Part I.
Please indicate if the answer is True or False for the following questions
1. Liquidity ratios measure the extent of a firm's financing with debt relative to equity. F
2. Using comparative statistical ratios to help determine a company's relative position within its industry is misleading due to the many accounting choices and techniques firms choose to report information. F
3. An increasing average collection period (Number of days increases) implies the firm has tightened its credit policies. F
4. Temporary shortfalls of cash can be satisfied by borrowing or other means, such as selling long-lived assets, but ultimately a company must generate cash from operations. T
5. Gains and losses from asset sales are considered an operating activity. F
Part II.
Please circle the correct answer for the Multiple Choice Questions 7-9
6. Which of the following is not true with regard to the preparation of a cash flow statement?
a. Cash flows are categorized by operating, investing, and financing activities.
b. The changes in all income statement accounts are calculated and then listed as cash inflows or outflows.
c. The direct method or the indirect method may be used to prepare the statement of cash flows.
d. The changes in all of the balance sheet accounts are calculated and then listed as inflows or outflows, except for cash.
7. Which of the following items are included in the adjustments to net income to obtain cash flow from operating activities?
a. Payment of dividends and depreciation expense.
b. The change in accounts receivable and the acquisition of land.
c. The gain from an asset sale and the payment of dividends.
d. The change in inventory and depreciation expense.
8. Which of the following could be indicative of cash flow problems or a result of an expansion?
a. Increasing accounts receivable and decreasing inventories.
b. Increasing accounts receivable and increasing inventories.
c. Decreasing accounts receivable and increasing inventories.
d. Decreasing accounts receivable and decreasing inventories.
9. The following items would be classified as investing activities on the statement of cash flows:
a. Proceeds from borrowing, payment of dividends, receipt of dividends.
b. Sale of goods, receipt of dividends, repurchase of firm's own stock.
c. Sale of property, purchase of equity securities, loans to others.
d. Payment to lenders, proceeds from issuing common stock, revenue.
Part III.
Use the indirect method to answer questions 10-11.
Balance Sheet
December 31, 2011 and 2010
2011 2010
Cash $220 $110
A/R 45 60
Inventory 110 90
Total current assets $375 $260
Property, plant & equipment 140 140
Less: Accumulated depreciation 40 25
Property, plant & equipment, net $100 $115
Total assets $475 $375
A/P $40 $30
Accrued expenses 10 15
Total current liabilities $50 $45
Common stock 200 200
Retained earnings 225 130
Total liabilities and stockholders' equity $475 $375
Income Statement
For the Year Ended December 31, 2011
Sales $600
COGS 240
Gross profit $360
Operating and other expenses 265
Net income $95
10. Compute cash flow from operating activities.
Net income $95
Adjustments:
Depreciation 15
Changes in assets/liabilities:
A/R 15
Inventory (20)
A/P 10
Accrued expenses ( 5)
Cash flow from operating activities $110
11. Compute cash flow from financing activities.
Cash received from customers (600 + 15) $615
Cash paid to suppliers for inventory (240 + 20 - 10) (250)
Cash paid for operating expenses (265 - 15 + 5) (255)
Cash flow from operating activities $110
12. What type of ratios measure the liquidity of specific assets and the efficiency of managing those assets?
a. Activity ratios.
b. Liquidity ratios.
c. Leverage ratios.
d. Profitability ratios.
13. Using the following list of items, classify each item in the table given below as inflow or outflow and whether it is operating, investing and financing
a. Proceeds from borrowing
b. Payments for purchase of inventory
c. Revenues from sales of long-lived assets
d. Payment of dividends
e. Revenue from sales of goods
f. Repayments of debt principal
g. Acquisitions of long-lived assets
h. Payments to lenders (interest)
i. Proceeds from issuing the firm's own equity securities
j. Revenue from services
k. Payments for operating expenses
l. Repurchase of firms own shares
m. Payments for taxes
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Operating Activities
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Inflows
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Outflows
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e. Revenue from sales of goods
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b. Payments for purchase of inventory
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g. Returns of equity securities (dividends)
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j. Payments to lenders (interest)
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l. Revenue from services
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m. Payments for operating expenses
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o. Payments for taxes
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Investing Activities
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Inflows
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Outflows
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c. Revenues from sales of long-lived assets
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h. Loans (principal) to others
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p. Revenue from sales of debt and equity securities of other entities
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i. Acquisitions of long-lived assets
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Financing Activities
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Inflows
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Outflows
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a. Proceeds from borrowing
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d. Payment of dividends
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k. Proceeds from issuing the firm's own equity securities
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f. Repayments of debt principal
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n. Repurchase of firms own shares
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Use the following selected financial information for Cascabel Corporation to answer question
Balance Sheet
December 31, 2012
Assets Liabilities and stockholders' equity
Current assets Current liabilities
Cash 2 Accounts payable 36
Short-term investments 10 Accrued liabilities 25
Accounts receivable 52 Total current liabilities 61
Other current assets 8 Long-term debt 82
Total current assets 129 Total liabilities 163
Long-term assets Stockholders' equity
Net PPE 65 Common stock and PIC 110
Goodwill 130 Retained earnings 51
Total stockholders' equity 161
Total assets 324 Total liabilities and equity 324
Cascabel Corporation
Income Statement
For the Year Ended December 31, 2012
Net sales $345
Cost of goods sold 248
Gross profit $97
Operating expenses 74
Operating profit $23
Interest expense 8
Earnings before taxes $15
Income tax expense 4
Net profit $ 11
Statement of Cash Flow Information
For the Year Ended December 31, 2012
Cash from operating activities $20
Investing activities:
Capital expenditures $25
Acquisitions $9
Financing activities:
Proceeds from long-term borrowing $12
Payments on long-term borrowing $31
Payments of cash dividends $6
Cash paid for interest $9
Cash paid for income taxes $5
14. Cascabel's current ratio is:
a. .47
b. 2.11
c. 1.18
d. 1.79
15. Cascabel's cash flow liquidity ratio is:
a. .52
b. .36
c. 1.91
d. .33
16. Cascabel's cash conversion cycle is:
a. 82 days
b. 24 days
c. 192 days
d. 86 days
17. Cascabel's fixed asset turnover ratio is:
a. 5.31
b. .19
c. 5.91
d. .17
18. Cascabel's cash interest coverage ratio is:
a. 2.50
b. 3.50
c. 3.78
d. 4.50
19. Cascabel's cash flow adequacy ratio is:
a. 3.10
b. .32
c. .28
d. .21
20. Cascabel's operating profit margin is:
a. 5.80%
b. 4.35%
c. 3.19%
d. 6.67%
21. Cascabel's cash flow margin is:
a. 1.81%
b. .58%
c. 5.80%
d. 3.48%
22. What is the cash conversion or net trade cycle?
a. The amount of time needed to complete the normal operating cycle of a firm.
b. The amount of time it takes to manufacture or buy inventory.
c. The amount of time it takes to sell inventory.
d. The amount of time it takes to be profitable.
23. Below is a Statement of cash Flows for Kat Kompany.
Using the information explain the company what is the company's cash flow situation from 2010 through 2012,
with specific reference to the three sections of the Cash Flow Statement
Statement of Cash Flows
For the Years Ended December 31, 2012, 2011, and 2010
2012 2011 2010
Net income (loss) ($145) $190 $206
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation 265 275 171
Deferred income taxes (70) (40) 20
Loss on sale of business assets 45 0 0
Changes in assets and liabilities:
Accounts receivable 395 (10) (125)
Inventory 70 (45) (145)
Other current assets (85) (25) &nbs