Chapter Two

In the case of 2CansAndAString Telecomm, the company's current net cash flow is:

$888,125

Which of the following is not an asset management ratio?

A price-earnings ratio

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.

Annual report

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

Balance sheet

Johnny Appleseed Brewing Company (JABC) has a quick ratio of 2.00; $38,250 in cash; $21,250 in accounts receivable; some inventory; total current assets of $85,000; and total current liabilities of $29,750. In its most recent annual report, JABC reported annual sales of $100,000 and a cost of goods sold equal to 65% of annual sales. How many times is Johnny Appleseed Brewing Company (JABC) selling and replacing its inventory?

2.55x

Nikola Motors has a quick ratio of 2.00; $29,250 in cash; $16,250 in accounts receivable; some inventory; total current assets of $65,000; and total current liabilities of $22,750. In its most recent annual report, Nikola reported annual sales of $100,000 and a cost of goods sold equal to 65% of annual sales. How many times is Nikola Motors selling and replacing its inventory?

3.33x

A firm engages in a variety of activities that generate cash 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. Tomorrow, Manchester Mortgage Makers Inc. will pay cash dividends of $55,000 to its preferred stockholders. This transaction is classified as ________________ .

a financing cash flow

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

an investing cash flow

Tomorrow, Chicago Pork Producers Inc. will close on the sale of its old office building. It is expected to receive $1.25 million for the building net of the sales commission. This transaction is classified as _________________________ .

an investing cash flow

Bell Industries paid common dividends of $56,000.

Financing activities

The inventory turnover ratio across companies in General Forge's industry is 2.17. 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.

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.

Income statement

Which of the following is true about the leveraging effect?

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

Sandler Co. purchased equipment for $88,000.

Investing activities

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

Liquidity

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?

Real estate assets

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.

Straight-line depreciation

A company exhibiting a high liquidity ratio means it is likely to have enough resources to pay off its short-term obligations.

True

Market-value or market-based ratios help analysts figure out what investors and the markets think about the firm's growth prospects or current and future operational performance.

True

One possible explanation for an increase in a firm's profitability ratios over a certain time span is that the company's income has increased.

True

A firm engages in a variety of activities that generate and require cash payment. The boxes below describe two examples of these activities. Classify each transaction according to its serving as a source of cash to the firm (cash inflow) or a use of cash (cash outflow). International Textile Importers Co. spent $930,000 to purchase a controlling interest (200,000 shares) in a competitor.

Use

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

Amalgamated Football League Inc. sold $100,000 of its holdings of short-term marketable securities.

Source

Sutherland Co.'s total raw materials inventory increased from the previous year.

Operating 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

Companies use different sources for financing their assets—internal resources as well as external resources, and debt funding versus equity financing. Which of the following is considered a financially leveraged firm?

A company that uses debt to finance some of its assets

Companies use different sources for financing their assets—internal resources as well as external resources, and debt funding versus equity financing. 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 no leverage, or an unleveraged company

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.

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

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. During the year, International Textile Importers Co. paid off $337,000 of its accounts payable. This transaction is classified as _______________ .

an operating cash flow

Purple Dog Pet Supply Inc. (PDPS) released its annual results and financial statements. Kyoko 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

General Forge and Foundry Company has a quick ratio of 2.00; $38,250 in cash; $21,250 in accounts receivable; some inventory; total current assets of $85,000; and total current liabilities of $29,750. In its most recent annual report, General Forge reported annual sales of $100,000 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?

2.55x

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.

Common-size financial statement

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.

Earnings per share

The statement of retained earnings or the statement of stockholders' equity reconciles the net income, dividends paid, and the change in retained earnings during a particular year. 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.

Debt or financial leverage ratios help analysts determine whether a company has sufficient cash to repay its short-term debt obligations.

False

The inventory turnover ratio across companies in JABC's industry is 2.87. Based on this information, which of the following statements is true for Johnny Appleseed Brewing Company (JABC)?

Johnny Appleseed Brewing Company (JABC) is holding more inventory per dollar of COGS compared to the industry average.

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 $4,375,000. 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

Martinez Co.'s total accounts payable owed to suppliers on account decreased from the previous year.

Operating activities

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.

Statement of cash flows

Company stakeholders use asset management ratios to provide insights into:

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

Asset management or activity ratios provide insights into management's efficiency in using a firm's working capital and long-term assets.

True

Yesterday, Intergalactic Broadcasting Co. prepaid its rent for the next three months. This required the payment of $279,249.

Use

Which of the following is true about the leveraging effect?

Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth.

A fundamental concern of asset management ratios is whether the firm is carrying too much or too little of a particular asset. If the firm's average collection period is shorter than the industry's average, possible explanations include: 1.the firm is holding accounts receivable balances that are _____________ than that held by the average firm in the industry; or 2.for some as-yet-unidentified reason, the firm's sales are not commensurate with those generated by the average firm in the industry.

greater

The statement of cash flows categorizes a firm's cash flows according to the nature of the activities that give rise to them (for example, operating, investing, and financing cash flows) and then further differentiates these activities and cash flows into whether they involve sources and uses of cash. Two methods can be used to construct a statement of cash flows: the direct method and the indirect method. Under the indirect method, data from three financial statements are used. 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

The statement of cash flows categorizes a firm's cash flows according to the nature of the activities that give rise to them (for example, operating, investing, and financing cash flows) and then further differentiates these activities and cash flows into whether they involve sources and uses of cash. Two methods can be used to construct a statement of cash flows: the direct method and the indirect method. Under the indirect method, data from three financial statements are used. These statements include _______________ and __________________.

two balance sheets one income statement

Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios. Check all that apply.

A higher operating profit margin than the industry average indicates either lower operating costs, higher product pricing, or both. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.

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. Along with calculating the ratios, what else is needed for your report?

Both Making observations and identifying trends that are suggested by the ratio analysis Identifying the factors that drive the trends in the ratios

The statement of cash flows reports a company's cash inflows and outflows for a given accounting period by categorizing the company's sources and uses of cash as either operating, investing, or financing activities. Determine whether the activities described in the following table should be categorized as operating, investing, or financing activities in the statement of cash flows. Eastwood Inc. issued long-term bonds for $370,000.

Financing activities

The inventory turnover ratio across companies in Nikola's industry is 2.83. Based on this information, which of the following statements is true for Nikola Motors?

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

This type of cash inflow or outflow results from the production, sale, and delivery of the firm's goods and services as well as collecting customer payments, and is reported in the statement of cash flows.

Operating cash flows

A firm engages in a variety of activities that generate and require cash payment. The boxes below describe two examples of these activities. Classify each transaction according to its serving as a source of cash to the firm (cash inflow) or a use of cash (cash outflow). Last month, Manchester Mortgage Makers Inc. purchased $23,452 worth of office supplies on credit.

Source

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 of retained earnings

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: You work as an analyst at a credit-rating agency, and you are comparing firms in the construction and engineering sector. One company in the portfolio of companies you are analyzing is a Chinese firm. This firm stands out in the ratio analysis, because the company's financial ratios are substantially lower than identical financial ratios of the other firms in the sector. You do not dissect the results of the ratio analysis and categorize report this firm as an under-performing company. Which of the following statements about your analysis report is true?

The analysis likely includes incorrect and misleading conclusions.

Based on your understanding of the different items reported on the balance sheet and the information they provide, which statement regarding Fuzzy Button Clothing Company'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.

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.

Window dressing might be in effect. Seasonal factors can distort data

Corporate decision makers and analysts often use a technique called DuPont analysis to understand and assess the factors that drive a company's financial performance, as measured by its return on equity (ROE). Depending on the version used, the DuPont equation will deconstruct the firm's ROE, its best measure of financial performance, into two or three important factors, or drivers. DuPont analysis can be conducted using either the traditional DuPont equation or the extended DuPont equation. The traditional equation is constructed using two drivers, whereas the extended DuPont equation uses three variables to examine a firm's ROE performance. Complete the following sentences by entering the appropriate words or phrases. 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

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 _________ times-interest-earned ratios (TIE).

high

There are several groups of ratios most decision makers and analysts use to examine different aspects of a company's performance. Based on the descriptions of ratios listed, identify the relevant category of ratios. •Ratios that help determine whether a company can access its cash and pay its short-term obligations are called __________ ratios. •Ratios that help determine the efficiency with which a company manages its day-to-day tasks and assets are called __________________________ ratios. •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. •________________ ratios help measure a company's ability to generate income and profits based on its invested capital. •_______________________________________ 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.

liquidity asset management or activity debt or financial leverage management Profitability Market-value or market-based