ACCY 100 E.3: Chapter 3 & 11

Risk

A concept that describes the range of possible outcomes from an action. The greater the range of possible outcomes, the greater the risk

Regular dividend

A dividend that is likely to be declared on a repetitive, periodic (i.e., quarterly, semiannual, or annual) basis

Extra dividend

A dividend that is not likely to be incorporated as a part of the regular dividend in the future

Common size statement

A financial statement in which amounts are expressed in percentage terms. In a vertical common size balance sheet, total assets are 100 percent, and all other amounts are expressed as a percentage of total assets each year, for an income statement, sales are 100 percent each year. Horizontal common size financial statements are side-by-side comparisons of several years' data in relation to the selected base year data.

Semilogarithmic graph

A graph format in which the vertical axis is a logarithmic scale

Rate of return

A percentage calculated by dividing the amount of return on an investment for a period of time by the average amount invested for the period. A primary measure of profitability

Return on assets (ROA)

A synonym for return on investment (ROI)

Return on Investment (ROI) can be described or computed in each of the following ways, except: A) Amount Invested / Amount of Return = ROI. B) Net Income / Average Total Assets = ROI. C) (Net Income / Sales) x (Sales / Average Total Assets) = ROI. D) Turnover x Margin = ROI. E) All of the above describe ROI.

A) Amount Invested / Amount of Return = ROI

Which of the following is(are) an example of a measure of leverage? A) Debt/equity ratio. B) Preferred dividend coverage ratio. C) Debt yield. D) Debt payout ratio.

A) Debt/equity ratio

For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is: A) Raises the current ratio. B) Lowers the current ratio. C) Doesn't affect the current ratio. D) Depends on the amount paid. E) Not determinable based on the facts given.

A) Raises the current ratio.

Another term for return on investment is: A) Return on assets. B) Return on retained earnings. C) Return to sender. D) Return on equity.

A) Return on assets.

Another term for the price/earnings ratio is: A) earnings multiple. B) profit ratio. C) sales multiple. D) cost ratio.

A) earnings multiple.

An advantage of the DuPont model for calculating ROI is that it: A) focuses on asset utilization as well as net income. B) is easier to use than the straightforward ROI formula. C) uses average total assets whereas the straightforward ROI formula does not. D) uses average total stockholders' equity. E) breaks ROI into its margin and return components.

A) focuses on asset utilization as well as net income.

The dividend payout ratio describes: A) the proportion of earnings paid as dividends. B) the relationship of dividends per share to market price per share. C) the percentage change in dividends this year as compared to last year. D) dividends as a percentage of the price/earnings ratio. E) the relationship of dividends per share to average total assets.

A) the proportion of earnings paid as dividends.

DuPont model

An expansion of the return on investment calculation to margin x turnover

Number of days' sales in accounts receivable

An indicator of the efficiency with which accounts receivable are collected

Number of day's sales in inventory

An indicator of the efficiency with which inventories are managed

Price/earnings ratio

An indicator of the relative expansiveness of a firm's common stock

Earnings multiple

Another term for price/earnings ratio; an indicator of the relative expansiveness of a firm's common stock

A vertical common size income statement: A) uses the dollar amount of net sales in the base year as the denominator for the comparisons made to other items within any given year. B) expresses all items within any given year's income statement as a percentage of net sales for that given year. C) makes horizontal comparisons between years more difficult. D) is useful in estimating the impact of inflation. E) is useful in comparing the percentage increases from year to year in operating expenses.

B) expresses all items within any given year's income statement as a percentage of net sales for that given year.

A common size income statement: A) uses the same dollar amount of revenues for each year. B) expresses items as a percentage of revenues. C) is useful in estimating the impact of inflation. D) makes comparisons between years more difficult.

B) expresses items as a percentage of revenues.

The return on investment measure of performance is: A) relevant only to business enterprises. B) used by individuals to compare investment performance. C) calculated using sales as the amount of return. D) calculated using total assets at the beginning of the period as the amount of investment. E) calculated using average stockholders' equity as the amount of investment.

B) used by individuals to compare investment performance.

Which of the following would not decrease working capital? A) A decrease in Cash. B) An increase in Accounts Payable. C) An increase in Merchandise Inventory. D) A decrease in Accounts Receivable. E) All of the above decrease working capital.

C) An increase in Merchandise Inventory.

Which of the following accounts is part of working capital? A) Retained Earnings B) Sales C) Merchandise Inventory D) Common Stock E) Long-Term Debt

C) Merchandise Inventory

Which of the following accounts is part of working capital? A) Retained Earnings. B) Common Stock. C) Merchandise Inventory. D) Sales.

C) Merchandise Inventory.

Working capital includes all of the following accounts except: A) Accounts Payable B) Cash C) Retained Earnings D) Merchandise Inventory E) Accounts Receivable

C) Retained Earnings

the comparison of activity measures of different companies is complicated by the fact that: A) dollar amounts of assets may be significantly different. B) only one of the companies may have preferred stock outstanding. C) different inventory cost flow assumptions may be used. D) the number of shares of common stock issued may be significantly different.

C) different inventory cost flow assumptions may be used.

If management wanted to increase the financial leverage of the firm, it would: A) raise additional capital by selling common stock. B) use excess cash to build up its productive capacity to achieve better utilization of its buildings and equipment. C) raise additional capital by selling fixed interest rate long-term bonds. D) try to increase its ROI by increasing asset turnover. E) concentrate on improving the firm's working capital management.

C) raise additional capital by selling fixed interest rate long-term bonds.

An individual interested in making a judgment about the profitability of a company should: A) compare the company's ROI for the most recent year with the industry average ROI for the most recent year. B) review the trend of working capital for several years. C) review the trend of the company's ROI for several years. D) calculate the company's ROI for the most recent year.

C) review the trend of the company's ROI for several years.

An individual interested in making a judgment about the profitability of a company should: A) review the trend of working capital for several years. B) calculate the company's ROE for the most recent year. C) review the trend of the company's ROI relative to the trend of the industry average ROI for several years. D) compare the company's price/earnings ratio at the end of most recent year with the industry average price/earnings ratio at the end of the most recent year. E) review the trend in the company's book value per share for several years.

C) review the trend of the company's ROI relative to the trend of the industry average ROI for several years.

An entity's current ratio will be influenced by: A) the depreciation method used. B) writing off an overdue account receivable against the allowance for uncollectible accounts. C) the inventory cost flow assumption used. D) issuance of a stock dividend.

C) the inventory cost flow assumption used.

The dividend payout ratio describes: A) dividends as a percentage of the price/earnings ratio. B) the percentage change in dividends this year compared to last year. C) the proportion of earnings paid as dividends. D) the relationship of dividends per share to market price per share.

C) the proportion of earnings paid as dividends.

COD

Cash on delivery, or collect on delivery

Many financial analysts substitute one amount for another in making ratio analysis comparisons in order to better achieve inter-company or company-to-industry data comparability. Which of the substitutions described below would not achieve better data comparability (for the ratio indicated) under any situation? A) Cost of goods sold for sales—in the numerator of the inventory turnover ratio. B) Cost of plant and equipment for net book value—in the numerator of the plant and equipment turnover ratio. C) Expected future earnings per share for current earnings per share—in the denominator of the price/earnings ratio. D) Average net assets for average total assets—in the denominator of the return on investment ratio. E) Number of working days in a year for 365—in the denominator of the number of days' sales in accounts receivable ratio.

D) Average net assets for average total assets—in the denominator of the return on investment ratio.

Which of the following is not usually considered a measure of an entity's liquidity? A)Acid-test ratio. B)Current ratio. C)Working capital. D) Cash ratio.

D) Cash ratio.

Return on equity: A) Will be the same as return on investment. B) Relates dividends and turnover. C) Relates dividends and stockholders' equity. D) Relates net income and stockholders' equity. E) Uses net cash flows as the measure of return.

D) Relates net income and stockholders' equity.

Which of the following is not a category of financial statement ratios? A) Financial leverage. B) Liquidity. C) Profitability. D) Reliability. E) Activity.

D) Reliability

A potential creditor's judgment about granting credit would be most influenced by the potential customer's: A) current ratio at the end of the prior fiscal year. B) most recent acid-test ratio. C) trend of acid-test ratio over the past three years. D) practice with respect to taking cash discounts offered by current suppliers. E) price/earnings ratio.

D) practice with respect to taking cash discounts offered by current suppliers.

Financial statement ratios support informed judgments and decision making most effectively when: A) viewed for a single year. B) viewed as a trend of entity data. C) compared to an industry average for the most recent year. D) the trend of entity data is compared to the trend of industry data. E) the trend of entity data is compared to industry data for the most recent year.

D) the trend of entity data is compared to the trend of industry data.

Assume that Kulpa Company has a current ratio of 0.7. Which of the following transactions would increase this ratio? A) Paying off Long-term Debt with Cash. B) Selling Merchandise Inventory at cost for Cash. C) Collecting Accounts Receivable in Cash. D) Paying off Accounts Payable with Cash. E) Purchasing Merchandise Inventory on credit.

E) Purchasing Merchandise Inventory on credit.

If the trend of the current ratio is increasing, while the trend of the acid-test ratio is decreasing over a period of time, this could be a warning that the firm is: A) depleting its inventories. B) having trouble collecting its accounts receivables. C) purchasing too much treasury stock. D) paying "extra" dividends. E) carrying excess inventories.

E) carrying excess inventories.

The comparison of activity measures (such as turnover ratios) of different companies is complicated by the fact that: A) dollar amounts of working capital may be significantly different from company to company. B) dollar amounts of assets may be significantly different from company to company. C) only one of the companies may have preferred stock outstanding. D) the number of shares of common stock issued may be significantly different. E) different inventory cost flow assumptions may be used.

E) different inventory cost flow assumptions may be used.

Trend analysis

Evaluation of the trend of data over time

Return on Investment (ROI) is computed as: A) Net income divided by average total assets. B) Net income divided by total sales. C) Net income divided by average total stockholders' equity. D) Sales divided by average total assets. E) Sales divided by average total stockholders' equity.

Net income divided by average total assets.

Liquidity

Refers to a firm's ability to meet its current financial obligations.

Principal

The amount of money invested or borrowed

Financial leverage measures

The debt ratio and debt/equity ratio that indicate the extent to which financial leverage is being used

Working capital

The difference between current assets and current liabilities. A measure of a firm's liquidity

Interest

The income or expense from investing or borrowing money

Interest rate

The percentage amount used, together with principal and time, to calculate interest

Return on Equity (ROE)

The percentage of net income divided by average stockholders' equity for the fiscal period in which the net income was earned; frequently referred to as ROE. A primary measure of a firm's profitability

Margin

The percentage of net income to net sales. Sometimes calculated using operating income or other intermediate subtotals of the income statement. The term also can refer to the amount of gross profit, operating income, or net income

Asset turnover

The quotient of sales divided by average assets for the year or other fiscal period

Turnover

The quotient of sales divided by the average assets for the year or some other fiscal period. A descriptor, such as total asset, inventory, or plant and equipment, usually precedes this term. A measure of the efficiency with which assets are used to generate sales.

Book value per share of common stock

The quotient of total common stockholders' equity divided by the number of shares of common stock outstanding. Sometimes called net asset value per share of common stock. Not a very useful measure most of the time

Return on investment (ROI)

The rate of return on an investment; frequently referred to as ROI. Sometimes referred to as return on assets or ROA. A primary measure of a firm's profitability

Current ratio

The ratio of current assets to current liabilities. A primary measure of a firm's liquidity

Times interest earned ratio

The ratio of earnings before interest and taxes to interest expense. An indicator of the risk associated with financial leverage.

Preferred dividend coverage ratio

The ratio of net income to the annual preferred stock dividend requirement

Dividend payout ratio

The ratio of the annual dividend per share of common stock to the earnings per share

Dividend yield

The ratio of the annual dividend per share of common stock to the market price per share

Acid-test ratio

The ratio of the sum of cash (including temporary cash investments) and accounts receivable to current liabilities. A primary measure of a firm's liquidity

Debt ratio

The ratio of total liabilities to the sum of total liabilities and total stockholders' equity. Sometimes long-term debt is the only liability used in the calculation

Debt/equity ratio

The ratio of total liabilities to total stockholders' equity. Sometimes only long-term debt is used for the numerator of the ratio

Credit risk

The risk that an entity to which credit has been extended will not pay the amount due on the date set for payment

Effect of the inventory cost flow assumption on working capital

When the cost of items being purchased for inventory is changing, the inventory cost flow assumption used (e.g., FIFO or LIFO) influences the inventory account balance, total current assets, and working capital.