CH 16 MGMT 201
Ordinarily, the market value of a stock __________ its book value
exceeds
How quickly an asset can be converted to cash is known as
liquidity
A company whose inventory ratio is much slower than its industry average may have too ______ inventory.
much
When analyzing a company, in addition to financial ratios, managers should consider ______.
Employee learning and growth, industry trends, and customer satisfaction
Average total assets divided by average stockholders' equity equals ______.
Equity multiplier
True or false: A company with an inventory turnover ratio that is much faster than the average for its industry may have too much inventory.
False
True or false: Analyzing financial ratios is the only way analysts should evaluate a company.
False
True or false: One of the reasons the current ratio is useful is because it is easy to interpret.
False
When evaluating the financial health and future prospects of a company, users rely on _______________ analysis
Financial Statement
Dividing sales on account (credit sales) by the average accounts receivable balance for the year is the calculation of the ___________
accounts receivable turnover
When constructing a common-size balance sheet, all items are usually expressed as a percentage of total ______.
assets
Dividing current assets by current liabilities calculates the ____________ ratio
current
When evaluating the trend in a company's current ratio, a(n) ______ ratio might be a sign of eliminating obsolete inventory whereas a(n) ______ ratio might be the result of stockpiling inventory.
declining, improving
Creditors and stockholders have ______ views about the optimal debt-to-equity ratio.
different
The rate of return, in the form of cash dividends only, that would be earned by an investor who buys common stock at the current market price is measured by the __________
dividend yield ratio
Given the potential benefits of maintaining positive financial leverage, managers ______.
do not try to avoid debt
Why would an investor be interested in knowing a company's earnings per share?
earnings form the basis of dividend payments and future increases in the value of shares
True or false: A company with a current ratio of at least 2 will never have difficulty meeting its financial obligations.
false
The difference between the rate of return the company earns on investments on its own assets and the rate of return that the company must pay its creditors is ______.
financial leverage
The relationship between the market value of a share of stock and the stock's current earnings per share is often stated in terms of the
price-earnings ratio
When analyzing the acid-test ratio, ideally each dollar of liabilities should be backed by at least $1 of _______________ assets
quick
The goal for the operating cycle is to ______.
reduce it to as few days as possible
Profits relative to the book value of stockholder's equity is measured by ____________
return on equity
Dividing 365 days by the inventory turnover yields the average _________ period
sales
When constructing a common-size income statement, each item is expressed as a percentage of ______.
sales
True or false: If a company's rate of return on total assets is less than the rate of return the company pays its creditors, financial leverage is positive.
False
What are the three elements of the DuPont approach?
operating efficiency, asset usage efficiency, financial leverage
The return on total assets is a measure of _________
operating performance
Stockholders generally ____________ of high amounts of debt
approve
What are limitations of financial statement analysis?
-Analyzing companies just based on the financial ratio calculations -comparing financial data across companies that follow the same accounting
What are 3 examples of performing financial statement analysis
1. Analyzing financial ratios to asses the financial health of a company 2. Comparing financial data across companies 3. examining trends in key financial data
A times interest earned ratio of ______________ or more is considered sufficient to protect long-term creditors
2
What is the average collection period when accounts receivable turnover is 12.3?
30 days
If a company has accounts receivable turnover of 10, the average collection period is ______ days.
36.5
Which ratio is used to measure how quickly credit sales are converted into cash?
Accounts receivable turnover
What measures excludes inventories and prepaid expenses from total current assets, leaving only the more liquid assets to be divided by current liabilities?
Acid-test (quick) ratio
The times interest earned ratio is based on earnings ______.
Before interest expense and income taxes
What measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off?
Book value per share
A vertical analysis in which each financial statement item is expressed as a percentage is a(n) ___________ - size financial statement
Common
Which of the following ratios measures the balance between a company's liabilities and stockholders' equity?
Debt-to-equity
The percentage of current earnings being paid out in dividends is quantified by the ____________
Dividend payout ratio
Which ratio measures the rate of return (in the form of cash dividends only) that would be earned by an investor who buys common stock at the current market price?
Dividend yield ratio
Analytical techniques that are widely used when comparing financial statements are ______.
Dollar and percentage changes on statements, common-size statements, ratios
In a horizontal analysis, the ___________ changes highlight the changes that are the most important economically; the ____________ changes highlight the changes that are most unusual
Dollar, percentage
Why is the times interest earned ratio based on earnings before interest expense and income taxes?
Earnings before interest expense and income taxes is the amount available for making interest payments
Because investors buy stock in hopes of a return in the form of either dividends or future increases in stock value, they have an interest in the company's ____________
Earnings per share
Analyzing financial data over time is ____________ analysis
Horizontal
Which of the following measures how many times a company's inventory has been sold and replaced during the year?
Inventory turnover
Managers want to minimize working capital because ______.
It must be financed with long-term debt or equity
Borrowing money to acquire assets in an effort to increase sales and profits is financial
Leverage
Expectations about future earnings and dividends is reflected in ________ value, whereas _________ value reflects the results of events that have occurred in the past
Market, book
When a company's operating cycle is longer than the average payment period for suppliers, the company ______.
May need to borrow money to fund inventories and accounts receivable
Another type of leverage ratio that indicates the portion of a company's assets that are funded by equity is the equity
Multiplier
Companies with excellent prospects for profitable growth ______.
Often pay little or no dividends
A times interest earned ratio of less than __________ is inadequate because interest expense exceeds the earnings that are available for paying that interest
One
The elapsed time from when inventory is received from suppliers until cash is collected from customers is the ________________
Operating cycle
When analysts use a company's financial information to make comparisons, three analytical techniques are widely used. They are dollar and _____________ changes on statements, _______________ - size statements, and __________________. (Enter only one word per blank.)
Percentage, common, ratios
Vertical analysis focuses on ______.
Relations among financial statement items at a given point in time
Asset turnover can be increased by increasing ______.
Sales and accumulated depreciation
Which of the following measures a company's ability to protect its long term creditors?
Times interest earned ratio
Which of the following measures how efficiently a company's assets are being used to generate sales?
Total asset turnover
A base year is selected and the data for all years are stated as a percentage of that base year when computing a(n) ____________ percentage
Trend
Showing data for several years as a percentage of a base year computes ______.
Trend percentages
True or false: The evaluation of the average collection period is dependent upon the company's credit terms.
True
It is difficult to compare financial data between companies when each company ______.
Uses a different accounting method
Maintaining large amounts of _________________ is costly because it must be financed with long-term debt and equity
Working capital
365 days can be divided by the accounts receivable turnover to determine the average number of days required to receive payment on an account, which is known as the average ___________ period
collection
When investors are willing to pay a premium for the company's stock, the price-earnings ratio is _________, whereas when investors believe a company's future earnings growth is limited, the price-earnings ratio is _________
high, low
Analyzing financial data over time is ______________ analysis
horizontal
A company's goal is to ______ total asset turnover
increase
The acid-test ratio is designed to measure how well a company can meet its obligations without having to liquidate or depend too heavily on its ___________
inventory
If the average collection period for a company is calculated to be 35 days, then on average ______.
it takes 35 days to collect a credit sale
An increase in the debt-to-equity ratio indicates that a company is increasing its financial
leverage
Managers generally maintain high debt-to-equity ratios in industries with _________ financial risk.
little
The adequacy of a current ratio depends upon ______.
the composition of the assets
The ratio that measures how efficiently company assets are being used to generate sales is the ____________ turnover ratio
total asset
Horizontal analysis is also know as __________ analysis
trend
True or false: Continual liquidity problems can lead to bankruptcy.
true
An increasing equity multiplier means a company is ______.
using more debt than equity to fund its assets
A common-size financial statement is a ______ analysis.
vertical
Current assets minus current liabilities is known as
working capital