ACT5735 Winter 2014 Final Exam Solution

Question #1 (6 points)
What is the controller’s role in strategy implementation? Be sure to provide specific examples in
your answer.
Question #2 (14 points)
List and describe the principles of internal control we discussed in this course . As part of your
answer, provide an example of each principle.
Question #3 (8 points)
List and describe four actions a firm can take to accelerate the collection of cash from sales. For
each action listed, describe the potential costs involved with the action.
Question #4 (6 points)
In your own words, describe the system that Lowes uses to manage its Accounts Payable.
Question #5 (6 points)
Using the financial statements provided on Blackboard, calculate and interpret the days to
collect ratio. Assume credit sales are 15% of total net sales.
Question #6 (10 points)
Using the financial statements provided on Blackboard, calculate and interpret the days to sell
and gross profit ratios.
Question #7 (10 points)
Using the financial statements provided on Blackboard, calculate and interpret the current
liabilities ratios (including cash cycle) we discussed in class.
Question #8 (10 points)
Using the financial statements provided on Blackboard, calculate and interpret the long-term
liabilities ratios we discussed in class.
Question #9 (10 points)
What is a firm’s WACC? How is it calculated? How is it used?
Question #10 (10 points)
Consider the following potential investment, which has the same risk as the firm’s other projects:
Time
0
1
2
3
4

Cash Flow
-$170,000
$58,000
$63,000
$67,000
$68,000

The firm’s current weighted-average cost of capital is 14%.
a) How much value will this investment create for the firm?

b) At what discount rate will this project break even?
c) Should the firm do this investment? Be sure to justify your recommendation.
d) How would your analysis change if this potential investment was more risky than the firm’s
other projects? Be specific.
Question #11 (15 points)
The following situations each describe a weakness in internal control. For each situation, explain
why it is a weakness and then suggest a change that would improve internal control.
1) The warehouse clerk is responsible for ordering merchandise when levels become low and
advising the accounting department to issue a payment to the supplier when the goods are
received.
2) The check-singing machine is stored with a supply of pre-numbered, blank checks in the lunch
room closet.
3) Purchase orders can be approved by the purchasing manager, accountant, or warehouse
supervisor, depending on who is least busy.
4) Sales managers are responsible for granting credit to customers.
5) Purchasing managers are allowed to order goods from any vendor he or she chooses