CH 16 MGMT 201

Ordinarily, the market value of a stock __________ its book value

exceeds

How quickly an asset can be converted to cash is known as

liquidity

A company whose inventory ratio is much slower than its industry average may have too ______ inventory.

much

When analyzing a company, in addition to financial ratios, managers should consider ______.

Employee learning and growth, industry trends, and customer satisfaction

Average total assets divided by average stockholders' equity equals ______.

Equity multiplier

True or false: A company with an inventory turnover ratio that is much faster than the average for its industry may have too much inventory.

False

True or false: Analyzing financial ratios is the only way analysts should evaluate a company.

False

True or false: One of the reasons the current ratio is useful is because it is easy to interpret.

False

When evaluating the financial health and future prospects of a company, users rely on _______________ analysis

Financial Statement

Dividing sales on account (credit sales) by the average accounts receivable balance for the year is the calculation of the ___________

accounts receivable turnover

When constructing a common-size balance sheet, all items are usually expressed as a percentage of total ______.

assets

Dividing current assets by current liabilities calculates the ____________ ratio

current

When evaluating the trend in a company's current ratio, a(n) ______ ratio might be a sign of eliminating obsolete inventory whereas a(n) ______ ratio might be the result of stockpiling inventory.

declining, improving

Creditors and stockholders have ______ views about the optimal debt-to-equity ratio.

different

The rate of return, in the form of cash dividends only, that would be earned by an investor who buys common stock at the current market price is measured by the __________

dividend yield ratio

Given the potential benefits of maintaining positive financial leverage, managers ______.

do not try to avoid debt

Why would an investor be interested in knowing a company's earnings per share?

earnings form the basis of dividend payments and future increases in the value of shares

True or false: A company with a current ratio of at least 2 will never have difficulty meeting its financial obligations.

false

The difference between the rate of return the company earns on investments on its own assets and the rate of return that the company must pay its creditors is ______.

financial leverage

The relationship between the market value of a share of stock and the stock's current earnings per share is often stated in terms of the

price-earnings ratio

When analyzing the acid-test ratio, ideally each dollar of liabilities should be backed by at least $1 of _______________ assets

quick

The goal for the operating cycle is to ______.

reduce it to as few days as possible

Profits relative to the book value of stockholder's equity is measured by ____________

return on equity

Dividing 365 days by the inventory turnover yields the average _________ period

sales

When constructing a common-size income statement, each item is expressed as a percentage of ______.

sales

True or false: If a company's rate of return on total assets is less than the rate of return the company pays its creditors, financial leverage is positive.

False

What are the three elements of the DuPont approach?

operating efficiency, asset usage efficiency, financial leverage

The return on total assets is a measure of _________

operating performance

Stockholders generally ____________ of high amounts of debt

approve

What are limitations of financial statement analysis?

-Analyzing companies just based on the financial ratio calculations -comparing financial data across companies that follow the same accounting

What are 3 examples of performing financial statement analysis

1. Analyzing financial ratios to asses the financial health of a company 2. Comparing financial data across companies 3. examining trends in key financial data

A times interest earned ratio of ______________ or more is considered sufficient to protect long-term creditors

2

What is the average collection period when accounts receivable turnover is 12.3?

30 days

If a company has accounts receivable turnover of 10, the average collection period is ______ days.

36.5

Which ratio is used to measure how quickly credit sales are converted into cash?

Accounts receivable turnover

What measures excludes inventories and prepaid expenses from total current assets, leaving only the more liquid assets to be divided by current liabilities?

Acid-test (quick) ratio

The times interest earned ratio is based on earnings ______.

Before interest expense and income taxes

What measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off?

Book value per share

A vertical analysis in which each financial statement item is expressed as a percentage is a(n) ___________ - size financial statement

Common

Which of the following ratios measures the balance between a company's liabilities and stockholders' equity?

Debt-to-equity

The percentage of current earnings being paid out in dividends is quantified by the ____________

Dividend payout ratio

Which ratio measures the rate of return (in the form of cash dividends only) that would be earned by an investor who buys common stock at the current market price?

Dividend yield ratio

Analytical techniques that are widely used when comparing financial statements are ______.

Dollar and percentage changes on statements, common-size statements, ratios

In a horizontal analysis, the ___________ changes highlight the changes that are the most important economically; the ____________ changes highlight the changes that are most unusual

Dollar, percentage

Why is the times interest earned ratio based on earnings before interest expense and income taxes?

Earnings before interest expense and income taxes is the amount available for making interest payments

Because investors buy stock in hopes of a return in the form of either dividends or future increases in stock value, they have an interest in the company's ____________

Earnings per share

Analyzing financial data over time is ____________ analysis

Horizontal

Which of the following measures how many times a company's inventory has been sold and replaced during the year?

Inventory turnover

Managers want to minimize working capital because ______.

It must be financed with long-term debt or equity

Borrowing money to acquire assets in an effort to increase sales and profits is financial

Leverage

Expectations about future earnings and dividends is reflected in ________ value, whereas _________ value reflects the results of events that have occurred in the past

Market, book

When a company's operating cycle is longer than the average payment period for suppliers, the company ______.

May need to borrow money to fund inventories and accounts receivable

Another type of leverage ratio that indicates the portion of a company's assets that are funded by equity is the equity

Multiplier

Companies with excellent prospects for profitable growth ______.

Often pay little or no dividends

A times interest earned ratio of less than __________ is inadequate because interest expense exceeds the earnings that are available for paying that interest

One

The elapsed time from when inventory is received from suppliers until cash is collected from customers is the ________________

Operating cycle

When analysts use a company's financial information to make comparisons, three analytical techniques are widely used. They are dollar and _____________ changes on statements, _______________ - size statements, and __________________. (Enter only one word per blank.)

Percentage, common, ratios

Vertical analysis focuses on ______.

Relations among financial statement items at a given point in time

Asset turnover can be increased by increasing ______.

Sales and accumulated depreciation

Which of the following measures a company's ability to protect its long term creditors?

Times interest earned ratio

Which of the following measures how efficiently a company's assets are being used to generate sales?

Total asset turnover

A base year is selected and the data for all years are stated as a percentage of that base year when computing a(n) ____________ percentage

Trend

Showing data for several years as a percentage of a base year computes ______.

Trend percentages

True or false: The evaluation of the average collection period is dependent upon the company's credit terms.

True

It is difficult to compare financial data between companies when each company ______.

Uses a different accounting method

Maintaining large amounts of _________________ is costly because it must be financed with long-term debt and equity

Working capital

365 days can be divided by the accounts receivable turnover to determine the average number of days required to receive payment on an account, which is known as the average ___________ period

collection

When investors are willing to pay a premium for the company's stock, the price-earnings ratio is _________, whereas when investors believe a company's future earnings growth is limited, the price-earnings ratio is _________

high, low

Analyzing financial data over time is ______________ analysis

horizontal

A company's goal is to ______ total asset turnover

increase

The acid-test ratio is designed to measure how well a company can meet its obligations without having to liquidate or depend too heavily on its ___________

inventory

If the average collection period for a company is calculated to be 35 days, then on average ______.

it takes 35 days to collect a credit sale

An increase in the debt-to-equity ratio indicates that a company is increasing its financial

leverage

Managers generally maintain high debt-to-equity ratios in industries with _________ financial risk.

little

The adequacy of a current ratio depends upon ______.

the composition of the assets

The ratio that measures how efficiently company assets are being used to generate sales is the ____________ turnover ratio

total asset

Horizontal analysis is also know as __________ analysis

trend

True or false: Continual liquidity problems can lead to bankruptcy.

true

An increasing equity multiplier means a company is ______.

using more debt than equity to fund its assets

A common-size financial statement is a ______ analysis.

vertical

Current assets minus current liabilities is known as

working capital