Leach TB Chap04 Ed3

Chapter 4: Measuring Financial Performance

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CHAPTER 4 MEASURING FINANCIAL PERFORMANCE True-False Questions T.

1. Assets are financial and physical items controlled or owned by the business.

F.

2. The practice of recording economic activity when realized is known as accrual accounting.

F.

3. How quickly an asset can be converted into cash is called liability.

F.

4. Cash or other assets that are expected to be converted into cash in less than one year are known as current liabilities.

F.

5. The reduction in value of a fixed asset over its expected life intended to reflect the usage or wearing out of the asset is called accumulated depreciation.

F.

6. Amounts owed to another for purchase made on credit which come due in less than one year are known as receivables.

T.

7. Long-term, non-cancelable leases whereby the owner receives payments that cover the cost of the equipment plus a return on investment in the equipment is known as a capital lease.

T.

8. Operating income, or earnings before interest and taxes, reflects the firm’s profits after all operating expenses, excluding financing costs, have been deducted from net sales.

T.

9. Net income, or profit, is the bottom line measure of what’s left from the firm’s net sales after operating expenses, financing costs, and taxes have been deducted.

F.

10. Net cash burn occurs when the sum of cash flows from operations and investing is positive.

F.

11. Net cash build occurs when the sum of cash flows from operations and investing is negative.

F.

12. GAAP stands for “General American Accounting Principles.”

T.

13. GAAP stands for “Generally Accepted Accounting Principles.”

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Chapter 4: Measuring Financial Performance

T.

14. Accrual accounting is the practice of recording economic activity when recognized rather than waiting until realized.

F.

15. The balance sheet equation is: Total Assets = Total Liabilities + Net Income.

T.

16. During the development stage in a new venture’s life cycle, the balance sheet reflects the acquisition of initial assets and the obtaining of seed financing.

T.

17. During the development stage in a new venture’s life cycle, the income statement typically shows no sales but expenses such as rent, utilities, and a subsistence salary for the entrepreneur.

F.

18. During the startup stage in a new venture’s life cycle, the income statement typically shows no sales but expenses including the production and market of products or services.

F.

19. Production assets (e.g., inventories and equipment to produce products and give credit to customers) usually occurs during the development stage in a new venture’s life cycle.

T.

20. Seed financing (e.g., financing from the entrepreneur’s assets, family, and friends) usually occurs during the development stage in a new venture’s life cycle.

F.

21. Startup financing (e.g., financing from business angels and venture capitalists) usually occurs during the development stage in a new venture’s life cycle.

F.

22. “Cost of goods sold” is the cost of materials, labor, and advertising incurred to produce the products that were sold.

T.

23. “Variable expenses” are costs or expenses that vary directly with revenues.

F.

24. “Variable expenses” are costs that are expected to remain constant over a range of revenues for a specific time period.

F.

25. EBDAT is earnings before interest, taxes, depreciation, and amortization.

T.

26. “Contribution profit margin” is the portion of the sale of a product that contributes to covering the cash fixed costs,

F.

27. “Economic value added” (EVA) measures a firm’s market value added over a specified time period.

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Multiple-Choice Questions b.

1. Financial statement that provides a snapshot of a business’ financial position as of a specific date is called the a. income statement b. balance sheet c. statement of retained earnings d. statement of cash flows

a.

2. Financial statement that reports the revenues generated and expenses incurred over an accounting period is called the a. income statement b. balance sheet c. statement of retained earnings d. statement of cash flows

d.

3. Financial statement that shows how cash, as reflected in accrual accounting, flows into and out of a company during a specific period of operation is called the a. income statement b. balance sheet c. statement of retained earnings d. statement of cash flows

d.

4. Cash includes all of the following except a. coins b. currency c. checking accounts d. certificates of deposit

b.

5. Which of the following is not a characteristic of marketable securities? a. short-term b. illiquid c. high-quality d. interest-bearing

c.

6. Which of the following is not a characteristic of inventories? a. raw materials b. finished products c. goods sold but not yet shipped d. work-in-process

e.

7. Which of the following is not depreciated?

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a. b. c. d. e.

inventory machinery land both a and b both a and c

d.

8. Which of the following is a use of cash? a. a decrease in inventory b. an increase in accrued liabilities c. the sale of an asset for a gain d. a drop in the amount owed on a bond e. an increase is stock issued

d.

9. Which of the following is a source of cash? a. an increase in accounts receivable b. a decrease in wages payable c. the acquisition of land d. an increase in the amount owed on a note payable e. the repurchase of outstanding shares of stock

b.

10. Which of the following is not a category on the statement of cash flows? a. cash flow from operating activities b. cash flow from equity activities c. cash flow from investing activities d. cash flow from financing activities Note: Use the following data for the next three problems (11, 12, & 13). Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling expenses of $3,500, depreciation of $2,000, interest expense of $2,000, and a tax rate of 34%.

a.

11. What is Acme’s operating income? a. $4,000 b. $2,000 c. $9,500 d. $6,000 e. $1,320

d.

12. What is Acme’s taxable income and tax expense? a. $6,000; $2,040 b. $2,000; $1,320 c. $4,000; $1,360 d. $2,000; $680 e. $9,500; $3,230

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e.

13. What is Acme’s net income? a. $2,720 b. $897.60 c. $6,460 d. $2,040 e. $1,320

c.

14. Your venture has total assets of $690, net fixed assets of $500, long term debt of $80, and stockholders’ equity of $400. What is the amount of your venture’s current liabilities? a. -$100 b. $100 c. $210 d. $290 e. $1,090

b.

15. In its first year, Joe’s Start-Up Company had revenues of $125,000 and cost of goods sold of $81,250, which was the only variable cost. Depreciation was $20,000, and cash costs were $5,000 in financing costs, admin expenses of $50,000, and $45,000 in marketing expenses – all of which were fixed. What is the survival breakeven revenue? a. $342,857 b. $285,714 c. $271,429 d. $184,615 e. $153,846

c.

16. In breakeven analysis, solving for when EBTDA is equal to zero gives breakeven in terms of: a. economic revenues b. variable costs c. survival revenues d. fixed costs

b.

17. A firm’s net operating profit after taxes (NOPAT) is calculated as: a. net profit b. EBIT times one minus the tax rate c. EBT minus interest paid d. EBIT times the tax rate

c.

18. Economic Value Added (EVA) is calculated as: a. NOPAT plus after-tax dollar cost of financial capital used b. ROE minus percentage cost of financial capital c. NOPAT minus after-tax dollar cost of financial capital used

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Chapter 4: Measuring Financial Performance

d. ROE plus the percentage cost of financial capital d.

19. Expenses or costs that vary directly with revenues are said to be: a. fixed expenses b. semi-fixed expenses c. semi-variable expenses d. variable expenses

a.

20. The balance sheet equation states that “total assets a. total liabilities + depreciation b. total liabilities + owners’ equity c. owners’ equity + net income d. owners’ equity + current liabilities e. total liabilities + net income

c.

21. A lease that provides maintenance in addition to financing and is also usually cancelable is called: a. capital lease b. liability lease c. operating lease d. asset lease e. equity lease

d.

22. Which one of the following is not considered to be a current asset? a. cash b. receivables c. inventories d. fixed assets

a.

23. Which one of the following is not considered to be an internal operating schedule? a. income statement b. cost of production schedule c. cost of goods sold schedule d. inventories schedule

c.

24. “Net cash burn” occurs when the sum of which of the following items is negative? a. cash flows from operations and financing b. cash flows from investing and financing c, cash flows from operations and investing d. cash flows from net income and depreciation e. cash flows from operations and net income

a.

25. EBDAT is equal to: a. revenues – variable costs – cash fixed costs

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b. revenues + variable costs + cash fixed costs c. revenues – variables costs – total fixed costs d. revenues + variable costs – cash fixed costs d.

26. NOPAT is defined as: a. revenues times (1 + tax rate) b. revenues times (1 – tax rate) c. EBITDA times (1 – tax rate) d. EBIT times (1 – tax rate) e. net income times (1 + tax rate)

c.

27. What is the survival revenues breakeven based on: cash fixed costs = $400,000 and a variable cost revenue ratio = .65? a. $460,500 b. $615,385 c. $1,142,857 d. $2,000,334 e. $4,000,667

b.

28. Use the following information to determine the cash fixed costs: Administrative expenses = $200,000; Marketing expenses = $180,000; Depreciation expenses = $100,000; and Interest expenses = $20,000. a. $380,000 b. $400,000 c. $480,000 d. $500,000 e. $620,000

c.

29. Find the “contribution profit margin” based on the following information: cash fixed costs = $60,000; variable costs = $70,000; and sales = $100,000. a. 70% b. 60% c. 30% d. 40% e. 100%

d.

30. Find the “survival revenues” (SR), also known as the EBDAT breakeven) based on the following information: cash fixed costs = $60,000; variable costs = $70,000; and sales = $100,000. a. $85,714 b. $100,000 c. $116,667 d. $200,000 e. $300,000

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Chapter 4: Measuring Financial Performance

a.

31. Find the NOPAT given the following information: sales = $520,000, earnings before interest = $100,000; interest = $20,000; and the tax rate = 30%. a. $70,000 b. $56,000 c. $30,000 d. $24,000 e. $10,000

c.

32. Find the NOPAT breakeven revenues (NR) given the following information: total operating fixed costs = $75,000; variable costs = $150,000; and sales = $200,000. a. $100,000 b. $240,000 c. $300,000 d. $400,000 e. $460,000

d.

33.. Determine the total operating fixed costs (TOFC) based on the following: Administrative expenses = $200,000; Marketing expenses = $180,000; Depreciation expenses = $100,000; and Interest expenses = $20,000. a. $200,000 b. $380,000 c. $400,000 d. $480,000 e. $500,000

c.

34. What is the survival revenues breakeven based on the following: Administrative expenses = $200,000; Marketing expenses = $180,000; Depreciation expenses = $100,000; and Interest expenses = $20,000; and a variable cost revenue ratio = .50? a. $400,000 b. $600,000 c. $800,000 d. $1,000,000 e. $1,200,000