being equal, will achieve this? i. repurchase stock ii. issue more dividends iii. sell accounts receivable at face value iv. split stock 2 for 1 a. i, ii and iii b. i and ii c. I and iv d. I, ii and iv 17. Which of the following statements are correct with respect to the times interest earned ratio? i. it is independent of operating income ii. it is independent of the interest rate paid on debt iii. it is independent of the tax rate iv. it is independent of the amount of dividends paid a. i, ii and iii b. i and iii c. i and iv d. iii and iv 18. The earnings to fixed charges ratio: a. indicates how efficiently assets are used b. typically includes depreciation in the denominator c. typically excludes extraordinary gains and losses from the numberator d. indicates the proportion of debt used to finance the company 19. Reported operating income for Horace Corporation was $145,000 and reported interest expense was $45,000. Times interest earned for Horace Corporation, after necessary adjustments, was: a. 2.22 b. 3.22 c. 4.22 d. 4.48 20. Typical debt covenants would i. limit the issuance of additional debt senior to the obligation ii. specify minimum levels of selected financial ratios iii. specify minimum levels of earnings coverage iv. prohibit excessive dividends or stock repurchases a. ii and iii b. ii and iv c. i, iii and iv d. I, ii, iii and iv 21. Pitfalls when forecasting earnings include failure to consider i. capital adequacy ii. capacity constraints iii. anticipated return on equity iv. new management a. i and iii b. ii and iv c. I, iii and iv d. I, ii and iii 22. Which of the following can affect earnings quality? i. managements choice of accounting principle ii. managements choice of dividend policy iii. managements estimates iv. managements discretionary expenditures a. i, ii, iii and iv b. i, ii and iii c. i, iii and iv d. i and iii 23. Which of the following is NOT a typical form of earnings management? a. Changing accounting estimates b. Offsetting one-time gains and losses c. Changing accounting principles d. Changing auditors 24. Which of the following would NOT be considered a component of business risk? a. financial leverage b. variability of demand c. variability of price of inputs to production d. changing regulatory requirements 25. business risk: a. is independent of actions by management b. does not affect the systematic risk of a company c. refers to financial leverage d. is a component of the overall risk of a company 26. Interim financial reports a. are not required by SEC b. are as reliable as annual reports c. require allocation of certain discretionary costs across interim periods d. normally use FIFO inventory reporting, regardless of method used for annual reports. 27. Which of the following will affect observed price earnings ratio (lagged ratio): i. quality of earnings ii. business risk iii. risk free rate of interest iv. expected growth a. all of the above b. ii, iii and iv c. ii and iv d. i, ii and iv 28. Which of the following will affect observed price to book ratio i. expected ROCE ii. business risk iii. risk free rate of interest iv. expected growth a. all of the above b. ii, iii and iv c. ii and iv d. i, ii and iv 29. Which of the following statement is most correct? a. if two companies have the same ROE and the same risk they must have the same residual income (abnormal earnings) for the year b. If two companies have the same net book value and the same residual income this year, then their stock prices must be the same c. If two companies have the same ROE and the same stock price their earnings must be the same for the year d. If two companies have the same ROE, net book value, and cost of capital then their residual income must be the same for the year 30. Two companies, A and B, have the same ROEs but Company A has a higher residual income. Which of the following would explain this, all else equal? a. company A is riskier than company B b. Company A has higher expected future growth c. Company A has greater net book value d. Company A has lower ROA