Accounting Exam 3

complete the following calculations relating to ROA: calculate ROA, profit margin, and asset turnover given the following information: net sales: $59,434 net income: $12,598 total assets, beginning: $95,789 total assets, ending: $98,598

ROA: net income / average total assets $12,598 / [($95,789 + $95,598) / 2] = 13.0% ROA asset turnover: revenue / average total assets $59,434 / [($95,789 + $95,598) / 2] = 0.61 times profit margin: net income / revenue $12,598 / $59,434 = 21.2%

explain the decentralization concept what is a performance evalaution system in which accountability for results is assigned to a segment manager of the business based on the amount of control or influence the managers has over those results? a. effective responsibility accounting requires clear lines of authority and ........ b. divisions of authority and responsibility normally occur at a natrual consequence of ........ business operations c. in a small business, one person can control everything, but in a large business, different parts of the business must be ...... what is the process of delegating authority and responsibility for business segment operations to lower-level managers? decentralization offers the following advantages: 1. encourages upper-level managment to concentrate on ........ decisions a. local managment instead makes the ........ decisions to upper-level managment can concentrate on the long-term ........, ........ setting, and ........ evaluation 2. improves the ......... of decisions by delegating ......... down a chain of command a. local managers are better informed about local ......... b. their .......... to local events allows them to react quickly to changes in their local ......... -- local managers can generally make ........ decisions 3. motivates managers to improve .......... a. the freedom to act coupled with the responsibility for ........ creates an environment that encourages most individuals to perform at ........ levels 4. trains lower-level managers for increased .......... a. decision making is a ....... b. managers accustomed to making decisions about local issues are generally able to apply their decision-making skills to broader issues when they are ......... to upper managment positions 5. improves ......... evaluation a. when lines of responsibility are clear, credit or ....... can be more accurately assigned what are identifiable parts of an organization where control over revenues or expenses can be assigned? a. ........... businesses are usually subdivided into distinct reporting units called responsibility centers responsibility centers may be divided into 3 categories: 1. what is a responsibility center that incurs costs but does not generate revenue? a. cost centers are in control of ...... b. goal is to minimize ....... and maximize ........ c. this includes minimizing ....... costs without cutting important and ....... costs how to evaluate: d. ........ variances --> what are the 2 variances associated with variable costs? e. encourage ....... f. compare to last ........ g. cost centers normally fall on the ........ levels of an organization chart h. the manager of a cost center is judged on his ability to keep costs within ....... parameters 2. what is a responsibility center for which both revenues and costs can be identified? a. profits are in control of ........ and costs b. goal is to maximize .......... and minimize ........ -- measure division ......... c. encourage ........ and compare to last ........ d. encourage a ......-term focus e. short-term measures are easy to measure but can cause perverted ......... making f. balance financial performance measures with ......... performance measures g. maangers of profit centers are judged on their ability to produce ...... in excess of ....... h. these responsibility centers appear ...... on the organization chart 3. what is a responsibility center for which revenue, expense, and capital measures can be measured? a. these centers normally appear at the ....... levesl of an organization chart b. managers of an investment center are accountable for assets and ........., as well as earnings what are performance reports for the various company responsibility centers that highlight controllable items? a. these reports show ........ between the budgeted and actual controllable items b. a typical report lists the items under the manager's ......., both the budgeted amount and the actual amount for each item, and the ....... between the budgeted and actual amounts c. these reports support what docterine? what is a philosophy of focusing managment attention and resources only on those operations where perfromance deviated significantly from expectations? a. what documents are arranged to support this docterine? b. from the lower level upward, each successive report includes summary data from the ........ report c. with this format, managers will concentrate only on the ....... deviations from expectations because the deviations are ......... in the responsibility reports d. once the operations where performance deviates significantly from expectation are identified, the manager can request a more ........ report e. at the corporate level, the responsibility normally includes YTD ........ statements to inform managment of the company's ...... performance f. these are normally prepared using ............ income statements (these are ........ income statements) what is the concept of evaluating managerial performance based only on revenue and costs under the manager's direct control? a. crucial to an effective ........ accounting system b. managers should be evaluated based on only the revenue and costs they ....... c. holding individuals accountable for things they can't control is ....... d. ........ control may be difficult responsibility reports should be expressed in ...... terms a. if they are too complex, managers will ....... them b. the reports should include only ........ and ......... amounts of controllable revenues and expenses, with ...... highlighted to highlight what principle? c. reports must be ....... a primary resson for responsibility accounting is to evaluate ......... performance

explain the decentralization concept responsibility accounting a. effective responsibility accounting requires clear lines of authority and responsibility b. divisions of authority and responsibility normally occur at a natrual consequence of managing business operations c. in a small business, one person can control everything, but in a large business, different parts of the business must be divided decentralization concept decentralization offers the following advantages: 1. encourages upper-level managment to concentrate on strategic decisions a. local managment instead makes the routine decisions to upper-level managment can concentrate on the long-term planning, goal setting, and performance evaluation 2. improves the quality of decisions by delegating authority down a chain of command a. local managers are better informed about local concerns b. their proximity to local events allows them to react quickly to changes in their local conditions -- local managers can generally make better decisions 3. motivates managers to improve productivity a. the freedom to act coupled with the responsibility for results creates an environment that encourages most individuals to perform at high levels 4. trains lower-level managers for increased responsibilities a. decision making is a skill b. managers accustomed to making decisions about local issues are generally able to apply their decision-making skills to broader issues when they are promoted to upper managment positions 5. improves performance evaluation a. when lines of responsibility are clear, credit or fault can be more accurately assigned responsibility centers a. decentralized businesses are usually subdivided into distinct reporting units called responsibility centers responsibility centers may be divided into 3 categories: 1. cost centers a. cost centers are in control of costs b. goal is to minimize costs and maximize efficiency c. this includes minimizing inefficient costs without cutting important and efficient costs how to evaluate: d. budget variances --> input and price variances e. encourage improvement f. compare to last period g. cost centers normally fall on the lower levels of an organization chart h. the manager of a cost center is judged on his ability to keep costs within budgeted parameters 2. profit center a. profits are in control of revenues and costs b. goal is to maximize revenue and minimize costs -- measure division profits c. encourage growth and compare to last period d. encourage a long-term focus e. short-term measures are easy to measure but can cause perverted decision making f. balance financial performance measures with non-financial performance measures g. mangers of profit centers are judged on their ability to produce revenue in excess of expenses h. these responsibility centers appear mid-tier on the organization chart 3. investment centers a. these centers normally appear at the highest levesl of an organization chart b. managers of an investment center are accountable for assets and liabilites, as well as earnings responsibility reports a. these reports show variances between the budgeted and actual controllable items b. a typical report lists the items under the manager's control, both the budgeted amount and the actual amount for each item, and the variances between the budgeted and actual amounts c. managment by exception managment by exception a. responsibility reports b. from the lower level upward, each successive report includes summary data from the preceding report c. with this format, managers will concentrate only on the significant deviations from expectations because the deviations are highlighted in the responsibility reports d. once the operations where performance deviates significantly from expectation are identified, the manager can request a more detailed report e. at the corporate level, the responsibility normally includes YTD income statements to inform managment of the company's overall performance f. these are normally prepared using contribution margin income statements (these are internal income statements) controlability concept a. crucial to an effective responsibility accounting system b. managers should be evaluated based on only the revenue and costs they control c. holding individuals accountable for things they can't control is unmotivating d. isolating control may be difficult responsibility reports should be expressed in simple terms a. if they are too complex, managers will ignore them b. the reports should include only budgeted and actual amounts of controllable revenues and expenses, with variances highlighted to show managment by exception c. reports must be timely a primary resson for responsibility accounting is to evaluate managerial performance

limitations of ratios: 1. beware of limitations to ......... a. between firms: if one has acquired intangibles and ther other's are .......... b. between firms if one uses GAAP and ther other uses ....... c. between forms if they use different .......... methods, even within US GAAP

1. beware of limitations to comparability a. between firms: if one has acquired intangibles and ther other's are self-made b. between firms if one uses GAAP and ther other uses IRS c. between forms if they use different differnet methods, even within US GAAP

answer the following examples: 1. as a certified management accountant, grace is bound by the standards of ethical conduct issued by the institute of management accountants. if she accepts an expensive gift from a vendor trying to win a contract with her firm, which of the following standards will she violate? 2. (true/false): because management accountants prepare and analyze financial information used by company decision-makers, they are considered to be at the forefront of corporate governance 3. (true/false) the four standards of ethical conduct for management accountants relate to competence, confidentiality, integrity, and objectivity 4. (true/false): the sarbanes-oxley act allows, but does not require, a corporation to establish a whistleblower policy. 5. (true/false): karen is a certified management accountant and is bound by the IMA's standards of ethical conduct. her superior has asked her to try to influence the firm's outside auditors with expensive gifts and favors. if karen complies, she will violate the competence standard.

1. integrity 2. true 3. true 4. false -- is required 5. false

EQUITY: what term represnets the share of asets that the owners of the company actually own? BOOK VALUE OF EQUITY: book value = value on the "........" -- what is the "book?" a. the book value of assets are mostly recorded at the ......... costs as opposed to fair ........ value b. does not indlude any self-created ......... c. accounting is ........ -- the book value is the ......... end of the asset's possible value d. the book value of liabilites is recorded at the ......... value of ......... cash flows e. interest rates can change but they are generally .......... to the book value of liabilites MARKET VALUE OF EQUITY: a. the market value of assets = the ....... value of expected ........ cash flows (future .........) b. assets can .......... such that their fair, market value is higher than their historical cost c. market value .......... include self-created intangibles b. liabilites are recorded at the ....... value of .......... cash flows c. interest rates can change but they are generally .......... to the book value of liabilites any difference between the book value and market value of equity is predominantely driven by differences in the book value and market value of ........... and ............. what is the formula for the market-to-book (MTB) ratio? what is the formula book price per share? what is the fmrmula for market value per share? assets and liabilites are listed on the balance sheet at their ........ value

EQUITY: stockholders' equity (equity) BOOK VALUE OF EQUITY: book value = value on the "book" -- the balance sheet a. the book value of assets are mostly recorded at the historical costs as opposed to fair market value b. does not indlude any self-created intangibles c. accounting is conservative -- the book value is the lower end of the asset's possible value d. the book value of liabilites is recorded at the present value of future cash flows e. interest rates can change but they are generally similar to the book value of liabilites MARKET VALUE OF EQUITY: a. the market value of assets = the preent value of expected future cash flows (future earnings) a. assets can appreicate such that their fair, market value is higher than their historical cost b. market value does include self-created intangibles b. liabilites are recorded at the present value of future cash flows c. interest rates can change but they are generally similar to the book value of liabilites any difference between the book value and market value of equity is predominantely driven by differences in the book value and market value of assets and liabilites market price per share / book value per share (stockholders' equity - preferred stock) / # of shares outstanding market price per share assets and liabilites are listed on the balance sheet at their book value

complete the following examples: EXAMPLE 1: the financial statements of colorado outfitters include the following selected data ($ in millions): sales, $9,143; net income, $240; beginning stockholders' equity, $2,419; and ending stockholders' equity, $1,974. calculate the return on equity. EXAMPLE 2: the financial statements of colorado outfitters include the following selected data ($ in millions): sales, $8,593; net income, $130; beginning stockholders' equity, $1,319; and ending stockholders' equity, $1,424. assuming colorado outfitters has 611 shares outstanding and 650 shares issued (shares in millions), calculate the earnings per share. EXAMPLE 3: kc gardens pays an annual dividend of $0.65 per share on earnings per share of $2.20. its stock price at the end of the year is $36. calculate the dividend yield. EXAMPLE 4: kc gardens pays an annual dividend of $0.65 per share on earnings per share of $2.20. its stock price at the end of the year is $36. calculate the price-earnings ratio. EXAMPLE 5: given the following data: net income: $207 dividends on preferred stock: $32 average shares outstanding: 300 stock price per share: $11.37 calculate EPS and P/E ratio EXAMPLE 6: the 2024 income statement for anderson TV and appliance reported net sales of $420,000 and net income of $65,000. average total assets for 2024 was $800,000. stockholders' equity at the beginning of the year was $500,000, and $20,000 was paid to shareholders as dividends. there were no other stockholders' equity transactions that occurred during the year. solve for ROE, profit margin, asset turnover, and the equity multiplier

EXAMPLE 1: ROE: net income / average stockholders' equity $20 / $2,196.5 = 10.9% EXAMPLE 2: EPS: net income / # of shares outstanding $130 / 611 shares = $0.21 EXAMPLE 3: dividend yield: dividend per share / stock price $0.65 / $36 = 1.8% EXAMPLE 4: P/E ratio: stock price / EPS $36 / $2.20 = 16.4 EXAMPLE 5: EPS: net income - dividends on preferred stock (preferred dividends) [207-32] / 300 = $0.58 P/E ratio: stock price / EPS $11.37 / $0.58 = 19.60 EXAMPLE 6: ROE: net income / average stockholders' equity $65,000 / $522,500 = 12.44% profit margin: net income / revenue $65,000 / $420,000 = 15.48% asset turnover: revenue / average total assets $420,000 / $800,000 = 0.53 times equity multiplier: average total assets / average stockholders' equity $800,000 / $522,500 = 1.53

solve the following examples: EXAMPLE 1: chipotle mexican grill reports total book value of $1,538 million and common shares outstanding of 27.72 million. the average PB ratio for restaurant companies is 16.35. using the industry average PB ratio, estimate the intrinsic value of chipotle mexican grill's equity per share (round answer to two decimal places) Estimated IV of equity: IV(equity) = Book Value of Equity * P/B Ratio of comparable company IV(equity) = $1,538,000,000 * 16.35 = $25,146,300,000 Equity per Share: $25,146,300,000 / 27,720,000 = $907.15 EXAMPLE 2: hasbro Inc. (HAS), a toy manufacturer, reports net income for the recent twelve months of $312.79 million. HAS has 126.2 million shares outstanding. the industry average PE (using the trailing twelve months earnings) for its competitors is 28.27. using this industry average PE, estimate the intrinsic value of HAS' equity per share. (round answer to two decimal places) EXAMPLE 3: calculate the P/E and P/B ratios for each individual company and then calculate the market multiples: MSFT: equity value: $725,089 net income: $21,204 book value of equity: $72,394 IBM: equity value: $145,443 net income: $5,763 book value of equity: $17,725 INTC: equity value: $245,144 net income: $9,601 book value of equity: $69,019 TWX: equity value: $75,911 net income: $5,247 book value of equity: $28,411 EXAMPLE 4: using the data for the following companies, calculate the equity intrinsic value per share of advanced auto parts using the P/B and P/E, assuming their book value per share is $51.18 and their EPS is $7.90: KMX: P/B: 4.06 P/E: 16.06 CRMT: P/B: 2.27 P/E: 12.01 GNTX: P/B: 3.71 P/E: 16.55

EXAMPLE 1: estimated IV of equity: IV(equity) = book value of equity * P/B ratio of comparable companies IV(equity) = $1,538,000,000 * 16.35 = $25,146,300,000 equity per share: $25,146,300,000 / 27,720,000 = $907.15 EXAMPLE 2: estimated IV of equity: IV(equity) = net income * P/E Ratio of comparable companies IV(equity) = $312,790,000 * 28.27 = $8,842,573,000 equity per share: $8,842,573,000 / 126,200,000 = $70.07 EXAMPLE 3: $MSFT: P/E Ratio: $725, 089 / $21,204 = 34.2 P/B Ratio: $725,089 / $72, 394 = 10 $IBM: P/E Ratio: $145,443 / $5,763 = 25.2 P/B Ratio: $145,443 / $17,725 = 8.2 $INTC: P/E Ratio: $245,144 / $9,601 = 25.5 P/B Ratio: $245,144 / $69,019 = 3.55 $TWX: P/E Ratio: $75,911 / $5,247 = 14.5 P/B Ratio: $75,911 / $28,411 = 2.7 market multiples: P/E Ratio: (34.2 + 25.2 + 25.5 + 14.5) / 4 = 24.85 P/B Ratio: (10 + 8.2 + 3.55 + 2.7) / 4 = 6.11 EXAMPLE 4: equity intrinsic value per share using P/B ratio: IV(equity): book value * P/B Ratio of comparable companies P/B ratio of comparable companies: (4.06 + 2.27 + 3.71) / 3 = 3.35 IV(equity): $51.18 * 3.35 = $171.45 equity intrinsic value per share using P/E ratio: IV(equity): net income * P/E ratio of comparable companies P/E ratio of comparable companies: (16.06 + 12.01 + 16.55) / 3 = 14.87 net Income per Share: $7.90 IV(equity): $7.90 * 14.87 = $117.47

complete the following examples: EXAMPLE 1: the balance sheet of pacific ocean resort reports total assets of $800,000 and $1,000,000 at the beginning and end of the year, respectively. the return on assets for the year is 21%. what is the net income? EXAMPLE 2: elder's bread and bakery reports net sales and net income for the year of $600,000 and $63,000, respectively. the company had assets of $350,000 and $390,000 at the beginning and end of the year, respectively. calculate elder's return on assets, profit margin, and asset turnover. EXAMPLE 3: betty's BBQ reported sales of $615,000 and net income of $36,500. betty's also reported ending total assets of $488,000 and beginning total assets of $381,000. calculate the return on assets, the profit margin, and the asset turnover ratio for Betty's BBQ.

EXAMPLE 1: ROA = net income / average total assets ROA = 21% average total assets = $900,000 21 * $900,000 = $189,000 EXAMPLE 2: ROA: net income / average total assets $63,000 / $370,000 = 17% profit margin: net income / revenue $63,000 / $600,000 = 10.5% assets turnover: revenune / average total assets $600,000 / $370,000 = 1.62 times EXAMPLE 3: ROA: net income / average total assets $36,500 / $435,000 = 8.4% profit margin: net income / revenue $36,500 / $615,000 = 5.9% asset turnover ratio: revenue / average total assets $615,000 / $434,500 = 1.4 times

how should we measure the success of a business? GENERAL OUTLINE FOR RUNNING A BUSINESS: a. these activities raise money by issuing debt or selling ownership in the form of equity b. these activities use money generated in "a" to buy productive assets c. these activities use the assets purchased in "b" to run the business and earn a return MEASURING SUCCESS: a. succesful businesses have productive assets that generate a ....... return b. investing cash flows are .......... and operating cash flows are ........

GENERAL OUTLINE FOR RUNNING A BUSINESS: a. financing activities b. investing activities c. operating activities MEASURING SUCCESS: a. succesful businesses have productive assets that generate a positive return b. investing cash flows are negative and operating cash flows are positive

GOAL OF EQUITY VALUATIONS the goal in equity valuation is to estimate the ......... value a. this is the ......... at which a rational investor is willing to pay for an investment (.........) given its level of ....... APPROACHES TO EQUITY VALUATION there are two common approached to valuing a company: 1. discounted ......... a. ......... dividends b. discounted "free ........." 2. multiples a. price/........, price/........ b. these are popular due to ........ VALUATION MODEL the idea is to express ......... value as a function of a summary ......... measure "X" and a market ........ on that measure "(P/X)" estimated for a comparable set of ............ a. what is the formula for this: IV(equity) = IV represents: X represents: P/X represents: STPES OF THE VALUATION MODEL: step 1: select the summary ........ emeasure to use as the ......... basis a. what are the 2 most relvevant? step 2: select the comparable ........ to determine the market ...... step 3: compute the market ....... from the comparable ........ market ....... and ......... measures step 4: compute the target company's ..... using its ....... measures and the market ....... from step 3 a. what do you do with these two values? step 5: calculate equity value per ...... COMMON RATIOS/MARKET MULTIPLES TO VALUE EQUITY: what are the two ways to calculate P/E ratio? a. what is the calculation for intrinsic value of equity using the price-to-earnings (P/E) ratio? a. what is the performance measure used? b. what is the market multiple used? c. what if there are multiple comparable companies? d. is the target company's P/E ratio included in the calcaulation of the market multiple? what are the two ways to calculate price-to-book (P/B) ratio? a. what is the calculation for intrinsic value of equity using the price-to-book (P/B) ratio? b. the P/B ratio is also known as the.... a. what is the performance measure used? c. what is the market multiple used? d. what if there are multiple comparable companies? e. is the target company's P/B ratio included in the calcaulation of the market multiple? to calculate per share values, divide ........ by the number of ....... at the time of valuation

GOAL OF EQUITY VALUATIONS the goal in equity valuation is to estimate the intrinsic value a. this is the price at which a rational investor is willing to pay for an investment (stock) given its level of risk APPROACHES TO EQUITY VALUATION there are two common approached to valuing a company: 1. discounted cash flows a. discounted dividends b. discounted "free cash flows" 2. multiples a. price/earnings, price/book b. these are popular due to simplicity VALUATION MODEL the idea is to express intrinsic value as a function of a summary performance measure "X" and a market multiple on that measure "(P/X)" estimated for a comparable set of companies a. what is the formula for this: IV(equity) = X * (P/X) IV represents: intrinsic value of equity X represents: summary performance measure P/X represents: market multiple calculated from comparable companies STPES OF THE VALUATION MODEL: step 1: select the summary performance measure to use as the valuation basis a. net income and book value step 2: select the comparable companies. to determine the market multiple step 3: compute the market multiple from the comparable companies' market values and performance measures step 4: compute the target company's value using its performance measures and the market multiple from step 3 a. multiply them step 5: calculate equity value per share COMMON RATIOS/MARKET MULTIPLES TO VALUE EQUITY: 1. stock price /EPS 2. market cap (market value) / net income *EPS = (net income - preferred dividends) / # of shares outstanding *market cap = # of shares outstanding * stock price a. IV(equity) = net income * P/E ratio of comparable companies a. net income b. P/E ratio c. take the average of the P/E ratios of each comparable company d. no 1. market value (market capital) of equity / book value of equity 2. price of common stock / book value per share *2 is simply a per-share basis of 1 a. IV(equity) = book value * P/B ratio of comparable companies b. market/book ratio c. book value c. P/B ratio d. take the average P/B ratio of each comparable company e. no to calculate per share values, divide intrinsic value(equity) by the number of shares outstanding at the time of valuation

complete the following calculations relating to ROE: calculate ROE, net sales: $79,591 net income: $11,872 total liabilites: $106,452 stockholders' equity, beginning: $17,725 stockholders' equity, ending: $16,929 stock price, ending: $113.67 dividends per share: $6.21

ROE: net income / average stockholders' equity $11,872 / [($17,725 + $16,929) / 2] = 68.5% ROE dividend yield: dividend per share / stock price $6.21 / $113.67 = 5.46 EPS: net income / # of shares outstanding $11,872 / $907 = $13.09 P/E ratio: stock price / EPS $113. 67 / $13.09 = 8.68

deeper dive into assets: a. companies buy assets with the intent of using the assets to generate ........ b. the market value of assets = the ....... value of expected .......... cash flows c. investors invest in a company to share in the company's future ....... d. either through a ........ payment or through ........... ownership in the future ....... of the company (future ........) e. more ........ firms will have higher market values

a. companies buy assets with the intent of using the assets to generate income b. the market value of assets = the present value of expected future cash flows c. investors invest in a company to share in the company's future earnings d. either through a dividend payment or through proportionate ownership in the future growth of the company (future earnings) e. more profitable firms will have higher market values

asset analysis: a. what is a profitability measure based on earnings a company generates relative to its asset base? b. what is the formula for this ratio? c. ROA is useful when comparing two companies of different ....... to determine which company is more ....... d. ROA measures the ....... earned for each dollar invested into the company's ........ e. can be seperated to examine two important business strategies: 1. ......... margin 2. ........ turnover ROA indicates the amount of ....... generated for each dollar invested into ........ PROFIT MARGIN: 1. what ratio indicates the earnings per dollar of sales? a. what is the formula for this ratio? b. this represents the percentage of ......... that is ultimately taken by the company as ........, after deducting expenses c. profit margin indicates how ........ a company earns money d. a company can increase profit margin by: 1. lowering ........ without losing ....... 2. incresing the ........ profit margin 2. what is a ratio that presents a company's operating expenses as a percentage of total revenue? a. what is the formula for this ratio? b. a decrease can be in this ratio can be good and bad: 1. good = company is getting rid of unnecessary layers of ........ 2. bad = lower pay cooresponds with lower ....... employees OR the cutting of R&D or advertising can hurt long-term .......... 3. what is a ratio that presents non-operating income as a percentage of revenue? a. what is the formula for this ratio? b. companies want this to be a .....-issue c. this is typically ....... d. if this ratio is large, it is typically influenced by a ........ transaction 4. what is a ratio that presents income tax as a percentage of revenue a. what is the formula for this ratio? b. what is a ratio that indicates the percent of income that an individual or corporation owes/pays in taxes? c. what is the forumula for this ratio? d. what is the statutory rate in the US? ASSET TURNOVER: what ratio measures sales per dollar of assets invested? a. what is the formula for this ratio? b. asset turnover shows the ....... of how our assets generate revenue c. asset turnover can be increased by geeting rid of .......... assets or using assets more .......... GROS PROFIT MARGIN: what ratio indicates how much profit was made on each dollar of sales after deducting COGS? a. what is the formula for this ratio? b. what are the ways in which a company can increase gross profit margin? 1. charge a ....... price -- this indicates the company possesses a more ........ product 2. reduce ........ costs without losing ....... 3. increase .......... efficiency c. the gross profit margin reflects a company's ......... power -- this reflects the ........ of the company's products d. a decrease in market power over time suggests the company's technology is ......., or there is a new ......... give the calculation for ROA using the formulas of profit margin and asset turnover accounting estimates are necessary in the reporting of ......-tem assets. however, these estimates can be ........... by managment to ......... sales and thus net income

asset analysis: a. return on assets (ROA) b. net income / average total assets c. ROA is useful when comparing two companies of different size to determine which company is more profitable d. ROA measures the profit earned for each dollar invested into the company's assets e. can be seperated to examine two important business strategies: 1. profit margin 2. asset turnover ROA indicates the amount of profit generated for each dollar invested into assets PROFIT MARGIN 1. profit margin a. net income / revenue b. this represents the percentage of revenue that is ultimately taken by the company as profit, after deducting expenses c. profit margin indicates how efficiently a company earns money d. 1. lowering expenses without losing revenue (i.e. unnecessary costs) 2. increasing the gross profit margin 2. operating expense margin a. operating expense / revenue b. a decrease can be in this ratio can be good and bad: 1. good = company is getting rid of unnecessary layers of managment 2. bad = lower pay cooresponds with lower quality employees OR the cutting of R&D or advertising can hurt long-term growth 3. non-operating income margin a. non-operating income / revenue b. companies want this to be a non-issue c. this is typically small d. if this ratio is large, it is typically influenced by a one-time transaction 4. income tax expense margin a. income tax expense / revenue b. effective tax rate c. income tax expense / pretax income d. 21% ASSET TURNOVER asset turnover a. revenue / average total assets b. asset turnover shows the effectivness of how our assets generate revenue c. asset turnover can be increased by geeting rid of unproductive assets or using assets more efficiently GROSS PROFIT MARGIN: gross profit margin (percentage) a. gross profit / revenues 1. charge a higher price -- this indicates the company possesses a more unique product 2. reduce production costs without losing customers 3. increase production efficiency c. the gross profit margin reflects a company's market power -- this reflects the uniqueness of the company's products d. a decrease in market power over time suggests the company's technology is stale, or there is a new competitor ROA = net income / revenue * revenue / average total assets [thus the revenue cancels out and we are left with: net income / average total assets] accounting estimates are necessary in the reporting of long-tem assets. however, these estimates can be manipulated by managment to inflate sales and thus net income

dupont framework: what is a system that depicts ROE as determined by profit margin, asset turnover, and the equity multiplier? BREAKDOWN OF THE COMPONENTS: 1. what is a ratio that indicates the earnings per dollar of sales? a. what is the formula for this ratio? b. in the dupont framework, profit margin represents what? 2. what is a ratio that measures the sales per dollar of assets invested? a. what is the formula for this ratio? b. in the dupont framework, asset turnover represents what? 3. what is a ratio that measures the portion of a company's assets that is financed by stockholder's equity rather than by debt? a. what is the formula for this ratio? b. in the dupont framework, the equity multiplier represents what? c. the higher the equity multiplier, the more a company's assets have been financed with ....... -- that is, the company is ........ leveraged d. this ratio shows our ........ and return e. answers the question about how many dollars worth of ....... we manage for every $1 a company ....... f. pre-interest ROA (> or <) interest expense g. if the debt fiananced assets bring in a higher return than the interest rate on the debt that financed the assets, the ......... return accrues to the ........... h. a more levered company will have a ....... ROE. why? -- a highly leveraged company has assets that are more heavily financed with ......., therefore they have less financing from stockholders' equity. therefore, the denominator of the ROE calculator is ......... what is the "catch" of financing leverage: 1. risk v . ......... 2. debt requires a ........ payment on a .......... schedule -- this is ....... 3. financial leverage ........ the return whether the company is profitable or operating at a ....... what is the formuala for ROE, using the dupont framework? what is the formula for ROE normally?

dupont framework BREAKDOWN OF THE COMPONENTS: 1. profit margin a. net income / revenues b. profitability 2. asset turnover a. revenues / average total assets b. efficiency of the company's assets 3. equity multiplier a. average total assets / average total stockholders' equity b. the financial leverage of the company c. the higher the equity multiplier, the more a company's assets have been financed with debt -- that is, the company is more leveraged d. this ratio shows our risk and return e. answers the question about how many dollars worth of assets we manage for every $1 a company invested f. pre-interest ROA > interest expense g. if the debt fiananced assets bring in a higher return than the interest rate on the debt that financed the assets, the extra return accrues to the stockholders' h. a more levered company will have a higher ROE. why? -- a highly leveraged company has assets that are more heavily financed with debt, therefore they have less financing from stockholders' equity. therefore, the denominator of the ROE calculator is smaller what is the "catch" of financing leverage: 1. risk v . reward 2. debt requires a fixed payment on a fixed schedule -- this is risky 3. financial leverage multiplies the return whether the company is profitable or operating at a ....... ROE = profit margin * asset turnover * equity multiplier [condensed to ROA * equitu multiplier] ROE = net income / average stockholders' equity

equity analysis: 1. what is a ratio that measures the income generates per dollar of equity? b. what is the formula for this ratio? c. earnings are key to a company's long-run ........ d. we need to evaluate the earnings of companies in comparison to the size of the ........ 2. what is the ratio used for comparing stock dividends paid in relation to the market price? a. what is the formula for this ratio? 3. what ratio presents net income available to common shareholders as a percentage of average shares of common stock outstanding? a. what is the formula for this ratio? b. EPS is essentially a measure of ....... per share of common stock c. the numerator of this calculation measure the ........ available to common stockholders d. we less any ........ on preferred stock (preferred dividends) from net income to arrive at the income available to the ....... owners of the company -- the ........ stockholders e. EPS is useful when comparing earnings perfomance of the same ...... over time f. is EPS useful when comparing earnings performance of one company in relation to another? -- there are wide differences in the number of shares ........ among companies g. investors use EPS in evaluating the earnings performance of a comany over .......... h. investors are looking for companies with the potential to .......... EPS i. analysts forecast EPS on a ............ basis j. if reported EPS falls short of anaylsts' forecasts, this is considered ........... news and usually results in a ......... in the company's stock price 4. what ratio indicates how the stock is trading relative to its current earnings? a. what is the formula for this ratio? b. this ratio makes it so that stock price and EPS are expressed on a per - ........ basis c. P/E ratio measures what you ..... (price) for what you expect to ....... (earnings) d. what is the range for a typical P/E ratio? e. a high P/E ratio indicates the market has high ........ for a company's stocks and has bid up the ........ f. what are stocks that tend to have higher P/E ratios and are expected to have higher future earnings? g. what are stocks that tend to have lower P/E ratios in relation to current earnings? h. this low price relation to earnings may be justified due to poor ......... prospects, or it might suggest an ........ stock that could ...... in the future h. firms with higher expected growth in earnings will have ....... P/E ratios i. firms with more risk (probability of decline in future earnings) will have ....... P/E ratios

equity analysis: 1. return on equity (ROE) b. net income / average stockholders' equity c. earnings are key to a company's long-run survival d. we need to evaluate the earnings of companies in comparison to the size of the investment 2. dividend yield a. dividends per share / stock price 3. earnings per share (EPS) a. (net income - preferred dividends) / # of shares outstanding b. EPS is essentially a measure of net income per share of common stock c. the numerator of this calculation measure the net income available to common stockholders d. we less any dividends on preferred stock (preferred dividends) from net income to arrive at the income available to the true owners of the company -- the common stockholders e. EPS is useful when comparing earnings perfomance of the same company over time f. is EPS useful when comparing earnings performance of one company in relation to another? -- there are wide differences in the number of shares outstanding among companies [the answer is NO, it is not useful] g. investors use EPS in evaluating the earnings performance of a comany over time h. investors are looking for companies with the potential to increase EPS i. analysts forecast EPS on a per-share basis j. if reported EPS falls short of anaylsts' forecasts, this is considered negative news and usually results in a decrease in the company's stock price 4. price-to-earnings ratio (P/E ratio) a. stock price / EPS b. this ratio makes it so that stock price and EPS are expressed on a per - share basis c. P/E ratio measures what you pay (price) for what you expect to receive (earnings) d. 12-25 e. a high P/E ratio indicates the market has high expectations for a company's stocks and has bid up the price f. growth stocks g. value stocks h. this low price relation to earnings may be justified due to poor performance prospects, or it might suggest an underpriced (undervalued) stock that could boom in the future

explain corporate governance what is a set of relationships between the board of directors, managment, shareholders, auditors, and other stakeholders that determines how a company is operated? a. .......... accoutants are at the forefront of corporate governance b. they are the guardians of the information used to report the financial ........ of their company c. they information they provide and analyze is used by the ............ and company executives to formulate the company's ......... strategy c. ....... usually begin with the shemes to manipulate a company's financial reports and end when the ....... is so great that i becomes obvious that the reports no longer represent ...... d. the appropriate manamgment of the information function is a highly effective force agaisnt ....... governance e. recent legislation requires that both ....... and ....... personally certify that the company's annual report does not contain false statements or omit significant facts THE MOTIVE TO MANIPULATE many managers are judged on their company's ......... statements or stock ...... -- which is determined, in part, by the ....... a. managers are ........ for strong financial statements with promotions, pay ......, bonuses, and ....... options b. weak financials can result in a manager being passed over for ........, demoted, or even ....... timing differences, such as reporting a downstream cost as part as production costs (thus ....... expenses) has the following temporary effects on financial statements: 1. availability of ...... a. the willingness of creditors and investors to provide ....... to a business is influenced by their expectations of the company's ...... performance b. more favorable financial statements ....... a company's ability to obtain ...... 2. ......... motivation a. financial statements might affect managment ......... 3. ....... tax considerations a. since income tax is calculated as a designated percentage of taxable ......, managers seek to ........ taxes by reporting the ....... amount of taxable ....... b. with respect to taxes, managers prefer to classify costs as ....... rather than ........ c. what servce is responsible for enforcing the proper classification of costs? -- internal ........ service managment accountants must be prepared to face pressures to: 1. undertake dutues that they have nor been trained to perform ...... 2. disclose ....... information 3. compromise their ....... through falsification, embezzlement, and ...... 4. issue biased, misleading, or incomplete ........ to provide managment accountants with guidance for ethical conduct, the insitute of managment accountants issued the statement of ........ professional practice a. the 4 standards for ethical conduct for managment accountants are: 1. 2. 3. 4. b. failure to adhere to professional and organizational ethical standards can lead to personal ......., loss of ........, and imprisonment THE FRAUD TRIANGLE a. what is an attempt to deceive others for personal gain? b. there are several types: 1. 2. 3. c. people frequently engage in activities they know are ethical or even ....... d. the auditing professions has determined that the following three elements are typically present when fraud occurs, thus forming the fraud triangle: 1. the availability of an ...... a. without opportunity, fraud couldn't ..... b. the most effective way to reduce opportunities fo ethical or criminal misconduct is to implement an effective set of ........ controls c. what are policies and procedures that a business implements to reduce opportunities of fraud and to ensure that its objectives will be accomplished? d. 8 commin internal control practices: 1. what is the process of separating the duties necessary to complete a task and assigning the separated duties to two or more employees reduces the opportunity for either employee to defraud the company? a. fraud would require ...... between the two employees 2. hiring ......... personnael a. ....... labor is not a baragin if the employees are ........ b. employees should be properly ..... and have a record that attests to personal ...... 3. ........ employees a. employees in positions of ...... should be bonded through ........ policies that protect the company from ....... caused by employee dishonesty 4. required extended ........ a. forcing extended avsenses creates an opportunity for the temporary ........ employee t o check the ....... of the absent employee b. fraud is difficult to cover up if you are not ....... to do so 5. establishing clear lines of ...... and responsibility a. employees tend to be more ....... in supporting company policies when they have clear ....... to exercise ........ b. they take their work more ...... when they realize they cannot shrink .......... 6. using ....... documents a. missing documents become apparent when there are ....... in a recorded sequence of numbers 7. establishing ......... controls a. keeping money in a ......, holding inventory in a ........ warehouse, and ........ computers to desks all protect ........ of a company 8. performing ....... at regular intervals a. knowing that inventory will be coutned on a regular basis encourages the inventory control manager to maintain ....... that support the ........ balance of inventory on hand 2. the existence of some form of ........ leading to an incentive a. pressure can come in a variety of forms: 1. intimidation from ...... 2. personal ....... 3. business ........ caused by poor ........ making or temporary factors such as a poor ...... 4. loyalty or trying to be ........ 3. the capicity to ......... a. common rationalities: 1. ........ does it 2. they aren't ......... me enough / im taking what i ....... 3. im only ........ the money / ill ........ it back 4. the company can ......... it 5. im providing for my ........

explain corporate governance corporate governance a. managerial accoutants are at the forefront of corporate governance b. they are the guardians of the information used to report the financial condition of their company c. they information they provide and analyze is used by the board of directors and company executives to formulate the company's operating strategy c. scandals usually begin with the shemes to manipulate a company's financial reports and end when the fabrication is so great that i becomes obvious that the reports no longer represent reality d. the appropriate manamgment of the information function is a highly effective force agaisnt corrupt governance e. recent legislation requires that both CEO and CFO personally certify that the company's annual report does not contain false statements or omit significant facts THE MOTIVE TO MANIPULATE many managers are judged on their company's financial statements or stock options -- which is determined, in part, by the financial statements a. managers are judged for strong financial statements with promotions, pay raises, bonuses, and stock options b. weak financials can result in a manager being passed over for promotion, demoted, or even fired timing differences, such as reporting a downstream cost as part as production costs (thus understate expenses) has the following temporary effects on financial statements: 1. availability of financing a. the willingness of creditors and investors to provide capital to a business is influenced by their expectations of the company's future performance b. more favorable financial statements increase a company's ability to obtain financing 2. managment motivation a. financial statements might affect managment compensation 3. income tax considerations a. since income tax is calculated as a designated percentage of taxable income, managers seek to reduce taxes by reporting the least amount of taxable income b. with respect to taxes, managers prefer to classify costs as expenses rather than assets (capitalizing) c. internal revenue service managment accountants must be prepared to face pressures to: 1. undertake dutues that they have nor been trained to perform competently 2. disclose confidential information 3. compromise their integrity through falsification, embezzlement, and bribery 4. issue biased, misleading, or incomplete reports to provide managment accountants with guidance for ethical conduct, the insitute of managment accountants issued the statement of ethical professional practice a. the 4 standards for ethical conduct for managment accountants are: 1. competence 2. objectivity 3. integrity 4. confidentiality b. failure to adhere to professional and organizational ethical standards can lead to personal disgrace, loss of employment, and imprisonment THE FRAUD TRIANGLE a. fraud b. there are several types: 1. corruption 2. asset misappropriation 3. financial statement fraud c. people frequently engage in activities they know are ethical or even illegal d. the auditing professions has determined that the following three elements are typically present when fraud occurs, thus forming the fraud triangle: 1. the availability of an opportunity a. without opportunity, fraud couldn't exist b. the most effective way to reduce opportunities fo ethical or criminal misconduct is to implement an effective set of internal controls c. internal controls d. 8 common internal control practices: 1. seperation of duties a. fraud would require coercion between the two employees 2. hiring competent personnael a. cheap labor is not a baragin if the employees are incompetent b. employees should be properly trained and have a record that attests to personal integrity 3. bonding employees a. employees in positions of authority should be bonded through insurance policies that protect the company from losses caused by employee dishonesty 4. required extended absence a. forcing extended avsenses creates an opportunity for the temporary replacement employee to check the work of the absent employee b. fraud is difficult to cover up if you are not there to do so 5. establishing clear lines of authority and responsibility a. employees tend to be more zealous in supporting company policies when they have clear authority to exercise enforcement b. they take their work more seriously when they realize they cannot shrink responsibility 6. using numbered documents a. missing documents become apparent when there are gaps in a recorded sequence of numbers 7. establishing physical controls a. keeping money in a safe, holding inventory in a locked warehouse, and bolting computers to desks all protect assets of a company 8. performing evaluations at regular intervals a. knowing that inventory will be coutned on a regular basis encourages the inventory control manager to maintain documents that support the actual (current) balance of inventory on hand 2. the existence of some form of pressure leading to an incentive a. pressure can come in a variety of forms: 1. intimidation from superiors 2. personal debt 3. business failure caused by poor decision making or temporary factors such as a poor economy 4. loyalty or trying to be agreeable 3. the capicity to rationalize a. common rationalities: 1. everybody does it 2. they aren't paying me enough / im taking what i deserve 3. im only borrowing the money / ill pay it back 4. the company can afford it 5. im providing for my family

explain determining variances for performance evaluation what are differences between the standard (budgeted) and actual amounts? a. variances compare standard amounts with ........ amounts 1. what is a variance in which the actual amount exceeds the budgeted amount? 2. what is a variance in which the budgeted amount exceeds the actual amount? consider the following and note whether or not the variance is favoravble or unfavorable: a. actual sales revenue > budgeted sales revenue b. actual sales revenue < budgeted sales revenue c. actual costs > budgeted costs d. actual costs < budgeted costs variance analysis is a control process to ensure people and processes are performed as ....... TOTAL PROFIT VARIANCE: a. total profit variance = ........... profit - ......... profit b. profit variance is favorable when we earn ....... than expected c. profit variance is unfavorable when we earn ....... than expected 1. a sales volume variance arises when we incorrectly estimated .......... 2. a sales price volume variance arises when we incorrectly estimated ....... 3. a cost variance (fixed or variable) arises when we incorrectly estimated ...... VARIANCES BETWEEN STATIC AND FLEXIBLE BUDGETS: a. what is a variance derived from calculating the difference between the static budget sales volume and the flexible sales volume? this is calcualated as: there are two variable variances: 1. INPUT USAGE: this is calculated as: 2. INPUT COST (relating to variable costs): this is calculated as: the variances between static and flexible budgets are attrituable to differences in .......... -- why? what expression indicates marketing managers attained the planned (static) budget sales? who is typically responsible for volume variances? there are exceptions: 1. poor ....... control can lead to ....... goods that are difficult to sell 2. ....... delays affect product ........, which may restrict sales volume a favorable sales volume variance creates a ......... variable cost variance, thus the variance of the .......... needs to be examined to determine whether the increase in sales volume was worthwhile a. the fixed cost variance between static budgets and flexible budgets is ....... b. this is because fixed costs do not depend on ........, and variances when comparing these two budgets are based on differences in ............ FLEXIBLE BUDGET VARIANCES for ........ evaluation, managent compares actual results to a ...... budget, which uses ........ unit price/cost based on the ....... volume of the activity flexible budget amounts: ....... unit cost/price * ........ volume actual results amounts: ........ unit price/cost * ........ volume what are differences between the flexible budget and actual results that are dependent not on differences in sales volume but on differences between standard unit cost and actual unit cost? variances between flexible budgets and actual results arise because of the difference between the .......... unit cost/price and the ......... unit cost/price NOT differences in ......... flexible budget variances hold ......... constant and analyze differences in ......... what is a flexible budget variance attributable to the actual sales price differing from the standard sales price? a. in some cases, an unfavorable sales price variance can result in an .......... what is a flexible budget variance attrituable to the actual sales volume differing from the flexible budget sales volume? -- what causes this? what is a flexible budget variance attrituable to actual variable costs differing from flexible budget variable costs? -- what causes this? what is a flexible budget variance attrituable to the actual fixed costs differing from the flexible budget fixed costs? THE HUMAN ELEMENT ASSOCIATED WITH FLEXIBLE BUDGET VARIANCES: a. favorable flexible budget variances can give insight into managment efficiency: 1. variable costs: purchasing agents negociating better ........ concessions, discounts or ........ terms and therefore ....... the price the company pays for variable costs b. unfavorable flexible budget variances can also offer insight: 1. labor cost: managers failed to control employees' ....... or failed to encourage the employees to work ...... ANALYZING VARIANCES: a. the variances could be ......... if the managers ......... sales or .......... costs to create an ........ target -- relates to "........ the numbers" and .......... plans b. what are small variances each year but always in the same direction? c. this example is an example of what: managment underestimated demand (thus providing a ......... sales variance when all said and done) so they had to hire temporary workers who weren't as ....... as the full-time workers (thus creating a ........ labor cost variance or input ........ variance)

explain determining variances for performance evaluation variances a. variances compare standard amounts with actual amounts 1. favorable 2. unfavorable consider the following and note whether or not the variance is favoravble or unfavorable: a. favorable b. unfavorable c. unfavorable d. favorable variance analysis is a control process to ensure people and processes are performed as expected TOTAL PROFIT VARIANCE: a. total profit variance = actual profit - budgeted profit b. profit variance is favorable when we earn more than expected c. profit variance is unfavorable when we earn less than expected 1. a sales volume variance arises when we incorrectly estimated demand --> in relation to master v. flexible 2. a sales price volume variance arises when we incorrectly estimated sales price 3. a cost variance (fixed or variable) arises when we incorrectly estimated costs VARIANCES BETWEEN STATIC AND FLEXIBLE BUDGETS: a. sales volume variance this is calcualated as: (standard sales price * actual volume) -(standard sales price * budgeted sales volume) there are two variable variances: 1. INPUT USAGE: this is calculated as: (budgeted input * actual volume) -(budgeted input * budgeted volume) 2. INPUT COST (relating to variable costs): this is calculated as: (budgeted unit cost * actual volume) -(budgeted unit cost *budeted volume) the variances between static and flexible budgets are attrituable to differences in sales volume -- standard unit cost/price is held constant "making the numbers" marketing managers there are exceptions: 1. poor quality control can lead to inferior goods that are difficult to sell 2. production delays affect product availability, which may restrict sales volume a favorable sales volume variance creates a unfavorable variable cost variance, thus the variance of the contribution margin needs to be examined to determine whether the increase in sales volume was worthwhile a. the fixed cost variance between static budgets and flexible budgets is 0 b. this is because fixed costs do not depend on sales volume, and variances when comparing these two budgets are based on differences in sales volume FLEXIBLE BUDGET VARIANCES for performance evaluation, managent compares actual results to a flexible budget, which uses standard unit price/cost based on the actual volume of the activity flexible budget amounts: standard unit cost/price * actual volume actual results amounts: actual unit price/cost * actual volume flexible budget variances variances between flexible budgets and actual results arise because of the difference between the standard unit cost/price and the actual unit cost/price NOT differences in volume flexible budget variances hold sales volume constant and analyze differences in standard and actual unit sales/cost flexible sales price variance a. in some cases, an unfavorable sales price variance can result in an favorable units sold variance flexible budget sales volume variance -- actual revenue < flexible budget revenue flexible budget variable cost variance -- actual variable cost > flexible budget variable cost (can be caused by favorable sales volume variance, but doesn't have to be) flexible budget fixed cost variance THE HUMAN ELEMENT ASSOCIATED WITH FLEXIBLE BUDGET VARIANCES: a. favorable flexible budget variances can give insight into managment efficiency: 1. variable costs: purchasing agents negociating better price concessions, discounts or delivery terms and therefore decreasing the price the company pays for variable costs b. unfavorable flexible budget variances can also offer insight: 1. labor cost: managers failed to control employees' wages or failed to encourage the employees to work hard ANALYZING VARIANCES: a. the variances could be purposeful if the managers underestimate sales or overestimate costs to create an easy target -- relates to "making the numbers" and managment incentive plans b. trends over time c. this example is an example of what: managment underestimated demand (thus providing a favorable sales variance when all said and done) so they had to hire temporary workers who weren't as efficient as the full-time workers (thus creating an unfavorable labor cost variance or input quantity variance)

explain identifying comparable companies using the multiples method and the overall weaknesses of the multiples model: IDENTIFYING COMPARABLE COMPANIES: a. the key to success is finding the ....... peer firms b. equity value is a function of ......., growth, and ......... --> this coincides with what framework? c. generally, comparable companies are similar in risk, ......, profitability , ........, and leverage d. rather than attempting to weight the merits of different ........., some investors prefer to combine them in the hope that ....... error for a specific multiple is mitigated by other ........... WEAKNESSES: a. there is no "right" ........ b. there is no "right" company for ........ c. there is no "right" way to combine ........ data to produce a ......... -- this is referring to being able to take the median, equal-weighted average, value-weighted average, or other averaging method

explain identifying comparable companies using the multiples method and the overall weaknesses of the multiples model: IDENTIFYING COMPARABLE COMPANIES: a. the key to success is finding the right peer firms b. equity value is a function of risk, growth, and profitability --> dupont framework c. generally, comparable companies are similar in risk, growth, profitability , efficiency, and leverage d. rather than attempting to weight the merits of different multiples, some investors prefer to combine them in the hope that estimation error for a specific multiple is mitigated by other multiples WEAKNESSES: a. there is no "right" measure b. there is no "right" company for comparison c. there is no "right" way to combine company data to produce a multiple -- this is referring to being able to take the median, equal-weighted average, value-weighted average, or other averaging method

explain planning: ......... is crucial to operating a successful business a. budgeting: expressing business plans in ........ terms b. the budget process involves coordinating the financial plans of all ...... of the business BUDGETING: a. promotes planning and ........ b. enhances .......... measures c. enhances corrective ....... THREE LEVELS OF PLANNING: a. what kind of planning involves making long-term decisions such as defining the scope of the business, determining which products to develop or discontinue, and identifying the most profitable markets? b. what kind of budgeting focuses on intermediate-range planning and involves decisions such as whether to buy or lease equipment; or commit organizational resources to long-term projects/increasing company assets? c. what kind of budgeting describes short-term objectives in specific amounts of sales targets, production goals, and financing plans -- this budgeting process normally begins with preparing the ........ budgers, which focus on detailed ........ activities, and these budgets are also used to prepare ......... statements what are financial statements based on projected (budgeted) rather than historical information?

explain planning: planning is crucial to operating a successful business a. budgeting: expressing business plans in financial terms b. the budget process involves coordinating the financial plans of all areas of the business BUDGETING: a. promotes planning and coordination b. enhances performance measures c. enhances corrective actions THREE LEVELS OF PLANNING: a. strategic planning b. capital budgeting c. operational budgeting -- this budgeting process normally begins with preparing the operational budgets, which focus on detailed operating activities, and these budgets are also used to prepare pro-forma statements pro-forma statements

explain sarbanes oxley and decision making/managment control SARBANES-OXLEY what is a federal law that regulates corporate governance? SOX affects 4 groups: 1. 2. board of ...... 3. external ..... 4. PCAOB SOX holds the ....... and ....... responsible for the etablishment and enforcement of a strong set of ....... controls a. along with its internal report, companues are required to report on the ........ of its internal controls b. the company's internal ........ are required to attest to the ....... of the internal controls report SOX charges the ........ and ........ with the ultimate responsibility of the ....... of the company's financial statements and the accompanying notes a. even thought ........-level managers will likely ........ the annual report, the ........ and ........ are required to certify that they have ........ the report and that, to their knowledge, the report does not contain ....... statements or significant ........ b. an ........... misrepresntation is pushible by a fine of up to $.......... and imprisonment of up to ....... years SOX requires ............ to establish a code of ...... and to filre reports on the code in the company's annual ...... report filed with the ......... SOX demands that managment establish a ...... and other mechanisms for ..... reporting of fraudlent activities a. SOX prohibits companies from .......... whistleblowers a. who are employees who legally report corporate misconduct? SOX hopes to: 1. counteract ......... for fraudlent activity a. stiff ...... and ........ terms 2. reduce ........ a. ......... control evaluation, independent ....... committee 3. encourage ........ a. tip ......., ........... protection ethics code the best indicator for personal integrity is ........ experience for an employee/accountant DECISON MAKING/MANAGMENT CONTROL when one runs their own business, they make ....... the decisions a. since they own the business, every decision they make will be in the ...... interest of the company as the business grows: 1. business owners need to hire ....... to help the growing business 2. business owners need outside ........ to help fund the growth as the firm grows, business owners can no longer make all the decisions by ....... -- thus, they hire ......... a. what is the practice of delegating decision-making authority to lower-level managers? b. benefits: 1. ........ decision making a. lower-level managers have more ...... information and can make decisions on the ...... without having to wait for all the levels of the burecracy to ....... 2. allows specialized people to make ...... decisions a. no one person can be an expert in ........, thus business owners hire ........ and give them control 3. empower ......... a. allowing employees to make real decisions enhances job ....... 4. train future ....... a. prepares ........-level managers for higher level positions c. costs: 1. requires costly and time-consuming ........ a. need a good ........ system 2. may lead to narrow-minded ....... that overlook the ...... picture a. managers will make the best decisions for their ......, which may not be the best decision for the whole ....... 3. lose ....... -- the ....... does not get to make every decision a. this could result in ........ decisions if managers make decisions to optimize their own ........ at the expense of the ....... minimizing the costs of decentralization using .......... pay: a. in a decentralizaed firm, division managers have ......... making powers b. thse managers will have their own priorities, goals, and ........ how do you make sure managers make the same decision you would make if you had the time and expertise? 1. option 1: constant ....... a. this is not ....... and not good for employee ...... and job ........ 2. option 2: ......... pay a. this ties an employee's salary/bonus/raise to an underlying measure of the employee's ....... b. desitned to incentivize employees to work ...... and make ....... decisions

explain sarbanes oxley SARBANES-OXLEY sarbanes-oxley act SOX affects 4 groups: 1. managment 2. board of directors 3. external auditors 4. PCAOB -- public company accounting oversight board SOX holds the CEO and CFO responsible for the etablishment and enforcement of a strong set of internal controls a. along with its internal report, companues are required to report on the effectivness of its internal controls b. the company's internal auditors are required to attest to the accuracy of the internal controls report SOX charges the CEO and CFO with the ultimate responsibility of the accuracy of the company's financial statements and the accompanying notes a. even thought lower.-level managers will likely prepare the annual report, the CEO and CFO are required to certify that they have reviewed the report and that, to their knowledge, the report does not contain false statements or significant omissions b. an intentional misrepresntation is pushible by a fine of up to $5 million and imprisonment of up to 20 years SOX requires managment to establish a code of ethics and to filre reports on the code in the company's annual 10-K report filed with the SEC SOX demands that managment establish a hotline and other mechanisms for anynomous reporting of fraudlent activities a. SOX prohibits companies from punishing whistleblowers a. whistleblowers SOX hopes to: 1. counteract incentives for fraudlent activity a. stiff fines and prison terms 2. reduce opportunity a. internal control evaluation, independent audit committee 3. encourage honesty a. tip line, whistleblower protection, ethics code the best indicator for personal integrity is past experience for an employee/accountant DECISON MAKING/MANAGMENT CONTROL when one runs their own business, they make all the decisions a. since they own the business, every decision they make will be in the best interest of the company as the business grows: 1. business owners need to hire managers to help the growing business 2. business owners need outside investors to help fund the growth as the firm grows, business owners can no longer make all the decisions by themselves-- thus, they hire help/managers a. decentralization b. benefits: 1. timely decision making a. lower-level managers have more detailed information and can make decisions on the spot without having to wait for all the levels of the burecracy to agree 2. allows specialized people to make specialized decisions a. no one person can be an expert in everything, thus business owners hire managers and give them control 3. empower employees a. allowing employees to make real decisions enhances job satisfaction 4. train future executives a. prepares lower-level managers for higher level positions c. costs: 1. requires costly and time-consuming coordination a. need a good information system 2. may lead to narrow-minded decisions that overlook the big picture a. managers will make the best decisions for their unit, which may not be the best decision for the whole company 3. lose control -- the owner does not get to make every decision a. this could result in subpar decisions if managers make decisions to optimize their own satisfaction at the expense of the company minimizing the costs of decentralization using performance pay: a. in a decentralizaed firm, division managers have decision making powers b. thse managers will have their own priorities, goals, and ambitions how do you make sure managers make the same decision you would make if you had the time and expertise? 1. option 1: constant monitoring a. this is not fesable and not good for employee morale and job satisfaction 2. option 2: performance pay a. this ties an employee's salary/bonus/raise to an underlying measure of the employee's perforamcne b. designed to incentivize employees to work hard and make good decisions

explain taking the stockholder perspective no longer should decisions be based solely on whether they will yield higher ....... for shareholders, rather corporate leaders should take into account all stockholders -- employees, customers, and society writ ........ 1. delivering ........ to customers a. we will further the tradition of american companies leading the way in meeting or exceeding customer ....... 2. investing in the ......... a. this starts with ......... them fairly and providing important ........ b. also included supporting them through training and ....... that help develop new skills for a rapidly changing ....... c. we foster diversity and ......, dignity, and ...... 3. dealing daily and ethically with ...... a. we should be dedicated to serving as good ....... to other companies, large and small, to help us meet our ...... 4. supporting the ........ in which we work a. we respect the people in our communities and protect the ....... by embracing sustanible ....... across our borders 5. generating long-term ......... for our shareholders a. shareholders provide ...... that allows companies to invest, grow, and ........ b. we are committed to ...... and effective engagement with our ...... THE BALANCED SCORECARD developed in the ....... to help companies: 1. communicate their ........ to all employees 2. translate their strategy into ........ goals and objectives 3. develop mearuable ........ metrics to track progress toward .....-term, sustanible growth there are 4 parts to the balanced scorecard: 1. innovation and ....... a. invest in your ...... so that they work ...... and provide value b. goals are established to improve ....... 2. internal ....... processes a. create ....... processes to generate .....-term value b. targets are established for continous ........ 3. customer ......... a. invest in your ....... to garner a large, loyal ....... base 4. financial a. achieve long-term financial ...... a. ultimate ex-post measure for success or ......... performance measures can be: 1. financial and ....... a. financial measures on their own reflect ....... performance, generally focus on the ........-term, and don't provide direction on what an ....... should focus on to achieve their ....... 2. long-term and ....... 3. objective and ...... 4. internal and ..... KPIs what are metrics that track key aspects of a company's stragegy? a. these are also referred to as ......... success factors (CSFs) and ......... key results (OKRs) b. these are: 1. simple 2. easy to ..... 3. easy to ...... 4. readily ...... c. examples: buying a car: hiring an undergrad employee: airlines: manufacturing product: service company: d. measurment creates visibility and ...... e. financial or non-financial, the purpose of a performance metric is to measure how well a ....... is being executed f. metrics turn abstract strategy into ....... goal SURROGATION: a. what is the process that occurs when we lose sight of the big picture strategy and instead only focus on the metric itself? b. the metric is a proxy or means to measure strategy ......., but not the ........ itself surrogation is likely to occur when: 1. performance metric is ........ aligned with the actual strategy 2. ............. is based off the metric 3. there is only ........ metric solutions: 1. involve employees with strategy ......, then they understand the ....... goal 2. targets should refflect the imperfect ........ of the metric 3. set a ......... goal USING PERFORMANCE PAY TO EMPHASIZE A STAKEHOLDER PERSPECTIVE a. the idea is to give managers a personal ........ to incorporate ......... considerations into everyday business activities b. if everyone from CEOs to plant managers factor in these ........ choices, rank and file-level employees will be more likely t make the ....... choices c. when tying a portion of executive ......... to sustainability goals, that portion must be .......... enough to incentivize change THE IDEAL PERFORMANCE METRIC 1. aligns an employee's ....... with the goals of the ....... 2. yields the maximum amount of ........ available about the decisions and/or actions of an individual ....... or organizational ....... 3. easy to ........ 4. easy to understand and ....... 5. does not pervert an employee's ........

explain taking the stockholder perspective no longer should decisions be based solely on whether they will yield higher profits for shareholders, rather corporate leaders should take into account all stockholders -- employees, customers, and society writ large 1. delivering value to customers a. we will further the tradition of american companies leading the way in meeting or exceeding customer expectations 2. investing in the employees a. this starts with compensating them fairly and providing important benefits b. also included supporting them through training and education that help develop new skills for a rapidly changing world c. we foster diversity and inclusion, dignity, and respect 3. dealing daily and ethically with our suppliers a. we should be dedicated to serving as good partners to other companies, large and small, to help us meet our missions 4. supporting the communities in which we work a. we respect the people in our communities and protect the environment by embracing sustanible practices across our borders 5. generating long-term value for our shareholders a. shareholders provide capital that allows companies to invest, grow, and innovate b. we are committed to transparency and effective engagement with our shareholders THE BALANCED SCORECARD developed in the 1990s to help companies: 1. communicate their strategy to all employees 2. translate their strategy into tangible goals and objectives 3. develop mearuable performance metrics to track progress toward long-term, sustanible growth there are 4 parts to the balanced scorecard: 1. innovation and learning a. invest in your employees so that they work hard and provide value b. goals are established to improve operations 2. internal business processes a. create sustainable processes to generate long-term value b. targets are established for continous improvement 3. customer satisfaction a. invest in your community to garner a large, loyal customer base 4. financial a. achieve long-term financial success a. ultimate ex-post measure for success or failure performance measures can be: 1. financial and non-financial a. financial measures on their own reflect past performance, generally focus on the short-term, and don't provide direction on what an employees should focus on to achieve their goals 2. long-term and short-term 3. objective and subjective 4. internal and external KPIs key performance indicators a. these are also referred to as critical success factors (CSFs) and objective key results (OKRs) b. these are: 1. simple 2. easy to understand 3. easy to monitor 4. readily quantifiable c. examples: buying a car: miles per gallon hiring an undergrad employee: GPA airlines: % on-time arrivals manufacturing product: % defective products service company: customer satisfaction d. measurment creates visibility and awareness e. financial or non-financial, the purpose of a performance metric is to measure how well a strategy is being executed f. metrics turn abstract strategy into concrete goal SURROGATION: a. surrogation b. the metric is a proxy or means to measure strategy execution, but not the strategy itself surrogation is likely to occur when: 1. performance metric is loosely aligned with the actual strategy 2. performance pay is based off the metric 3. there is only one metric solutions: 1. involve employees with strategy development, then they understand the larger goal 2. targets should refflect the imperfect nature of the metric 3. set a realistic goal USING PERFORMANCE PAY TO EMPHASIZE A STAKEHOLDER PERSPECTIVE a. the idea is to give managers a personal incentive to incorporate sustainable considerations into everyday business activities b. if everyone from CEOs to plant managers factor in these sustainable choices, rank and file-level employees will be more likely to make the same choices c. when tying a portion of executive compensation to sustainability goals, that portion must be meaningful enough to incentivize change THE IDEAL PERFORMANCE METRIC 1. aligns an employee's goals with the goals of the organization 2. yields the maximum amount of information available about the decisions and/or actions of an individual available or organizational unit 3. easy to measure 4. easy to understand and communicate 5. does not pervert an employee's action

explain the broken aspect of corporate budgeting compensation should not be based on a ...... a. a lot of companies pay their employees for meeting or exceeding a ........ b. if that target is a budger, employees will have the incentive to lie when making the ...... c. which employees have the best information and details to make an accurate budget? d. these employees are encouraged to ........ demand and ........ costs e. downsides: 1. underproduce and run out of ....... - miss out on ....... and revenue 2. prevents the money from being ........ elsewhere NON-LINEAR BONUSES only have incentive to produce more in the ....... zone a. this is generally .......%-.......% of budget b. if far below and no hope of meeting: try to push ....... to next period so they have a better chance of ........ c. if far above and have already maximized ......., the employees ........ off, stop ......, and shift ........ to "......." next period SOLUTIONS a. use a ....... payment plan b. remove the ...... from the payment plan entirely so employees will ....... participate in the budget setting process c. remove the ...... and flaws -- make it to where employees are always incentivized to do ....... and work ....... PERVERSE INCENTIVES a. these incentives promote ....... behavior in organizations b. organizaitons should ensure ........ goals are ...... and don't promote/foster pressure or ....... behavior

explain the broken aspect of corporate budgeting compensation should not be based on a budget a. a lot of companies pay their employees for meeting or exceeding a target b. if that target is a budget, employees will have the incentive to lie when making the budget c. lower-level employees d. these employees are encouraged to underestimate demand and overestimate costs e. downsides: 1. underproduce and run out of inventory - miss out on sales and revenue 2. prevents the money from being invested elsewhere NON-LINEAR BONUSES only have incentive to produce more in the target zone a. this is generally 80%-120% of budget b. if far below and no hope of meeting: try to push revenue to next period so they have a better chance of hitting c. if far above and have already maximized bonus, the employees slack off, stop stop., and shift expenses to "pad" next period SOLUTIONS a. use a linear payment plan b. remove the budget from the payment plan entirely so employees will honestly participate in the budget setting process c. remove the issues and flaws -- make it to where employees are always incentivized to do better and work harder PERVERSE INCENTIVES a. these incentives promote destructive behavior in organizations b. organizaitons should ensure performance goals are realistic and don't promote/foster pressure or unethical behavior

explain the process of preparing flexible budgets what is a budget that shows expected revenues and costs at a variety of different activity levels? a. managers frequently use flexible budgets to examine ........ scenarios b. managers use flexible budgets for both planning and ........ evaluations c. flexible budgets are critical to implementing an effective .......... evaluation system d. flexible budgets use the ......... inputs (in relation to costs and sales price) from the ........ budget but ....... the sales volume to .......... sales volume -- sales quantity affects revenue and all ........ costs associated with the quantity of units sold what is a budget based solely on the planned level of activity and is not adjusted for changes in activity volume? a. group of detailed budgets and schedules representing the company's operating and financial ...... for a future accounting period b. remains ........... even if the actual volume of activity, actual sales price, or actual costs ........ what are the 3 pieces of information static budgets use? 1. ......... budgets 2. ......... budgets 3. ........ statements *the difference between the numbers reported on the static and flexible budgets are dependent on ........... NOT ........ a. remember: ........ costs for flexible budgets remain the same across all different ......... amounts example: the static budget for a company called for production and sales volume of 25,000 units. at that volume, the budgeted fixed costs were $150,000 and total budgeted variable costs were $200,000. prepare a flexible budget for an expected volume of 26,000 units

explain the process of preparing flexible budgets flexible budget a. managers frequently use flexible budgets to examine what-if scenarios b. managers use flexible budgets for both planning and performance evaluations c. flexible budgets are critical to implementing an effective performance evaluation system d. flexible budgets use the same inputs from the master budget but update the sales volume to actual sales volume -- sales quantity affects revenue and all variable costs associated with the quantity of units sold master (static) budget a. group of detailed budgets and schedules representing the company's operating and financial plans for a future accounting period b. remains unchanged even if the actual volume of activity, actual sales price, or actual costs differ what are the 3 pieces of information static budgets use? 1. capital budgets 2. operational budgets 3. pro-forma statements *the difference between the numbers reported on the static and flexible budgets are dependent on sales volume differences NOT changes in sales price or unit costs a. remember: fixed costs for flexible budgets remain the same across all different sales volume amounts example: $200,000 / 25,000 = $8 $8 * 26,000 = $208,000 fixed costs remain the same

interpeting market-to-book ratios: MTB = 1: a. market value of equity (>, <, =) book value of equity b. market value of assets (>, <, =) book value of assets c. market value of liabilites (>, <, =) book value of liabilites d. existing assets have not .......... from their historical cost e. assets are not expected to generate any ........ in excess of fair rate of ....... MTB > 1: a. a. market value of equity (>, <, =) book value of equity b. market value of assets (>, <, =) book value of assets d. the company has unrecorded ............ e. some examples of these are: 1. customer ........ 2. employee ......... 3. successful ........ f. existing assets have .......... g. assets are expected to generate income in ......... of a fair rate of ......... MTB < 1: a. a. market value of equity (>, <, =) book value of equity b. market value of assets (>, <, =) book value of assets d. the market value of equity is ........ than the book value conservative accounting should prevent which of these results? a. firms with higher ROA's will also have higher ........ ratios b. the asset is generating more ......... for each dollar of book value c. firms with higher ROE's will also have higher ........ ratios d. if the ROE > ROA, the company is more ......... e. firms with more debt will have ........ MTB ratios f. more ........ signifies higher ........ with less money invested OTHER ITEMS TO CONSIDER WHEN INTERPRETING MTB RATIOS: a. firms with more expected growth will have ........ MTB ratios a. firms with more operating risk (a less certain ........) will have .......... MTB ratios b. operating risk can come from competition, .........., threat of ........ change, and threat of ........... change c. in the computation of ROE, what component (per the dupont framework) represents riskiness -- how is this calculated? THE EFFECT OF TREASURY STOCK ON MTB RATIOS: a. treasury stock is repurchased at ....... value b. if market value > book value, the buy back of treasury stock will disproportionately ........ the book value of equity EXAMPLE: a company with a MTB of 3 buys 10% of its commin stock outstanding: a. what is the change to market value? b. what is the change to book value? c. what is the MTB ratio? 1. what is the formula to calculate this? 2. solve

interpeting market-to-book ratios: MTB = 1: a. market value of equity = book value of equity b. market value of assets = book value of assets c. market value of liabilites = book value of liabilites d. existing assets have not appreciated from their historical cost e. assets are not expected to generate any income in excess of fair rate of return MTB > 1: a. a. market value of equity > book value of equity b. market value of assets > book value of assets d. the company has unrecorded intangibles e. some examples of these are: 1. customer loyalty 2. employee creativity 3. successful R&D c. existimg f. existing assets have appreciated g. assets are expected to generate income in excess of a fair rate of return MTB < 1: a. a. market value of equity < book value of equity b. market value of assets < book value of assets d. the market value of equity is less than the book value MTB < 1 a. firms with higher ROA's will also have higher MTB ratios b. the asset is generating more income for each dollar of book value c. firms with higher ROE's will also have higher MTB ratios d. if the ROE > ROA, the company is more leveraged e. firms with more debt will have higher MTB ratios f. more leverage signifies higher returns with less money invested OTHER ITEMS TO CONSIDER WHEN INTERPRETING MTB RATIOS: a. firms with more expected growth will have higher MTB ratios a. firms with more operating risk (a less certain future) will have lower MTB ratios b. operating risk can come from competition, obsolescence, threat of climate change, and threat of economic change c. equity multiplier (financing leverage) -- average total assets / average total stockholders' equity THE EFFECT OF TREASURY STOCK ON MTB RATIOS: a. treasury stock is repurchased at market value b. if market value > book value, the buy back of treasury stock will disproportionately decrease the book value of equity EXAMPLE: a company with a MTB of 3 buys 10% of its commin stock outstanding: a. the change to market value is a 10% reduction b. the change to book value is a 30% reduction (market value reduction * MTB) 1. market value / book value 2. (3 * book value) - 0.1 (3 * book value) / book value - 0.1 (3 * book value) = 2.7 / 0.7 = 3.85

practical uses of equity multiples: MTB and P/E ratios can be better used to understand the market's cumulative assessment of a company's: 1. expected ...... rates 2. expected ......... 3. expected ......... MTB and P/E ratios can also be used to ........ a company: a. peer forms with similar growth, profitability, and risk should have ......... multiples b. the key is finding the .......... firm c. P/E ratios is calculated with ........ earnings, rather than ........ cost d. this best explains ......... stock prices in terms of relative performance, the following general rankings are observed consistenly each year: 1. ........ earnings measures 2. ........ earnings measures 3. cash flow measures and ........ value of equity are tied for 3rd 4. ......... performance is worst contrary to popular view that different industries have different "......." multiples, the above rankings are observed consistenly for almost all .......... examined

practical uses of equity multiples: MTB and P/E ratios can be better used to understand the market's cumulative assessment of a company's: 1. expected growth rates 2. expected profitability 3. expected risk MTB and P/E ratios can also be used to value a company: a. peer forms with similar growth, profitability, and risk should have similar multiples b. the key is finding the right firm c. P/E ratios is calculated with expected earnings, rather than historical cost d. this best explains current stock prices in terms of relative performance, the following general rankings are observed consistenly each year: 1. forward earnings measures 2. historical earnings measures 3. cash flow measures and book value of equity are tied for 3rd 4. sales performance is worst contrary to popular view that different industries have different "best" multiples, the above rankings are observed consistenly for almost all industries examined

ratio analysis compares the amounts for one or more line items to the amounts for ther line items for the same ........ RATIOS ARE CLASSIFIED INTO THREE CATEGORIES: 1. ......... ratios a. these ratios examine a company's ability to generate ....... 2. ......... ratios a. these ratios help us determine if a company has sufficient current ........ to repay ......... when due 3. ......... ratios a. these ratios examine a company's ability to pay ....... and repay ...... when due COMMON PROFITABILITY RATIOS: 1. this ratio represents the percentage of revenue that ultimately makes it to net income after deducting expenses a. what is the formula for this ratio? 2. this ratio indicates how much profit was made on each dollar of sales after deducting the COGS a. what is the formula for this ratio? 3. this ratio indicates how much revenue the company generates in sales for each dollar in fixed assets (or just assets) a. what is the formula for this ratio? 4. this ratio compares the amounts of net income to the average stockholders' equity; reports the amount earned during the period as a percentage of each dollar contributed by common stockholders and retained in the business a. what is the formula for this ratio? 5. this ratio shows the amount of earnings generated for each share of outstanding common stock a. what is the formula for this ratio? 6. this ratio shows the relationship between the market price and EPS for one share of the company's stock a. what is the formula for this ratio? COMMON LIQUIDITY RATIOS: 1. this ratio represents the number of times during a year that the average accounts receivable balance is collected (or "turns over") a. what is the formula for this ratio? 2. this ratio represents the approximate number of days the average accounts receivable balance is outstanding a. what is the formula for this ratio? 3. this ratio represents the number of times a firm sells its average inventory balance during a reporting period a. what is the formula for this ratio? 4. this ratio represents the approximate number of days the average inventory is held (how many days it takes to sell inventory on hand) a. what is the formula for this ratio? 5. this ratio measures the company's ability to pay its current liabilites and presents current assets as a percentage of current liabilites a. what is the formula for this ratio? COMMON SOLVENCY RATIOS: 1. this ratio indicates the proportion of total assets that creditors finance a. what is the formula for this ratio? 2, this ratio indicates how many times the company's interest expense was covered by its operating results a. what is the formula for this ratio?

ratio analysis compares the amounts for one or more line items to the amounts for ther line items for the same year RATIOS ARE CLASSIFIED INTO THREE CATEGORIES: 1. profitability ratios a. these ratios examine a company's ability to generate income/profit 2. liquidity ratios a. these ratios help us determine if a company has sufficient current assets to repay liabilites when due 3. solvency ratios a. these ratios examine a company's ability to pay interest and repay debt when due COMMON PROFITABILITY RATIOS: 1. net profit margin a. net income / revenues 2. gross profit percentage (margin) a. (revenues - COGS) / revenues 3. fixed asset turnover a. revenues / average net fixed assets 4. return on equity a. (net income - preferred dividends) / average common stockholders' equity 5. earnings per share a. (net income - preferred dividends) / # of shares outstanding 6. price-to-earnings ratio a. stock price / EPS COMMON LIQUIDITY RATIOS: 1. accounts receivables turnover ratio a. revenues / average accounts receivables 2. days sales outstanding (DSO) a. 365 / accounts receivables turnover ratio 3. inventory turnover ratio a. COGS / average inventory 4. days inventory outstanding (DIO) a. 365 / inventory turnover ratio 5. current ratio a. current assets / current liabilites COMMON SOLVENCY RATIOS: 1. debt-to-assets a. total liabilites / total assets 2. times interest earned a. (net income + interest expense + income tax expense) / interest expense