ABC Corporation began operations on January 1st of this year with a cash balance of $250,000. ABC had sales of $200,000 for the month of January, all on credit. ABC allows its customers 30 days to pay. ABC’s expenses for January equal $150,000, and ABC’s ending balance in accounts payable at January 31st is $50,000. In its cash budget for January, ABC’s ending cash balance should be equal to.

Practice exam two

Question 1

Which of the following will most likely result in an increase in discretionary funding needed?

Select one:

1. The company’s profit margin increases.
2. The company’s dividend payout ratio increases.
3. The company’s assets are only operating at 50% of capacity.
4. The company pays its accounts payable in 50 days, up from 45 days.

Question 2

A firm’s cash position would most likely be helped by

Select one:

1. delaying payment of accounts payable.
2. more liberal credit policies for their customers.
3. purchasing land for investment purposes.
4. holding larger inventories.

Question 3

Which of the following is a limitation of the “percent of sales method” of preparing pro forma financial statements?

Select one:

1. A firm’s investment in accounts receivable is seldom related to sales volume.
2. Not all assets and liabilities increase or decrease as a constant percent of sales.
3. Inventory levels are seldom affected by changes in sales volume.
4. The dividend payout ratio may change from one year to the next.

Question 4

ABC Corporation began operations on January 1st of this year with a cash balance of $250,000. ABC had sales of $200,000 for the month of January, all on credit. ABC allows its customers 30 days to pay. ABC’s expenses for January equal $150,000, and ABC’s ending balance in accounts payable at January 31st is $50,000. In its cash budget for January, ABC’s ending cash balance should be equal to

Select one:

1. $300,000 because of GAAP accrual accounting rules.
2. $150,000.
3. $200,000.
4. $100,000.

Question 5

When preparing pro forma financial statement, the income statement must be prepared first because the projected retained earnings balance on the balance sheet is based on the expected net income.

Select one:

1. True
2. False

Question 6

Which of the following is always a non-cash expense?

Select one:

1. income taxes
2. salaries
3. depreciation
4. none of the above

Question 7

Fixed assets are often estimated incorrectly by the percent of sales method because

Select one:

1. fixed assets remain constant and the percent of sales method assumes all assets increase proportionally with sales.
2. fixed asset are very expensive.
3. fixed assets are typically purchased in “lumps” and therefore do not increase proportionally with sales.
4. fixed assets are part of the capital budgeting process.

Question 8

What is the primary tool for short-term financial forecasting?

Select one:

1. pro forma income statement
2. pro forma balance sheet
3. pro forma cash budget
4. capital budgeting

Question 9

The primary purpose of a cash budget is to

Select one:

1. determine the level of investment in current and fixed assets.
2. determine financing needs.
3. provide a detailed plan of future cash flows.
4. determine the estimated income tax for the year.

Question 10

Financial forecasting is the process of attempting to estimate a firm’s future financing requirements.

Select one:

1. True
2. False

Question 11

Marley Financial plans to sell $50,000,000 of 120-day commercial paper, on which it expects to pay discounted interest at a rate of 5% per year. Dealer fees are expected to be $30,000. The effective cost of credit to Marley Financial is

Select one:

5. 5.27%.
6. 5.64%.
7. 6.22%.
8. 7.53%.

Question 12

The primary sources of collateral for secured loans are accounts receivable and inventory.

Select one:

1. True
2. False

Question 13

Blastdale Corp. is considering borrowing $15,000 for a 60-day period. The firm will repay the $15,000 principal amount plus $200 in interest. What is the effective annual rate of interest? Use a 360-day year.

Select one:

7. 7.2%
8. 8.0%
9. 8.2%
10. 10.5%

Question 14

Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APR, or annual percentage rate, calculation?

Select one:

3. 3.33%
4. 4.00%
5. 10.00%
6. 11.75%

Question 15

Which of the following statements concerning liquidity and debt is true?

Select one:

1. The greater the use of short-term debt, the lower the risk of illiquidity.
2. Long-term debt is generally less costly than short-term debt.
3. A firm can reduce its risk for illiquidity by shifting from short-term debt to long-term debt.
4. The risk of illiquidity does not depend on the mix of short-term versus long-term debt.

Question 16

Total assets must always equal the sum of temporary, permanent, and spontaneous sources of financing.

Select one:

1. True
2. False

Question 17

Net working capital refers to which of the following?

Select one:

1. cash, accounts receivable, and inventory
2. notes payable, accruals, and accounts payable
3. current assets plus current liabilities
4. current assets divided by current liabilities
5. current assets minus current liabilities

Question 18

A bank is legally obligated to provide credit under a revolving credit agreement, but not under a line of credit.

Select one:

1. True
2. False

Question 19

A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with

Select one:

1. common equity to avoid interest on a recurring annual need.
2. selling equipment.
3. trade credit.
4. long-term bonds since this is a recurring financing need.

Question 20

A company decreases the risk of insolvency by financing long-term assets with short-term debt.

Select one:

1. True
2. False