Chapters 3 and 5 FIN3403

an increase in an asset is a _____________ of cash, a decrease in an asset is a _________ of cash.

USE ; SOURCE

which fo these computes days' sales in receivables?

365/receivables turnover

the cash coverage ratio adds _________________ to operating earnings (EBIT) for a better measure of how much cash is available to meet interest obligations

Depreciation

the _____________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

DuPont

___________ ___________ are the prime source of information about a firm's financial health.

Financial Statements

an increase in a liability is a _____________ of cash, an decrease in a liability is a __________ of cash.

SOURCE ; USE

________________ financial statements provide for comparison of firms that differ in size

Standardized

True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest

TREU : with compound interest, you earn interest on interest as well as interest on the principal

a common-size income statement helps compare financial results over time by controlling for changes in______________.

sales

the EBITDA ratio is similar in spirit to:

the PE ratio

interest rate (r)

"exchange rate" between earlier money and later money other names: -Discount rate -Cost of capital -required return

the idea behind_____________ is that interest is earned on interest

compounding

If you invest for a single period at an interest rate of r, your money will grow to ___________ per dollar invested.

(1 +r)

which of the following are SOURCES of cash?

-A decrease in accounts receivable. -An increase in notes payable.

which of the following are correct spreadsheet functions?

-FUTURE VALUE = FV(rate,nper,pmt,pv) -PRESENT VALUE = PV(rate,nper,pmt,fv) -DISCOUNT RATE = RATE(nper,pmt,pv,fv)

which of the following are traditional financial ratio categories?

-Profitability ratios -asset management ratios -market value ratios

which of the following items are among the items used to compute the current ratio?

-accounts payable and cash

which of the following methods can be used to calculate present value?

-financial calculator -an algebraic formula -a time value of money table

which of the following are USES of cash?

-increases in property, plant and equipment -increases in inventory -decreases in accounts payable

which three of the following are most apt to create problems when comparing financial statements for multiple firms?

-seasonality -differing fiscal years -differing accounting methods

types of standardized financial statements:

1. Common-size balance sheet (% of total assets) 2. Common-size income statement (% of sales)

types of ratio analysis

1. Liquidity ratios (short-term solvency) 2. Financial leverage ratios (long-term solvency) 3. turnover ratios (inventory or asset management ratios) 4. market value ratios 5. profitability ratios

the difference between ____________ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ______________ every year.

SIMPLE ; BIGGER

which of the following can be determined using the future value approach to compound growth developed in this chapter?

Sales and dividend growth

sources of cash

a firm's activities that generate cash (cash inflow) -anytime a firm "sells" something -DECREASE in ASSET accounts : Accts. Receivables, inventory, Net fixed assets INCREASE in liability or equity accounts : Accts. payable, current liabilities, and common stock

Statement of Cash Flows

a firm's financial statement that SUMMARIZES its sources and uses of cash over a specified period

common-base year statements

a standardized financial statement presenting all items relative to a certain base year amount

Profitability measures such as ROA and ROE are __________ rates of return.

accounting

although _____________ ______________ are often poor reflections of reality, they are often the best information available.

accounting numbers

long term solvency ratios

are intended to address the firm's long-term ability to meet its obligations, or more generally, its financial leverage ALSO KNOWN AS: financial leverage ratios

Return on Equity (ROE)

can be used to measure how well a firm is attaining owner wealth maximization

future value is the __________ value of an investment at some time in the future.

cash

when combining common-size and common-base year analysis, the effect of overall growth assets can be eliminated by first forming the:

common-size statements

Discounting is the opposite of

compounding -because compounding increases money forward in time, discounting reduces money back in time

the cash ratio is found by dividing cash by:

curent liabilities

an important accounting goal is to report financial information to users in a way that is useful for ________.

decision making

a common-base year financial statement presents items relative to a certain base, which is the:

dollar amount of each item during a common base year

a times interest earned (TIE) ratio of 3.5 times means a firm has ________ that is (are) 3.5 times greater than the firm's interest expense.

earnings before interest and taxes

the inventory ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times respectively. Explaining the upward trend in the inventory turnover ratio requires:

further investigation

When the typical stock in the S&P 500 index has a PE ratio 12, a company PE ratio of 15 may have _______________ than average growth prospects, given similar earnings per share.

higher

as long as all sales requests are being met, a ________________ inventory turnover ratio is better.

higher -higher turnover implies more efficient operations provided there is sufficient inventory to meet demand

Return on Assets (ROA)

is a measure of profit per dollar of assets

If management has been UNSUCCESSFUL at creating value for the company's stockholders, the market-to-book ratio will be _____.

less than 1

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past three years is 30%, 34%, and 40%, respectively. Indicates that the firm has increased its ____________

leverage

current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased. from 29 to 25%. This indicates the firm has increased its ________.

liquidity

the quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes a ___________ time to sell

long

whenever ______________ information is available, it should be used instead of accounting data.

market

how is the price-earnings (PE) ratio computed?

market price per share/earnings per share

how is market-to-book ratio measured?

market value per share/book value per share

profit margin (PM)

measure of operating efficieny

the concept of the time value of money is based on the principle that a dollar today is worth _________ a dollar promised at some time in the future

more than

one of the most important uses of financial statement information within the firm is:

performance evaluation

if you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you will need to find a(n) _______________ value

present

when a company has negative earnings for an extended period of time, analysts will often resort to the:

price-sales ratio

companies pay a great deal of attention to their

profit margins

if a company's common-size income statement shows a lower percentage for cost of goods sold this period compared to last period, the company may be controlling its costs well or it has ____________.

raised its prices relative to costs

financial ratios

relationships determined from a firm's financial information and used for comparison purposes

the profit margin is equal to net income divided by__________.

sales

which of the following represents the receivables turnover ratio?

sales/accounts receivable

at the most fundamental level, firms generate cash and:

spend it

a good working knowledge of financial statements is desirable because

such statements are the primary means of communicating financial information both within and outside the firm

which two of the following groups are most interested in liquidity ratios?

suppliers and bankers

assuming the interest rate offered for a 10 year investment plan is same as for a 4 year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?

the 10 year investment plan

the equity multiplier tells us

the amount of the firm's assets that are financed by shareholders

Average Collection Period (ACP)

the average length of time required to convert the firm's receivables into cash, that is, to collect cash following a sale

what does an inventory turnover ratio of 5 mean?

the entire inventory was sold and replaced 5 times during the year

Time Value of Money (TVM)

the fact that a dollar in hand today is worth more than a dollar promised at some time in the future

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

what does a current ratio of 1.2 mean?

the firm has $1.20 in current assets for every $1 in current lliabilities

what indicates how long a start-up company can operate until it needs more financing?

the interval measure

Tobin Q's Ratio

the market value of firm's assets divided by their replacement cost

burn rate

the rate at which cash is burned in the race to become profitable

which one of the following is one way in which financial managers use a common-size balance sheet?

to track changes in a firm's capital structure

a common-size balance sheet expresses accounts as a percentage of _____________.

total assets

Use of cash (cash outflow)

when cash is being spent by the first (cash outflow) -INCREASE in Asset accounts :current assets -DECREASE in liability + equity :Notes payable, long-term debt (LTD)

financial managers use a common-size income statement to determine_______________.

which costs are rising or falling as a percentage of sales

Changes in cash flow can be divided into 3 categories

1. OPERATING ACTIVITY: (Net Income) and changes in most current accounts 2. INVESTMENT ACTIVITY: changes in fixed assets. And change in net fixed assets + depreciation 3. FINANCING ACTIVITY: changes in Notes Payable, LTD, and equity accounts

financial ratios are traditionally grouped into the following categories:

1. Short-term solvency, or liquidity, ratios 2. Long-term solvency, or financial leverage, ratios. 3. Asset management, or turnover, ratios. 4. Profitability ratios. 5. Market value ratios

the Dupont identity tells us that ROE is affected by three things:

1. operating efficiency (as measured by profit margin) 2. Asset use efficiency (as measured by total asset turnover) 3. Financial leverage (as measured by the equity multiplier)

Relationship 1 : given any interest rate the longer the time period Relationship 2: Given the time period, the higher the interest rate

: the higher the future value :the lower the present valuewhich

Standard Industrial Classification (SIC) codes

A U.S. government code used to classify a firm by its type of business operations - four-digit codes established by the U.S. government for statistical reporting.

How are firms classified into peer groups for ratio analysis?

According to Standard Industrial Classification codes (SIC codes)

Present value (PV)

EARLIER money on a time line "how much did _____ invest" also means fv is given to find investment of PV

true or false: when acquiring another firm, financial statement information is not important in identifying potential targets

FALSE

true or false: there is only one method for preparing the statement of cash flows

FALSE -the exact form differs from one preparer to the next

true or false: small changes in the interest rate affect the future value of a small-term investment more than they would affect the value of a long-term investment

FALSE : small rate differences can be worth thousands of dollars, especially when either the amount or the time period is large

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______________.

INCREASE

A(n) ___________ in net profit margin will increase ROE.

Increase

which one of the following does NOT affect ROE according to DuPont identity?

Investor sentiment

Future Value (FV)

LATER money on a time line "how much would the investment be worth today" means PV is whats given to find FV

if a company has inventory, the quick ratio will always be ____________ the current ratio

LESS than

some financial ratios measure a firm's ___________, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial ______________, which demonstrates the proportion of assets financed by long-term obligations

Liquidity ; Leverage

total capitalization equals total equity plus total:

Long-term Debt

which ratios use some information that is not contained in financial statements?

Market Value Ratios

which one of the following is the correct equation for computing return on assets (ROA)?

Net income/Total assets

what is the main difference between the cash coverage ratio and the times interest earned ratio (TIE)?

Non-cash expenses

alpha has assets of $102 million, net income of $4.3 million, and total sales of $97million. Omega has assets pf $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 -greater net profit margin