Cashflow3

Which scenario below presents a red flag or warning sign of potential trouble?

• a)       The company reduces cash reserves to finance growing amounts of inventory

• b)       The company postpones distributing auditing financial information and has difficulty in public disclosures explaining the cause of recent losses.

• c)       The company uses cash reserves to prepay certain overhead expenses

• d)       A portion of cash reserves are designated for future investments in the short term

2.        Which scenario presents warning signs of concerns about the financial soundness of the company?

• a)       Company managers explain accounting methodology and standards for investments and depreciations thoroughly and clearly

• b)       Company managers announce losses in operations, but explain reasons clearly and respond with steps to return to profitability

• c)       Company managers explain the details in footnotes for a balance sheet item “Goodwill and Intangibles”

• d)       Company managers lump substantial amounts of assets into a “Miscellaneous Assets” category and elect not to explain the content of assets in audited financial statements.

3. What special warning sign below is related to revenue recognition?

• a)       The company changes its method for accounting for inventory from FIFO to LIFO

• b)       The company manages credit risk of accounts receivable by reassessing credit terms with customers

• c)       The company prepays certain minor expenses, but has not yet expensed the items on the income statement

• d)       The company aggressively reports revenues for a product delivered before the product has been manufactured and a sales agreement has been prepared with the prospective buyer

 

4.       Which practice below would be a warning signal or red flag in revenue recognition?

• a)       The company sells a product, buys it back, sells it again to the same customer and then buys it back and sells it to a third party (“round trips”)

• b)       The company performs services and is paid for them at the completion of the project timeline

• c)       The company receives payment up front for a product before it has been manufactured and reports the transactions as “deferred revenue”

• d)       The company sells inventory at a 5% mark-up from the cost

5.Tangible net worth is equal to

• a)       Total shareholder equity minus fixed assets

• b)       Total liabilities minus goodwill

• c)       Total shareholder equity + long-term debt – cash reserves

• d)       Total shareholder equity minus (Goodwill + Intangibles)

6.       In projections, which scenario best describes the no-growth case?

• a)       Revenues and cash flows grow at a modest 10%/year pace thereafter

• b)       Revenues and operating cash flows decline from year to year

• c)       Revenues and operating cash flows fluctuate up and down in each succeeding year

• d)       Revenues, costs and operating cash flows remain flat in each year

7.       Which scenario below presents an acute warning signal in project finance?

• a)       Project contractors announce the project will be delayed another 18 months because of uncertainty about labor and related compensation

• b)       Project sponsors have decided to limit the number of equity investors in the project

• c)       A government body has introduced attractive tax credits related to the project

• d)       The company hires outside experts to perform an analysis of environmental issues and risks at the new project site

8.        For companies that require significant research and development expenses to support growth, what rational approach should be considered for projections?

• a)       Project revenues on the basis that R&D expenses at a certain amount will result in an identical increase in the total of revenues

• b)       Project revenues on the basis of recent customer growth rates

• c)       Project revenues based on past track record, history, and timetables in past research efforts and based on expected product approvals, regulation, and product testing

• d)       Project revenues should grow at the same rate as the last reported year, regardless of R&D expenses

9.       In projections, which scenario best describes forecasts prepared by management

• a)       Revenues, costs and operating cash flows are projected based projects supplied by equity-research analysts

• b)       Revenues, costs and operating cash flows are projected based on optimistic reports prepared by government regulators

• c)       Revenues, costs, and operating cash flows are projected based on optimistic, confident scenarios, often for the benefit of shareholders

• d)       Revenues and cash flows are projected based only on worst-case, scenarios

10.       Which description describes a company and industry experiencing decline and possible disappearance?

• a)       Revenues across the industry and with the company start to decline quickly with little sign of an upturn until the company adapts and adopts new product strategies

• b)       Revenues will fluctuate as some customers choose to support an old company by boosting demand in the medium term

• c)       Revenues for the company will increase by amounts averaging 10%

• d)       Revenues will not decline, because equity researches will likely have overstated the potential decline in the industry