Question

1. For a firm with revenue growing each month and a collection pattern that averages 55 days, the amount of cash collections during any one month will never exceed monthly sales for the same month. TRUE/FALSE

2. Assume that a profitable firm has been notified that all costs for the coming year will decrease by 2%.  The firm will respond by decreasing all selling prices by 2%.  The impact of these changes will be to

a. lower the breakeven point in sales dollars

b. increase the breakeven point in sales dollars

c. have no impact on the breakeven point in sales dollars

3. The company sells inventory costing $20,000 for $35,000.  The customer has been billed for the sales price but has not yet paid the amount. This transaction

a. increases the balance of total assets

b. causes no change to the balance of total assets

c. decreases the balance of total assets

4. The company sells a machine that it purchased 5 years ago for $40,000.  The original cost of the machine was $120,000 and $90,000 of accumulated depreciation was recorded just prior to sale.  This event

a. increased the asset balance and increased net income

b. increased the asset balance and decreased net income

c. decreased the asset balance and increased net income

d. decreased the asset balance and decreased net income

Answer 1

1.

TRUE because suppose your revenue is 100$. You'll receive the amount after 55 days i.e end of 2nd month and by that month your revenue would have grown to say 110$ (growing revenue). It is a loop where it won't be able to exceed the revenue amount.

2.

a) CORRECT - because suppose ,

Sales Variable Cost Fixed Cost

100 30 20    before reduction

98 29.4 19.6    after reduction

Contribution Contribution Ratio

70 70% before reduction

68.6 70% after reduction

Break Even Point in sales = Fixed Costs / Contribution Ratio(%)

20 / 70% = $ 28.57

19.6 / 70% = $ 28

Therefore, impact of changes will be to lower the breakeven point in sales dollars.

b) INCORRECT - Because it will lower the breakeven point in sales dollars and not increase as solved above.

c) INCORRECT - Because it will lower the breakeven point in sales dollars and not be equal as solved above.

3.

a) INCORRECT - because these is no change in the assets as explained in (b) point.

b) CORRECT - because your inventory will reduce as you have sold it and at the same time your Debtors/Accounts Receivable will increase because you are owed the money.

c) INCORRECT - because these is no change in the assets as explained in (b) point.

4.

a) CORRECT - because assets's value prior to sale is $120,000 - $90,000 = $30,000. Thus after sale the cash/accounts receivable balance will be $ 40,000 and net income will be $40,000 - $30,000 = $10,000.

b) INCORRECT - because net income will increase as explained above.

c) INCORRECT - because asset balance will increase as explained above.

d) INCORRECT - because asset and net income will increase as explained above.