MULTIPLE CHOICE:

Question 1. Bob Lawson is the president of his company; his CFO is Mark Ziegler. Like many entrepreneurs, Bob is more concerned about the big picture and leaves the day-to-day accounting details up to Mark. Bob reviews the financial statements regularly; however, Mark would like to help him understand how to make better use of the company's financial statements to gauge the changes in his business and plan for the future. Even though Mark generates all statements in terms of dollars and percents (common-size statements), Bob ignores the common-size statements. The two have agreed to meet next week.

Mark plans to begin his coaching with the following topics:

• Making comparisons using standardized financial statements
• Calculating and understanding performance ratios
• Determining the company's profitability and growth
• Drawbacks associated with financial statement comparisons

Bob's balance sheet reflects the following information:

Cash 750,000

Accounts Receivable 150,000

Inventory 450,000

Plant and Equipment 1,235,000

If Mark used these values to create a common-size balance sheet, which of the following would you expect to see as the cash line item?

A. 32%

B. 47%

C. 29%

D. 55.5%

Question 2. If someone told you that the marginal and average tax rates both increase each time taxable income increases, would you agree? If you disagree, what is the reason?

A. I agree.

B. I disagree because marginal tax rates increase and decrease as taxable income increases; average tax rate

increases consistently as taxable income increases.

C. I disagree because average tax rates increase and decrease as taxable income increases; marginal tax rate

increases consistently as taxable income increases.

D. I disagree because both tax rates increase and decrease as taxable income increases.

Question 3. Bob Lawson is the president of his company; his CFO is Mark Ziegler. Like many entrepreneurs, Bob is more concerned about the big picture and leaves the day-to-day accounting details up to Mark. Bob reviews the financial statements regularly; however, Mark would like to help him understand how to make better use of the company's financial statements to gauge the changes in his business and plan for the future. Even though Mark generates all statements in terms of dollars and percents (common-size statements), Bob ignores the common-size statements. The two have agreed to meet next week.

Mark plans to begin his coaching with the following topics:

• Making comparisons using standardized financial statements
• Calculating and understanding performance ratios
• Determining the company's profitability and growth
• Drawbacks associated with financial statement comparisons

Bob is pleased that the company's sales have increased to $2,650,000 this year from $2,240,000 last year. What suggestion should Mark make to Bob to keep the sales increase in perspective?

A. Make sure you also pay attention to the common-size statements. This will show what, if any changes in other items

on the financial statements (compared to revenue) also occurred.

B. Bob should know that the increase could result from a decrease in the cost of good sold.

C. Mark should remind Bob that this increase in sales will also affect owner's equity.

D. Bob needs to understand that even if sales decrease next year, depreciation of the same amount will help retained

earnings.

Question 4. If you had to decide&#-96;whether or not to lend money to a company, would you use the market value of its assets or the book value? Why?

A. Market value; it is the only method consistent with GAAP.

B. Market value; it tells you how much the company could sell the assets for if it has to re-pay the debt.

C. Book value; it tell you how much money they spent on assets in the past.

D. Either; they are usually the same.

Question 5. You and Bob are enrolled together in a course on financial management. You missed the class last Friday, and Bob copied his lecture notes for you to study. Unfortunately, after reading the book, you believe the following statements in Bob's notes are incorrect:

- "The amount money needed to borrow and invest in the purchase of land for expansion is a function of working capital management."

- "The financial manager acts in the best interest of management."

- "The general partners in a partnership are the only type of business owners that can be sued for their personal property to resolve the business' debt."

- "The main purpose of financial management is to increase revenue annually by a percentage set by the Board of Directors."

- "Management and owners generally agree on investment decisions because both are acting in the best interest of the company."

- "All of the cash generated by a company's operations is either re-invested in assets or used to pay off debt."

What changes should Bob make to Statement F?

A. Cash is used only to pay off debt.

B. Cash is used only to pay off debt and pay stockholder dividends.

C. Cash is also used to pay taxes and stockholder dividends.

D. Cash is always either re-invested or used to pay taxes or various stakeholders.

Question 6. A company purchases packaging materials, as well as a new packing and storage warehouse where these materials will be used. Should the materials and warehouse be classified as current or fixed assets?

A. Both are current assets because some or all of their value will be used within one year.

B. They are both fixed assets because they are used in production, which is an ongoing operation for this business.

C. The packing materials are current assets because they will be used within one year; the warehouse is a fixed asset

because it has a life longer than one year.

D. The materials are current assets because of their short life; the warehouse is a liability because it is not completely

paid for.

Question 7. Bob Lawson is the president of his company; his CFO is Mark Ziegler. Like many entrepreneurs, Bob is more concerned about the big picture and leaves the day-to-day accounting details up to Mark. Bob reviews the financial statements regularly; however, Mark would like to help him understand how to make better use of the company's financial statements to gauge the changes in his business and plan for the future. Even though Mark generates all statements in terms of dollars and percents (common-size statements), Bob ignores the common-size statements. The two have agreed to meet next week.

Mark plans to begin his coaching with the following topics:

• Making comparisons using standardized financial statements
• Calculating and understanding performance ratios
• Determining the company's profitability and growth
• Drawbacks associated with financial statement comparisons

Now that Bob has a better understanding of financial ratios, he's anxious to begin comparing last year's performance with this year's performance. What initial advice should Mark offer?

A. Bob can compare results with similar companies that operate within the U.S.

B. Bob can compare results with similar companies, even if it is operating overseas, as long as those companies

subscribe to GAAP.

C. In spite of what Bob believes, the sale of obsolete plant equipment last year will not affect the comparison.

D. He should remind Bob that the company switched from a calendar year to a fiscal year beginning in June of this year.

Question 8. You and Bob are enrolled together in a course on financial management. You missed the class last Friday, and Bob copied his lecture notes for you to study. Unfortunately, after reading the book, you believe the following statements in Bob's notes are incorrect:

- "The amount money needed to borrow and invest in the purchase of land for expansion is a function of working capital management."

- "The financial manager acts in the best interest of management."

- "The general partners in a partnership are the only type of business owners that can be sued for their personal property to resolve the business' debt."

- "The main purpose of financial management is to increase revenue annually by a percentage set by the Board of Directors."

- "Management and owners generally agree on investment decisions because both are acting in the best interest of the company."

- "All of the cash generated by a company's operations is either re-invested in assets or used to pay off debt."

What changes should Bob make to Statement D?

A. The main purpose of financial management exists to maximize cash flow.

B. The main purpose of financial management is to decrease long-term liability.

C. The main purpose of financial management is to reduce labor turnover.

D. The main purpose of financial management is to maximize stock value or market value of equity.

Question 9. Bob Lawson is the president of his company; his CFO is Mark Ziegler. Like many entrepreneurs, Bob is more concerned about the big picture and leaves the day-to-day accounting details up to Mark. Bob reviews the financial statements regularly; however, Mark would like to help him understand how to make better use of the company's financial statements to gauge the changes in his business and plan for the future. Even though Mark generates all statements in terms of dollars and percents (common-size statements), Bob ignores the common-size statements. The two have agreed to meet next week.

Mark plans to begin his coaching with the following topics:

• Making comparisons using standardized financial statements
• Calculating and understanding performance ratios
• Determining the company's profitability and growth
• Drawbacks associated with financial statement comparisons

Bob meets next month with a banker to secure a 60 day line of credit. He asks Mark which financial ratios will be of the most interest to the loan officer. How should Mark respond, any why?

A. The total debt ratio, times interest earned ratio, or cash coverage ratio to discover the company's amount of long

term debt

B. The inventory turnover, receivables turnover, or asset turnover ratio to judge the firm's ability to use convert assets

to sales

C. The profit margin ratio, ROA ratio, or ROE ratio to understand the profitability of the company

D. The current ratio, quick ratio, or cash ratio to determine the firm's liquidity

Question 10. Bob Lawson is the president of his company; his CFO is Mark Ziegler. Like many entrepreneurs, Bob is more concerned about the big picture and leaves the day-to-day accounting details up to Mark. Bob reviews the financial statements regularly; however, Mark would like to help him understand how to make better use of the company's financial statements to gauge the changes in his business and plan for the future. Even though Mark generates all statements in terms of dollars and percents (common-size statements), Bob ignores the common-size statements. The two have agreed to meet next week.

Mark plans to begin his coaching with the following topics:

• Making comparisons using standardized financial statements
• Calculating and understanding performance ratios
• Determining the company's profitability and growth
• Drawbacks associated with financial statement comparisons

Mark knows that Bob does not want to spend a lot of time pouring over his financial statements. Which of the following statements would be helpful if Mark wanted to suggest an easy way to remember how certain factors affect his company's ROA?

A. All else being equal, a decrease in the cost of goods sold will decrease ROA.

B. All else being equal, an increase in the cost of goods sold will decrease ROA.

C. All else being equal, an increase in depreciation will increase ROA.

D. All else being equal, the cost of goods sold has no affect on ROA.