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ANSWERS TO SHORT QUESTIONS
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Evaluating financial performance financial planning and forecasting capital budgeting analysis managing cash flows mergers and acquisition
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Answers to Final Exams – Short Courses located atwww.exinfm.com/training
Course 1 – Evaluating Financial Performance
1. Which ratio is best used for measuring how well management did in managing the funds
provided by shareholders?
a. Profit Margin
b. Debt to Equity
c. Return on Equity
d. Inventory Turnover
Answer = c: Shareholders are interested in the return a business generates on the money
the shareholder has invested. Therefore, answer c – Return on Equity is correct.
Shareholders tend to focus on long term returns vs. managers who focus on profitability.
Answer a – Profit Margin would be more applicable to Managers. Financial Managers and
people interested in assessing risk would be interested in b – Debt to Equity. Mangers,
primarily interested in inventory management, would be interested in d – Inventory Turnover.
2. If sales are $ 600,000 and assets are $ 400,000, then asset turnover is:
a. .67
b. 1.50
c. 2.00
d. 3.50
Answer = b: The British often refer to sales as turnover since the ultimate reason a business
invests in assets is to turn over the asset dollar into a sales dollar. If we divide sales of $
600,000 by $ 400,000 we get 1.5 – answer is thus b. Average assets is often used in the
denominator of the ratio. This tells us for every $ 1.00 we invested into assets, we were able
to turn this into $ 1.50 of sales.
3. An extremely high current ratio implies:
a. Management is not investing idle assets productively.
b. Current assets have been depleted and the company is insolvent.
c. Total assets are earning a very low rate of return.
d. Current liabilities are higher than current assets.
,Answer = a: A high current ratio may imply that the company is carrying a lot of current
assets on the books and these assets might be better utilized if the company invested or
converted these assets into long-term investments. Generally, a business generates a return
on its long-term assets and not its liquid or current assets such as cash, accounts receivable,
or inventory. These types of assets are sitting around – idle. They don’t produce or generate
sales or service customers like your long-term investments in technology would. You gain
little by holding idle assets (including non-productive fixed assets) and you tend to gain much
more by investing into longer term investments that provide solutions to your customers,
make your employees more productive, etc.
4. If we have cash of $ 1,500, accounts receivables of $ 25,500 and current liabilities of $
30,000, our quick or acid test ratio would be:
a. 1.88
b. 1.33
c. 1.11
d. .90
Answer = d: If you add up your highly liquid assets ($ 1,500) of cash and accounts
receivable ($ 25,500), you have total liquid assets of $ 27,000. Now divide this by the total
current liabilities of $ 30,000 = .90. For every $ 1.00 of current liabilities, we have $ .90 of
liquid assets to cover these liabilities.
5. The number of times we convert receivables into cash during the year is measured by:
a. Capital Turnover
b. Asset Turnover
c. Accounts Receivable Turnover
d. Return on Assets
Answer = c: The Accounts Receivable Turnover ratio measures the number of times you
turn receivables over into cash. It is calculated by dividing your credit sales by the average
receivable balance for the period. For example, if you had credit sales for the year of $
100,000 and your average receivable balance during the year was $ 10,000, then you have a
receivable turnover of 10.
6. If our cost of sales are $ 120,000 and our average inventory balance is $ 90,000, then our
inventory turnover rate is:
a. .50
b. .75
c. 1.00
d. 1.33
,Answer = d: Simply divide the Cost of Goods Sold or Cost of Sales of $ 120,000 by the
average inventory balance for the period of $ 90,000 = 1.33.
7. We can estimate our Operating Cycle by taking the sum of:
a. Receivable Turnover + Inventory Turnover
b. Days in Receivables + Days in Inventory
c. Asset Turnover + Return on Sales
d. Days in Sales + Days in Assets
Answer = b. A company must run through a conversion cycle which for retail businesses
would consist of the company’s time to take cash invest the cash into inventory and then sell
the inventory on account, turning inventory into accounts receivable and then finally,
converting the receivable back into cash where we first started. So the number of days in
receivables + inventory would be the time we tied up our cash and this time period should
cover the normal operating cycle of the business and depending upon the business, this may
or may not fit within a 12-month annual period.
8. If Operating Income (Earnings Before Interest Taxes) is $ 63,000 and Net Sales are $
900,000, then Operating Income to Sales is:
a. 18%
b. 12%
c. 7%
d. 4%
Answer = c: This is simply dividing your operating income of $ 63,000 by the total net sales
of $ 900,000 = 7%. This gives us some idea of the operating return the company generates;
i.e. before taxes and non-operating expenses, for every $ 1.00 of sales we generate a return
of $ .07.
9. If the price of the stock is $ 45.00 and the Earnings per Share is $ 9.00, then the P / E
Ratio is:
a. 2
b. 5
c. 9
d. 15
Answer = b: Simply divide the price of the stock of $ 45.00 by the Earning per Share of $
9.00 = 5. The company is selling for 5 times earnings. This is a ratio commonly used by
investors to quickly evaluate if a company is possibly under or over valued on the stock
market.
, 10. Net Income for 1996 was $ 400,000 and Net Income for 1997 was $ 420,000. The
percentage change in Net Income is:
a. 1%
b. 3%
c. 5%
d. 10%
Answer = c: The percentage increase in net income is 5%. Simply divide the incremental
change of $ 20,000 ($ 420,000 - $ 400,000) by the base period amount of $ 400,000.
Course 2 – Financial Planning and Forecasting
1. In order for budgeting to really work, we must link the budgeting process with:
a. Financial Statements
b. Accounting Transactions
c. Strategic Planning
d. Operating Reports
Answer = c: There is an overall process that must be in place so that everything is linked.
This typically starts with planning at a very high level – strategic. Once you have defined a
strategy, you can move the process down to operational plan and this in turn should feed
your financial planning process or budgets.
2. The first forecast we will prepare for budgeting will be the:
a. Budgeted Income Statement
b. Sales Forecast
c. Cash Budget
d. Budgeted Balance Sheet
Answer = b: Many financial forecasting models will begin with the sales variable since this
variable impacts so many of your other financial forecasts. For example, the inventory and
assets you need is dependent upon the level of sales you expect. And once you know your
asset needs, then you can take a look at how you will finance these assets.
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