D) Calendar based accounting 31. The disadvantage in holding cash balances is th
ID: 2620363 • Letter: D
Question
D) Calendar based accounting 31. The disadvantage in holding cash balances is that A) Cannot be used to pay offishore invoices B) C) D) Cannot be easily sccured against theft Can easily be counterfeited Earns no, or low, returns for the business Analysts who make recommendations employee would be most interested in ratios dealing with 32. on credit policies, inventory levels and sales per A) Liquidity B) Financial leverage C) Efficiency D) Profitability 33. A basis of comparison for financial ratios that is determined from an industrial sector, historical data, direct competitors or pro forma statements is called a A) Benchmark B) Comparable C) Financial trend line D) Performance standard 34. Net Present Value is the only method of investment appraisal that A) B) C) D) Considers the time value of money Uses all the relevant cash flows in the analysis Deals with cash outflows exceeding inflows after the start of the project Considers the investment's direct impact on shareholder's wealth 35. What type of investment opportunities are Apple Inc.'s iPod, 4G iPhone, and iPad? A) B) C) D) New product development. Improving existing product sales Reducing costs Replacement of equipmentExplanation / Answer
31. The disadvantage of holding cash balance is that Option (D) earns low or no returns for the business. Cash balances when held by the company ensure liquidity and can be used to make payments. There are insurance policies available for cash in the business to protect it from theft. However one major disadvantage of holding cash is that since it is not into the business operating cycle, it is not contributing to the business. Investing it for short term in banks earn very low returns for the cash whereas simply holding it in lockers earns no return. The money is kept idle earning no/low return.
32. Such analysts are mainly concerned about (C) efficiency ratios. Efficiency ratios include receivables turnover, inventory turnover, etc. These ratios help the analyst to see how effectively the company is managing its assets and liablilties. Thus if the analyst is concerned about credit policies, he is interested in account receivables and payables. Whether or not inventory levels are optimum and policies regarding inventories are appropriately in place can be gauged by inventory turnover ratio.
33. A basis of comparison for financial ratios that is determined from an industrial sector, historical data ,direct competitor or pro forma statements is called a (B) Comparable. Comparables are those companies which are similar to the company being analysed - these similarities might be in terms of size of the company, its past performance, etc. A competitor from the same industry can be picked for comparing financial ratios by making certain adjustments to financial statements on account of leverage, etc (preparation of pro forma statements).
34. Net present value is the only method of valuation that (D) Considers the investment's direct impact on shareholder's wealth. Time value of money is considered by NPV approach but it is also considered by discounted payback period approach - that makes NPV to NOT be the only method to do so. Similarly, even IRR uses all relevant cash flows in the analysis, it is not just NPV which uses all relevant cash flows. Likewise, even profitability index deals with cash flows exceeding inflows after the start of the project. So it really is NPV the only method which gives us a particular amount which shall have direct effect on shareholder's wealth.
35. The answer for that is option (A) New product development. As iPod, iPhone and iPad are different products with different functions and features, they are not investment opportunities to improve existing sale or to reduce cost or any type of replacement. They are clearly new products developed by Apple with specific functions.
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