Financial Management / / The Islamic University of Gaza
Ramadan Al-Omari, FCCA / Faculty of Commerce
Time : One hour / Department of Accounting

Mid-term exam (2012/2013)

Question 1 (10 marks)

Use the following informationto prepare a cash flow forecast for the period April to June 2013 for Real Madrid Ltd, an ice cream factory.

  1. On 31 March, 2013, Real Madrid has a cash balance of US$ 8,200.
  2. Real Madrid has a policy to keep a minimum cash balance of $ 8000 at the end of each month.
  3. A 5-year loan of $ 10,000 from Manchester United, a local Bank, will be deposited in Real Madrid’s bank account in May 2013.
  4. Sales for March 2013 amounted to $ 40,000. The Sales forecast for the months April to June, 2013 will be $ 50,000, $ 60,000, and $ 80,000 respectively. Real Madrid’s policy for sales requires that 30% will be for cash in the month of sale, 30% will be collected during the next month, and the remaining 40% will be collected in the following month.
  5. Real Madrid is expected to receive other income of $ 2,000 each month.
  6. Real Madrid’s purchases are expected to be $ 30,000, $ 40,000, and $ 50,000 respectively for the months April to June 2013. Payments for purchases are usually made at the rate of 40% immediately, 40% the next month and the remaining 20% the month after. Purchases for March 2013 amounted to $ 20,000.
  7. Rent payable will be $ 9,000 per month.
  8. Wages and Salaries will be 10% of the previous month’s sales.
  9. A cash purchase ofice cream equipment costing $ 10,000 is scheduled during June 2013.

Question 2 (10 marks)

Choose the correct statement. Insert your answers in the given answer book.

1. A major difference in perspective and emphasis between finance and accounting is that accountants generally use the accrual method, while in finance the focus is on

  1. Net income.
  2. Customer relations.
  3. Large companies only.
  4. Cash flows.

3. Ratio analysis involves methods of

  1. Calculating and interpreting financial ratios to assess a firm’s financial performance.
  2. Preparing the financial statements.
  3. Responding to the stock exchange requirements.
  4. Preparing the stockholders report.

2. Which of the following is the correct statement?

  1. Financial management is concerned with the management of the financial affairs of large public companies only.
  2. The financial manager is primarily concerned with analyzing and interpretingfinancial information for decision-making purposes.
  3. It is not necessary for the financial manager to follow up issues regarding the economic conditions.
  4. It is the responsibility of the financial managers to prepare the financial statements of the firm.

4. In order to ensure a reliable ratio analysis

  1. Financial statements that are being compared should carry the same date.
  2. Audited financial statements should be used when possible.
  3. Financial data being compared should have been developed in the same way.
  4. All of the above.

5. Ratios must be considered together because

  1. Multiple ratios are difficult to understand.
  2. Multiple ratios may confuse users of information.
  3. A single ratio by itself means relatively little.
  4. Single ratios are easier to understand.

6. The liquidity of a firm is measured by

  1. Its ability to satisfy its short-term obligations as they come due.
  2. The amount of its annual earnings.
  3. The amount of its retained earnings.
  4. The value of the earnings per share.

7. An inventory turnover ratio of 4.0 may not be suitable for a firm that deals in

  1. Electrical supplies.
  2. Construction supplies.
  3. Grocery supplies.
  4. Car manufacturing.

8. All groups of individuals who have a direct economic link to a firm are called

  1. Stockholders.
  2. Stakeholders.
  3. Board of Directors.
  4. Employees.

9. To adjust the income statement to show cash flows from operations

  1. Non-cash chargesshould be added back to net profit after taxes.
  2. Dividends paid to shareholders should be added back to net profit.
  3. Amounts paid to suppliers should be added back to net profit after taxes.
  4. Amounts received from customers should be added back to net profit.

10. In the context of business and finance, riskis defined as the

a.Certainty of losing money.

b.Possibility of hiring efficient staff.

c.Possibility of closing abranch.

d.Chance of suffering a financial loss.

Question No. 3 (10 Marks)

The following are the financial statements of Barcelona Inc., a company that deals in sports tools and equipment. (All figures are in US$)

Income Statement for the year ended 31 December 2012

Sales revenue100,000

Less: Cost of goods sold

Beginning Inventory 8,000

Purchases74,000

82,000

Ending Inventory 7,000 75,000

Gross Profit 25,000

Less: Operating expenses 12,000

Operating Profit 13,000

Less: Interest expense 2,000

Net profit before taxes 11,000

Less: Taxes 3,000

Net profit available for distribution 8,000

Less Dividends 4,500

Retained Earnings 3,500

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Balance Sheet as at 31 December 2012

AssetsLiabilities

Cash5,000Accounts payable9,000

Accounts Receivable8,000Notes payable1,000

Inventories 7,000Long Term Debt 20,000

Land and Buildings 50,000Common Stock (45,000

Furniture and Equipment 10,000shares of $ 1 each) 45,000

Retained earnings 5,000

Total Assets 80,000Total Liabilities 80,000

  1. Calculate the following ratios: Current ratio, Quick ratio, Inventory turnover, Average age of inventory, Average collection period, Debt ratio, Gross profit margin, Operating profit margin, Times interest earned ratio, Return on total assets, Dividends per share, Return on Equity, and Earnings per share.
  2. What does the “Debt Ratio” mean?
  3. Comment on Barcelona’s average collection period, assuming its payment terms are n/30.
  4. What was the amount of Retained Earnings on 1 January 2012?