Financial Management
1. The field of finance is closely related to the fields of:
- statistics and economics
- statistics and risk analysis
- economics and accounting
- accounting and comparative return analysis
Correct answer: (C)
economics and accounting
2. Which of the following properly lists balance sheet items in order of liquidity, from most liquid to least liquid?
- Accounts receivable, inventory, marketable securities, cash.
- Cash, marketable securities, accounts receivable, inventory.
- Inventory, marketable securities, cash, accounts receivable.
- Cash, inventory, accounts receivable, marketable securities.
Correct answer: (B)
Cash, marketable securities, accounts receivable, inventory.
3. Amortization is considered a source of funds to the firm because:
- it is purely an accounting entry and doesn't involve a direct disbursement of funds, freeing up these funds for other investments
- it represents a reduction in asset holdings
- it represents an increase in an asset account
- amortization is not a source of funds
Correct answer: (A)
it is purely an accounting entry and doesn't involve a direct disbursement of funds, freeing up these funds for other investments
4. Profitability ratios measure:
- the speed at which the firm is turning over its assets
- the ability of the firm to earn an adequate return on sales, total assets, and invested capital
- the firm's ability to pay off short term obligations as they are due
- the debt position of the firm in light of its assets and earning power
Correct answer: (B)
the ability of the firm to earn an adequate return on sales, total assets, and invested capital
5. Receivables turnover is:
- a profitability ratio
- a debt utilization ratio
- an asset utilization ratio
- a liquidity ratio
Correct answer: (C)
an asset utilization ratio
6. Financial ratios are used to:
- weigh and evaluate the operating performance of the firm
- provide an absolute benchmark of industry performance
- determine which firm will provide the highest return to investors
- None of the above are correct
Correct answer: (A)
weigh and evaluate the operating performance of the firm
7. The construction of the pro forma income statement is based on:
- the prior year's income statement
- sales projections and the production plan
- the cash budget
- the cash budget and prior year's income statement
Correct answer: (B)
sales projections and the production plan
8. The primary purpose of the cash budget is:
- to break the income statement down into monthly periods
- to determine monthly cash receipts
- to determine the collection pattern
- to allow the firm to anticipate the need for outside funding
Correct answer: (D)
to allow the firm to anticipate the need for outside funding
9. Operating leverage may be defined as:
- the degree to which debt is used in financing the firm
- the difference between price and variable costs
- the extent to which capital assets and fixed costs are utilized
- the difference between fixed costs and the contribution margin
Correct answer: (C)
the extent to which capital assets and fixed costs are utilized
10. Financial leverage:
- reflects the firm's commitment to fixed, financial assets
- has no impact on the earning of the firm
- reflects the amount of debt used in the capital structure of the firm
- primarily affects the left side of the balance sheet
Correct answer: (C)
reflects the amount of debt used in the capital structure of the firm