SB Chapter 11

The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into four categories:

1.) debt (or financial leverage) 2.) liquidity 3.) activity 4.) profitability

The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the LIFO ___.

reserve

Earnings multiple is another term used to describe the price/earnings ratio. This term merely reflects that:

the market price of stock is equal to the earnings per share multiplied by the P/E ratio.

The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the:

LIFO reserve

A company desiring to increase its total asset turnover could do so by using:

an accelerated depreciation method and the LIFO cost flow assumption.

Financial leverage is considered positive if the interest rate paid on borrowed money is ___ than the rate of return (ROI) earned on that money.

less

The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into four (4) categories:

liquidity, activity, profitability, and debt

Firm D had total stockholders equity of $1,000,000 at the end of Year 1 and $1,400,000 at the end of Year 2. Throughout Year 2, there were 100,000 shares of common stock authorized, 60,000 shares issued, and 50,000 shares outstanding. Firm D's book value per share at the end of Year 2 was:

$1,400,000 / 50,000 = $28 per share

Firm C's common stock has a par value per share of $10, earnings per share of $6, dividends per share of $5, a book value per share of $69, and a market value per share of $84. Firm C's price/earnings ratio is:

$84 / $6 = $14 per share

The P/E ratio is calculated by dividing the ___ per share of common stock by the ___ per share of common stock.

1.) price 2.) earnings

In ___ common size analysis, the base year selected impacts how the trends of a company's financial results in recent years are portrayed.

horizontal

The use of an accelerated depreciation method and the LIFO inventory cost flow assumption will usually ___ a company's total asset turnover relative to using the straight-line method and FIFO.

increase

Identify the correct statements about vertical common size financial statement analysis.

1.) Each financial statement is examined from top to bottom on an annual basis. 2.) Each asset is expressed as a percentage of total assets. 3.) Each stockholders' equity item is expressed as a percentage of total assets.

Identify the correct statements about vertical common size financial statement analysis.

1.) With vertical common size financial statement analysis, total current assets are expressed as a percentage of total assets. 2.) With vertical common size financial statement analysis, each item on the income statement is expressed as a percentage of sales.

Operating income is frequently substituted for net income in the calculation of ROI and ROE because:

1.) operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability. 2.) operating income excludes income tax expense, which varies from firm to firm based on country-specific tax rates.

Operating income is frequently substituted for net income in the calculation of ROI and ROE because:

1.) operating income is a more direct measure of the results of a firm's activities. 2.) operating income excludes interest expense, which varies from firm to firm based on their capital structure decisions.

Examples of physical or combined physical/financial measures of activity that are sometimes disclosed in the notes to the financial statements include:

1.) plant operating expenses per square foot 2.) operating income per employee 3.) sales dollars per employee

Examples of physical or combined physical/financial measures of activity that are sometimes disclosed in the notes to the financial statements include:

1.) sales in units 2.) gross profit per square foot of selling space 3.) number of employees

Book value per share of common stock is usually calculated by dividing a company's ___ total stockholders' equity by the ___ number of shares of common stock ___.

1.) year-end 2.) year-end 3.) outstanding

Financial leverage refers to the use of ___ to finance the assets of an entity.

debt

Firm A's common stock has a par value per share of $1, market value per share of $90, earnings per share of $5, dividends per share of $2, and a book value per share of $60. Firm A's price/earnings ratio is:

$90 / $5 = $18 per share