MIDTERM EXAM

d. A manufacturer with annual sales of less than ₱10 million

ABC is a retailer with annual sales of less than P10 million. At the end of 2023, ratio analysis is performed on ABC's financial statements by various stakeholders. ABC 2023 ratios are not likely to be compared to:

a. ABC’s 2022 ratios

b. ABC’s 2023 budgeted ratios

c. Other retailers with annual sales of less than ₱10 million

d. A manufacturer with annual sales of less than ₱10 million

b. Common-size financial statements

Which of the following generally is the most useful in analyzing companies of different sizes?

a. Comparative statements

b. Common-size financial statements

c. Price-level accounting

d. Profitability index

b. Other time periods within the firm

Trend analysis allows a firm to compare its performance to:

a. Other firms in the industry

b. Other time periods within the firm

c. Other industries

d. None of the above

a. Liquidity, activity, and profitability

4. In the near term, the important ratios that provide the information critical to the short-run operation of the firm are:

a. Liquidity, activity, and profitability

b. Liquidity, activity, and debt

c. Liquidity, activity, and equity

d. Activity, debt, and profitability

a. Sales volume decreases materiality late in the year

Which of the following reasons should not be considered in order to explain why the receivables appear to be abnormally high?

a. Sales volume decreases materiality late in the year

b. Receivables have collectability problems and possibly some should have been written off

c. Material amount of receivables are on the installment basis

d. Sales volume expanded materially late in the year

b. Current ratio

Which of the following ratios is rated to be a primary measure of liquidity and considered of highest significance rating of the liquidity ratios a bank analyst?

a. Debt/equity

b. Current ratio

c. Degree of financial leverage

d. Accounts receivables turnover in days

a. Decreases

As a company’s accounts receivables turnover ratio increases from one year to the next, they will find that the number of days’ sales in receivables

a. Decreases

b. Increases

c. Stays the same

d. Can not be determined

d. The company took longer to collect on their accounts receivables in the current year than in prior years

ABC has recently calculated the accounts receivable turnover for the current year to be 15. In prior years, the same ratio was always higher. Which of the following statements would be the best interpretation for teh reason for the ratio’s change?

a. The company had less sales in the current year than in prior years

b. The company had more sales in the current year than in prior years

c. The company had fewer accounts receivables in the current year than in prior years

d. The company took longer to collect on their accounts receivables in the current year than in prior years

c. The company fewer days to sell its inventory in the current year than in prior years

ABC has recently calculated the inventiry turnover for the current year to be 30. In prior years, the same ratio was always lower. Which of the following statements would be the best interpretation for the reason for the ratio’s change?

a. The company had less sales in the current year than in prior years

b. The company purchased less inventory in the current year than in prior years

c. The company fewer days to sell its inventory in the current year than in prior years

d. The company took more days to sell its inventory in the current year than in prior years

b. Stable current ratio with declining quick ratios

Which of the following would best indicate the the firm is carrying excess inventory?

a. A decline in the current ratio

b. Stable current ratio with declining quick ratios

c. A decline in days’ sales in inventory

d. A rise in total asset turnover

d. Pay off a portion of long-term payable with cash

Which of the following would be most detrimental to a firm’s current ratio if that ratio is currently 2.0?

a. Buy raw materials on credit

b. Sell marketable securities at cost

c. Pay off accounts payable with cash

d. Pay off a portion of long-term payable with cash

c. Decrease No effect

If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash in short-term debt and collection of accounts receivables have on the ratio?

Short-term borrowing Collection of receivables

a. Increase No effect

b. Increase Increase

c. Decrease No effect

d. Decrease Decrease

c. Decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios

A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should

a. Improve its collection practices, thereby increasing cash and increasing its current and quick ratios

b. Improve its collection practices and pay accounts payable, thereby decreasing current liabilities and increasing the current and quick ratios

c. Decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios

d. Increase inventory, thereby increasing current assets and the current and quick ratios

c. Decreasing current liabilities

ABC Company has determine that it needs to increase its current ratio in order to comply with a creditor’s loan agreement. All else being equal, which of the following ways would be best for increasing their current ratio?

a. Increasing long-term assets

b. Decreasing current assets

c. Decreasing current liabilities

d. Increasing long-term liabilities

d. The company prefers to raise funds by issuing capital stock than long-term borrowing

Which of the following statements would be the best interpretation of a company’s low debt-to-equity ratio?

a. The company chooses to pay cash for most of its major purchases

b. The company is not liquid

c. The company prefers to pay stockholders high dividends out of their retained earnings

d. The company prefers to raise funds by issuing capital stock than long-term borrowing

a. Adopting a new inventory system that reduces the inventory conversion period

Which of the following actions is likely to reduce the length of a firm’s cash conversion cycle?

a. Adopting a new inventory system that reduces the inventory conversion period

b. Adopting a new inventory system that increases the inventory conversion period

c. Increasing the average days sales outstanding on its accountable receivable

d. Reducing the amount of time the firm tkaes to pay its suppliers

c. Decrease

If everything else remains constant and a firm increases its cash conversion cycle, its probability will likely

a. Increase

b. Increase if earnings are positive

c. Decrease

d. Not be affected

d. Less the firm must invest in working capital

The longer the firm’s accounts payable period, the

a. Longer the firm’s cash conversion period

b. Shorter the firm’s inventory period

c. More the delay in the accounts receivable period

d. Less the firm must invest in working capital

d. Financing permanent inventory buildup with long-term, debt is an example of an aggressive working capital policy

All of the following statements about working capital are correct except:

a. Current liabilities are an important source of financing for many small firms

b. Profitability varies inverselt with liquidity

c. The hedging approach to financing involves matching maturities of debt with specific financing needs

d. Financing permanent inventory buildup with long-term, debt is an example of an aggressive working capital policy

d. A firm strives to maximize the float for cash disbursement and minimize the float for cash receipts

Which of the following true about a firm’s float?

a. A firm strives to minimze the float for both cash receipts and cash disbursements

b. A firm strives to maximize the float for both cash receipts and cash disbursements

c. A firm strives to maximize the float for cash receipts and minimize the float for cash disbursements

d. A firm strives to maximize the float for cash disbursement and minimize the float for cash receipts

d. Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency

Determining the appropriate level of working capital for a firm requires

a. Evaluating the risks associated with various levels of fixed assets and the types of debt used finance these assets

b. Changing the capital structure and dividend policy of the firm

c. Maintaining short-term debt at the lowest possible level because it is generally more expense

d. Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency

b. ABC has a low current ratio which DEF has a high current ratio

ABC Company follows an aggressive financing policy in its working capital management while DEF Company follows a conservative financing policy. Which of the following statements is correct?

a. ABC has low ratio of short-term debt to total debt while DEF has a high ratio of short-term debt to total debt.

b. ABC has a low current ratio which DEF has a high current ratio.

c. ABC has less liquidity risk while BEF has more liquidity risk.

d. ABC finances short-term assets with long-term debt while DEF finances short-term assets with short-term debt.

b. Increases its investment in working capital days

As a firm's cash conversion cycle increases, the firm:

a. Becomes less profitable

b. Increases its investment in working capital days

c. Reduces its accounts payable period

d. Incurs more shortage costs

b. Company might well end up with a lower debt ratio

Which of the following statements is most correct? If a company lowers its days' sales outstanding, but not changes occur in sales or operating costs, then the

a. Company might well end up with a higher debt ratio

b. Company might well end up with a lower debt ratio

c. Company would probably end up with a higher ROE

d. Company's total asset turnover ratio would probably decline

b. Cost of carrying inventory decreases

The amount of inventory that a company would tend to hold in stock would increase as the

a. Sales level falls to a permanently lower level

b. Cost of carrying inventory decreases

c. Variability of sales decreases

d. Cost of running out of stock decreases

c. Increases by one-half the amount of the safety stock

When a specified level of safety stock is carried for an item in inventory, the average inventory level for that item

a. Decreases by the amount of the safety stock

b. Is one-half the level of the safety stock

c. Increases by one-half the amount of the safety stock

a. Current order size is greater than optimal

Which of the following statements is correct for a firm that currently has total costs of carrying and

ordering inventory that are 50% higher than total carrying costs?

a. Current order size is greater than optimal

b. Current order size is less than optimal

c. Per unit carrying costs are too high

d. The optimal order size is currently being used

b. Decreasing Increasing

Which changes in costs are most conductive to switching from a traditional inventory ordering system to a just-in-time ordering system?

Cost per purchase Inventory unit carrying cost

order

a. Increase Increasing

b. Decreasing Increasing

c. Decreasing Decreasing

d. Increasing Decreasing

a. Average daily usage

To determine the reorder point, calculations normally include the

a. Average daily usage

b. Ordering cost

c. Economic order quantity

d. Carrying cost

d. Volume of products in inventory

36. To evaluate the efficiency of purcahse transactions, management decise to calculate the economic order quantity for a sample of the company’s products. To calculate the economic order quantity, management would need data for all of the following, except the

a. Volume of product sales

b. Purchase prices of the products

c. The fixed cost of ordering products

d. Volume of products in inventory

b. Net income is less than the interest expense

A times interest earned ratio of 0.90 to 1 means that the

a. Firm will default on its interest payment

b. Net income is less than the interest expense

c. Cash flows is less than the net income

d. Cash flow exceeds the net income

c. Company A is riskier than Company B

Companies A and B are in the same industry and have similar characteristics except that Company A is more leveraged that Company B. Both companies have the same income before interest and taxes and the same total assets. Based on this information, we could conclude that

a. Company A has higher net income than Company B

b. Company A has a lower return on assets than Company B

c. Company A is riskier than Company B

d. Company A has a lower debt ratio than Company B

c. The ratio decreased

ABC Company had 250,000.00 of current assers and 90,000.00 of curent loabilities befoe borrowing 60,000.00 from the bank with a 3-month note payable. What effect did the borrowing transaction have on ABC Company current ratio?

a. The ratio remained unchanged

b. The change in the current ratio cannot determined

c. The ratio decreased

d. The ratio increased

c. Increase Decrease

ABC Company from a traditional manufacturing philosophy to a just-in-time technology. What are the expected effects of this change on ABC inventoy turnover and inventory as a percentage assets reported on ABC’s balance sheet?

Inventory turnover Inventory Percentage

a. Decrease Decrease

b. Decrease Increase

c. Increase Decrease

d. Increase Increase

Refinancing of 500,000 of short-term debt with long-term debt

ABC Company has current assets of 4,000,000 and current liabilities of 3,000,0000. Which of following transactions would increase its working capital?

a. Prepayment of 50,000 of nect years rent

b. Refinancing of 500,000 of short-term debt with long-term debt

c. Acquisition of land valued at 1 million by issuing new common stock

d. Purchase of 500,000 marketable securities for cash