FIN 534 Midterm Exam

1. Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?

2. Lucy’s Music Emporium opened its doors on January 1, 2012, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 20 years, but in December 2012 management realized that the assets would last for only 15 years. The firm’s accountants plan to report the 2012 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements?

3. The LeMond Corporation just purchased a new production line. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

9. Which of the following items cannot be found on a firm’s balance sheet under current liabilities?

10. Which of the following items is NOT included in current assets?

11. Assume that Congress recently passed a provision that will enable Barton’s Rare Books (BRB) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate. Prior to the new provision, BRB’s net income after taxes was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BRB’s financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

12. Danielle’s Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

17. If a bank loan officer were considering a company’s request for a loan, which of the following statements would you consider to be CORRECT?

18. A firm’s new president wants to strengthen the company’s financial position. Which of the following actions would make it financially stronger?

19. Which of the following would indicate an improvement in a company’s financial position, holding other things constant?

22. Cordelion Communications is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

23. Arshadi Corp.’s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?

24. If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

25. You observe that a firm’s ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?

26. Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?

27. Companies A and C each reported the same earnings per share (EPS), but Company A’s stock trades at a higher price. Which of the following statements is CORRECT?

28. Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company Heidee has the higher debt ratio. Which of the following statements is CORRECT?

29. Considered alone, which of the following would increase a company’s current ratio?

30. Which of the following statements is CORRECT?