Financial Management

1. The field of finance is closely related to the fields of:

  1. statistics and economics
  2. statistics and risk analysis
  3. economics and accounting
  4. 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?

  1. Accounts receivable, inventory, marketable securities, cash.
  2. Cash, marketable securities, accounts receivable, inventory.
  3. Inventory, marketable securities, cash, accounts receivable.
  4. 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:

  1. it is purely an accounting entry and doesn't involve a direct disbursement of funds, freeing up these funds for other investments
  2. it represents a reduction in asset holdings
  3. it represents an increase in an asset account
  4. 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:

  1. the speed at which the firm is turning over its assets
  2. the ability of the firm to earn an adequate return on sales, total assets, and invested capital
  3. the firm's ability to pay off short term obligations as they are due
  4. 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:

  1. a profitability ratio
  2. a debt utilization ratio
  3. an asset utilization ratio
  4. a liquidity ratio
Correct answer: (C)
an asset utilization ratio

6. Financial ratios are used to:

  1. weigh and evaluate the operating performance of the firm
  2. provide an absolute benchmark of industry performance
  3. determine which firm will provide the highest return to investors
  4. 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:

  1. the prior year's income statement
  2. sales projections and the production plan
  3. the cash budget
  4. 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:

  1. to break the income statement down into monthly periods
  2. to determine monthly cash receipts
  3. to determine the collection pattern
  4. 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:

  1. the degree to which debt is used in financing the firm
  2. the difference between price and variable costs
  3. the extent to which capital assets and fixed costs are utilized
  4. 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:

  1. reflects the firm's commitment to fixed, financial assets
  2. has no impact on the earning of the firm
  3. reflects the amount of debt used in the capital structure of the firm
  4. 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
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