Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Chapter 5, Problem 5QE
To determine
Explain the relation between working capital turnover ratios and cash flow from operation.
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Select all of the following that will have a negative effect on the firm's cash
flows?
(Assume other variables remain constant, no change in revenues, etc.)
O Increase in Inventory
Decrease in Accounts Payable
Increase in Accounts Receivable
Increase in Working Capital
Decrease in Accounts Receivable
Decrease in Inventory
Increase in Accounts Payable
Assuming the firm’s sales volume remained constant, would you expect it tohave a higher cash balance during a tight-money period or during an easymoney period? Why?
Prior to the end of the fiscal year a company decides to increase its sales by loosening its credit standards resulting in lower accounts receivable turnover. What effect would this action have on the firm’s
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ROA?
return on net operating assets?
Chapter 5 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
Ch. 5 - Prob. 1QECh. 5 - Prob. 2QECh. 5 - A firm has experienced an increasing current ratio...Ch. 5 - A firm has experienced a decrease in its current...Ch. 5 - Prob. 5QECh. 5 - A firm had the following values for the four debt...Ch. 5 - Prob. 7QECh. 5 - Prob. 8QECh. 5 - Prob. 9QECh. 5 - Prob. 10QE
Ch. 5 - Market equity beta measures the covariability of a...Ch. 5 - Altmans bankruptcy risk model utilizes the values...Ch. 5 - Calculating and Interpreting Risk Ratios. Refer to...Ch. 5 - Refer to the financial state-ment data for...Ch. 5 - Refer to the profitability ratios of Coca-Cola in...Ch. 5 - Delta Air Lines, Inc., is one of the largest...Ch. 5 - Prob. 17PCCh. 5 - Prob. 18PCCh. 5 - Prob. 19PCCh. 5 - Prob. 20PCCh. 5 - Prob. 21PCCh. 5 - Prob. 22PCCh. 5 - Compute the values of each of the ratios in...
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- Discuss and explain the difference between profit/loss and cash flow. How could a company have positive cash flow, but show a net loss at year end? What are some examples of industries and/or companies that might generate subtantial cash flow, but could lose money? Conversely, what are some examples of industries and/or companies that might generate very limited cash flow, but could show a profit at year end?arrow_forwardSuppose the risk of the company changes based on an unanticipated decrease in the Free Cash Flows by 10% annually during the years 2015, 2016, and 2017. What are the implications of the change in present value based on risk? In other words, what does the change mean to the company, and how would a financial manager interpret it?arrow_forwardIs it possible for a company that has negative net income and negative operating cash flow to end the year with an increase in cash and an increase in stock price?arrow_forward
- A firm wants to reduce its cash conversion cycle sharply. Which of the following actions should it take? a. The company increases its average inventory without increasing its sales. b. The company increases its DSO (days sales outstanding). c. The company increases its average accounts payable without reducing its sales. d. The company sells an issue of long-term bonds and uses the proceeds to buy back some of its common stock.arrow_forwardAlderson Metals is compiling a cash balance projection by quarter for next year. Which one of the following adjustments to this projection will decrease the cumulative surplus? A. Reducing payroll costs from its current projection amount B. Decreasing the accounts receivable period by changing the firm's credit policy effective the first of next year C. Receiving more favorable credit terms from the firm's suppliers D. Increasing the dividend per share on the firm's outstanding common stock E. Refinancing the firm's long-term debt at a lower interest ratearrow_forwardWhich of the following is true? I. If there is no change in gross fixed assets from one year to the next, then net fixed assets would have to have decreased. II. For firms with lower P/E ratios, investors are valuing each dollar of earnings more than for firms with higher P/E ratios. III. A increase in the current ratio indicates an improvement in a firm's long-term solvency condition.arrow_forward
- Which of the following is the most correct? A. In reference to the time value of money, the present value is always labeled as t=1 B. Negative MVAs indicate that a company's executives are managing the expenses well C. Nominal rates, or annual percentage rates, always equal the effective annual rate D. A strong ROE always indicates a strong year for a company E. Firms should generally try to minimize their days' sales outstanding in order to access their receivables at fast rates.arrow_forwardYou observe that a firm's ROE has increased from the previous year, but both its profit margin and equity multiplier are below the previous year's levels. Which of the following statements is CORRECT? Its return on assets must be lower than the previous year. Its total assets turnover must be lower than the previous year. Its TIE ratio must be higher than the previous year. Its total assets turnover must be higher than the previous year.arrow_forwardWhich one of the following statements is correct? A. If a firm decreases its inventory period, its accounts receivable period will also decrease. B. The longer the cash cycle, the more cash a firm typically has available to invest. C. A firm would prefer a negative cash cycle over a positive cash cycle. D. Decreasing the inventory period will also decrease the payables period. E. Both the operating cycle and the cash cycle must be positive values.arrow_forward
- Which of the following statements is most correct? a. A cash management system that maximizes collections float while minimizing disbursement float is preferable to one that has lower collections float while increasing disbursement float. b. Other things held constant, a firm will need a smaller line of credit if it can arrange to pay its bills by the 5th of each month than if its bills come due uniformly during the month. c. None of the statements are correct. d. The use of a lockbox is intended to reduce cash theft losses. In the event that if the cost of the lockbox is less than the theft losses avoided, the lockbox should be installed. e. A cash management system that minimizes collections float while increasing disbursement float outperforms one with higher collections float but lower disbursement float.arrow_forwardWhat does it mean when a company’s free cash flow is negative in one or more years? Do negative values of free cash flow in any way alter or invalidate the notion that a company’s fair market value equals the present value of its free cash flows discounted at the company’s weighted-average cost of capital? Suppose a company’s free cash flows were expected to be negative in all future periods. Can you conceive of any reasons for buying the company’s stock?arrow_forwardCould a company’s change in NWC be negative in a given year? (Hint: Yes.) Explain how this might come about. What about net capital spending?arrow_forward
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