Chapter 3

What is the debt-equity ratio for a company with $3.5 million in total assets and $1.4 million in equity?

1. DER= total debt/ total equity 2. total debt= assets-equity 3. 2.1 mil/ 1.4 mil=1.5

Assume cash= 120 inventory=470 acct payable=811 acct receivable= 510 total assets= 21,400 There are no other current assets. What is the current ratio?

1. current assets: 120+510+470=1100 2. 1100/811= 1.36

Assume current assets=$11,300; Long term liabilities = $45,000; and total debt= $54,800. What is the current ratio?

=11,300/ (54,800-45,000)= 1.15

What is receivables turnover ratio?

=Sales/ accts receivable

What does a current ratio of 1.2 mean?

A firm has $1.20 in current assets for every $1 in current liabilities

How are firms classified into peer groups for ratio analysis?

According to standard industrial classification codes

Although _______________ are often poor reflections of reality, they are often the best info available

Accounting numbers

Financial statements report:

Book values

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

Common size statements

The current ratio show the relationship between

Current assets and current liabilities

There is only one method for preparing the statement of cash flows

False

______________ are the prime source of info about a firm's financial health

Financial statements

The info needed to compute profit margin can be found on the_________

Income statement

An _______ in net profit margin will increase ROE

Increase

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase

If the company has inventory, the quick ratio will always be ____ the current ratio

Less than

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

Liquidity

Whenever ____ info is available, it should be used instead of accounting data

Market

How is market to book ratio measured?

Market value per share/ book value per share

ROE is a measure of:

Profitability

At the most fundamental level, firms generate cash and:

Spend it

The EBITDA ratio is similar in spirit to:

The PE ratio

Alpha Co. has interest expense of $1.2 million, total assets of $84 million, sales of $76 million, long term debt of $16.4 million, and net income of $12.1 million. How will interest expense be recorded in the common size income statement?

-Common size expresses each item as a percent of total sales. = 1.2 mill/ 76 mill= 1.58%

Financial statements are used to:

-Communicate financial info within the firm -Communicate financial info to outsiders -Assess a company's current financial position

Explaining an upward trend in inventory turnover ratio requires:

-Examining whether the trend is because of increased sales, or decreased inventory -further investigation

Sources of cash on balance sheet

-Increase in acct payable -Increase in common stock -Increase in retained earnings

Uses of cash on balance sheet

-Increase in acct receivable -Increase in inventory -Decrease in notes payable -Decrease in long term debt

Which are uses of cash?

-Increases in inventory -Increases in property, plant, equipment -Decreases in acct payable

Which are traditional financial ratio categories?

-Market value ratios -Asset management ratios -Profitability ratios

Which 2 groups are most interested in liquidity ratios?

-Suppliers -Bankers

Which is a way financial managers use a common size balance sheet?

To track changes in a firm's capital structure

A common size balance sheet expresses accounts as a percentage of:

Total assets

Total capitalization =

Total equity + long term debt

A good working knowledge of financial statements is desirable because such statements are the primary means of communicating financial info both within and outside the firm

True