FRL 300, Sample Mid I

Student: ___________________________________________________________________________
1. Which one of the following is a capital budgeting decision?
A. determining how many shares of stock to issue
B. deciding whether or not to purchase a new machine for the production line
C. deciding how to refinance a debt issue that is maturing
D. determining how much inventory to keep on hand
E. determining how much money should be kept in the checking account

2. Which one of the following is a capital structure decision?

A. determining which one of two projects to accept
B. determining how to allocate investment funds to multiple projects
C. determining the amount of funds needed to finance customer purchases of a new product
D. determining how much debt should be assumed to fund a project
E. determining how much inventory will be needed to support a project

3. Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life
A. I and II only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV

4. Which one of the following best illustrates that the management of a firm is adhering to the goal of financial
management?
A. increase in the amount of the quarterly dividend
B. decrease in the per unit production costs
C. increase in the number of shares outstanding
D. decrease in the net working capital
E. increase in the market value per share

5. The Sarbanes-Oxley Act of 2002 is a governmental response to:

A. decreasing corporate profits.
B. the terrorists attacks on 9/11/2001.
C. a weakening economy.
D. deregulation of the stock exchanges.
E. management greed and abuses.

6. Which one of the following actions by a financial manager is most apt to create an agency problem?
A. refusing to borrow money when doing so will create losses for the firm
B. refusing to lower selling prices if doing so will reduce the net profits
C. refusing to expand the company if doing so will lower the value of the equity
D. agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of
sales
E. increasing current profits when doing so lowers the value of the firm's equity

7. Which one of the following is an agency cost?

A. accepting an investment opportunity that will add value to the firm
B. increasing the quarterly dividend
C. investing in a new project that creates firm value
D. hiring outside accountants to audit the company's financial statements
E. closing a division of the firm that is operating at a loss

8. A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable,
and $70 in cash. What is the amount of the current assets?
A. $710
B. $780
C. $990
D. $2,430
E. $2,640

9. A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are
$3,910. What is the amount of the total liabilities?
A. $2,050
B. $2,690
C. $4,130
D. $5,590
E. $5,860

10. Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation
is $42,000. The tax rate is 35 percent. What is the net income?
A. $42,750
B. $44,450
C. $82,550
D. $86,450
E. $124,550

11. Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is
34 percent. The firm does not have any interest expense. What is the operating cash flow?
A. $129,152
B. $171,852
C. $179,924
D. $281,417
E. $309,076

12. At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the
end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is
the amount of the cash flow to creditors?
A. -$18,348
B. -$1,001
C. $11,129
D. $13,861
E. $19,172

13. The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was
$2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased
net working capital by $1,330. What is the amount of the cash flow to stockholders?
A. $5,100
B. $7,830
C. $18,020
D. $19,998
E. $20,680

14. Noncash items refer to:

A. accrued expenses.
B. inventory items purchased using credit.
C. the ownership of intangible assets such as patents.
D. expenses which do not directly affect cash flows.
E. sales which are made using store credit.

15. The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called
the:
A. operating cash flow.
B. net capital spending.
C. net working capital.
D. cash flow from assets.
E. cash flow to stockholders.

16. During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75,
and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows for the
year?
A. $245 use of cash
B. $165 use of cash
C. $95 use of cash
D. $95 source of cash
E. $165 source of cash

17. A firm has total debt of $4,620 and a debt-equity ratio of 0.57. What is the value of the total assets?
A. $6,128.05
B. $7,253.40
C. $9,571.95
D. $11,034.00
E. $12,725.26

18. The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000, and a
profit margin of 5.20 percent. What is the return on assets?
A. 6.22 percent
B. 6.48 percent
C. 7.02 percent
D. 7.78 percent
E. 9.79 percent

19. The Meat Market has $747,000 in sales. The profit margin is 4.1 percent and the firm has 7,500 shares of
stock outstanding. The market price per share is $27. What is the price-earnings ratio?
A. 6.61
B. 8.98
C. 11.42
D. 13.15
E. 14.27

20. A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit margin of 4.9 percent.
The total equity is $511,640. What is the amount of the net income?
A. $28,079
B. $35,143
C. $44,084
D. $47,601
E. $52,418

21. The sources and uses of cash over a stated period of time are reflected on the:
A. income statement.
B. balance sheet.
C. tax reconciliation statement.
D. statement of cash flows.
E. statement of operating position.

22. Which one of the following is a source of cash?

A. increase in accounts receivable
B. decrease in notes payable
C. decrease in common stock
D. increase in accounts payable
E. increase in inventory

23. Which one of the following is a use of cash?

A. increase in notes payable
B. decrease in inventory
C. increase in long-term debt
D. decrease in accounts receivables
E. decrease in common stock

24. On the Statement of Cash Flows, which of the following are considered financing activities?
I. increase in long-term debt
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A. I and IV only
B. III and IV only
C. II and III only
D. I, III, and IV only
E. I, II, III, and IV

25. On the Statement of Cash Flows, which of the following are considered operating activities?
I. costs of goods sold
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A. I and III only
B. III and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV

FRL 300, Solution to Sample Mid I

1. Which one of the following is a capital budgeting decision?

A. determining how many shares of stock to issue
B. deciding whether or not to purchase a new machine for the production line
C. deciding how to refinance a debt issue that is maturing
D. determining how much inventory to keep on hand
E. determining how much money should be kept in the checking account
Refer to section 1.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 1-1
Ross - Chapter 01 #14
Section: 1.1
Topic: Capital budgeting

2. Which one of the following is a capital structure decision?

A. determining which one of two projects to accept
B. determining how to allocate investment funds to multiple projects
C. determining the amount of funds needed to finance customer purchases of a new product
D. determining how much debt should be assumed to fund a project
E. determining how much inventory will be needed to support a project
Refer to section 1.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 1-1
Ross - Chapter 01 #16
Section: 1.1
Topic: Capital structure

3. Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life
A. I and II only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 1.2

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 1-3
Ross - Chapter 01 #27
Section: 1.2
Topic: Corporation

4. Which one of the following best illustrates that the management of a firm is adhering to the goal of financial
management?
A. increase in the amount of the quarterly dividend
B. decrease in the per unit production costs
C. increase in the number of shares outstanding
D. decrease in the net working capital
E. increase in the market value per share
Refer to section 1.3

AACSB: N/A
Bloom's: Knowledge
Difficulty: Intermediate
Learning Objective: 1-2
Ross - Chapter 01 #38
Section: 1.3
Topic: Goal of financial management

5. The Sarbanes-Oxley Act of 2002 is a governmental response to:

A. decreasing corporate profits.
B. the terrorists attacks on 9/11/2001.
C. a weakening economy.
D. deregulation of the stock exchanges.
E. management greed and abuses.
Refer to section 1.3

AACSB: Ethics
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 1-4
Ross - Chapter 01 #41
Section: 1.3
Topic: Sarbox

6. Which one of the following actions by a financial manager is most apt to create an agency problem?
A. refusing to borrow money when doing so will create losses for the firm
B. refusing to lower selling prices if doing so will reduce the net profits
C. refusing to expand the company if doing so will lower the value of the equity
D. agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of
sales
E. increasing current profits when doing so lowers the value of the firm's equity
Refer to section 1.4

AACSB: Ethics
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 1-4
Ross - Chapter 01 #45
Section: 1.4
Topic: Agency problem

7. Which one of the following is an agency cost?

A. accepting an investment opportunity that will add value to the firm
B. increasing the quarterly dividend
C. investing in a new project that creates firm value
D. hiring outside accountants to audit the company's financial statements
E. closing a division of the firm that is operating at a loss
Refer to section 1.4

AACSB: Ethics
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 1-4
Ross - Chapter 01 #48
Section: 1.4
Topic: Agency cost

8. A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable,
and $70 in cash. What is the amount of the current assets?
A. $710
B. $780
C. $990
D. $2,430
E. $2,640
Current assets = $520 + $190 + $70 = $780

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 2-1
Ross - Chapter 02 #46
Section: 2.1
Topic: Current assets

9. A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are
$3,910. What is the amount of the total liabilities?
A. $2,050
B. $2,690
C. $4,130
D. $5,590
E. $5,860
Current assets = $6,230 - $3,910 = $2,320
Current liabilities = $2,320 - $640 = $1,680
Total liabilities = $1,680 + $4,180 = $5,860

AACSB: Analytic
Bloom's: Synthesis
Difficulty: Intermediate
Learning Objective: 2-1
Ross - Chapter 02 #47
Section: 2.1
Topic: Net working capital

10. Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation
is $42,000. The tax rate is 35 percent. What is the net income?
A. $42,750
B. $44,450
C. $82,550
D. $86,450
E. $124,550
Net income = ($687,000 - $492,000 - $26,000 - $42,000) (1 - .35) = $82,550

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 2-2
Ross - Chapter 02 #54
Section: 2.2
Topic: Net income

11. Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is
34 percent. The firm does not have any interest expense. What is the operating cash flow?
A. $129,152
B. $171,852
C. $179,924
D. $281,417
E. $309,076
Earnings before interest and taxes = $1,349,800 - $903,500 - $42,700 = $403,600
Tax = $403,600 .34 = $137,224
Operating cash flow = $403,600 + $42,700 - $137,224 = $309,076

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 2-4
Ross - Chapter 02 #59
Section: 2.4
Topic: OCF

12. At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the
end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is
the amount of the cash flow to creditors?
A. -$18,348
B. -$1,001
C. $11,129
D. $13,861
E. $19,172
Cash flow to creditors = $6,430 - ($68,219 - $72,918) = $11,129

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 2-4
Ross - Chapter 02 #62
Section: 2.4
Topic: Cash flow to creditors

13. The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was
$2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased
net working capital by $1,330. What is the amount of the cash flow to stockholders?
A. $5,100
B. $7,830
C. $18,020
D. $19,998
E. $20,680
Cash flow from assets = $48,450 - (-$1,330) - $24,000 = $25,780
Cash flow to creditors =$2,480 - (-$2,620) = $5,100
Cash flow to stockholders = $25,780 - $5,100 = $20,680

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 2-4
Ross - Chapter 02 #65
Section: 2.4
Topic: Cash flow to stockholders

14. Noncash items refer to:

A. accrued expenses.
B. inventory items purchased using credit.
C. the ownership of intangible assets such as patents.
D. expenses which do not directly affect cash flows.
E. sales which are made using store credit.
Refer to section 2.2

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 2-2
Ross - Chapter 02 #5
Section: 2.2
Topic: Noncash items

15. The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called
the:
A. operating cash flow.
B. net capital spending.
C. net working capital.
D. cash flow from assets.
E. cash flow to stockholders.
Refer to section 2.4

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 2-4
Ross - Chapter 02 #8
Section: 2.4
Topic: Cash flow from assets

16. During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75,
and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows for the
year?
A. $245 use of cash
B. $165 use of cash
C. $95 use of cash
D. $95 source of cash
E. $165 source of cash

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 3-1
Ross - Chapter 03 #49
Section: 3.1
Topic: Sources and uses of cash

17. A firm has total debt of $4,620 and a debt-equity ratio of 0.57. What is the value of the total assets?
A. $6,128.05
B. $7,253.40
C. $9,571.95
D. $11,034.00
E. $12,725.26
Total equity = $4,620/0.57 = $8,105.26
Total assets = $4,620 + $8,105.26 = $12,725.26

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 3-2
Ross - Chapter 03 #58
Section: 3.3
Topic: Long-term solvency ratios

18. The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000, and a
profit margin of 5.20 percent. What is the return on assets?
A. 6.22 percent
B. 6.48 percent
C. 7.02 percent
D. 7.78 percent
E. 9.79 percent
Return on assets = (.0520 $687,400)/($210,000 + $365,000) = 6.22 percent

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 3-2
Ross - Chapter 03 #64
Section: 3.3
Topic: Profitability ratios

19. The Meat Market has $747,000 in sales. The profit margin is 4.1 percent and the firm has 7,500 shares of
stock outstanding. The market price per share is $27. What is the price-earnings ratio?
A. 6.61
B. 8.98
C. 11.42
D. 13.15
E. 14.27
Earnings per share = (.041 $747,000)/7,500 = 4.0836
Price-earnings ratio = $27/4.0836 = 6.61

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 3-2
Ross - Chapter 03 #66
Section: 3.3
Topic: Market value ratios

20. A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit margin of 4.9 percent.
The total equity is $511,640. What is the amount of the net income?
A. $28,079
B. $35,143
C. $44,084
D. $47,601
E. $52,418
Return on equity = .049 1.12 (1 + 0.57) = .0861616
Net income = $511,640 .0861616 = $44,084

AACSB: Analytic
Bloom's: Application
Difficulty: Intermediate
Learning Objective: 3-3
Ross - Chapter 03 #71
Section: 3.4
Topic: Du Pont identity

21. The sources and uses of cash over a stated period of time are reflected on the:
A. income statement.
B. balance sheet.
C. tax reconciliation statement.
D. statement of cash flows.
E. statement of operating position.
Refer to section 3.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 3-1
Ross - Chapter 03 #2
Section: 3.1
Topic: Statement of cash flows

22. Which one of the following is a source of cash?

A. increase in accounts receivable
B. decrease in notes payable
C. decrease in common stock
D. increase in accounts payable
E. increase in inventory
Refer to section 3.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 3-1
Ross - Chapter 03 #8
Section: 3.1
Topic: Source of cash

23. Which one of the following is a use of cash?

A. increase in notes payable
B. decrease in inventory
C. increase in long-term debt
D. decrease in accounts receivables
E. decrease in common stock
Refer to section 3.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 3-1
Ross - Chapter 03 #9
Section: 3.1
Topic: Uses of cash

24. On the Statement of Cash Flows, which of the following are considered financing activities?
I. increase in long-term debt
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A. I and IV only
B. III and IV only
C. II and III only
D. I, III, and IV only
E. I, II, III, and IV
Refer to section 3.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 3-1
Ross - Chapter 03 #12
Section: 3.1
Topic: Statement of cash flows

25. On the Statement of Cash Flows, which of the following are considered operating activities?
I. costs of goods sold
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A. I and III only
B. III and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV