BA 240 Ch 1, 2, 3, 4
The U.S. tax rate becomes a flat-rate tax in practice at approximately what corporate income level?
$0
A firm has a total debt ratio of 0.30 times. This means the firm has ________ in total debt for every $1 in total assets.
$0.30
If Marley Company has a stock price of $12 per share, 100,000 shares outstanding, $432,000 in liabilities and $100,000 in cash, what is its enterprise value?
$1,532,000
Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?
$11,300/($54,800 - $45,000) = 1.15
Vera's has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?
$30/$3 = 10 times
A firm has an operating profit (EBIT) of $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio?
$600/$250 = 2.40
If the Federal marginal tax bracket is 21%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 in taxable income?
$730,000
Which of the following is the correct representation of the cash coverage ratio?
(EBIT + depreciation) / Interest expense
Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?
- 10.71%- Profit Margin = Net income / Sales
BC Toys has total equity of $584,000. there are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratio?
- 3.24 times- $54 / ($584,000 / 35,000) = 3.24 times
AD corporation had sales of $750,000 and cost of goods sold of $350,000. Inventory at year end was $87,500. the firm's inventory turnover is ______.
- 4.00
Cal's market has return on equity (ROE) of 15%. What does this mean?
- Cal's generated $.15 in profit for every $1 of book value of equity.
What is the main difference between the cash coverage ratio and the times interest earned ratio?
- Non Cash Expenses
If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be:
- less than or equal to 1
Current assets on the common size balance sheet over the past three years have increased from 32 to 35% while current liabilities have decreased from 29 to 25%. This indicates the firm has increased its _____.
- liquidity
Return on equity (ROE) is a measure of _____.
- profitability
if interest paid is 100 and net new borrowing is 150, then cash flow to creditors equals:
-50
BT Tools has current assets totaling $9.2 million, including $4.3 million in inventory. The company's current liabilities total $8.1 million. What is the quick ratio?
.60
Long-term liabilities represent obligations of the firm lasting over ____.
1 year
Rank these (from easiest to hardest) of turning the following assets into cash.
1. Cash Equivalents 2. Accounts Receiveable 3. Inventory 4. Plant and Equipment
What is the debt-equity ratio for a company with $3.5 million in total assets and $1.4 million in equity?
1.5
given the tax rate of 15% on income from 0 to 50,000, 25% on income from 50,001 to 75,000 and 34% on income from 75,001 to 100,000, approximately how much tax would a company pay on a taxable income of 60,000?
10,000
if dividends are 100, stock sold is 10, and stock repurchased is 25, what is the cash flow to stockholders?
115
Omega Co. has annual sales of $250,000, costs of goods sold of $168,000, and assets of $322,000. Accounts receivable are $86,200. What is the receivables turnover?
2.90
AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity (ROE)?
20.18
How long will take for $40 to grow to $240 at an interest rate of 6.53% compounded annually?
28.33 years
days sales in receivables formula:
365 / receivables turnover
Assume current assets = $48; fixed assets = $125, current liabilities = $42, and equity = $100. What is the total debt ratio?
42
if ending net fixed assets are 100 beginning net fixed assets are 60 and depreciation is 10 then the change in capital spending is
50
If you wish to find the future value of $100 invested at 10% for 5 years, which of the following would be the correct Excel function?
=FV(0.10,5,0,-100)
suppose your company taxable income is 235,000. what is the income tax due, the average tax rate, and the marginal tax rate?
>74,900 >32% >39%
Which of the following are components of cash flow from assets?
>Capital spending >Change in net working capital >Operating cash flow
The cash flow identity reflects the fact that:
>Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders. >A firm generates cash through its various activities. >Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.
Categories of assets:
>Current and fixed >Tangible and intangible
Which three of the following are most apt to create problems when comparing financial statements for multiple firms?
>Differing fiscal years >Seasonality >Differing accounting methods
which should you keep in mind when examining an income statement?
>GAAP >time and costs >cash versus non-cash items
The use of financial leverage can
>Increase the chance of financial distress and business failure. >Greatly magnify both gains and losses. >Increase the potential reward for investors.
Which of the following are uses of cash?
>Increases in property, plant and equipment >Decreases in accounts payable >Increases in inventory
For a mature firm, operating cash flow:
>Is usually positive >Is a sign of trouble if negative over a long period of time
Which of the following are traditional financial ratio categories?
>Market value ratios >Profitability ratios >Asset management ratios
The short run for a firm is the period of time during which ___.
>Output can vary. >Some costs are fixed.
Which one of the following can be determined using the future value approach to compound growth development in this chapter?
>Population Growth >Dividend Growth >Sales Growth
Which two of the following groups are most interested in liquidity ratios?
>Suppliers >Bankers
Time value of money tables are not as common as they once were because
>They are available for only a relatively small number of interest rates >It is easier to use inexpensive financial calculators instead
Assets can be described as items that
>a firm owns >provide market value to the firm >generate revenue
which of the following are current assets?
>accounts >inventory
which of the following are period costs?
>administrative expenses>general expenses >selling costs
which of the following items are among the items used to compute the current ratio
>cash >accounts payable
which two of the following are most likely to create problems when comparing financial statements for multiple firms
>differing fiscal years >differing accounting methods
increasing its non-cash liquid assets will enable a firm to do which of the following?
>increase its ability to avoid financial distress >increase its ability to meet short term obligations
marginal tax rates are important because
>incremental cash flows are taxed at marginal tax rates >financial decisions are based on new cash flows
marginal tax rates are the most important tax rates because:
>incremental cash flows are taxed at marginal tax rates>financial decisions are usually on new cash flows
which of these items do not appear on a balance sheet?
>knowledge that has no patent >good management >favorable economic conditions
residual value is the amount left over after paying
>other debt holders >bondholders >accounts payable >preferred stockholders
examples of fixed assets:
>plant >patents >land
what are the two classifications used by financial accountants?
>product costs >period costs
what are true concerning product costs?
>product costs are reported as costs of goods sold >product costs contain both fixed and variable costs
following are true about the difference between the income statement and cash inflows and outflows:
>sales on credit are accounts relivable rather than cash inflows until they are collected which may be in a different period >income taxes are often deferred so the amount on the income statement may not represent the amount of the check to the IRS >cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period
under a flat-rate tax, all income levels are taxed at___
>the same marginal rate >the same average rate
which of the following can be answered by reviewing a firm's balance sheet?
>what is the total amount of assets the firm owns >how much debt is used to finance the firm
when is revenue recognized on an income statement?
>when the earnings processed is virtually completed >when the value of an exchange of goods or services can be reliably determined
How are firms classified into peer groups for ratio analysis?
According to Standard Industrial Classification codes
What does a balance sheet reflect about a firm?
Accounting value on a specific date
Which one of these is a correct version of the balance sheet equation?
Assets = Liabilities + Stockholder's Equity
Liquidity refers to the ease of changing ___.
Assets to cash
A company's _______________ tax rate is its tax bill divided by its total taxable income, and its ___________ tax rate is the tax rate it pays on the next dollar of income
Average; marginal
The short run is a period when there are ______________ costs
Both fixed and variable
Product costs are usually shown on the income statement under the heading of _______________
Cost of goods sold
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory
Net working capital plus current liabilities equal ___.
Current assets
Calculating the present value of a future cash flow to determine its worth today is commonly called ____ valuation
Discount Cash Flow (DCF)
When a firm smooths earnings to please investors, its called:
Earnings management
What does GAAP stand for?
Generally Accepted Accounting Principles
The price at which willing buyers and sellers would trade is called ____________ value.
Market value
The ___________ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service
Matching [revenues with expenses]
Alpha has assets of $102 million, net income of $4.3 million, and total assets of $97 million. Omega has assets of $12.4 million, net income of $0.76 million, and total sales of $9.3 million. Based on common-size income statements, which company is more profitable?
Omega
Return on assets (ROA) is a measure of _____.
Profitability
Which of the following equations defines the total asset turnover ratio?
Sales / Total Assets
Who is entitled to the residual value of a firm's cash flows?
Shareholders
__________ financial statements provide for comparison of firms that differ in size.
Standardized
An official accounting statement that helps to explain the change in cash and cash equivalents is called the ___.
Statement of cash flows
What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?
The total asset turnover ratio will increase.
A common-size balance sheet expresses accounts as a percentage of _____.
Total Assets
True or false: Operating cash flow does not include depreciation or interest
True
According to GAAP, when is income reported?
When it is earned or accrued
what does stockholders equity represent
a residual claim against the book value of the firm's assets
firms are classified into peer groups for ratio analysis
according to standard industrial classifications codes
Although ______________ _____________ are often poor reflections of reality, they are often the best information available.
accounting numbers
although___ ___ are often poor reflection of reality, they are often best information available
accounting numbers
in the long run___ are variable
all costs
Net working capital will be negativing when current assets:
are less than current liabilities
The cash flow identity states that cash flows from ___________ should equal cash flows to creditors and equity investors
assets
on the balance sheet, assets are listed at their
book value
In finance, the value of a firm depends on its ability to generate:
cash flows
when a combining common size and common base year analysis the effect of overall growth in assets can be eliminated by first forming the:
common-size statements
the cash flows identify states that cash flow from assets equals cash flows to
creditors and stockholders
the current ratio shows the relationship between
current assets and current liabilities
The cash ratio is found by dividing cash by:
current liabilities
An important accounting goal is to report financial information to users in a way that is useful for _________
decision making
assets are listed on balance sheet in order of:
decreasing liquidity
an example of non-cash items on an income statement:
depreciation
Cash flow to stockholders equals:
dividends paid minus net new equity raised
a common base year financial statements presents items relative to a certain base which is the
dollar amount of each item during a common base year
Net capital is equal to
ending net fixed assets - beginning net fixed assets + depreciation
depreciation is the accountants estimate of the cost of___ used up in the production process
equipment
true or false: for financial analysis, financial statements and accounting numbers are more important than cash flows
false
true or false: operating cash flow includes capital spending and working capital requirements
false
true or false: the corporate tax code is simplistic and makes good economic sense
false
true or false: there is only one method for preparing the statement of cash flows
false
Long-term solvency ratio are also known as:
financial leverage ratios
As long as all sales requests are being met, a __________ inventory turnover ratio is better.
higher
when the typical stock in the s&p 500 index has a PE ratio 12 a company with a PE ratio of 15 may have___ than average growth prospects given similar earnings per share
higher
the information needed to compute the profit margin can be found on the ___
income statement
A(n)______________in net profit margin will increase ROE.
increase
why is it important for accounting standards to become more comparable across countries?
increased globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards
assets are recorded at historical cost, not market value because:
it is hard to keep up with the market value
why is positive net working capital important?
it means the firm should have sufficient cash to meet its current obligations
what will happen to the current ratio if current assets increase while everything else remains unchanged
it will increase
If a company has inventory, the quick ratio will always be ______ the current ratio
less than
what is a primary concern for bank lending funds to a business for the short term?
liquidity
some financial ratios measure a firms___ which shows ability meet short term obligations without undue stress while others measure firms financial___ which demonstrates the proportion of assets financed by long term obligations
liquidity; leverage
the quick ratio provides a more reliable measure of liquidity than the current especially when the company inventory takes a ___ time to sell
long
for financial decision-making purposes, the most important tax rate is the ___tax rate
marginal
new cash flows are taxed at
marginal tax rates
Whenever _________ information is available, it should be used instead of accounting data.
market
whenever___ information is available it should be used instead of accounting data
market
the price earnings pe ratio is a___ ratio
market value
which ratios use some information that is not contained in financial statements
market value ratios
non-cash items are expenses that directly affect___ but do not directly affect___
net income; cash flow
what is the main difference between the cash coverage ratio and the times interest earned ratio
non-cash expenses
book value of assets is generally:
not what the assets are actually worth
a positive operating cash flow indicates that the firm is generating enough cash to:
pay operating costs
when a company has negative earnings for an extended period of time analysts will often resort to the
price sales ratio
return on assets is a measure of
profitability
if a company common size income statement shows a lower percentage for costs of goods sold this period compared to last period the company may be controlling its costs well or it has___
raised its price relative to costs
The profit margin is equal to net income divided by _______
sales
total asset turnover ratio
sales / total assets
interval measure
shows how long a business could keep running until it needs another round of financing
at the most fundamental level, firms generate cash and
spend it
an official accounting statement that helps to explain the change in cash and cash equivalents is called the:
statements of cash flows
the last residual claimants to be paid by a firm are the:
stockholders
the EBITDA ratio is similar in spirit to:
the PE ratio
what does it mean when a firm has a days sales in receivables of 45
the firm collects its credit sales in 45 days on average
a current ratio of 1.2 means
the firm has 1.20 in current assets for every 1 dollar in current liabilities
For a given time period (t) and interest rate (r), the present value factor is
the reciprocal of 1 divided by the future value factor
in the us modified flat-rate tax system:
the tax rate becomes flat at very high income levels
what is the purpose of the income statement?
to measure performance over a set period of time
which one of the following is one way in which managers use a common-size balance sheet
to track changes in a firms capital structure
free cash flow is better described as:
total distributable cash flow
Total Capitalization formula
total equity + total long-term debt
true or false: free cash flow is the total of cash flow to cash flow to stockholders
true
true or false: taxes can be a large cash outflow for a corporation
true
an income statement reflects activity occurs over a period of time while a balance sheet reflects:
values as of a specific date
