1. Striving to maximize the size of the firm is not considered the most theoreti

Question

1. Striving to maximize the size of the firm is not considered the most theoretically correct objective for a financial manager to pursue. The reasons for this include the fact that while the pursuit of this objective can efficiently include the measurement of the risk taken in financial decisions, it does not allow consideration of the time value of money. True/False

2. To estimate the retained earnings balance on a pro-forma balance sheet, simply subtract preferred and common dividend payments from after-tax net income. True/False

3. Depreciation expense and accumulated depreciation provide the same information. The only difference between the two is that one is presented on the income or profit and loss statement while the other is presented on the balance sheet or statement of financial position. True/False

4. An increasing Debt/Assets ratio suggests that the firm is reducing financial risk. True/False

5. An increasing inventory turnover ratio is an indication of a decreasing position of liquidity. True False

Explanation / Answer

1. Striving to maximize the size of the firm is not considered the most theoretically correct objective for a financial manager to pursue. The reasons for this include the fact that while the pursuit of this objective can efficiently include the measurement of the risk taken in financial decisions, it does not allow consideration of the time value of money. TRUE The main objective of financial management is wealth maximisation and profit maximisation with some risk consideration but totally ignores the time value of money concept. 2. To estimate the retained earnings balance on a pro-forma balance sheet, simply subtract preferred and common dividend payments from after-tax net income. True/False FALSE The retained earnings balance on a pro -forma b/s is calculated by adding net income, minus any dividends, to the previous retained earnings balance. 3. Depreciation expense and accumulated depreciation provide the same information. The only difference between the two is that one is presented on the income or profit and loss statement while the other is presented on the balance sheet or statement of financial position. True/False FALSE Depreciation is a current year expenses showed income statement while accumulated depreciation is the total amount of depreciation that has been collected on the assets up to the date of the balance sheet 4. An increasing Debt/Assets ratio suggests that the firm is reducing financial risk. True/False FALSE A higher debt/ total asset ratio increases the insolvency risk 5. An increasing inventory turnover ratio is an indication of a decreasing position of liquidity. FALSE A increase in the inventory turnover ratio suggests that the firm's liquidity position is improving.

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