FIN 3400 Finances Chapter 2-3 Financial Statements

inflow

: Cash received, often from income or sale of an investment.

time line

A graphical representation showing the size and timing of cash flows through time.

Which of the following statements is correct?

A high average payment period and a low accounts payable turnover are a sign of good management.

Preferred stocks

A hybric security a form of ownership of a corporation that gives stockholders certain privileges

Which action fit with the definition of retained earnings

A major sale to the customer was purposely delayed one day to be registered in next month.

Which of the following will increase a firm's quick ratio assuming no other accounts change?

A. A reduction in accounts payable. B. An increase in accounts receivable. C. An increase in inventory. D. All of these statements will increase a firm's quick ratio.

Common-size financial statements:

A. Allow for an easy comparison of balance sheets and income statements across firms in the industry. B. Provide quantitative clues about the direction that the firm is moving. C. Are obtained by dividing all income statement accounts by net sales and all balance sheet accounts by total assets. D. All of these.

Which of the following statements is correct?

A. The use of debt in the capital structure results in tax benefits to the firm. B. Debt is referred to as "financial leverage" because it magnifies returns to shareholders. C. Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing. D. All of these statements are correct.

These ratios measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets.

A. debt management ratios

Which of the following assets has concerted in cash within A YEAR

ACCOUNT RECEIVABLE

Which of this assets are converted in cash within one year?

Account receivables Inventory

Financial statement

Accounting base picture of a firm financial position.

Term: Rule of 72

An approximation for the number of years needed for an investment to double in value.

A stream of level of cash flow paid at the end of each time period- often referred to as ordinary annuity.

Annuity.

What of the this statement best illustrate the definition of marginal tax rate?

Antonio will pay 0.28 cent more in taxes if his taxable income increase by 1 dollar or 28 percent

What statement regarding liquidity is correct

As the liquidity of the assets increase, both the firm's probability of financial distress and its profits on those assets decrease.

Market value

Assets are listed at the amount the firm would get if it sold them

Book (or historical cost) value

Assets are listed on the balance sheet at the amount the firm paid for them

What is the definition of current assets

Assets that can be converted in cash within a one year

Stockholder equity can define as

Assets- liabilities

All of the following are users of financial ratios except ___________.

Auditors

Which of the actions listed below would cause a firm's current ratio to increase?

B) Notes payable are paid off with cash.

The term "capital structure" refers to

. the amount of debt versus equity on the balance sheet.

An investor wanting large returns will be interested in companies that have ____.

B. high ROEs

Which ratio measures the operating return on the firm's assets irrespective of financial leverage and taxes?

Basic earning power ratio

This measures the operating return on the firm's assets, irrespective of financial leverage and taxes.

Basic earnings power ratio

What of these are long term debts?

15 years mortgage 10 years bonds

Example of current assets

Cash

Which ratio measures the number of dollars of operating cash available to meet each dollar of interest and other fixed charges that the firm owes?

Cash coverage ratio

A statement of retained Earnings showed a beginning retained earning balance of 24 and an end balance of 22. Net income was positive . What do you know given the information?

Cash dividend paid exceeded net income

Cash flow for investing activities

Cash flow associates with purchase or sales of fixed or other long term assets.

Cash flow from operations

Cash flow that are the direct result of the production and sale on the fir's product.

Cash flow for financing activities

Cash flow that result from debt and equity financing transactions.

Term: outflow

Cash payment, often a cost or the price of an investment or deposit.

Balance sheets list the assets in declining order of liquity

Cash, account receivable, inventory, plant, and equiptment

Which of these are added or subtracted from net income to compute the net cash flow from operating activities

Changes in accrued wages and taxes are operating activities Depreciation Increase inventory

Which of the following transactions, when considered by itself, will not change the current ratio?

Collecting an account receivable that was previously written off through the allowance for doubtful accounts

Which statement is correct in straight line depreciation?

Commonly used when compiling financial statements

Capital structure

Compares firm's debt with the total equity

Which of the following are likely to have the reported amounts on the balance sheet being close to their current value?.

Current Assets

Net working capital

Current assets minus current liabilities

Report the firm amount of money owes its creditors within next year

Current liabilities

Current assets DIVIDED BY current liabilities is the

Current ratio

Which of the following ratios would not be classified as an asset management ratio?

Current ratio

Which of these is NOT considered a coverage ratio?

Current ratio

Term: compounding

Def: The process of adding interest earned every period on both the original investment and the reinvested earnings.

Which of these questions can be answered by monitoring a firm balance sheet for last and this year

Did the firm issue additional shares of stock this year Is the firm more a\or less liquid this year

What formula in correct relate with income statement

EBT= Gross income - Depreciation - Other operating expenses EBT= Dividends paid + Addition to Retained Earnings + Taxes Gross profit= Net sales - Less Cost of Goods Sold

EBIT

Earnings before interest taxes

EBITDA

Earnings before interest, taxes, depreciation and amortization

EBT

Earnings before taxes

What of the following identify a balance sheet

Equity= Assets -Liabilities

Which formula define FCF(free cash flow)

FCF= OCF (Operating cash flow) - IOC (investment in operating capital

Free cash flow is the cash provided by operating activities minus the cash used by financing activities.

False

Statement of Retained Earnings

Financial Statement that reconciles net income earned during a given period and any cash dividends paid with the change in retained earnings over the period.

Income Statement

Financial statement that reports the total revenues and expenses over specific period of time

Statement of Cash Flow

Financial statement that shows the firm's cash flow over a period of time.

Which company has the most risk from an investor's standpoint? Firm A has a PE of 92 times and Firm B has a PE of 16 times. Assume both firms operate in the same industry. Firm A has fewer shares outstanding than Firm B.

Firm A because it has the higher PE ratio.

Firm A and Firm B have the same total assets, ROA and profit margin. However, Firm B has a higher debt ratio and interest expense than Firm A. Which of the following statements is correct?

Firm B must have a higher ROE than firm A.

Which ratio assesses how efficiently a firm uses its fixed assets?

Fixed asset turnover

This ratio measures the number of dollars of operating earnings available to meet the firm's interest dollars and other fixed charges.

Fixed charge coverage ratio

Which of these characteristics apply to the definition of preferred stock?

Fixed period payments Ownership interest in the firm

Stock equity

Funds provide for the firm preferred and common

According to the structure of Income Statement

Gross profit= Net sales-Cost of Goods Sold EBIT=Gross profit - Depreciation - Operating Expenses EBT= Dividends paid + Addition to Retained Earnings + Taxes

Which of the following statements is correct?

Holding extremely high levels of liquidity to guard against liquidity crises is an inappropriate goal for the firm.

Preferred stock

Hybrid securities that has characteristics of both long term debt and common stock

Which of the following statements is correct?

If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity.

Which of these statements is true?

In general, the higher the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be.

Which of these are cash flow for financing activities?

Increase common stock Preferred stock dividend Decrease in long term-debt

What statement is correct concerning the structure of cash flow

Increase in amount payable is an addition to the cash flows from operating activities A decrease in fixed assets is an addition to the cash flow from the investing activities.

Which of these are resources of cash

Increase in long term debt Decrease inventory

Cash flow from financing activities

Increase in note payable Increase in long term debt Increase in common and preferred stock Decrease in note payable Decrease in long term debt Decrease in common and preferred stock Dividends paid

Source of cash

Increase long term debt Decrease in inventory

Which of these are addition to the cash flow from financing activities?

Increase long term debt Increease common stock

Which statement regarding the federal taxation of interest income earned by a corporation is correct

Interest earned by a corporation bond is taxable Interest earned of a bond issue by a city is tax-exempt

simple interest

Interest earned only on the original deposit.

The quick ratio EXCLUDES which of the following?

Inventory

What is the definition of marketable security

It is a short term low rate investment security.

Long term debt

It is defined as obligations of the firm that are due in more than one year.

What is the definition of net income

It is the after-tax profits or loss earned over specific period of time

What is the best definition of retained earnings

It is the cumulative earnings a firm has reinvested rather than paid out as dividends

Earning management

It is the process of controlling a firm earnings

Which of these is the best definition non cash flow

It summarizes the resources of cash by type of cash flow.

Which one of the following is unlikely to have a high capital intensity ratio?

Law firm

Liabilities definition

Liabilities are funds provide by lenders to a firm

Price at common stock can sold

Market value per share

For publicly traded firms, these ratios measure what investors think of the company's future performance and risk.

Market value ratios

Which of the following is NOT a quick asset?

Merchandise inventory

What examples best defines liquid assets

Mia sold 100 shares of stock today at the going market price

These ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm.

Profitability

This ratio measures the overall return on the firm's assets inclusive of financial leverage and taxes.

ROA

Which of the following ratios is a measure of profitability, operating results, and efficiency?

Rate of return on total assets

The formula for which of the following ratios has a denominator of total liabilities?

Ratio of stockholders' equity to total liabilities

Balance sheet

Report firm's asset, liabilities, and equity at a particular point of time.

Sarbanes-Oxley Act 2002

Requires that firm senior management must sign off of the financial statements of the firm certifying the statement as accurate and representative of the firm's financial condition during the period covered.

Which party has a residual claim to the firm's cash flow?

Stockholders

Cash flow that result from debts and equity financing are cash flow from financing activities

TRUE

The decrease in a long term asset account balance is a cash flow for investing activities

TRUE

Which of these statements is true?

The age of a firm's fixed assets will affect the fixed asset turnover ratio level.

present value (PV)

The amount a future cash flow is worth today

Marginal Taxes Rate

The amount of additional a firm must pay out for every additional dollar of taxable income it earns.

Capital structure

The amount of debt versus equity financing held on the balance she

Net change in cash and marketable securities

The sum of cash flows from operating, investing, and financing activities.

future value (FV)

The value of an investment after one or more periods.

This ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt.

Times interest earned

Which of the following statements is correct?

To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry.

Single period future value

Today cash flow + interest earned

Intangible long term assets

Trademark

Current asset MINUS current liabilities is the

Working Capital

Which is true? Ratio analysis:

can provide useful information on a firm's current position and hint at future performance.

Current ratio

capital structure

These can be used by interested parties to identify changes in corporate performance.

common-size financial statements

The term "spreading the financial statements" refers to _____________.

creating common-size financial statements

his ratio measures the percentage of total assets financed by debt.

debt

An decrease in financial leverage means

decrease the risk faced by the firm.

The maximum growth rate that can be achieved by financing asset growth with internal financing or retained earnings is called the ____________.

internal growth rate

Another name for Gross Profit

is EBIT

Book Value per share (BVPS)

is based on the equity of the firm that is attributable to the common shareholders

. The maximum growth rate that can be achieved financing asset growth with new debt and retained earnings is called the __________.

sustainable growth rate

This is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings.

sustainable growth rate

Cash flow from operations is defined as

the cash flow that are the direct result of the production and sale of the firm's products

A strong liquidity position means that ______________.

the firm is able to meet its short-term obligations

Common stocks and paid in surplus

the fundamental ownership claim in a public and private company

To interpret financial ratios, managers, analysts, and investors use the follow type of benchmarks:

time series analysis

Cash flow for operating activities

Decrease in account payable

What of these is cash flow for financing activities

Decrease in loan payable

Which ratio measures how many days inventory is held before the final product is sold?

Days' sales in inventory

Sources of Cash

Net income Depreciation Decrease a non-cash current assets Decrease a fixed asset Increase a current liability Increase a long term debt Sell common or preferred stock

Retaining Earnings formula

Net income= Dividends paid + Change in Retained Earnings

Uses of cash

Net looses Increase a non cash current assets Increase a fixed asset Decrease a current liability Decrease a long term debt Repurchased common or preferred stock Pay dividends

Net operation profit after taxes (NOPAT)

Net profit a firm earns after taxes but before of any financing cost.

Gross profit

Net sales lminus cost of the goods sold

Which of these are included in net working capital

Notes payable Inventory

What of these account are current liabilities

Notes payable account payable Accrued Wages

Current liabilities are debts of the firm must paid within --

One year

Fixed assets is a asset that is defined as having a useful life in excess of which time periods

One year

Net income

The bottom line of income statement

Free Cash Flow

The cash that is actually available for distribution to the investors in the firm after the investments that are necessary to sustain the firm's ongoing operation are made.

Retained earnings

The cumulative earning in the firm reinvested rather than paid dividends

Networking capital

The difference between form current assets and current liabilities

Financial leverage

The ext which debt security is used by the firm

A firm that is efficient in inventory management will have ____________.

The firm has a different capital structure.

discount rate

The interest rate used to discount future cash flow(s) to the present.

Average Tax rate

The percentage of each dollar of tax payable income that the firm pay in taxes

discounting

The process of finding present value by reducing future values using the discount, or interest, rate.

This measures the number of dollars of sales produced per dollar of fixed assets.

fixed asset turnover ratio

Cash flow for financing activities are defined as the cash flow resulting

from debt and equity financing transactions