Finance For Non Financial Managers 7th Edition Bergeron Test Bank

Chapter 1 Overview of Financial Management40. What must plans include if they are to be expressed in measurable terms?a. terms such as good, medium, and badb. specific expressions of corporate financial objectivesc. a reference to the firm’s well-beingd. quantities and dollar amountsANS: DPTS: 1BLM: Higher OrderREF: 11OBJ: LO 341. What do managers examine to assess the impact of their decisions on the financial well-beingof their organization?a. general corporation correspondenceb. statistical reportsc. financial pages of newspapersd. financial statementsANS: DBLM: RememberPTS: 1REF: 12OBJ: LO 342. Which of the following is an example of an external financing source?a. mortgage payableb. profit for the yearc. retained earningsd. depreciation/amortizationANS: ABLM: RememberPTS: 1REF: 17OBJ: LO 543. What is an example of “sources” of funds?a. landb. automobilec. share capitald. machinery and equipmentANS: CBLM: RememberPTS: 1REF: 17OBJ: LO 544. What is an example of an internal source of funds?a. mortgagesb. retained earningsc. common sharesd. bondsANS: BBLM: RememberPTS: 1Copyright 2014 Nelson Education Ltd.REF: 16OBJ: LO 51-9

Chapter 1 Overview of Financial Management45. What is an example of an external source of funds?a. mortgagesb. decreased receivablesc. depreciation/amortizationd. retained earningsANS: ABLM: RememberPTS: 1REF: 16 17OBJ: LO 546. Which of the following statements describes a source of funds?a. Operating at a loss is a source of funds.b. Trade credit is a source of funds.c. Dividends paid are a source of funds.d. Investments in all types of assets are sources of funds.ANS: BBLM: RememberPTS: 1REF: 18OBJ: LO 547. Which of the following is NOT an operating decision?a. Deciding on the amount of operating expenses.b. Deciding on the amount of operating revenue.c. Deciding on the amount of equipment to buy for the operating divisions.d. Deciding on the amount of equity capital to raise for operating divisions.ANS: APTS: 1BLM: Higher OrderREF: 23OBJ: LO 548. Which of the following is NOT a source of financing?a. equipment vendorsb. investment bankersc. dividendsd. commercial banksANS: CBLM: RememberPTS: 1REF: 19OBJ: LO 549. Which of the following are “forms” of financing?a. instalment loansb. unsecured short-term borrowingsc. inventoriesd. term loansANS: CBLM: RememberPTS: 1Copyright 2014 Nelson Education Ltd.REF: 20OBJ: LO 51-10

Chapter 1 Overview of Financial Management50. Which of the following is an example of an investing decision?a. buying inventoryb. buying non-current assetsc. selling trade receivablesd. selling a bondANS: BBLM: RememberPTS: 1REF: 19OBJ: LO 551. What term refers to an increase in non-current assets between two accounting periods?a. cash outflowb. source of cashc. cash inflowd. revenueANS: ABLM: RememberPTS: 1REF: 18OBJ: LO 552. Which of the following is an example of a non-current liability?a. trade receivablesb. inventoriesc. mortgage payabled. goodwillANS: CPTS: 1BLM: Higher OrderREF: 18OBJ: LO 553. Which of the following statements describes the effect of taxes on interest and dividends?a. Income taxes increase the cost of borrowing.b. Income taxes increase the cost of preferred dividends.c. Preferred share dividends are deductible for tax purposes.d. Finance costs are deductible for tax purposes.ANS: DPTS: 1BLM: Higher OrderREF: 20OBJ: LO 554. When does cash flow increase?a. when inventories are reducedb. when trade receivables are increasedc. when revenue is reducedd. when non-current assets are purchasedANS: APTS: 1BLM: Higher OrderCopyright 2014 Nelson Education Ltd.REF: 18OBJ: LO 51-11

Chapter 1 Overview of Financial ManagementTRUE/FALSE1. An important objective of financial management is to ensure that the cost of borrowed fundsis higher than the return on assets.ANS: FPTS: 1REF: 72. Efficiency means the ability of a firm to meet its short-term obligations.ANS: FPTS: 1REF: 133. Financial management ensures that operating managers formulate accounting and financialpolicies that are clearly defined.ANS: FPTS: 1REF: 84. Financial management deals with two things: raising funds and buying and utilizing assets inorder to gain the highest possible return.ANS: TPTS: 1REF: 85. The controller is the person responsible for establishing the accounting and financial reportingpolicies and procedures.ANS: TPTS: 1REF: 116. The treasurer is the person responsible for budgets and analysis.ANS: FPTS: 1REF: 117. One key function of the treasurer is “investor relations”.ANS: TPTS: 1REF: 118. Efficiency measures the relationship between profit for the year (outputs) generated and assetsemployed (inputs).ANS: TPTS: 1REF: 139. Liquidity focuses on the ability of a firm to grow (i.e., revenue, profit for the year, etc.).ANS: FPTS: 1REF: 1410. Stability deals with the relationship between debt and equity.ANS: TPTS: 1Copyright 2014 Nelson Education Ltd.REF: 151-12

Chapter 1 Overview of Financial Management11. Funds obtained from “external financing” include depreciation/amortization and retainedearnings.ANS: FPTS: 1REF: 1612. Reducing working capital accounts such as trade receivables and inventories can generatefunds “internally”.ANS: TPTS: 1REF: 1613. Capital shares can be considered an “external” source of funds.ANS: TPTS: 1REF: 1614. Investing decisions relate to borrowing funds from investors.ANS: FPTS: 1REF: 1915. Investing decisions has to do with the management of current assets.ANS: FPTS: 1REF: 1916. Financing decisions focus on long-term borrowings.ANS: TPTS: 1REF: 2017. A commercial bank is a “form” of financing.ANS: FPTS: 1REF: 2018. A term loan and mortgage are considered “forms” of financing.ANS: TPTS: 1REF: 819. A component of “financing decisions” is determining the proportion of funds that should beraised from lenders versus owners.ANS: TPTS: 1REF: 1620. The matching principle is the process of selecting the most appropriate financing source whenselling an asset.ANS: FPTS: 1REF: 2021. Financing mix is an important component of “financing decisions”.ANS: TPTS: 1Copyright 2014 Nelson Education Ltd.REF: 201-13

Chapter 1 Overview of Financial Management22. Revenue and cost of sales are accounts shown on the statement of income that deal withoperating decisions.ANS: TPTS: 1REF: 2323. Planned downsizing is a recession-driven technique to add management layers inorganizational charts to cut costs.ANS: FPTS: 1REF: 1524. Gross profit is the difference between revenue and cost of sales.ANS: TPTS: 1REF: 14 2325. Decisions affecting gross profit are found in two categories of expenses: distribution costs andcost of sales.ANS: FPTS: 1REF: 2426. Two accounts that affect profit for the year are distribution costs and administrative expenses.ANS: TPTS: 1REF: 2427. The purpose of the Sarbanes-Oxley Act was to set new standards for all public companyboards, management and public accounting firm.ANS: TPTS: 1REF: 2528. Corporate governance has to do with the management of federal and provincial, or territorial,government organizations"ANS: FPTS: 1REF: 2629. Corporate culture is a management wave that appeared in the early 1980s and has to do with ashared system of values and beliefs within an organization.ANS: TPTS: 1REF: 2630. A key role of the International Accounting Standards Committee is to review and reinforcethe convergence of global management standards for all publicly owned corporations.ANS: FPTS: 1Copyright 2014 Nelson Education Ltd.REF: 271-14

Chapter 1 Overview of Financial ManagementCOMPLETION1. Financial management is the activity that has to do with raising funds and buyingin order to obtain the highest possible return.ANS: assetsPTS: 1REF: 72. The is the person responsible for establishing the accounting andfinancial reporting policies and procedures.ANS: controllerPTS: 1REF: 113. The is the person responsible for raising funds.ANS: treasurerPTS: 1REF: 114. Financial management activities are carried out by three individuals, the, the controller and managers.ANS: treasurerPTS: 1REF: 115. General accounting is the responsibility of the .ANS: controllerPTS: 1REF: 116. means productivity of assets, which can be measured by therelationship between profit for the year and revenue.ANS: EfficiencyPTS: 1REF: 137. is a financial objective that shows if a firm has the ability to meet itsshort-term obligations.ANS: LiquidityPTS: 1REF: 14Copyright 2014 Nelson Education Ltd.1-15

Chapter 1 Overview of Financial Management8. There are four financial objectives: efficiency, liquidity, andstability.ANS: prosperityPTS: 1REF: 159. is a financial objective that deals with the relationship between debtand equity.ANS: StabilityPTS: 1REF: 1510. There are three types of business decisions: investing, operating and .ANS: financingPTS: 1REF: 1611. Funds obtained from retained earnings and depreciation/amortization are consideredfinancing.ANS: internalPTS: 1REF: 1612. Funds obtained from investors are considered decisions.ANS: financingPTS: 1REF: 1613. decisions relate to the acquisition of non-current assets.ANS: InvestingPTS: 1REF: 1714. The acquisition of a business and the purchase of non-current assets are considereddecisions.ANS: investingPTS: 1REF: 17Copyright 2014 Nelson Education Ltd.1-16

Chapter 1 Overview of Financial Management15. assets are statement of financial position accounts such as land,buildings and equipment.ANS: Non-currentPTS: 1REF: 1716. provide funds to a business in the form of trade and other payables.ANS: SuppliersPTS: 1REF: 817. decisions deal with many accounts appearing on the statement ofincome.ANS: OperatingPTS: 1REF: 1618. Gross profit is the different between revenue and .ANS: cost of salesPTS: 1REF: 2319. Profit for the year is the difference between and income tax expense.ANS: profit before taxesPTS: 1REF: 2420. is defined as the process of decision-making and the process bywhich decisions are implemented (or not implemented).ANS: GovernancePTS: 1REF: 26Copyright 2014 Nelson Education Ltd.1-17

Chapter 1 Overview of Financial ManagementMATCHINGMatch each term with the correct definition.a. controllerb. treasurerc. efficiencyd. liquiditye. prosperity1.2.3.4.5.external activitiesinternal activitiesrevenuereturn on salesmeeting short-term 4Match each term with the correct definition.a. efficiencyb. prosperityc. internal financingd. external financinge. stability6.7.8.9.10.relationship between equity and debtretained earningsrevenue, profit for the year, working capitalprofit for the year DPTS:PTS:PTS:PTS:PTS:11111Copyright 2014 Nelson Education Ltd.REF:REF:REF:REF:REF:15161513171-18

Chapter 1 Overview of Financial ManagementMatch each term with the correct definition.a. investing decisionsb. efficiencyc. operating decisiond. financing decisione. liquidity11.12.13.14.15.machinery and equipmentprofit for the yearreturn on revenuedividendsworking 14Match each term with the correct definition.a. accountingb. investor relationsc. dividendsd. return on assetse. cost of NS:ANS:ADCBEPTS:PTS:PTS:PTS:PTS:11111Copyright 2014 Nelson Education Ltd.REF:REF:REF:REF:REF:1171411211-19

Chapter 1 Overview of Financial ManagementMatch each term with the correct definition.a. statement of incomeb. matching principlec. planned downsizingd. trade receivablese. capital asset21.22.23.24.25.budgeting techniqueworking capital accountoperating EF:REF:REF:1123231920PROBLEM1. An individual intends to invest 100,000 in a new business. The financial projections showthat during the first year of operations the business will generate 12,500 in profit for the year.Calculate the expected return on assets?The return on assets is .ANS:ROA is 12.5%Profit for the yearTotal assetsPTS: 1 12,500 100,000REF: 92. Using the following information, calculate the company’s average daily sales:Revenue is 250,000Cost of sales is 230,000Trade receivables is 100,000The average daily sales is .ANS:Average daily sales isRevenueNumber of daysPTS: 1 684.93 250,000 365REF: 23Copyright 2014 Nelson Education Ltd.1-20

Chapter 1 Overview of Financial Management3. A company invested 100,000 in a business. During the first year of operations the businessgenerated 25,000 in profit before taxes. The company’s income tax rate is 25%. Calculate thecompany’s return on investment.The company’s return on investment is .ANS:ROA is 18.75%.Profit before taxesIncome tax expenseProfit for the yearInvestmentPTS: 1 25,000 6,250 18,750 100,000( 25,000 25%)REF: 204. With the following information, calculate the company’s weighted cost of capital. Assumethat all costs are on an after-tax basis.MortgageBondCapital sharesCost6.0%4.0% 400,000300,000300,00010.0%The weighted average cost of capital is .ANS:The weighted average cost of capital is 6.6%.MortgageBondCapital sharesPTS: 1Proportion 0%4.0%10.0%Cost2.4%1.2%3.0%6.6%REF: 21Copyright 2014 Nelson Education Ltd.1-21

Chapter 1 Overview of Financial Management5. A company wants to reinvest 60% of their 60,000 profit for the year in their business and usethe rest to pay down the principal on its loan and dividends to their common shareholders. Thecompany expects to invest 70% of their retained earnings in non-current assets and 30% inworking capital. The company’s revenue is 600,000.On the basis of this information, calculate how much the managers would keep in theirbusiness for growth reasons and how much would be used to pay off their loan and theamount that would be invested in non-current assets and in working capital.Retained earnings:Non-current assets: Loan and dividends: Working capital: ANS:60% of the 60,000 profit for the year is 36,000 allocated for retained earnings40% of the 60,000 profit for the year is 24,000 allocated to pay the loan and dividends70% of the 36,000 retained earnings or 25,200 will be spent on non-current assets30% of the 36,000 retained earnings or 10,800 will be spent on working capitalPTS: 1REF: 15Statement of IncomeRevenueCost of salesGross profitOperating expensesProfit before taxesIncome tax expenseProfit for the year 000) 200,000Statement of Financial PositionNon-current assetsInventoriesTrade receivableCash 1,200,000400,000380,000 20,000EquityLong-term borrowingsTrade and otherpayablesShort-term borrowings 800,000800,000100,000 300,000Short-term borrowings interest rate8 % (before tax)Long-term borrowings interest rate6 % (before tax)Shareholders expected return on investment 12%Copyright 2014 Nelson Education Ltd.1-22

Chapter 1 Overview of Financial Management6. The company’s current assets are .ANS:Current assets are 800,000.InventoriesTrade receivablesCashCurrent assetsPTS: 1 400,000380,00020,000 800,000REF: 237. The company’s current liabilities are .ANS:Current liabilities are 400,000.Short-term borrowingsTrade and other payablesCurrent liabilitiesPTS: 1 300,000100,000 400,000REF: 238. The company’s net working capital is .ANS:Net working capital is 400,000.Current assetsCurrent liabilitiesNet working capitalPTS: 1 800,000 400,000400,000REF: 239. The company’s total assets is .ANS:Total assets are 2,000,000.Non-current assetsInventoriesTrade receivablesCashTotal assetsPTS: 1 1,200,000400,000380,00020,000 2,000,000REF: 8Copyright 2014 Nelson Education Ltd.1-23

Chapter 1 Overview of Financial Management10. The company’s total liabilities are .ANS:Total liabilities are 1,200,000.Long-term borrowingsShort-term borrowingsTrade and other payablesTotal liabilitiesPTS: 1 800,000300,000100,000 1,200,000REF: 811. The company’s total equity and liabilities is .ANS:Total equity and liabilities is 2,000,000.EquityTotal liabilitiesTotal liabilities and equityPTS: 1 800,0001,200,000 2,000,000REF: 812. The company’s return on assets is .ANS:Return on assets is 10%.Profit for the yearTotal assetsPTS: 1 200,000 2,000,000REF: 1313. The company’s return on revenue is .ANS:Return on revenue is 6.7%.Profit for the yearRevenuePTS: 1 200,000 3,000,000REF: 13Copyright 2014 Nelson Education Ltd.1-24

Chapter 1 Overview of Financial Management14. The company’s after tax cost of financing is .ANS:The after tax cost of financing is 7.21%.SourcesEquityLong-term borrowingsShort-term borrowingsTotal 800,000800,000300,000 1,900,00042.142.115.8100.0Weightedcost offinancingAfter-taxcostProportion 12.0 %3.4 %4.6 % 5.05 %1.43 %.73 %7.21 %The company’s income tax rate is 42.8% ( 150,000 350,000).After tax cost for the short-term borrowingsAfter tax cost for the long-term borrowingsShareholders expected returnPTS: 14.6% (8% 57.2)3.4% (6% 57.2)12.0%REF: 2215. If the statement of income would show a depreciation/amortization amount of 20,000, whatwould be the cash generated by the company?The cash flow would be .ANS:The cash would be 220,000.Profit for the yearDepreciation/amortizationCash flowPTS: 1 200,00020,000 220,000REF: 2416. If the company’s accounts receivable is lowered to 300,000, how much cash will it generate?The additional cash would be .ANS:The additional cash flow from trade receivables would be 80,000.The existing level of trade receivablesThe new level of trade receivableAdditional cash flowPTS: 1 380,000300,000 80,000REF: 24Copyright 2014 Nelson Education Ltd.1-25

Chapter 1 Overview of Financial Management17. If the company improv

The non-financial manager who is responsible for resources or budgets should be familiar with the language of finance. b. Business decisions made by non-financial managers do affect the financial performance of the organization. c. All non-financial managers are really financial managers because their actions ultimately affect the financial .