Question

1. ABC Co anticipates adding 100 new stores in the next year to its existing 500 stores. If last year's sales growth of 15% is expected to repeat, how would you derive a sales growth percentage forecast?

Select an answer:

• past year sales growth percentage plus percentage increase in new stores
• past year sales volume plus percentage increase in new stores
• past year sales growth percentage plus anticipated sales volume for the next year
• past year sales volume plus anticipated percentage increase in sales for the next year

2. When you are forecasting expenses, what assumption can you generally rely on?

Select an answer:

• cost of goods sold will remain constant as a percentage of sales if sales increase

depreciation expense will increase at the same rate sales increase

operating expenses will decrease in dollars as sales increase

cost of goods sold will decrease as a percentage of sales if sales increase

3. ABC Co. anticipates a 50% increase in sales volume for the next year as a result of expanding capacity. What financial statement item will change at a different percentage rate than its sales volume increase?

Select an answer:

• cash

depreciation expense

accounts receivable

operating assets

4. Why would a company's property, plant, and equipment expense increase from Year 1 to Year 2 at a higher rate than its sales volume increase?

Select an answer:

• property, plant, and equipment expense always increases at a rate twice that of sales volume increase

the company has to invest in new property, plant, or equipment to achieve its sales volume increase

property, plant, and equipment expense always increases at a rate three times that of sales volume increase

property, plant, and equipment expense will increase because sales volume increase lowers depreciation expense

5. Although most businesses utilize computerized records, they are still based on journals and ledgers. What does a ledger contain differently than a journal?

Select an answer:

• business events by category or account

payments made in chronological order

year-end income and depreciation

cash collections in chronological order

6. If you have a small sideline business selling homemade items over the internet, what would be the least complicated software for you to use if you only needed to create an income statement?

Select an answer:

• QuickBooks

Quicken

EXCEL spreadsheet

mint.com

7. Of the three types of books kept by large companies, in which book does the company keep summary reports provided to banks and investors?

Select an answer:

• tax

managerial

journal

financial

8. What type of internal control is intended to avoid adjustments to books in order to cover up a theft?

Select an answer:

• separation of duties

perceived opportunity

internal checks

physical safeguards

9. Consider ABC Co. has a P/E ratio of 40 and earnings per share of $2.00. How would a potential investor estimate price per share if the average P/E ratio in ABC's industry is 20?

Select an answer:

• Price-Earnings Ratio 40 x earnings per share $2.00 equals estimated price per share of $80.00

Price-Earnings Ratio 40 / earnings per share $2.00 equals estimate price per share of $20.00

Price-Earnings Ration 20 / earnings per share $2.00 equals estimated price per share of $10.00

Price-Earnings Ratio 20 x earnings per share $2.00 equals estimated price per share of $40.00

10. What is the price-earnings (P/E) ratio of the average public company in the United States across all industries?

Select an answer:

• 15

1

less than 1

30

11. If ABC Co. is in an industry where the average price-to-sales ratio is 1.0, how could ABC achieve a higher price per share than its competitors?

Select an answer:

• lower its return on equity

lower its profit per dollar of sales

have a higher expected sales growth

have a lower expected sales growth

12. To provide more credible income forecasts in order to sell the company, what would ABC Co. do to enhance its reputation for honesty and fair dealing?

Select an answer:

• create relationships with banks and customers

construct forecasts for internal planning purposes

identify factors that lead to better forecasts

avoid relationships with banks and customers

Answer 1

1. Past year sales growth percentage plus percentage increase in new stores

15% + [(100/500)*100)] = 35%

Lets Suppose Last Year Sales was 500 i.e. 1 per store. This year It will be 1+15% i.e. 1.15 Per store for 500 Stores + 1 each for 100 New Stores = 500*1.15 + 1*100 = 675

Increase % = 175/500 = 35%

2. Cost of goods sold will decrease as a percentage of sales if sales increase

This is because COGS has a variable and fixed component. Variable will stay same as a % of sales but fixed saty same and will decrease as % of sales if sales increase.

3. Depreciation expense

Depreciation will change at a different % than change in sales.

4. The company has to invest in new property, plant, or equipment to achieve its sales volume increase.

PPE is for longer period of time, hence its value is depreciated over its life. So, its value is more than the value of sales.

5. Business events by category or account

It contains a list of accounts mentioned in the journals.

6. EXCEL spreadsheet

For basic income and expense account i.e. income statement , Excel can be used.

7. financial

Financial books contains financial reports needed by various stakeholders.

8. Physical safeguards keep a regular check on books to avoid adjustments or theft.

9. Price-Earnings Ratio 40 x earnings per share $2.00 equals estimated price per share of $80.00

P/E Ratio = Market Price / EPS

40 = Market Price / 2