. The following is the December 31, 2010 balance sheet for the Epics Corporation
ID: 2741278 • Letter: #
Question
. The following is the December 31, 2010 balance sheet for the Epics Corporation.
Assets
Liabilities
Cash
$ 70,000
Accounts Payable $ 100,000
Accounts Receivable
150,000
Notes Payable 120,000
Inventory
280,000
Bonds Payable 300,000
Total Current Assets
$ 500,000
Total Liabilities $ 520,000
Plant and Equipment
$ 1,250,000
Equity
Less: Accum. Deprec.
250,000
Common Stock 300,000
Net Plant and Equipment
$ 1,000,000
Paid In Capital 200,000
Retained Earnings 480,000
Total Assets
$ 1,500,000
Total Equity $ 980,000
Total Liab. & Equity $ 1,500,000
Sales for 2010 were $3,000,000, with the cost of goods sold being 60% of sales. Depreciation expense was 10% of the gross plant and equipment at the beginning of the year. Interest expense was 9% on the notes payable and 11% on the bonds payable. Selling and administrative expenses were $200,000 and the firm’s tax rate is 40%.
Prepare an income statement.
2. Using ratios to construct financial statements. Construct the current assets section of the balance sheet from the following data. (Use cash as a plug figure after computing the other values.)
Yearly sales (credit)..................................................................... $420,000
Inventory turnover....................................................................... 7 times
Current liabilities.......................................................................... $80,000
Current ratio................................................................................. 2
Average collection period............................................................ 36 days
Current assets: $
Cash........................................................................ ______
Accounts receivable................................................ ______
Inventory................................................................ ______
Total current assets............................................. ______
(10 points).
3.Eddie's Bar and Restaurant Supplies expects its revenues and payments for the first part of the year to be:
Sales Payments
January $24,000 $18,000
February 20,000 21,300
March 35,000 19,100
April 22,000 22,400
May 28,000 14,700
Eighty percent of the firm's sales are on credit. Past experience shows that 40 percent of accounts receivable are collected in the month after sale, and the remainder is collected in the second month after sale. Prepare a schedule of cash receipts for March, April and May. Eddie's pays its payments in the following month. Eddie's had a cash balance of $2,000 on March 1, which is also its minimum required cash balance. There is an outstanding loan of $6,000 on March 1. Prepare a cash budget for March, April, and May. (20 points).
PART 2. Please write the correct answer of each question on a separate piece of paper such as 1.A, 2 B 3. D…… . One point will be awarded for each correct answer.
1. What is the primary goal of financial management?
A. Increased earnings
B. Maximizing cash flow
C. Maximizing shareholder wealth
D. Minimizing risk of the firm
2. Professor Merton Miller received the Nobel prize in economics for his work on
A. dividend policy.
B. investment theory.
C. working capital management.
D. capital structure theory.
3. Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the
A. options pricing model.
B. theories of working capital management.
C. theories of risk-return and portfolio theory.
D. theories of international capital budgeting.
4. With a Subchapter S corporation
A. income is taxed as direct income to stockholders.
B. stockholders have the same liability as members of a partnership.
C. the number of stockholders is unlimited.
D. life of the corporation is limited.
5. Agency theory deals with the issue of
A. when to hire an agent to represent the firm in negotiations.
B. the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone.
C. the limitations placed on an employee acting as the firm's agent to obligate or bind the firm.
D. the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers.
6. The increasing percentage ownership of public corporations by institutional investors has
A. had no effect on corporate management.
B. created higher returns for the stock market in general.
C. created more pressure on public companies to manage their firms more efficiently.
D. taken away the voice of the individual investor.
7. Money markets would include which of the following securities?
A. common stock and corporate bonds.
B. treasury bills and commercial paper.
C. certificates of deposit and preferred stock.
D. all of these.
8. When a corporation uses the financial markets to raise new funds, the sale of securities is made in the
A. primary market.
B. secondary market.
C. on-line market.
D. third market.
9. Corporate restructuring has been one result of more institutional ownership. Restructuring can cause
A. changes in the assets and liabilities of the firm.
B. the sale of low-profit margin divisions.
C. the removal of current management and/or large reductions in the workforce.
D. all of these.
10. Capital markets do not include which of the following securities:
A. common stock
B. commercial paper
C. government bonds
D. preferred stock
11. Allen Lumber Company had earnings after taxes of $580,000 in the year 2006 with 400,000 shares outstanding on December 31, 2006. On January 1, 2007, the firm issued 35,000 new shares. Because of the proceeds from these new shares and other operating improvements, 2007 earnings after taxes were 25 percent higher than in 2006. Earnings per share for the year-end 2007 was
A. $1.67
B. $1.45
C. $1.81
D. None of these
12. Consider the following information for Ball Corp.
What is the Operating Profit for Ball Corp?
A. $71,450
B. $90,000
C. $120,000
D. None of these
13. Candy Company had sales of $240,000 and cost of goods sold of $108,000. What is the gross profit margin (ratio of gross profit to sales)?
A. 75%
B. 55%
C. 73.3%
D. None of these
14. A firm has $2,000,000 in its common stock account and $20,000,000 in its paid-in capital account. The firm issued 500,000 shares of common stock. What is the par value of the common stock?
A. $40 per share
B. $44 per share
C. $4 per share
D. $3 per share
15. A firm with earnings per share of $5 and a price-earnings ratio of 15 will have a stock price of
A. $20.00
B. $75.00
C. $3.00
D. the market assigns a stock price independent of EPS and the P/E ratio.
16. The firm's price-earnings (P/E) ratio is influenced by its
A. capital structure.
B. earnings volatility.
C. sales, profit margins, and earnings.
D. all of these.
17. An item which may be converted to cash within one year or one operating cycle of the firm is classified as a
A. current liability.
B. long-term asset.
C. current asset.
D. long-term liability.
18. Asset accounts on the balance sheet are listed in the order of:
A. liquidity.
B. profitability.
C. size.
D. importance.
19. How many of the following balance sheet items are classified as current?
Retained earnings
Accounts payable
Plant and equipment
Inventory
Common stock
Bonds payable
Accrued wages payable
Accounts receivable
Preferred stock
A. 3 of these items are classified as current
B. 4 of these items are classified as current
C. 5 of these items are classified as current
D. 6 of these items are classified as current
20. The major limitation of financial statements is
A. in their complexity.
B. in their lack of comparability.
C. in their use of historical cost accounting.
D. in their lack of detail.
21. Ratio analysis can be useful for
A. historical trend analysis within a firm.
B. comparison of ratios within a single industry.
C. measuring the effects of financing.
D. All of these are true.
22. Which two ratios are used in the DuPont system to create return on assets?
A. Return on assets and asset turnover
B. Profit margin and asset turnover
C. Return on total capital and the profit margin
D. Inventory turnover and return on fixed assets
23. A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is
A. 60%
B. 15%
C. 30%
D. not enough information
24. XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. The average collection period is 36 days. What was the sales figure for the year assuming all sales are on credit?
A. $60,000
B. $6,000,000
C. $24,000,000
D. none of these
25. A firm's long term assets = $75,000, total assets = $200,000, inventory = $25,000 and current liabilities = $50,000.
A. current ratio = 0.5; quick ratio = 1.5
B. current ratio = 1.0; quick ratio = 2.0
C. current ratio = 1.5; quick ratio = 2.0
D. current ratio = 2.5; quick ratio = 2.0
26. An increasing average collection period indicates
A. the firm is generating more income.
B. accounts receivable are going down.
C. the company is becoming more efficient in its collection policy.
D. the company is becoming less efficient in its collection policy.
27. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The stockholders equity is $900,000. What is the total debt to asset ratio?
A. 45%
B. 40%
C. 55%
D. none of these
28. Disinflation may cause
A. an increase in the value of gold, silver, and gems.
B. a reduced required return demanded by investors on financial assets.
C. additional profits through falling inventory costs.
D. None of these.
29. A company experiencing rapid price increases for its products would take the most conservative approach by using
A. FIFO accounting.
B. LIFO accounting.
C. average cost accounting.
D. a or c.
30. The most rigorous test of a firm's ability to pay its short-term obligations is its
A. current ratio.
B. Acid test ratio
C. debt-to-assets ratio.
D. times-interest-earned ratio.
31. In developing the pro forma income statement we follow four important steps:
1) compute other expenses,
2) determine a production schedule,
3) establish a sales projection,
4) determine profit by completing the actual pro forma statement.
What is the correct order for these four steps?
A. 1,2,3,4
B. 3,2,4,1
C. 2,1,3,4
D. 3,2,1,4
32. Pro forma financial statements are
A. the most comprehensive means of financial forecasting.
B. often required by prospective creditors.
C. projections of financial statements for a future period.
D. all of these.
33. A rapid rate of growth in sales may require
A. higher dividend payments to shareholders.
B. increased borrowing by the firm to support the sales increase.
C. the firm to be more lenient with credit customers.
D. sales forecasts to be made less frequently.
34. Required production during a planning period will depend on the
A. beginning inventory of products.
B. sales during the period.
C. desired level of ending inventory.
D. all of these.
35. When the cost of raw materials is increasing, FIFO accounting
A. yields higher ending inventory values than LIFO.
B. produces higher unit sales than using LIFO.
C. yields higher cost of goods sold than LIFO.
D. All of these.
36. In general, the larger the portion of a firm's sales that are on credit, the
A. lower will be the firm's need to borrow.
B. higher will be the firm's need to borrow.
C. more rapidly credit sales will be paid off.
D. more the firm can buy raw materials on credit.
37. The need for an increase or decrease in short-term borrowing can be predicted by
A. ratio analysis.
B. trend analysis.
C. a cash budget.
D. an income statement.
38. A firm has forecasted sales of $3,000 in April, $4,500 in May and $6,500 in June. All sales are on credit. 30% is collected the month of sale and the remainder the following month. What will be the balance in accounts receivable at the beginning of July?
A. $1,950
B. $6,500
C. $4,550
D. $5,100
39. The difference between total receipts and total payments is referred to as
A. cumulative cash flow.
B. beginning cash flow.
C. net cash flow.
D. cash balance.
40. Net cash flow is equal to:
A. income after taxes minus depreciation.
B. income after taxes minus dividends.
C. cash receipts minus cash payments.
D. cash receipts minus cash payments minus depreciation.
41. The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.
A. fixed costs
B. variable costs
C. marginal costs
D. semi-variable costs
42. Which of the following questions does break-even analysis attempt to address?
A. How much do changes in volume effect costs and profits?
B. At what point does the firm break even?
C. What is the most efficient level of fixed assets to employ?
D. All of these
43. In break-even analysis, the contribution margin is defined as
A. price minus variable cost.
B. price minus fixed cost.
C. variable cost minus fixed cost.
D. fixed cost minus variable cost.
44. At the break-even point, a firm's profits are
A. greater than zero.
B. less than zero.
C. equal to zero.
D. Not enough information to tell
45. If a firm has a price of $4.00, variable cost per unit of $2.50 and a breakeven point of 20,000 units, fixed costs are equal to:
A. $13,333
B. $10,000
C. $30,000
D. $50,000
46. Which of the following is concerned with the change in operating profit as a result of a change in volume?
A. Financial leverage
B. Break-even point
C. Operating leverage
D. Combined leverage
47. When a firm employs no debt
A. it has a financial leverage of one.
B. it has a financial leverage of zero.
C. its operating leverage is equal to its financial leverage.
D. it will not be profitable.
48. Financial leverage deals with:
A. the relationship of fixed and variable costs.
B. the relationship of debt and equity in the capital structure.
C. the entire income statement.
D. the entire balance sheet.
49. If EBIT equals $160,000 and interest equals $30,000, what is the degree of financial leverage?
A. 5.33x
B. 1.23x
C. .8125x
D. 4.33x
50. If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then
A. DOL equals 1, and DFL equals 0.
B. DOL equals 0, and DFL equals 1.
C. DOL equals 1, and DFL equals 1.
D. none of these
Assets
Liabilities
Cash
$ 70,000
Accounts Payable $ 100,000
Accounts Receivable
150,000
Notes Payable 120,000
Inventory
280,000
Bonds Payable 300,000
Total Current Assets
$ 500,000
Total Liabilities $ 520,000
Plant and Equipment
$ 1,250,000
Equity
Less: Accum. Deprec.
250,000
Common Stock 300,000
Net Plant and Equipment
$ 1,000,000
Paid In Capital 200,000
Retained Earnings 480,000
Total Assets
$ 1,500,000
Total Equity $ 980,000
Total Liab. & Equity $ 1,500,000
Explanation / Answer
Answer- There are too many question to answer. I am giving answer to some question only-
1. What is the primary goal of financial management?
Answer-C. Maximizing shareholder wealth
2. Professor Merton Miller received the Nobel prize in economics for his work on
Answer-D. capital structure theory.
He won this prize in 1990 for this theory on capital structure .
3. Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the
Answer-C. theories of risk-return and portfolio theory.
They won this prize in 1990
5. Agency theory deals with the issue of
Answer-D. the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers
6. The increasing percentage ownership of public corporations by institutional investors has
Answer-C. created more pressure on public companies to manage their firms more efficiently.
7. Money markets would include which of the following securities?
Answer=A. common stock and corporate bonds.
8. When a corporation uses the financial markets to raise new funds, the sale of securities is made in the
Answer=A. primary market.
9. Corporate restructuring has been one result of more institutional ownership. Restructuring can cause
Answer=D. all of these.
10. Capital markets do not include which of the following securities:
Answer=B. commercial paper
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