1. Which of the following is the correct method to calculate ending retained earnings? a. Net income + Dividends - Beginning RE b. Beginning RE + Net Income - Dividends c. Net Income - Dividends - Beginning RE 2. Which of the following effects of an increase in depreciation expense are true? a. An increase in Operating Cash Flows b. An decrease in Net Income c. A reduced tax liability d. All of the above e. Both A and C but not B 3. Which of the following cannot be found on the balance sheet? a. Owner's equity b. Retained earnings c. Net income d. Net fixed assets 4. A firm has an unadjusted cash balance of $55,000 at the end of April. In May, the firm reports a net change in cash of $40,000. A new policy made by the firm states that they must maintain a minimum cash balance of $30,000. How much must the firm borrow in May to maintain that minimum cash balance? a. $20,000 b. $45,000 c. $30,000 d. $15,000 e. They do not need to borrow 5. Which of the below ratios are used to measure the ability of a firm to cover short-term obligations with assets generating cash within the year? a. The times interest earned (TIE) ratio b. Debt ratio c. Current ratio d. Inventory turnover ratio 6. A firm is offered a discount for purchasing more units per order from their suppliers. As a result the firm has a higher inventory balance. How would this change affect their quick ratio? a. The ratio will increase as current assets increase b. The ratio will remain unchanged c. The ratio will increase due to a decrease in current liabilities d. The ratio will decrease as current liabilities will increase 7. On the statement of cash flows, under which activity would you find depreciation expense? a. Financing b. Operating c. Investing d. Depreciation does not belong on the statement of cash flows because it is a noncash expense 8. If the number of units per order is less than the economic order quantity, which of the following is true? a. The company must find an outside supplier to purchase more units b. Holding costs will increase and carrying costs will decrease c. Holding costs and ordering costs will decrease d. Carrying costs will increase with no changes to holding costs e. Holding costs will decrease and ordering costs will increase 8. If the number of units per order is less than the economic order quantity, which of the following is true? a. The company must find an outside supplier to purchase more units b. Holding costs will increase and carrying costs will decrease c. Holding costs and ordering costs will decrease d. Carrying costs will increase with no changes to holding costs e. Holding costs will decrease and ordering costs will increase Use the following schedules to answer questions 9-11 9. Because 35% of receivables are still outstanding 31-60 days after purchase, the company should hire a new receivable manager to collect the sales sooner. a. True b. False 10. At the end of June, 130% of sales are still outstanding in receivable accounts. a. True b. False 11. Total accounts receivable at the end of June are $128,000. a. True b. False 12. Next to the ratio or measurement, indicate + if preference for the ratio/measurement is to be high, and - if the preference is low. 12. Next to the ratio or measurement, indicate + if preference for the ratio/measurement is to be high, and - if the preference is low. Current ratio Quick ratio Times interest earned ratio (TIE) Profit margin (PM) Cash conversion cycle (CCC) Return on equity (ROE) Weighted average cost of capital (WACC) Inventory Turnover Operating Cash Flows Days payable outstanding (DPO) Days sales outstanding (DSO) Days sales in inventory (DSI) 13. Meghan's Market Co. is thinking of extending their credit terms. This would increase sales by 20% to $1,200,000. However, DSO would increase from 30 to 50 days and bad debt losses would increase from 2% to 5%. The increase in sales would require a higher level of inventory. Variable costs are 65%. The company's required return on investments is 8% percent and their inventory turnover is 3 times. What is the change in pre-tax profits from the current policy to the new policy? Should the company change their policy? (assume a 365 day year) 14. Margo's Marshmallow Shoppe purchases 36,000 bags of sugar each year. They pay $20 to place each order and have an annual carrying cost of 20% of the purchase price per bag. Each bag costs $2 and management likes to keep 500 bags for safety stock. The sugar vendor now offers a quantity discount of $0.05 per bag when Margo's orders 10,000 bags. a. Determine the EOQ b. Calculate the Total Inventory Cost at EOQ with safety stock. c. Determine the before tax benefit or loss of accepting the quantity discount. (hint: find TIC with new order quantity to take the discount; compare the added cost to the savings from the discount) 15. Digby Company projects cash outlays of $2 Million that will occur uniformly throughout the year. Digby plans on meeting its cash requirements by selling marketable securities from its portfolio. The firm's marketable securities are invested to earn 2% and the fixed cost of each transaction is $18. a. Use the Baumol Model to determine the optimal transaction size. (C*) b. What will be Digby's annual cost of maintaining cash balances (TCC)? 16. Financial Planning a. Create a Cash Budget for the months April through June with the information given below. b. Create a Pro forma Income Statement and Balance Sheet for the same period. Sales are shown in the table below: - Sales are 29% cash and 70% credit, 1% bad debt - Of the credit sales, 50% are collected in the month following the sale, and 50% are collected two months following the sale. - Cost of Goods Sold is strictly materials and is 55% of sales. - All inventory (material) purchases are paid for one month after they are made. - The store follows a policy of purchasing enough inventory one month in advance of sales. - A minimum cash balance of $8,000 is desired. - All "Accrued Wages" and "Other Current Liabilities" remain unchanged. Wages April through June are paid as incurred. - The corporate tax rate is 35%. No tax payments are due during this quarter. - A $6,000 dividend payment will be made in April. Monthly expenses are below: Wages: April $1500 May $1700 June $1800 Rent: 700 per month Depreciation: 150 per month Administrative expenses: 3% of sales per month paid as incurred