Chapter 2: Analysis of Financial Statements

Which of the following is true about the leveraging effect?' Interest on debt can be deducted, leading to lower taxable income and lower taxes. Interest on debt can be deducted, leading to higher taxable income and a lower available operating income.

Interest on debt can be deducted, leading to lower taxable income and lower taxes.

Under the indirect method, a decrease in an asset account (excluding the cash and cash equivalent account) reflects (or results in) a cash _______ , and an increase in a liability or equity account represents and gives rise to a cash _______.

inflow inflow

Can a company's stock have a negative P/E ratio?

yes

In the case of 2CansAndAString Telecomm, the company's current net cash flow is: $252,800 $637,500 $507,500 $382,500

$507,500

A liquid asset can be converted quickly to cash with little sacrifice in its value. Which of the following assets classes is generally considered to be the least liquid? Accounts receivable Inventories Plant and equipment

Plant and equipment

Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called _______ ratios.

debt or financial leverage management

Eastwood Inc. issued long-term bonds for $370,000.

financing activities

Gibbons Industries repurchased common stock for $260,000.

financing activities

Companies use different sources for financing their assets—internal resources as well as external resources, and debt funding versus equity financing.

following 2 questions

Alexander Co. sold property for $71,000.

investing activities

Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with _____ debt ratios.

low

1. A ___ days sales outstanding, or average collection period, represents an efficient credit and collection policy. Between the two companies, ______ is collecting cash from its customers faster than ______; but both companies are collecting their receivables less quickly than the industry average.

low IntelliGames Inc. BrainGames

_________ ratios help measure a company's ability to generate income and profits based on its invested capital.

profitability

Income statement

This statement summarizes the revenues earned and the expenses incurred by the firm. The "bottom line" of this statement usually reports either the firm's net profit in total or the net profit earned on a per-share basis.

These ratios, which help determine how efficiently a firm is using its assets to generate sales are called ________ ratios.

asset management or activity

Purple Dog Pet Supply Inc. (PDPS) released its annual results and financial statements. Simone is reading the summary in the business pages of today's paper. In its annual report this year PDPS reported a net income of $125,000. Last year, the company reported a retained earnings balance of $527,000, whereas this year it increased to $620,000. How much was paid out in dividends this year? $32,000 $1,147,000 $282,000 $218,000

$32,000

3. IntelliGames' total asset turnover ratio is _____, which is ____ than the industry's average total asset turnover ratio. In general, a higher total asset turnover ratio indicates greater efficiency.

1.05 x lower

Liquidity

An asset with this characteristic may be sold or converted into cash with quickly, with minimum loss of value, and with small transaction costs.

One of the most important assumptions behind the calculation of quick ratio is that: The firm's accounts receivables can be collected and converted into cash within the time period for which credit was granted The firm's inventories are highly liquid and can be sold quickly with minimal loss of value to assist in the settlement of the firm's financial obligations The firm's accounts receivables will be collected late (after the expiration of the credit period) or are uncollectible

The firm's accounts receivables can be collected and converted into cash within the time period for which credit was granted

Annual Report

This document, which is required by the Securities and Exchange Commission (SEC), usually includes (among other things) a general description of the industry in which the firm is involved and management's discussion and analysis of the firm's financial condition and results for the past two years.

Straight-line depreciation

This method of allocating a tangible asset's cost over its useful life results in a constant, or equal, cost allocation over each year of the asset's productive life.

Common-size financial statement

This standardized financial statement can be used to compare the financial performance of companies of different sizes or industries by dividing each account on the income statement by the firm's total sales. Doing so, standardizes each account in terms of $1 of total sales earned.

Earnings per share

This value is the amount of earnings generated by the firm during an accounting period per each outstanding share of a company's common stock.

Tampa Trucking Co. sold its old computer system for $70,000. This transaction is classified as __________.

an investing cash flow

Throughout the year, International Textile Importers Co. purchased $1,598,248 worth of raw-materials inventory. This transaction is classified as ___________.

an operating cash flow

In contrast, in the traditional version of the equation, the firm's efficiency and profitability metrics are multiplied and summarized in a single measure, the ___________. In this analysis, a company's financial performance is expected to result from both management's financing decisions and its effectiveness and efficiency in generating profits using the firm's asset base.

return on assets ratio

A firm engages in a variety of activities that generate and require cash payment. The boxes below describe examples of these activities. Classify each transaction as to whether it constitutes an operating, an investing, or a financing cash flow.

2 following questions correspond to this !!!

Company stakeholders use asset management ratios to provide insights into: The firm's use of financial capital, both borrowed and equity, to acquire assets, as well as the firm's ability to pay the interest and dividends associated with these funds The effectiveness of management in generating spendable sales dollars using the firm's current and fixed assets The effectiveness of management to generate before-tax and after-tax profits using the firm's assets The effectiveness of management in providing ready funds to pay the firm's short-term financial obligations as they become due

The effectiveness of management in generating spendable sales dollars using the firm's current and fixed assets

Statement of cash flows

This statement can be created using either of two methods: the direct or the indirect methods. The indirect method requires the use of some information from the period's income statement and the comparison of the balances between two balance sheets.

You are Olivia, a financial analyst who works for an investment bank in downtown Denver, Colorado. You are analyzing the current cash condition of 2CansAndAString Telecomm. You've collected the following information from the company's financial reports: •The company just reported net sales of $2,500,000. Assume that there are no noncash sales. •The operating costs (excluding depreciation and amortization) are 65% of the company's total revenues. •Its depreciation and amortization charges are 5% of total sales. •The interest charges are 15% of EBIT, and it pays a 40% tax rate. ___________ reflects the true cash position of the company, and can differ from the balance that reflects the money that the business is left with after paying its operating expenses, interest expense, and taxes.

net cash flow

Vallante's current ratio is _______ and its quick ratio is _________, whereas Fusionista's current ratio is _________, and its quick ratio is _________.

1.33 (total current assets / total current liabilities) 0.75 [total current assets - inventory] / total current liabilities 1.66 (total current assets / total current liabilities) 0.93 [total current assets - inventory] / total current liabilities

General Forge and Foundry Company has a quick ratio of 2.00; $24,750 in cash; $13,750 in accounts receivable; some inventory; total current assets of $55,000; and total current liabilities of $19,250. In its most recent annual report, General Forge reported annual sales of $300,000 and a cost of goods sold equal to 65% of annual sales. How many times is General Forge and Foundry Company selling and replacing its inventory? 0.35x 18.18x 13.002x 11.82x

11.82x

statement of retained earnings

This statement describes the changes that have occurred in the equity account that reports the total value of net income earned by the firm but not paid out as dividends.

Statement #3: The book value of one of Cold Goose's fixed assets is calculated as the original cost of the asset minus its annual depreciation expense.

This statement is incorrect because: An asset's net book value is calculated by subtracting its accumulated depreciation expense from its total historic and installation costs.

Balance sheet

This statement provides a quantitative summary of a company's assets, liabilities, and net worth as of a specific point in time (date).

Operating cash flows

This type of cash inflow or outflow is generated in the normal course of a firm's business activities. Examples include sales revenues, the making and collection of accounts payable and receivable, and wages and taxes payable.

In the extended DuPont equation, a firm's ROE reflects (1) its use of debt financing, or leverage, as reflected by its ________ (2) the efficiency with which it uses its assets, as measured by the __________, and (3) its ability to generate sales and manage its production costs and operating expenses, as summarized by its __________.

equity multiplier ratio total asset turnover ratio net profit margin

A company reports accounting data in its financial statements. This data is used for financial analyses that provide insights into a company's strengths, weaknesses, performance in specific areas, and trends in performance. These analyses are often used to compare a company's performance to that of its competitors, or to its past or expected future performance. Such insight helps managers and analysts improve their decision making. Consider the following scenario: Your boss asked you to analyze Green Hamster Manufacturing's performance for the past three years and prepare a report that includes a comparative ratio analysis (sometimes called a benchmarking analysis) of the company's performance. Using the company's last three years of financial reports, you've calculated its financial ratios, including the ratios of Green Hamster Manufacturing's competition—that is, comparable ratios of other participants in the industry—and submitted the report.

following question corresponds

The inventory turnover ratio across companies in General Forge's industry is 10.05. Based on this information, which of the following statements is true for General Forge and Foundry Company? General Forge is holding less inventory per dollar of COGS compared to the industry average. General Forge and Foundry Company is holding more inventory per dollar of COGS compared to the industry average.

General Forge is holding less inventory per dollar of COGS compared to the industry average.

Which of the following statements are true? Check all that apply.

Fusionista Inc. has a better ability to meet its short-term liabilities than Vallante Corporation. If a company's current liabilities are increasing faster than its current assets, the company's liquidity position is weakening. If a company has a quick ratio of less than 1 but a current ratio of more than 1, and if the difference between the two ratios is large, it would mean that the company depends heavily on the sale of its inventory to meet its short-term obligations.

Ratios that help determine whether a company can access its cash and pay its debts that mature in less than a year are called _______ ratios.

liquidity

2. BrainGames Inc.'s fixed-asset turnover ratio is _____ than that of IntelliGames Inc. This could be because BrainGames is a relatively new company, such that the acquisition costs and book values of its fixed assets is _____ than the acquisition costs and book values of IntelliGames's net fixed assets.

lower greater

________ ratios examine the market value of a company's share price, its profits and cash dividends, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market.

market-value or market-based

Jenkins Co.'s total finished-goods inventory increased from the previous year.

operating activities

Ross Co.'s total accounts receivable owed by customers on account decreased from the previous year.

operating activities

Aunt Dottie's Linen Inc. reported no long-term debt in its most recent balance sheet. A company with no debt on its books is referred to as: A company with leverage, or a leveraged company A company with no leverage, or an unleveraged company

A company with no leverage, or an unleveraged company

Along with calculating the ratios, what else is needed for your report? Both of the above Making observations and identifying trends that are suggested by the ratio analysis Identifying the factors that drive the trends in the ratios

Both of the above

Which of the following best describes shareholders equity? Equity is the sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years. Equity is the difference between the paid-in capital and retained earnings.

Equity is the sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years.

Ratio analysis is an important component of evaluating company performance. It can provide great insights into how a company matches up against itself over time and against other players within the industry. However, like many tools and techniques, ratio analysis has a few limitations and weaknesses. Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply. Ratio analysis is conducted using benchmarking techniques. A firm's ratios can lead to conflicting conclusions—some ratios might be "good" and some "bad." Inflation can distort balance sheet data.

Inflation can distort balance sheet data. A firm's ratios can lead to conflicting conclusions—some ratios might be "good" and some "bad."

Based on your understanding of the different items reported on the balance sheet and the information they provide, which statement regarding Blue Hamster Manufacturing Inc.'s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?

The company's debts are listed in the order in which they are to be repaid.