finance ch2

In the case of 2CansAndAString Telecomm, the company's current net cash flow is:

$507,500 NCF=Net Income - Noncash Revenues + Noncash Charges NCF=$382,500- 0 + $125,000 = $382,500+ $125,000 =507,500

Which of the following is not an asset management ratio?

A return on assets ratio

Vallante's current ratio is______ and its quick ratio is_____ , whereas Fusionista's current ratio is_____ , and its quick ratio is_____.

1.33 0.75 1.66 0.93 Current Ratio=Current Assets / Current Liabilities Quick Ratio=Current Assets - Inventories / Current Liabilities

One year later, Atlantic Northern Inc.'s stock is trading at $40.00, and the company reports its common equity value as $31,606,200. What is Atlantic Northern Inc.'s market-to-book(M/B) ratio? Can a company's stock have a negative P/E ratio?

10.26X Yes

Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios.

A higher operating profit margin than the industry average indicates either lower operating costs, higher product pricing, or both. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.

This document, issued once a year, provides a thorough reporting of the firm's activities during the previous year and its prospects for the future, including both quantitative and descriptive information.

Annual report

This standardized financial statement can be used to compare the financial performance of companies of different sizes or industries by dividing each account on the income statement by the firm's total sales. Doing so, standardizes each account in terms of $1 of total sales earned.

Common-size financial statement

This value is the amount of earnings generated by the firm during an accounting period per each outstanding share of a company's common stock.

Earnings per share

The inventory turnover ratio across companies in Nikola's industry is 17.19. Based on this information, which of the following statements is true for Nikola Motors?

Nikola is holding less inventory per dollar of COGS compared to the industry average.

Most firms borrow money to finance some of their assets, and most will choose to borrow some long-term funds and some short-term funds. Which group of lenders would put greater emphasis on a firm's liquidity ratio when evaluating a potential borrower?

Short-term lenders

This statement can be created using either of two methods: the direct or the indirect methods. The indirect method requires the use of some information from the period's income statement and the comparison of the balances between two balance sheets.

Statement of cash flows

Statement #2: In Year 2, Green Caterpillar Garden Supplies Inc. was profitable. This statement is______ because

True Green Caterpillar's retained earnings account increased between the end of Years 1 and 2.

Which of the following is true about financial leverage?

Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth.

Yesterday, International Business Services Co. repaid $125,000 of bonds payable for $126,875. This transaction is classified as

a financing cash flow

Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with______ times interest earned (TIE) ratios.

high

You are Olivia, a financial analyst who works for an investment bank in downtown Denver, Colorado. You are analyzing the current cash condition of 2CansAndAString Telecomm. You've collected the following information from the company's financial reports: _________ reflects the true cash position of the company, and can differ from the balance that reflects the money that the business is left with after paying its operating expenses, interest expense, and taxes.

net cash flow

The statement of cash flows categorizes a firm's cash flows according to the nature of the activities that give rise to them (for example, operating, investing, and financing cash flows) and then further differentiates these activities and cash flows into whether they involve sources and uses of cash. Two methods can be used to construct a statement of cash flows: the direct method and the indirect method. Under the indirect method, data from three financial statements are used. These statements include_______________ and ________________.

two balance sheet one income statement

A firm engages in a variety of activities that generate and require cash payment. The boxes below describe two examples of these activities. Classify each transaction according to its serving as a source of cash to the firm (cash inflow) or a use of cash (cash outflow). During the year, International Business Services Co. relocated its corporate headquarters and purchased a new office building. American Sporting Goods Inc. sold $100,000 of its holdings of short-term marketable securities.

use source

Which of the following is considered a financially leveraged firm?

A company that uses debt to finance some of its assets

This statement is constructed using the firm's short-term and long-term asset accounts, short-term and long-term liability accounts, and equity accounts.

Balance sheet

The statement of retained earnings or the statement of stockholders' equity reconciles the net income, dividends paid, and the change in retained earnings during a particular year. Which of the following best describes shareholders equity?

Equity is the sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years. Shareholders equity = Paid-in capital+Retained earnings Shareholders equity = Total assets−Total liabilities

An asset that lacks this attribute may take a long time to sell or be collected (so that it can be converted into usable cash), may require a big drop in price compared to its purchase price to induce a buyer to purchase it and/or a large transaction cost to purchase or sell it.

Liquidity

Based on your understanding of the different items reported on the balance sheet and the information they provide, which statement regarding Green Caterpillar Garden Supplies Inc.'s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?

The company's debts are listed in the order in which they are to be repaid.

DuPont analysis can be conducted using either the traditional DuPont equation or the extended DuPont equation. The traditional equation is constructed using two drivers, whereas the extended DuPont equation uses three variables to examine a firm's ROE performance. Complete the following sentences by entering the appropriate words or phrases. In the extended DuPont equation, a firm's ROE reflects (1) its use of debt financing, or leverage, as reflected by its________ (2) the efficiency with which it uses its assets, as measured by the_______ , and (3) its ability to generate sales and manage its production costs and operating expenses, as summarized by its________

equity multiplier ratio total asset turnover ratio net profit margin

Given the results of the previous income statement calculations, complete the following statements: • In Year 2, if Blue Hamster has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive_____ in annual dividends.• If Blue Hamster has 500,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change from_______in Year 1 to _____in Year 2.• Blue Hamster's before interest, taxes, depreciation and amortization (EBITDA) value changed from______in Year 1 to It is _____to say that Blue Hamster's net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company's annual contribution to retained earnings, $1,512,050 and $2,121,050, respectively. This is because________ of the items reported in the income statement involve payments and receipts of cash.

10 5.42 6.63 6,000,000 7,500,000 incorrect all but one

A company reports accounting data in its financial statements. This data is used for financial analyses that provide insights into a company's strengths, weaknesses, performance in specific areas, and trends in performance. These analyses are often used to compare a company's performance to that of its competitors, or to its past or expected future performance. Such insight helps managers and analysts improve their decision-making. You work for a brokerage firm. Your boss asked you to analyze Blue Parrot Manufacturing's performance for the past three years and to write a report that includes a comparative ratio analysis (sometimes called a benchmarking analysis) of the company's performance. Which of the following components would be best for you to include in your financial statement analysis?

A critique of the company's financial statements and a report of any misprints to be sent to the Securities and Exchange Commission

The balance sheet provides a snapshot of the financial condition of a company. Investors and analysts use the information given on the balance sheet and other financial statements to make several interpretations regarding the company's financial condition and performance. Green Caterpillar Garden Supplies Inc. is a hypothetical company. Suppose it has the following balance sheet items reported at the end of its first year of operation. For the second year, some parts are still incomplete. Use the information given to complete the balance sheets for Green Caterpillar Garden Supplies Inc. for the years ending December 31, Year 2 and 1, respectively.

Cash and Equivalents Cash and Equivalents= Total Current assets−Accounts receivable − Inventories = $281,250−$42,188−$123,750 =$115,312 Net fixed assets = Total assets −T otal Current assets =$625,000−$281,250 = $343,750 Total Current liabilities= Accounts payable+Accruals+Notes payable =$0+$5,859+$33,203 =$39,062 Retained earnings = Total Common equity−Common stock = $468,750−$304,688 =$164,062

Most investors and analysts in the financial community observe a firm's ROE closely. The ROE can be calculated by dividing the firm's net income by the shareholders' equity, or it can be reduced into the key factors that drive the ROE. Investors and analysts like to focus on these drivers to develop a more holistic image of what is changing within a company. An analyst collected the following data for firms operating in the transportation sector. Use the data to compute the net profit margin (NPM), total asset turnover (TAT), and equity multiplier (EM) values required for a DuPont analysis. Note: The following dollar values are expressed in millions of U.S. dollars.) Referring to this data, which of the following conclusions is true about the companies' ROEs?

Company B's ROE performance results from its terrible profitability and cost-containment performance, and despite its superior asset-management productivity performance.

Statement #1: Green Caterpillar's accumulated owed financial obligations decreased from Year 1 to Year 2. This statement is______ because

False Accruals actually increased from $0 in Year 1 to $5,859 at the end of Year 2.

The statement of cash flows reports a company's cash inflows and outflows for a given accounting period by categorizing the company's sources and uses of cash as either operating, investing, or financing activities. Determine whether the activities described in the following table should be categorized as operating, investing, or financing activities in the statement of cash flows. Eastwood Inc. issued long-term bonds for $370,000. Matthews Industries paid preferred dividends of $28,000. Jenkins Co.'s total finished-goods inventory increased from the previous year. Sandler Co. sold property for $71,000. Martinez Co.'s total accounts receivable owed by customers on account decreased from the previous year.

Financing activities Financing activities operating activities investing activities operating activities

Which of the following statements are true?

Fusionista Inc. has a better ability to meet its short-term liabilities than Vallante Corporation. A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities. If a company has a quick ratio of less than 1 but a current ratio of more than 1, and if the difference between the two ratios is large, it would mean that the company depends heavily on the sale of its inventory to meet its short-term obligations.

In contrast, in the traditional version of the equation, the firm's efficiency and profitability metrics are multiplied and summarized in a single measure, the____________ . In this analysis, a company's financial performance is expected to result from both management's financing decisions and its effectiveness and efficiency in generating profits using the firm's asset base.

return on assets ratio

Ratios are mostly calculated based on the financial statements of a firm. However, another group of ratios, called market-based ratios, relate to a firm's observable market value, stock prices, and book values, integrating information from both the market and the firm's financial statements. Consider the case of Atlantic Northern Inc.: Atlantic Northern Inc. just reported a net income of $8,000,000, and its current stock price is $23.00 per share. Atlantic Northern is forecasting an increase of 25% for its net income next year, but it also expects it will have to issue 2,600,000 new shares of stock (raising its shares outstanding from 5,500,000 shares to 8,100,000 shares). If Atlantic Northern's forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does management expect its stock price to be one year from now?

$19.51 per share

Nikola Motors has a quick ratio of 2.00; $33,750 in cash; $18,750 in accounts receivable; some inventory; total current assets of $75,000; and total current liabilities of $26,250. In its most recent annual report, Nikola reported annual sales of $700,000 and a cost of goods sold equal to 65% of annual sales. How many times is Nikola Motors selling and replacing its inventory?

20.22x Quick Ratio=Current Assets - Inventories / Current Liabilities Inventories = Current Assets−(Quick Ratio×Current Liabilities) = $75,000−(2.00×$26,250)= $22,500 Inventories = Current Assets−(Cash−Accounts Receivables) =$75,000−($33,750−$18,750)= $22,500 Given annual sales of $700,000, Nikola has a cost of goods sold of 455000 ($700,000 x 65%). The inventory turnover ratio will be: Inventory turnover ratio= 455000/ 22,500= 20.22

Purple Dog Pet Supply Inc. (PDPS) released its annual results and financial statements. Hilary is reading the summary in the business pages of today's paper. In its annual report this year PDPS reported a net income of $155,000. Last year, the company reported a retained earnings balance of $442,000, whereas this year it increased to $520,000. How much was paid out in dividends this year?

77,000 Dividends paid = Net income−(Ending Retained earnings − Beginning Retained earnings) = $155,000−($520,000−$442,000)$ = $77,000

This statement is also called a profit and loss (or P&L) statement since it reports whether the business earned a profit or a loss during the period reported.

Income statement

Ratio analysis is an important component of evaluating company performance. It can provide great insights into how a company matches up against itself over time and against other players within the industry. However, like many tools and techniques, ratio analysis has a few limitations and weaknesses. Which of the following statements represent a weakness or limitation of ratio analysis?

Inflation can distort balance sheet data. A firm's ratios can lead to conflicting conclusions—some ratios might be "good" and some "bad."

This type of cash inflow or outflow is generated in the normal course of a firm's business activities. Examples include sales revenues, the making and collection of accounts payable and receivable, and wages and taxes payable.

Operating cash flows

This statement is said to report an "accumulation of the firm's earnings" from the beginning of the firm's life (since it represents the year-to-year accumulation of the firm's profits (and losses).

Statement of retained earnings

This method of allocating a tangible asset's cost over its useful life results in a constant, or equal, cost allocation over each year of the asset's productive life.

Straight-line depreciation

One of the most important assumptions behind the calculation of quick ratio is that:

The firm's accounts receivables can be collected and converted into cash within the time period for which credit was granted

The income statement, also known as a profit and loss (P&L) statement, provides a snapshot of a company's financial performance during a specified period of time. It reports a firm's gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders. The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm's revenues and expenses to the period in which they are incurred, not necessarily when cash is received or paid. Investors and analysts use the information presented in the income statement, and the other financial statements and reports, to evaluate the company's financial performance and condition. Consider the following scenario: Blue Hamster Manufacturing Inc.'s income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% next year. 1. Blue Hamster is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). 2. The company's operating costs (excluding depreciation and amortization) remain at 70.00% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company's tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Blue Hamster expects to pay $100,000 and $1,195,950 of preferred and common stock dividends, respectively.

Year 2 (Forecasted) Net sales $25,000,000 Less: Operating costs, except depreciation and amortization $17,500,000 Less: Depreciation and amortization expenses $800,000 Operating income (or EBIT)$6,700,000 Less: Interest expense $1,005,000 Pre-tax income (or EBT) $5,695,000 Less: Taxes (40%) $2,278,000 Earnings after taxes $3,417,000 Less: Preferred stock dividends $100,000 Earnings available to common shareholders $3,317,000 Less: Common stock dividends $1,195,950 Contribution to retained earnings$2,121,050

A firm engages in a variety of activities that generate cash and require cash payment. The boxes below describe examples of these activities. Classify each transaction as to whether it constitutes an operating, an investing, or a financing cash flow. Last month, International Business Services Co. relaxed its credit standards and the characteristics of the customers who would qualify for credit. Accounts receivable increased by $257,982. This transaction is classified as____________.

an operating cash flow

Statement #3: One way to interpret the change in Green Caterpillar's accounts receivable balance from Year 1 to Year 2 is that more customers purchased new items on credit rather than paying off existing credit accounts. This statement is________ because

correct The $8,438 increase in accounts receivable means either that Year 1's existing credit customers are not paying off their owed balances and new or existing customers are making additional purchases on credit, or that Year 1's credit customers have repaid their owed balances and Year 2 credit sales have exceeded Year 1's credit sales.

There are several groups of ratios most decision-makers and analysts use to examine different aspects of a company's performance. Based on the descriptions of ratios listed, identify the relevant category of ratios. • Ratios that help determine whether a company can access its cash and pay its debts that mature in less than a year are called_______ ratio • These ratios, which help determine how efficiently a firm is using its assets to generate sales are called______ ratios • Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called______ ratios ________ ratios help measure a company's ability to generate income and profits based on its invested capital ________ ratios examine the market value of a company's share price, its profits and cash dividends, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market.

liquidity asset management or activity debt or financial leverage management Profitability Market-value or market-based

You are analyzing two companies that manufacture electronic toys—IntelliGames Inc. and BrainGames Inc. IntelliGames was launched eight years ago, whereas BrainGames is a relatively new company that has only been in operation for the past two years. However, both companies have an equal market share with sales of $700,000 each. You've gathered up company data to compare IntelliGames and BrainGames. For the same period, the average sales for industry competitors was $1,785,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You've collected data from the companies' financial statements, and the information follows: A ________days sales outstanding, or average collection period, represents an efficient credit and collection policy. Between the two companies,______ is collecting cash from its customers faster than_______; but both companies are collecting their receivables less quickly than the industry average. BrainGames Inc.'s fixed-asset turnover ratio is________than that of IntelliGames Inc. This could be because BrainGames is a relatively new company, such that the acquisition costs and book values of its fixed assets is_________than the acquisition costs and book values of IntelliGames's net fixed assets. IntelliGames' total asset turnover ratio is______ , which is_____than the industry's average total asset turnover ratio. In general, a higher total asset turnover ratio indicates greater efficiency.

low IntelliGames Inc. Braingames lower greater 1.05 lower DSO (days) = Receivable s/ (Annual credit sales / 360) FAT Ratio=Sales / Net Fixed Assets TAT Ratio=Sales / Total Assets