ACC 240 topic 3

Days' sales in inventory

Inventory at year-end/average day's cost of goods sold

Preferred dividend coverage ratio=

Net income/preferred dividend requirement

A company desiring to increase its total asset turnover could do so by using:

Oan accelerated depreciation method and the LIFO cost flow assumption

Dividends that are stable , or gradually changing , and periodic in nature are known as ________ dividends .

Regular

Accounts receivable turnover=

Sales/average accounts receivable

Plant and equipment turnover=

Sales/average plant and equipment

The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into four categories:

liquidity, activity, profitability, and debt or financial leverage

Suppliers or potential suppliers / creditors of a firm consider which of the following to be more important than the aggregate working capital or liquidity ratios of the firm ?

-Cash discounts availed by the firm for prompt payments made -Current and recent payment experience of the firm

Suppliers or potential suppliers / creditors of a firm consider which of the following to be more important than the aggregate working capital or liquidity ratios of the firm ?

-Current and recent payment experience of the firm -Cash discounts availed by the firm for prompt payments made

What indicators help suppliers and creditors judge the liquidity of a company ?

-How promptly the company has been paying its current and recent bills -How the company is portrayed in Dun & Bradstreet reports -Whether the company is taking all available cash discounts for prompt payment

Credit-rating firms gather and report data about which of the following ?

-Individual companies -Industries -Segments of the economy

Because firms within a given industry may vary considerably over time in terms of their_____________, it is difficult to develop reliable rules of thumb for the evaluation of ratio results.

-relative scale of operations -selected accounting methods -market segmentation strategies -life cycle stage development -cost and capital structures

✪ The use of an accelerated depreciation method and the LIFO inventory cost flow assumption will usually ____________ ( increase / decrease ) a company's total asset turnover relative to using the straight - line method and FIFO

Increase

The LIFO reserve is the difference between the inventory valuation as reported under :

LIFO and the amount that would have been reported under FIFO.

The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the:

LIFO reserve

Price/earnings Ratio(or earnings multiple)=

Market price of common stock/ diluted earnings per share of common stock

Identify the true statements about extra dividends:

-They indicate to stockholders that they should not expect to receive the larger amount every year -They may be declared and paid after an especially profitable year

Why is operating income frequently substituted for net income in the calculation of ROI and ROE ?

-Operating income excludes interest expense , which varies from firm to firm based on their capital structure decisions -Operating income is a more direct measure of the results of a firm's activities -operations income excludes income tax expense, which varies from firm to firm based on country-specific tax rates -operating income excludes the effects of discontinued operations and thus provides a more foreword looking measure of the firms profitability. -operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability

Days' sales in accounts receivable=

Accounts receivable at year-end/average day's sales

Dividend payout ratio

Annual Dividend per share / Earnings per Share

Average day's cost of goods sold=

Annual cost of goods sold/365

Average day's sales=

Annual sales/365

Inventory Turnover=

Cost of goods sold/ average inventories

Dividend Yield

annual dividend per share / market price per share of stock

Earnings multiple is another term used to describe the price / earnings ratio . This term merely reflects that:

the market price of stock is equal to the earnings per share multiplied by the P / E ratio

Which of the following statements are true regarding the price / earning ( P / E ) ratio ?

-The P / E ratio is sometimes referred to as earnings multiple -P / E ratios are shown in the stock listing tables of The Wall Street Journal -The P / E ratio is a measure of the relative expensiveness of a company's common stock -Firms with high P/E ratios generally have strong investor confidence -A high P/E ratio usually means that investors expect the firm to have strong future earnings and dividend growth -Low P/E ratios usually indicate poor earnings expectations -The P/E ratio is one of the most important measures used by investors to evaluate the market price of a firm's common stock -Analysts sometimes use expected future earnings per share and the current market price in the calculation to evaluate the prospects for changes in the stock's market price. -Diluted earnings per share is usually the denominator of the P/E calculation. -An above-average P/E ratio often indicates that investors anticipate relatively favorable future developments, such as increased earnings per share or higher dividends per share -The P/E ratio should not be the sole, or even principal, consideration in an investment decision

Identify the true statements about credit - rating firms:

-They usually have a rating system and assign a credit risk value based on that system -They evaluate the common and preferred stock issues of publicly traded companies