FSA2

    As the company improves performance and earnings grow, if the company pays out a steady proportion in dividends and buys back shares, what happens to the level of equity capital?

• a)       Equity capital will grow at the same amount of earnings reported

• b)       Equity capital will grow at the same amount of earnings reported

• c)       The equity capital account remains the same no matter dividend-payout policy

• d)       Equity capital will grow at the same amount of increases on the balance sheet

    Decreases in “Inventory Days on Hand” imply

• a)       The company cannot afford to fund inventory purchases

• b)       The company has much more cash on hand

• c)       The company is selling off inventory more quickly and managing inventory levels efficiently

• d)       The company has rising tax obligations

The permanent-growth impact on working investment implies the following

• Working investment may rise during certain periods because of seasonal growth in sales

• As the company grows to new levels, working investment will rise to new permanent levels

• Working investment will remain the same regardless of the season

• Working investment will rise because of change in the company’s accounting for inventory

If the measure of “Payables Days on Hand” decreases, this may imply

• Suppliers and vendors are granting more lenient terms

• Suppliers and vendors have concerns about the company’s financial soundness and, therefore, are becoming stricter with terms

• Suppliers and vendors are not sure about the health of the company—whether it’s improving or deteriorating

• Customers of the company are indifferent to the company’s condition

The concept of operating leverage measures

• The impact of fixed costs when revenues are in decline

• The impact of cost accounting as businesses evolve

• The efforts of companies to distinguish between expenses vs. expenditures

• The impact of LIFO vs. FIFO inventory accounting