Finance 300

one of the most important uses of financial statement information within the firm is:

Performance evaluation - Credit evaluation (Ex. an external use)

A firm with the profit margin of 10% generates _____ in net income for every dollar in sales.

- 10 cents

Return on equity (ROE) is a measure of _____.

- profitability

If a company's balance sheet shows $400 in cash, $100 in inventory, and $200 in current liabilities, its cash ratio is ______.

- 2.0 - cash ratio = 400 / 200

BK Trucking has total equity of $25,380 and 1,500 shares outstanding. its stock is currently selling $38 per share. What is the market-to-book ratio?

- 2.25 - $38 / (25,380 / 1,500) = 2.25

_____ _____ are the prime source of information about a firm's financial health.

Financial statements

Better Life Corporation has sales of $500,000 on assets of $2,000,000. At year end accounts receivable were still 5% of assets. the firm's receivable turnover is ______ times.

- 5 - refer to page 61

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes an average of _____ days to sell.

- 287

Rock construction has current assets of $45 million, total liabilities and equity of $67 million, and sales of $59 million. how would current assets be expressed on a common-size balance sheet?

- 67% - $45m / $67m

BC Corporation has net income of $176,000, sales of $1,982,000 and total assets of $2.24 million. What is the return on assets?

- 7.86% - 176,000 / 2.24m = 7.86%

Which of the following items is used to compute the current ratio? (2 answers)

- Accounts Payable - Cash

Which of the following create problems with financial statement analysis?

- The firm or its competitors are global companies - The firm and its competitors operate under different regulatory environments - the firm or its competitors are conglomerates

Solid Rock Construction has current assets totaling $7 million, including $4 million in inventory. The company's current liabilities total $5 million. The quick ratio is _____.

- .6

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?

- 1.58% - 1.2 million / $76 million

Vera's has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio.

- 10 times - $30 / $3 = 10 times

Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?

- 10.71% - Profit Margin = Net income / Sales

A firm has an operating profit (EBIT) of $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio.

- 2.4 - $600 / $250

Alder Inc. has net income of $403,000, operating earnings of $640,000, sales of $1.23 million, and total assets of $1.48 million. what is the return on assets?

- 27.23% - 403,000 / 1.48m = 27.23%

BC Toys has total equity of $584,000. there are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratio?

- 3.24 times - $54 / ($584,000 / 35,000) = 3.24 times

AD corporation had sales of $750,000 and cost of goods sold of $350,000. Inventory at year end was $87,500. the firm's inventory turnover is ______.

- 4.00

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times respectively. Explaining that upward trend in the inventory turnover ratio requires:

- Further Investigation

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

- It will increase

Which of the following would a company wish to compare its ratios against?

- Its own historical ratios - major companies - Aspirant companies - Peer companies

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past three years is 30%, 34%, and 40% respectively. This indicates that the firm has increased its _____.

- Leverage

Which one of the following is the correct equation for computing return on assets (ROA)?

- Net Income / Total Assets

What is the main difference between the cash coverage ratio and the times interest earned ratio?

- Non Cash Expenses

If a company has had negative earnings for several periods they might choose to use a ______.

- Price-sales ratio

What does it mean when a company reports ROA of 12%?

- The company generates $12 in sales for every $100 invested in assets.

Which of the following are traditional financial ratio categories? (3 answers)

- Turnover Ratios - Profitability Ratios - Financial Leverage Ratios

A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders.

- created

If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be:

- less than or equal to 1

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

A firm with a 26% return on equity earned ____ cents in profit for every one dollar in shareholders' equity

26

Days' sales in receivables is given by the following ratio:

365 / Receivables turnover

A firm with a market-to-book value that is greater than 1 is said to have ________ value for its shareholders.

Created

A cash ratio is found by dividing cash by:

Current liabilities

The information needed to compute the profit margin can be found on the ________.

Income Statement

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ________.

Increase

How is price-earnings (PE) ratio computed?

Market price per share / Earnings price per share

Return on assets (ROA) is a measure of _____.

Profitability

Which of the following represents the receivables turnover ratio?

Sales / Accountants receivable

Which of the following equations defines the total asset turnover ratio?

Sales / Total Assets

what does a Times Interest Earned (TIE) Ratio of 3.5 times mean?

The company's interest obligations are covered 3.5 times versus EBIT

Alpha Manufactoring has cost of goods sold of $90 million and a net income of $9.6 million on total sales of $120 million. Total assets are $150 million. A common-size income statement will show cost of goods sold of 75% and a net profit of ______%

- 8 - Net Profit(%) = 9.6 / 120 = 8%

Which of the following is (are) true of financial ratios? (2 answers)

- Are used for comparison purposes - Are developed from a firm's financial information

Cal's market has return on equity (ROE) of 15%. What does this mean?

- Cal's generated $.15 in profit for every $1 of book value of equity.

Which of the following is the correct representation of the cash coverage ratio?

(EBIT + depreciation) / Interest expense

The debt to equity ratio for a company with $1 million in total debt and $2 million in equity is _________?

- .5 - Total Debt / Equity

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase.

A common-size balance sheet expresses accounts as a percentage of _____.

Total Assets