Financial Management Midterm #1

long term liabilities represent obligations of the firm lasting over

1 year

assume current assets = 11,300, long term liabilities = 45,000, total debt = 54,800. What is the current ratio

11,300/(54,800-45,000)=1.15

if dividends are 100, stock sold is 10 and stock repurchased is 25, what is the cash flow to stockholders

115

if a firms current assets equal $200 and its current liabilities equal $150, then its net working capital is

50

If ending net fixed assets are 100, beginning fixed assets are 40, and depreciation is 10, then the change in capital spending is

70

what should you keep in mind when examining an income statement

GAAP, cash vs non cash items, time and costs

the statement of cash flow explains changes in

cash and equivalents

what are often left out of most financial planning models

cash flow size, risk and timing

the cash flow identity reflects the fact that

cash is either used to produce the product or service, pay creditors, or pay out to the owners of the firm; a firm generates cash through its various activities; cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders

which of the following items are among the items used to compute the current ratio

cash, accounts payable

In large firms, financial activity is usually associated with which top officer

chief financial officer

The officer responsible for corporate tax reporting is the

controller

what are the two basic classifications under which most potential financial goals fall

controlling risk and earning or increasing profits

inventory is a

current asset, part of working capital

net working capital + current liabilities =

current assets

net working capital plus current liabilities equal

current assets

net working capital equals

current assets - current liabilities

the current ratio shows the relationship between

current assets and current liabilities

what is included in working capital

current assets, accounts payable, accounts receivable

the cash ratio is found by dividing cash by

current liabilities

an important accounting goal is to report financial information to users in a way that is useful for

decision making

what are uses of cash

decreases in accounts payable, increases in inventory, increases in property, plant and equipment

the more debt a firm has, the greater its

degree of financial leverage

the cash coverage ratio adds _____ to EBIT for a better measure of how much cash is available to meet interest obligations

depreciation

what are most likely to create problems when comparing financial statements for multiple firmsj

differing fiscal years, differing accounting methods

accounting profit ____ cash flow

differs from

based on ROE and the sustainable growth rate, what factors affect a firms ability to sustain growth

dividend policy, profit margin, financial policy

some of the cash flow generated by a firm goes back to the financial markets in the form of

dividends and debt payments

A general partnership has what characteristics

each owner has unlimited liability for all firm debts, and it is difficult to transfer ownership

the main advantage of th percentage of sales approach to producing pro forma statements is

ease and practicality

a commonly cited reason for financial failure is a lack of

effective long range planning

depreciation is the accountants estimate of the cost of ____ used up in the production process

equipment

T/F given external financing needs in a financial plan, the firm must borrow both long term and short term funds

false

T/F in the short run, all costs are fixed

false

T/F operating cash flow includes capital spending and working capital requirements

false

T/F shareholders are the only stakeholder in a firm as they are the owners

false

T/F the financial planning process will not change from firm to firm

false

T/F financial planning addresses all the basic elements of firm value

false, firm value is determined by cash flow, risk and timing

______ are the prime source of info about a firms financial health

financial statements

In a large corporation, the financial manager is primarily responsible for

financing decisions, financial aspects of operations, such as accounts receivable, long term investment decisions

costs that do not change in the short run arise because of

fixed commitments

explaining an upward trend in the inventory ratio requires

further investigation, examining whether the trend is because of increased sales or decreased activity

GAAP stands for

generally accepted accounting principles

all else equal, when the rate of growth in sales or assets in a financial plan is higher, external financing needs will be

greater

Given an internal growth rate of 3%, a firm can

grow by 3% or less without any additional external financing

A treasurer's responsibilities typically include:

handling cash flows, managing capital expenditure decisions, making financial plans

All other things staying the same, a high growth firm will have a relatively ____ need for external financing than a low growth firm

higher

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 will

increase

an _______ in net profit margin will increase ROE

increase

an increase in a firms total asset turnover will _____ the sustainable growth rate

increase

an increase in the profit margin will ____ a firms sustainable growth

increase

if a firm increases its debt-equity ratio, its sustainable rate of growth will

increase

the use of financial leverage can

increase the potential reward for investors, greatly magnify both gains and losses, and increase the chance of financial distress and business failure

marginal tax rates are the most important tax rates because

incremental cash flows are taxed at marginal rates; financial decisions are usually based on new cash flows

what are current assets

inventory and accounts receivable

Why is a corporation the most important form of business

it is a separate legal entity with the ability to acquire and exchange property, they can enter into contracts, and can sue and be sued

assets are recorded at historical cost, not market value, becuase

it is hard to keep up with the market value

what is true about the sustainable growth rate

it is the maximum rate of growth a firm can maintain without increasing its financial leverage

why is positive net working capital important

it means the firm should have sufficient cash to meet its current obligations

financial planning is a _____ process

iterative

businesses are motivated to organize as corporations because stockholders in a corporation have ___ liability for corporate debts

limited

in a limited partnership, a limited partners liability for business debts is

limited to their cash contribution to the partnership

what is a primary concern for a bank lending funds to a business for the short term

liquidity

the Sarbanes-Oxley act requires corporate officers to

list any deficiencies in internal controls, accept responsibility for material errors in the annual report, confirm the validity of the annual financial report

what can be found in the liabilities section of a firms balance sheet

long term bonds, notes payable

total capitalization equals total equity plus total

long term debt

What are included in a firm's capital structure

long term debt and equity

Capital budgeting is concerned with planning and managing a firm's

long term investments

whose responsibility is it to create value for a firm

management

what can be used to encourage managers to act in the best interests of shareholders

managerial compensation tied to performance, better prospects of promotions, stock options and bonuses

since new cash flows are taxed at _____ tax rates, those tax rates are the most important

marginal

the price at which willing buyers and sellers would trade is called _____ value

market

whenever ____ information is available, it should be used instead of accounting data

market

how is the PE ratio computed

market price per share/ earnings per share

How is market to book ratio measured

market value per share/book value per share

what are traditional financial ratio categories

market value ratios, profitability ratios, asset management ratios

the _______ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service

matching

the goal for a for-profit company is to ___ existing owners equity

maximize

the aggregation process determines the total

needed investment

______ income is money earned after interest and taxes

net

non cash items are expenses that directly affect _____ but do not directly affect _____

net income; cash flow

growth, by itself, is

not an appropriate goal

book value of assets is generally

not what the assets are actually worth

A companys _____ cash flows reflect whether its cash flows from business operations can cover its everyday cash outflows

operating

indirect agency costs are often due to lost

opportunities

One of the most important uses of financial statement info within the firm is

performance evaluation

What are common elements of a financial planning model

pro forma statements, sales forecast, economic assumptions

return on equity is a measure of

profitability

what is an important mechanism used by unhappy stockholders to replace current management

proxy fight

corporations in other countries are often called

public limited companies and joint stock companies

what is a variable cost in the short run

raw materials used in production

What are generally considered to be short run fixed costs

rent payments for a warehouse, management salaries, property taxes

what are examples of short-run fixed costs

rent, bond interest

the percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with _____ and those that do not

sales

the profit margin is equal to net income divided by

sales

what is the equation for the total asset turnover ratio

sales/total assets

When one owner or creditor sells to another, the transaction takes place in the _____ market

secondary

what are period costs

selling costs, administrative expenses, general expenses

who is entitled to the residual value of a firms cash flows

shareholders

who would be the last to receive payment if a firm were to close

shareholders

financial plans dont work, but financial planning does. what does that mean

since financial plans are forecasts, they seldom happen as foreseen, but they allow managers to examine goals and prioritize

common size statements are used for comparing firms with differing

sizes

at the most fundamental level, firms generate cash and

spend it

what are frequently used to encourage key managers to maximize the value of a firms stock

stock options

the last claimants to be paid by a firm are the

stockholders

a corporation receives cash from financial markets by selling ____ and _____

stocks and bonds

what groups are most interested in liquidity ratios

suppliers, bankers

If a firm maintains a constant debt-equity ratio and does not use any external equity financing, the firm can grow at a rate no greater than its

sustainable growth rate

the controller is responsible for what tasks

tax reporting, financial accounting

what is important when considering a partnership

taxation of partnership income, fund raising limitations, personal liability for firm debts

organized auction markets include

the NY stock exchange

the EBITDA ratio is similar in spirit to

the PE ratio

The liability of a shareholder in a corporation is limited to

the amount the shareholder invested in the corporation

a financial planning model can be used to test the feasibility of a planned growth rate because it incorporates what

the asset turnover rate, the firms use of financial leverage, and the firms dividend policy

What does it mean if a companys capital intensity ratio is 2.4

the firm requires 2.40$ in assets to generate $1 in sales

an official accounting statement that helps to explain the change in cash and cash equivalents is

the statement of cash flows

what is true concerning period costs

they contain both fixed and variable costs, and are reported as COGS

what motivates managers to make good decisions

threat of a hostile takeover and stock options

main goal of financial management

to maximize current value per share of existing stock

what is one way in which financial managers use a common size balance sheet

to track changes in a firms capital structure

a common size balance sheet expresses accounts as a percentage of

total assets

free cash flow is better described as

total distributable cash flow

the officer responsible for managing the firms cash flows is the

treasurer

T/F a balance sheet shows what a firm owns and how it is financed

true

assets provide ___ to the firm

value

the rules used by a corporation to regulate its existence are known as

bylaws

the ratio of total assets to sales is known as the

capital intensity ratio

what does stockholders equity represent

a residual claim against the book value of the firms assets

when constructing a pro forma income statement, the first step is to supply

a sales figure

what is depreciation

a systematic expensing of an asset based on the asset's estimated life

How are firms classified into peer groups for ratio analysis

according to Standard Industrial Classification Codes

although ____ ______ are often poor reflections of reality, they are often the best information available

accounting numbers

what does a balance sheet reflect about a firm

accounting value on a specific date

what are classified as liabilities on a firms balance sheet

accounts payable and notes payable

what are among the items used to compute the current ratio

accounts payable, cash

what is the most liquid

accounts receivable

when a customer purchases an item on credit, the purchase amount is recorded by the seller in which account

accounts receivable

what is included in the fixed asset portion of a balance sheet

accumulated depreciation, trademarks

In a financial plan using the percentage of sales approach, why is it assumed that assets increase with sales

additional working capital and fixed assets are needed to support growth

The relationship between stockholders and management can best be described as an _____ relationship

agency

in the long run, _____ are variable

all costs

what are sources of cash

an increase in notes payable, a decrease in accounts available

what will decrease a firms sustainable rate of growth

an increase in the dividend payout ratio

the sustainable growth rate can be used to

assess planned growth

balance sheet equation

assets = liabilities + stockholders equity

liquidity refers to the ease of changing

assets to cash

one advantage to well executed financial planning is that the firm can

avoid surprises

financial statements report

book values

in a financial plan, how is the amount of borrowing determined

by management