Question

For which of the following financial measures is it safe to assume that the reported (measured) amount represents a current period cash flow? (As always, read all options before answering.)

		Sales
		None of the other alternative answers are safe to assume that the reported (measured) amount represents a current period cash flow
		Cost of good sold
		Earnings per share
		Depreciation

A firm's short-term solvency, i.e. ability to pay its current liabilities (aka liquidity), is measured by which of the following ratio(s)? (Read all options before answering.)

		Quick ratio
		Inventory turnover ratio
		Current ratio
		Both the inventory turnover ratio and the return on assets ratio
		Both the current ratio and the quick ratio
		Return on assets ratio

The extended Du Pont equation, a.k.a. the 3 component decomposition of ROE equation, (i.e. ROE = (profit margin)x(total asset turnover)x(equity multiplier)) is used to:

		compute the firm s ROA, as the equation states.
		decompose the firm s ROE into sub-components, for a better understanding of the firm s financial health.
		determine if the firm is liquid
		compute the firm s ROE, as the equation states.

A speedup in a firm's __________ should __________ a firm's financing needs; whereas, a slowdown in a firm's __________ should __________ financing needs for a firm. (Hint: Systematically go through each alternative a-e individually (sequentially) & decide if it is correct, then select the correct response. Also, note that everything is from the firm s perspective; thus collections are received by the firm and payments are paid by the firm.)

		collections; increase; collections; decrease
		collections; increase; payments; increase
		payments; increase; collections; decrease
		payments; increase; collections; increase
		collections; decrease; payments; increase

Answer 1

1
Ans - NONE OF THE OTHER ALTERNATIVE ANSWERS ARE SAFE TO ASSUME THAT THE REPORTED (MEASURED) AMOUNT REPESENTS A CURRENT PERIOD CASH FLOW. (OPTION 2)
It is because in Cash flow we only need those items which shows actual movement of cash. In our options we see that DEPRECIATION is a Non cash expense. EARNING PER SHARE shows the part of Net profit that each outstanding shares is owed but does not ensure actual cash distribution, And COST of GOODS SOLD and SALES may be related to credit sales for future period instead of Cash sales for current period. So unless specified, none of the above options can be safely assumed to be Current period cash flows

2
Ans - BOTH THE CURRENT RATIO AND QUICK RATIO (OPTION 5)
Current ratio shows us the comparison of Firm's Current assets with Current Liabilities so that we can measure the firm's ability to pay off it's immediate obligations without hampering smooth functioning of business. And Quick ratio is simply a more liquid version of Current ratio which only takes those assets in consideration which can be immediately turned to cash to meet Current obligations (Stock is excluded). Thus both Current and Quick ratio helps us measure Firm's Short term solvency.

3
Ans - DECOMPOSE THE FIRM'S ROE INTO SUB-COMPONENTS. FOR A BETTER UNDERSTANDING OF THE FIRM'S FINANCIAL HEALTH (OPTION 2)
DU Pont model is basically used to decompose different components which are a part of ROE or Return on Equity in order to measure the efficiency of individual factors. This is mainly used by investors for comparison purpose between two firms in order to know which Key factor contributes most towards the strengths of ROE and which does not

4
Ans - PAYMENTS; INCREASE. COLLECTIONS; INCREASE (OPTION 4)
These are the most reasonable of the other options. If there is Speedup in the company's PAYMENTS then company's need for funds will grow resulting an INCREASE in it's Financing needs. Similarly If there is a slowdown or decrease in company's COLLECTIONS then also there will be same effect as previous alternative resulting an INCREASE in Financing needs