CPA Business Environment and Concepts (BEC) : Financial Ratios
Study concepts, example questions & explanations for CPA Business Environment and Concepts (BEC)
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Example Questions
Example Question #1 : Financial Ratios
When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the asset, it is applying:
Financial leverage
Operating leverage
Working capital management
Return maximization
Working capital management
Working capital management matches the maturity life of each asset with the length of the financial instrument used to finance that asset.
Example Question #1 : Financial Risk Management
If a firm increases its cash balance by issuing additional shares of common stock, working capital:
Remains unchanged and the current ratio remains unchanged
Increases and the current ratio increases
Increases and the current ratio decreases
Increases and the current ratio remains unchanged
Increases and the current ratio increases
An increase in cash balance by issuing more common stock would increase assets and equity, thus increasing working capital and current ratio.
Example Question #3 : Financial Ratios
The main reason that a firm would strive to reduce the days sales in accounts receivable is to increase:
Contribution margin
Cost of good sold
Cash
Accounts receivable
Reducing the A/R cycle increases cash collected and on hand.
Cash
Reducing the A/R cycle increases cash collected and on hand.
Example Question #2 : Financial Risk Management
Which of the following would increase the working capital of a firm?
Payment of a 20 year mortgage payable with cash
Refinancing a short term note payable with a two year note payable
Purchase of a new plant financed by a 20 year mortgage
Cash collection of A/R
Refinancing a short term note payable with a two year note payable
This answer would increase the working capital of a firm as the amount of this current liability is transferred to a long term liability.
Example Question #3 : Financial Risk Management
The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations is the policy that finances:
Permanent current assets with short term debt
Fluctuating current assets with long term debt
Permanent current assets with long term debt
Fluctuating current assets with short term debt
Permanent current assets with short term debt
The working capital financing policy that finances permanent current assets with short term debt subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations.
Example Question #2 : Financial Ratios
Fewer days sales in accounts receivable are:
Not ideal
Ideal as long as the company does not lose too many sales
Ideal
Irrelevant
Ideal as long as the company does not lose too many sales
Reducing the number of days it takes to collect cash is ideal for a company, as long as it does not reduce the number of sales to customers. Customers may not like this shortened receivable policy.
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