Chapter 14
A firm's cash holds $1,000 of cash. It's marketable securities are worth $2,000 and it's receivables are worth $2,500. It currently values its inventory at $3,000. It's current liabilities are valued at $4,000. What is the cash ratio of the firm?
.75
A firm's cash holds $1,000 of cash. It's marketable securities are worth $2,000 and it's receivables are worth $2,500. It currently values its inventory at $3,000. It's current liabilities are valued at $4,000. What is the quick ratio of the firm?
1.375
A firm's cash holds $1,000 of cash. It's marketable securities are worth $2,000 and it's receivables are worth $2,500. It currently values its inventory at $3,000. It's current liabilities are valued at $4,000. What is the current ratio of the firm?
21.25
_____ earnings, the earnings of the firm as reported on its income statement, convey considerable information about and provide estimates of firm's _____ earnings, the earnings that represent the real flow of cash that can be paid out to stockholders without impairing its productive capacity and are used in stock valuation models.
Accounting Economic
Which of the following represents the earnings of a firm as reported on its income statement?
Accounting earnings
Analysts consider a number of accounting practices when determining the quality of earnings of a firm. Which of the following are not considered by analyst in this determination?
All of the following are considered
Economic value added, also called residual income, is defined as the difference between a firm's ROC_____ _____ _____ and multiplied by the capital invested in the firm.
Cost of capital
The ______________ system is a system of equations decomposing a firm's ROE.
DuPont
Return on Assets equals
EBIT as a fraction of the firm's total assets.
Return on capital equals
EBIT divided by long-term capital.
Which of the following represents the real flow of cash that a firm could pay out without impairing its productive capacity?
Economic Earnings
The income statement is a financial statement of a firm's profitability over a specified period that presents _____ generated during the operating period, the _____ incurred during the same period and the firm's net _______________
Expenses Revenues Earnings
True or False: Intangible assets, such as, patents, are difficult to value and thus they are left out of the balance sheet.
FALSE
True or false: The income statement and balance sheet are the only two financial statements most relevant in evaluating firm's financial health.
FALSE
True or false: A firm whose ROE (return on equity) exceeds that of its competitors is always a better investment because it provides higher earnings per dollar of equity.
False
True or false: Financial leverage increases the expected ROE, hence firms should use as much debt financing as possible.
False
True or false: Return on capital tells us the income earned per dollar of short-term capital invested in the firm.
False
True or false: The quick ratio is a better measure of liquidity than the current ratio because it excludes accounts receivable from the current assets portion of the equation.
False
One source of potential comparability issues is from the use of ______ in the accounting process.
GAAP
The inventory valuation method known as ___________ uses up-to-date prices to evaluate the costs of goods sold and therefore may help provide a more realistic picture of sustainable cash flows.
LIFO
Which of the following inventory valuation techniques is preferred for calculating economic earnings?
LIFO
Proponents of fair value accounting believe which best represents the true value of the firm?
Market Value of Assets and Liabilities
The cash ratio includes which of the following components in its calculation:
Marketable Securities Cash Current Liabilities
Which of the following are components of ROE using the DuPont decomposition
Profit Margin Total Asset Turnover
Which of the following are liquidity ratios?
Quick Ratio Cash Ratio Current Ratio
Select all that apply Which of the following affect EVA?
Return on Assets Size of firm (invested capital) Firm's cost of capital
Which of the financial statements measure a firm's cash transactions?
Statement of cash flow
True or false: Economic value added measures the success of the firm relative to its return on projects versus the rate investors could earn themselves in the capital markets.
True
True or false: One important way to express return on assets is the ratio of the firm's operating income to its total assets.
True
The ______________ definition of depreciation is the amount of the original cost of an asset allocated to each accounting period and is reported in financial statements.
accounting
The _____ _____ is an accounting statement of a firm's financial position at a particular time that lists the firm's _____ and _____ at that moment as well as their difference which is referred to as shareholders' equity.
balance sheet assets liabilities
The statement of _____ _____ only recognizes the results of transactions in which only _____ has been changed exchanged.
cash flow cash
Economic value added, also called residual income, is defined as the difference between a firm's ROA _____ _____ _____ and multiplied by the capital invested in the firm.
cost of capital
Which of the following are examples of broad classes of expenses on the income statement?
cost of goods sold taxes general and administrative expenses interest expense
The _______________ ratio measures the ability of the firm to pay off its current liabilities by liquidating its current assets.
current
Fair value accounting uses _____ _____ values rather than _____ _____ in the firm's financial statements.
current market historical cost
The _________ definition of depreciation is the amount of the firm's operating cash flow required to be reinvested to sustain its real cash flow.
economic
Two firms can have the same _____ profits while having differing _____ profits.
economic accounting
One of the two broad responsibilities of the firm's financial managers is _________________decisions which pertain to the firm's sources of capital.
financing, finance, or investment
The ____________ _______________ turnover is a measure of sales per dollar of the firm's money invested in fixed assets.
fixed asset
Firms with greater growth potential normally exhibit _______ market-price-to-book value ratios.
higher
The _____ financial leverage, the _____ the sensitivity of ROE to the fluctuations in the business cycle.
higher higher
Return on equity expresses the net _______________ earned per dollar of shareholders' _____________
income equity
The _____ _____ reports a firm's financial activity during a specified period, while _____ _____ the provides a "snapshot" of a financial condition of the firm at a particular time.
income statement balance sheet
As firms tend to use accrual accounting, their may not necessarily reflect changes in their cash positions. In contrast, the statement of recognizes only transactions in which cash changes hands and provides important evidence on company's financial health.
income statement cash flows
Mismeasurement of real interest means that _____ results in an underestimate of real income.
inflation
The current ratio is one indication of the firm's ability to avoid
insolvency
The ____________ turnover is a measure of speed in which inventory is sold or turned over.
inventory
The _________ _____________ ________________ _________________ ratio is the market price of a share of common stock divided by its book value.
market to book value
If ROA exceeds the borrowing rate, the firm earns ____________________ on its money than it pays out to creditors.
more
Return on equity equals
net income divided by shareholders' equity
The _____________ of earnings refers to the realism and sustainability of reported earnings.
quality
Economic value add equals
the spread between ROC and the cost of capital multiplied by the capital invested in the firm.
An underestimation of inflation would result in a(n) ____________ of nominal rate of interest.
underestimation
