Chapter 4

-What is the difference between the current ratio and the quick ratio? Inventories is subtracted from the
numerator. -Based on the information in Table 4-3, assuming that the firm has no preferred stock, and paid
$300,000 in common dividends, the firm's return on equity was: 33.53%. -Lower asset turnover ratios are generally
indicative of more efficient asset management. False -Based on the information in Table 4-2, the debt ratio is:
45.69%. -Based on the information in Table 4-3, the operating profit margin is: 13.75% -Gemini Corp.'s debt ratio
is: 37.62%. -An industry average is best used as: A guide to the financial position of the average firm in the
industry. -How managers choose to finance the business affects the company's risk, and as a result, the rate of
return stockholders receive on their investments. True -Which ratio is used in both measuring a firm's liquidity and
generating adequate operating profitability? A and D. Average collection period and inventory turnover
-Financial ratios are useful for measuring performance because maximizing the return on equity for common
shareholders is the primary goal of financial managers. False -Operating return on assets is affected by:
Depreciation expense -Financial ratios that are higher than industry averages may indicate problems that are as
detrimental to the firm as ratios that are too low. True -Financial analysis:
Uses historical financial statements to measure a company's performance and in making financial
projections of future performance. -Total asset turnover is equal to accounts receivable turnover plus inventory
turnover plus fixed asset turnover. False -Which ratio does not help answer the question of adequate operating
profitability generated by the firm's assets? Return on common equity -Current assets minus inventories over
current liabilities is: Acid-test ratio -Which of the following is not used to evaluate how management is doing at
creating shareholder value? Operating profit margin -Return on Common equity is affected by which of the
following? All of the above. Sales, total asset turnover, debt-equity ratio, and net profit margin. -The
ratio of total debt over total assets is: The debt ratio. -Common stockholders may use financial ratios to monitor
manager actions to help lessen agency problems. True -Ratios are used to standardize financial information,
thereby making it easier to interpret. True -Based on the information in Table 4-2, the average collection period is:
81 days. -Based on the information in Table 4-2, the acid-test ratio is: 1.17. -Ratios of almost all companies are
easily comparable because all public companies prepare their financial reports based upon generally accepted
accounting principles. False -Based on the information in Table 4-3, the debt ratio is: 48.48% -Based on the
information in Table 4-3, the average collection period is: 20.53 days -Based on the information in Table 4-2, and
assuming the company's stock price is $50 per share, the P/E ratio is: 10.89 -Based on the information in Table 4-3,
the total asset turnover is: 2.42 times -Based on the information in Table 4-2, the current ratio is: 2.35 -An
inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that: the firm's
products are in inventory for fewer days before they are sold than is average for the industry. -Based
on the information in Table 4-2, the times interest earned ratio is 8.65 -Based on the information in Table 4-2, the
return on equity is 15.65% -Based on the information in Table 4-3, the operating return on total assets is 33.33%
-Borrowing money causes a corporations return on operating assets to decrease because of the interest that must
be paid. False
Chapter 5 -The present value of a single future sum: depends upon the number of discount periods -If you
put $10 in a savings account at the beginning of each month for 10 years, how much money will be in the account
at the end of the 10th year? Assume that the account earns 12% compounded monthly and round to the nearest
$1: $2,323 -What is the present value of $15,500 to be received 12 years from today? Assume a discount rate of
7.5% compounded annually and round to the nearest $1. $6,508 -A financial advisor tells you that you can make
your child a millionaire if you just start saving early. You decide to put an equal amount each year into an
investment account that earns 7.5% interest per year, starting on the day your child is born. How much would you
need to invest each year (rounded to the nearest dollar) to accumulate a million for your child by the time he is 35
years old? (Your last deposit will be made on his 34th birthday.) $6,525 -Tim has $100 in a bank account paying 2%
interest per year. At the end of 5 years, Tim's bank account balance will be $110 if interest is not compounded, but
will be greater than $110 if interest is compounded. True -How much money must you pay into an account at the
beginning of each of 20 years in order to have $10,000 at the end of the 20th year? Assume that the account pays
12% per year, and round to the nearest $1. $124 -You are 21 years old today. Your grandparents set up a trust fund
that will pay you $25,000 per year for 20 years, starting on your 65th birthday to supplement your retirement. If the
trust can earn 7.5% per year, how much will your grandparents need to put in the trust fund today (rounded to the
nearest ten dollars)? $44,926 -You are thinking of buying a craft emporium. It is expected to generate cash flows of
$30,000 per year in years 1 through 5, and $40,000 per year in years 6 through 10. If the appropriate discount rate
is 8%, what amount are you willing to pay for the emporium? $228,476 -It is never appropriate to compare nominal
rates unless they include the same number of compounding periods per year. True -Your grandparents deposit
$2,000 each year on your birthday, starting the day you are born, in an account that pays 7% interest compounded
annually. How much will you have in the account on your 21st birthday, just after your grandparents make their
deposit? $98,016 -Congratulations! You are the proud winner of the multi-state Sour Ball Lottery. You are to receive
$2,000,000 at the end of each year for the next 20 years. While the Lottery Commission refers to this as a
$40,000,000 jackpot, if you choose the "cash option" they will give you much less than that; you can receive a lump
sum payment today equal to the present value of the ordinary annuity instead of the 20 annual payments. If the
discount rate that the Lottery Commission uses to determine the lump sum payoff is 7%, what is your payoff if you
select the cash option? $21,188,028 -When using a financial calculator, cash outflows generally have to be
entered as negative numbers, because a financial calculator sees money "leaving your hands." True -If you only
earned interest on your initial investment, and not on previously earned interest, it would be called simple interest.
True -You decide you want your child to be a millionaire. You have a son today and you deposit $15,000 in an
investment account that earns 9% per year. The money in the account will be distributed to your son whenever the
total reaches $1,000,000. How old will your son be when he gets the money (rounded to the nearest year)? 49

years -Bill saves $3,000 per year in his IRA starting at age 25 and continuing to age 65, when he retires. The
amount Bill has in his IRA at age 65 can be characterized as the future value of an annuity. True -A bond maturing
in 10 years pays $80 each year (including year 10) and $1,000 upon maturity. Assuming 10 percent to be the
appropriate discount rate, the present value of the bond is: $877.11 -The present value of a $100 perpetuity
annuity discounted back to the present at 6% is: $1,666.67 -You decide to borrow $250,000 to build a new home.
The bank charges an interest rate of 8% compounded monthly. If you pay back the loan over 30 years, what will
your monthly payments be (rounded to the nearest dollar)? $1,834 -An investment earning simple interest is
preferred over an investment earning compound interest because the simplicity adds value. False -Bill and Cathy
will be retiring in fifteen years and would like to buy an Italian villa. The villa costs $500,000 today, and housing
prices in Italy are expected to increase by 6% per year. Bill and Cathy want to make fifteen equal annual payments
into an account, starting today, so there will be enough money to purchase the villa in fifteen years. If the account
earns 10% per year, what is the amount of each deposit? $34,286 -How much money must be put into a bank
account yielding 3.5% (compounded annually) in order to have $1,250 at the end of 10 years (round to nearest $1)?
$886 -A car manufacturer offers either $2,000 cash back or zero percent financing for 5 years. A rational consumer
will always take the cash back because money received today is worth more than money received in the future.
False -The Fuller Company has received a $50,000 loan. The annual payments are $6,202.70. If the Fuller Company
is paying 9% interest per year, how many loan payments must the company make? 15 -A timeline identifies the
timing and amount of a stream of cash flows, along with the interest rate it earns. True -At an annual interest rate
of 9%, an initial sum of money will double approximately every 8 years. True -Tim invested $1,000 in a mutual fund
paying 8% per year. John invested $500 in the same fund. If both Tim and John keep their money invested for the
same period of time, Tim will end up with twice as much money as John. True -A certificate of deposit that pays
9.8% compounded monthly is better than a similar certificate of deposit that pays 10% compounded only once per
year. True -A rational investor would prefer to receive $1,200 today rather than $100 per month for 12 months.
True -What is the value on 1/1/10 of the following cash flows? Use a 7% discount rate, and round your answer to
the nearest $10: $128,490 -Bill borrowed $100,000 today that he must repay in 15 annual end-of-year installments
of $10,000. What annual interest rate is Bill paying on his loan? 5.556% -If we invest money for 10 years at 8
percent interest, compounded semi-annually, we are really investing money for 20 six-month periods, and receiving
4 percent interest each period. True -At what rate must $500 be compounded annually for it to grow to $1,079.46
in 10 years? 8% -You charged $1,000 on your credit card for Christmas presents. Your credit card company charges
you 26% annual interest, compounded monthly. If you make the minimum payments of $25 per month, how long
will it take (to the nearest month) to pay off your balance? 94 months -The present value of $1,000 to be received
in 5 years is ________ if the discount rate is 7.8%. $687 -You have contracted to buy a house for $250,000, paying
$30,000 down and taking out a fully amortizing loan for the balance, at a 5.7% annual rate for 30 years. What will
your monthly payment be if they make equal monthly installments over the next 30 years (to the nearest dollar)?
$1,277 -The same underlying formula is used for computing both the future value and present value. True How
much money do I need to place into a bank account that pays a 6% rate in order to have $500 at the end of 7
years? $332.53 -How much money must you pay into an account at the end of each of 20 years in order to have
$100,000 at the end of the 20th year? Assume that the account pays 6% per year, and round to the nearest $1.
$2,718 Timelines are used for simple time value of money problems, but cannot be used for more complex
problems. False -Ann deposited $1,000 in a bank account and 10 years later she closes out the account, which is
worth $2,000. What annual rate of interest has she earned over the 10 years? 7.18% -A financial analyst tells you
that investing in stocks will allow you to double your money in 7 years. What annual rate of return is the analyst
assuming you can earn? 10.41% -If you put $200 in a savings account at the beginning of each year for 10 years
and then allow the account to compound for an additional 10 years, how much will be in the account at the end of
the 20th year? Assume that the account earns 10% compounded monthly and round to the nearest $100. $9,100
-The present value of a $100 perpetuity discounted at 5% is $5,000. False It is January 1st and Darwin Davis has
just established an IRA. Darwin will put $1,000 into the account on December 31st of this year and at the end of
each year for the following 39 years (40 total). How much money will Darwin have in his account at the end of the
40th year? Assume that the account pays 12% interest compounded annually and round to the nearest $1,000.
$767,000 If we place $100 in a savings account that yields 6% compounded semiannually, what will our
investment grow to at the end of five years? $134.40 To evaluate or compare investment proposals, we must
adjust the value of all cash flows to a common date. True -When solving a problem involving an annuity due, you
must select the beg or beginning mode on your financial calculator. True
Fraud -The following are (is a) good control(s) for preventing fraud: Physical control/proper authorization -In
order to set a good "tone at the top," management must ____ proper behaviors. Model -In order to prevent fraud, a
company should create a corporate culture of honesty and integrity. Which of the following is helpful in creating this
kind of culture? Both A and C. Giving employees positive feedback and recognition of job performance,
and conducting background checks before hiring a new employee. -Which of the following kinds of pressure
is most often associated with fraud? Financial pressure. -One way that criminal law differs from civil law is that it:
Must yield a unanimous verdict. -Research shows that legal action is taken against fraud perpetrators in: Less
than half of fraud cases. -An effective accounting system is designed to provide which of the following to help
discover fraud? An audit trail -Which of the following is not a common type of fraud pressure? Pressure to
outsmart peers -Which of the following is not a good way to eliminate opportunities for fraud? Discreetly and
quietly terminate employees who have been caught -Management fraud is typically perpetrated by:
Manipulating financial statements -The fraud triangle includes all of the following except for: Validation -Workrelated pressures that people use to justify their actions include: Any one of these. Dissatisfaction with their
job, believing that they are underpaid, and forced to work too many hours. -Which of the following is not a
control activity (procedure)? Appropriate hiring procedures -Which of the following is not one of the primary

ways to detect fraud? By asking all employees if they know of any fraud -Opportunity involves: none of the
above opportunity to conceal fraud, opportunity to avoid being punished for fraud, and opportunity to commit
fraud. -Organizations can eliminate opportunities to commit fraud by: All of these. Accurately identifying
sources and measuring risks, implementing appropriate preventative and detective controls, and
creating widespread monitoring by employees. -If pressures and opportunities are high and personal integrity
is low, the chance of fraud is: High. -Which of the following is a common perceived pressure? The ability to
"borrow" money by committing fraud -Which of the following are the most effective fraud detectors?
Employees -Which of the following is not a primary control procedure? Decreasing work-related pressure
-Which of the following is not a common vice that motivates people to commit fraud? All of the above are vices
that motivate people to commit fraud. Gambling, drugs, expensive extramarital relationships, and
alcohol. Fraud perpetrators: B. Have profiles that look like most honest people. -In order to minimize fraud,
a fraud-savvy organization should: Develop and promote a company code of conduct -What is the most
important element in a control environment? Management's role and example -Which of the following is not an
element of most frauds? Breaking and entering Most Fraud perpetrators: none of these -The majority of Frauds
are committed by: someone acting alone -Each of the following is an example of an inadequate control
environment EXCEPT: The employees know who has responsibility for each business activity. --The
responsibility for preventing fraud is often seen as belonging to: Managers -What is the most likely way to deter
fraud? Implement a good system of controls -The best way to limit opportunities for committing fraud in an
organization is to: Maintain good internal controls -Even with the best possible internal control system in place,
its effectiveness still depends on what? Both of the above