FINC 301 Exam 2 Chapter 3 & 4

Anyone analyzing a firm's financial statements should: do a trend analysis. all of these. perform a benchmark analysis. use audited financial statements.

all of these

Current Attempt in Progress The average tax rate is: calculated by dividing the total taxes paid by the taxable income. the tax rate on the excess over the base. always higher than the marginal tax rate. the tax rate that is paid on the last dollar of income earned.

calculated by dividing the total taxes paid by the taxable income.

Net cash flows =

cash inflows - cash outflows

Common-sized financial statement Balance sheet Expresses each item as a % of:

Total asset

Leverage Ratios

"How much LT Debt compared to equity? What portion of assets are finances with debt?" Higher ratio indicate greater potential return but also greater bankruptcy risk

Profitability Ratio

"How much profit for every $ sold? What is return for the shareholders?" Higher ratio indicate better performance

Liquidity ratios

"How well can firm pay its short term debt" Higher ratios = favorable indicators

Efficiency ratios

"How well is a company using its assets? Turning over its inventory? Higher number = positive signal

Market Value Ratios

"What is the market prices vs. its book value? How many times more is the stock priced at compare dot the earnings per share? Indicate how market is valuing firms equity Higher ratio = greater shareholder wealth

Financing activities

N/P LT Debt Common stock Dividend

Profitability Ratio Examples

Net Profit Margin (NPM) Return on Assets (ROA) Return on Equity (ROE)

Investing activites

Net fixed assets

Common-sized financial statement Income statement: expresses each item as a % of:

Net sales

Quick (acid test) ratio

(Current Assets - Inventory) / Current Liabilities

Cash inflows

-Decreases in assets -Increases in L&E

Cash outflows

-Increased in Asset -Decreases in L&E

Operating activites

A/R Inventory A/P Deferred taxes

Shareholders analyze financial statements in order to: all of these. determine the firm's profitability, their return for that period, and the dividend they are likely to receive. focus on the value of the stock they hold. assess the cash flows that the firm will generate from its operations.

All of these

5 Accounting Principals Cost Principal

Asset value are recorded at the cost (book value) for which they were acquired. As market values change over time, the book value at the time of acquisition will be an historical value

Organization

Assets listed in order of liquidity Liabilities in order in which they are due to be paid Stockholders equity listed last

5 Accounting Principals Going Concern Assumption

Assume a company will continue to operate for the predictable future The value of an asset reflects presumed use

Inventory Accounting FIFO (First-in-first-out)

Assumes merchandise is sold in the order it was acquired by a firm

Inventory Accounting LIFO (Last-in-first-out)

Assumes merchandise is sold in the reverse of the order it was acquired by a firm

Market Value

Todays value of the asset

Statement of Retained Earnings layout

Beginning retained earnings +NI -Dividends =Ending Retained Earnings

A company's current ratio is 2.0. Which of the following actions would lower the current ratio, assuming everything else remains the same? Borrow using short-term notes payable and use the proceeds to reduce accruals. Use cash to reduce accounts payable. Use cash to reduce accruals. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

Tangible assets

Buildings and equipment decline with use and are depreciated (not land)

Cash flows from financing activities include all but one of the following: Cash purchases of treasury stock. Cash payments on the principal of long-term debt. Cash proceeds from a bank loan. Buying and selling bonds or stock of other firms.

Buying and selling bonds or stock of other firms

NWC

CA-CL

Current ratio

CA/CL

Liquidity ratio examples

Current Ratio Quick (Acid-Test) ratio

Leverage Ratio Examples

Debt: Total Debt Ratio D/E: Debt to Equity TIE: Times Interest Earned

What is the DuPont equation?

Diagnostic tool for evaluating a firm's financial health

An increase in liabilities is generally ____ for your cash, while a decrease is generally ___ for your cash

GOOD, BAD

Intangible assets

Goodwill ( price paid over value), patents, copyrights lose value over time and are amortized (equivalent to depreciation)

FIFO

Higher balance in INV Lower COGS Higher taxable income Higher income taxes Higher net income

The DuPont system identifies some areas where a firm's management should focus its efforts in order to maximize the firm's ROE, which of the following is one of them? How much dividend is paid to stockholders? How liquid are the assets at management's disposal? How much is the price-earnings ratio? How efficient management is in using the firm's assets?

How efficient management is in using the firm's assets?

Retained earnings is/is not cast

IS NOT CASH

Efficiency ratio examples

Inventory turnover (IT) Days' sales in inventory (DSI) Accounts receivable turnover (ART) Days' sales outstanding (DSO) Total Asset turnover (TAT)

Which of the following is NOT true about the inventory turnover ratio? It measures how many times the inventory is turned over into saleable products. It is calculated by dividing inventory by cost of goods sold. The more times a firm can turn over its inventory, the better. Too high a turnover or too low a turnover could be a warning sign.

It is calculated by dividing inventory by cost of goods sold.

Which of the following is NOT true about treasury stock? It increases the net worth of the company. It is a firm's own shares repurchased in the market by the firm. It can be reissued under stock option and other employee benefit plans. It lowers the value of the company.

It lowers the value of the company.

Which of the following is true of a firm that has no debt in its capital structure? Its return on equity (ROE) will be greater than its return on asset (ROA). Its return on equity (ROE) will be lesser than its return on asset (ROA). Its return on equity (ROE) will be equal to its return on asset (ROA). None of these.

Its return on equity (ROE) will be equal to its return on asset (ROA).

On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on: June 23, 2008. July 2, 2008. September 20, 2008. None of these.

June 23, 2008.

FIFO reporting says a firm sold the _______ expensive inventory More/less

Less

Categories of ratios

Liquidity Efficiency Leverage Profitability Market Value

LIFO

Lower balance in INV Higher COGS Lower Taxable income Lower income taxes Lower net income

Income Statement

Measures profitability over reporting period Revenue - expenses =net income

Which of the following would appear as a liability on a company's balance sheet? Preferred stock Cost of goods sold Notes payable Depreciation expense

N/P

Depreciation

Non-cash expense Lowers taxable income Higher D.Expense, lower tax

Differentiate between cash flow results from 3 financing activities

Operating Investing Financing

5 Accounting Principals Assumption of Arm's length transaction

Parties involved in an economic transaction arrive at a decision independently and rationally Balance sheet should reflect the value of the asset at the time of acquisition

Market Value Ratio Examples

Price to earnings ratio (P/E Ratio) Market to Book Ratio (M/B Ratio)

Investors are likely to be most interested in a firm's times-interest-earned ratio total asset turnover ratio price-earnings ratio current ratio

Price-earning ratio (PE Ratio)

How will the ending RE on a company's balance sheet change if: The company had a net loss?

RE down

How will the ending RE on a company's balance sheet change if: The company paid a dividend?

RE down

How will the ending RE on a company's balance sheet change if: The company had net income?

RE up

DuPont equation

ROE = NPM * TAT * EM

Statement of Retained earnings

Reports how much of the company's earnings were retained in the business rather than paid as dividends

Income Statement layout

Revenue -COGS EBITDA -DA EBIT -I EBT -T NI

5 Accounting Principals Matching Principal

Revenue is matched with the expense incurred to generate it

5 Accounting Principals Realization principal

Revenue is recognized when a transaction is completed, although cash may be received earlier or later

Statement of cash flows

Summarized cash inflows and outflows during a period It will first give us the change in cash Using the starting balance we can then determine teh total cash

Which of the following does NOT change a firm's current ratio? The firm pays down its accounts payables. The firm purchases inventory by taking a short-term loan. The firm collects its accounts receivables. None of these.

The firm collects its accounts receivables.

Book Value

The value of the asset as shown on the balance sheet Historical cost less accumulated depreciation

Balance sheet

a snapshot of the firm's assets and liabilities at a given point in time

The assumption of arm's-length transaction states that: both parties to a transaction can act independently of each other and make economically rational decisions both parties to a transaction must have had previous transactions. one of the parties to the transaction is a bank that has full knowledge of the firm's creditworthiness. none of these.

both parties to a transaction can act independently of each other and make economically rational decisions.

LIFO reporting says a firm sold the ________ expensive inventory More/less

more

Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced during the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate: the inventory acquired on July 2 with the products sold. the inventory acquired on April 23 with the products sold. neither of these dates is valid because the products were sold in July. none of these.

the inventory acquired on April 23 with the products sold.