A) Future profitability based on past profitability.
B) Probability of success of a new product development.
C) A forecast of dividends.
D) Assessment of risk that a company may have more debt than it can repay if the economy enters a recession.
2. On January 31, an entity's balance sheet showed total assets of $750 and liabilities of $250. Owners' equity at January 31 was:
A) $ 500
C) $ 750
D) $ 250
3. The term, "earned," in revenue recognition refers to which of the following?
A) The entity has completed, or substantially completed, the activities it must perform to be entitled to the revenue benefits.
B) The product or service has been exchanged for cash, claims to cash, or an asset that is readily convertible to a known amount of cash or claims to cash.
C) The entity has received an irrevocable order for goods or services.
D) Cash has been received with an irrevocable order for goods or services.
E) None of the above.
4. Management's use of resources can best be evaluated by focusing on measures of:
D) book value.
5. An entity's current ratio will be influenced by:
A) the inventory cost flow assumption used.
B) writing off an overdue account receivable against the allowance for uncollectible accounts.
C) the depreciation method used.
D) issuance of a stock dividend.
6. The comparison of activity measures of different companies is complicated by the fact that:
A) different inventory cost flow assumptions may be used.
B) dollar amounts of assets may be significantly different.
C) only one of the companies may have preferred stock outstanding.
D) the number of shares of common stock issued may be significantly different.
7. The inventory turnover calculation:
A) is wrong unless cost of goods sold is used in the numerator.
B) is wrong unless sales is used in the numerator.
C) is an alternative way of expressing the number of days' sales in inventory.
D) requires knowledge of the inventory cost flow assumption being used.
8. If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts receivable would be expected to be:
A) less than 10.
B) between 10 and 25.
C) between 25 and 40.
D) over 40.
9. Asset turnover calculations:
A) are made by dividing the average asset balance during the year by the sales for the year.
B) are made by dividing sales for the year by the asset balance at the end of the year.
C) communicate information about how promptly the entity pays its bills.
D) should be evaluated by observing the turnover trend over a period of time.
10. The cost of a single unit of production in excess of the breakeven point in units is:
A) its fixed cost and variable cost.
B) its fixed cost only.
C) its variable cost only.
D) none of the above.
11. What percentage of the contribution margin is profit on units sold in excess of the breakeven point?
A) It's 50% to the contribution margin ratio.
B) It's equal to the variable cost ratio.
C) It's equal of the gross profit ratio.
D) It's 100%.
12. An example of a cost that is likely to have a variable behavior pattern is:
A) sales force salaries.
B) depreciation of production equipment.
C) salaries of production supervisors.
D) direct labor costs.
13. What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 40 days, and an annual cost of goods sold of $18 million?
A) 14.59 days
B) 46.25 days
C) 70.41 days
D) 136.25 days
14. Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?
A) $ 952
15. What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?
16. What is the required return for a stock that has a 5% constant growth rate, a price of $25, an expected dividend of $2, and a P/E ratio of 10?
17. An increase in a firm's financial leverage will:
A) increase the variability in earnings per share.
B) reduce the operating risk of the firm.
C) increase the value of the firm in a non-MM world.
D) increase the WACC.
18. A firm has an expected return on equity of 16% and an after-tax cost of debt of 8%. What debt-equity ratio should be used in order to keep the WACC at 12%?
19. What is the most likely prediction after a firm reduces its regular dividend payment?
A) Earnings are expected to decline.
B) Investment is expected to increase.
C) Retained earnings are expected to decrease.
D) Share price is expected to increase.
20 . Which of the following would not be included among the costs of carrying inventory?
B) Opportunity cost of capital
C) Raw material cost
D) Risk of pilferage
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