Managerial Finance Exam 1
According to GAAP, when is income reported?
When it is earned or accrued
U.S. corporations pay tax at a rate of
flat 21%
Physical assets are termed ______ assets.
tangible
a common-size balance sheet expresses accounts as a percentage of
total assets
what is the correct representation of the total debt ratio
(total assets- total equity)/(total assets)
Business finance is broadly concerned with?
-What long term investments to take on -Where will you get the long-term financing to pay off your investments -How will you manage day-to-day finance
what companies were involved in corporate scandals that led to Sarbenes-Oxley
Enron, WorldCom, Tyco
compute Return on Assets (ROA)
Net Income/Total Assets
return on equity equation
Net Income/Total Equity
what creates problems with financial statement analysis
The firm and its competitors operate under different regulatory environments. The firm or its competitors are conglomerates The firm or its competitors are global companies.
how is the average income tax rate computed
Total tax bill/Total taxable income
what questions can be answered by reviewing a firm's balance sheet
What is the total amount of assets the firm owns? how much debt is used to finance the firm?
the relationship between stockholders and management can best be described as
an agency relationship
the short run is
an imprecise period of time
an organization must prepare _______ and bylaws when forming a corporation
articles of incorporation
the short run is a period when there are
both fixed and variable
what three subjects is the financial manager concerned with
capital budgeting capital structure working capital management
What are components of cash flow from assets
capital spending operating cash flow change in net working capital
Non-cash items do not affect
cash flow
In finance, the value of a firm depends on its ability to generate
cash flows`
In large firms, financial activity is usually associated with which top officer?
chief financial officer
What position generally reports to the chief financial officer
controller and treasurer
The Sarbanes-Oxley Act is intended to strengthen protection against
corporate accounting fraud and financial malpractice
What are the four basic areas of finance
corporate finance, investments, financial institutions, international finance
public limited companies and joint stock companies are other names for
corporations
How is inventory turnover calculated?
cost of goods sold/average inventory
assets can be categorized as
current and fixed assets tangible and intangible assets
the current ratio computes the relationship between
current assets and current liabilities
"increasing shareholder wealth" means increasing the
current common stock value
The more debt a firm has, the greater its:
degree of financial leverage
Cash flow refers to the
difference between the number of dollars that came in and the number that went out
Cash flow to stockholders is defined as:
dividends paid minus net new equity raised
When a firm smooths earnings to please investors, it is called ________.
earnings management
Net capital spending is equal to:
ending net fixed assets minus beginning net fixed assets plus depreciation.
the goal of financial management is to increase the value of
existing shares of stock
who are considered non-owner stakeholders in a company
government employees suppliers
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
Cash flow to creditors is defined as:
interest paid minus net new borrowing
inventory turnover is cost of goods sold divided by
inventory
what are defining features of the primary market
is it the market where initial public offerings are made proceeds from the sale of securities goes to the issuing firm
For a mature firm, operating cash flow:
is usually positive is a sign of trouble if negative over a long period of time
if a company has inventory, the quick ratio will always be _____ the current ratio
less than
the times interest earned ratio is a measure of
long-term solvency
in a shareholder-manager relationship, who is the agent
managers
the _____ tax rate is the tax rate paid on the next dollar of income
marginal
Price Earnings Ratio
market price per share/earnings per share
the price at which willing buyers and sellers would trade is called
market value
The DuPont identity shows that __________ times total asset turnover ties equity multiplier equals ROE
net profit margin
The cash flow that results from the firm day-to-day activities of producing and selling is called
operating cash flow
earnings management is a controversial practice in which corporations ______ or ______ their earnings to "smooth out" dips and surges and keep investors calm
overstate; understate
where does cash generated by a corporation typically go
paid to shareholders and creditors to pay corporate taxes reinvested in the firm
a business without separate legal authority formed by two or more people is known as a
partnership
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows
return on assets (ROA) is a measure of
profitability
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value
The profit margin is equal to net income divided by
sales
what represents the receivables turnover ratio
sales/ accounts receivable
When one owner or creditor sells to another, the transaction takes place in the _________ market.
secondary
someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm is a
stakeholder
_______ can be used to encourage managers to maximize the value of the stock
stock options
managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of
stock options
owners of a corporation are called
stockholders or shareholders
A corporation receives cash from financial markets by selling ________ and _________.
stocks and bonds
a shareholder's liability is limited to
the amount the shareholder invested in the corporation
a shareholder's liability is limited to?
the amount the shareholder invested in the corporation
changes in capital spending can be negative if
the firm sold more assets than it purchased
what is true of financial ratios
they are used for comparison purposes they are developed from a firm's financial information
what is the main goal of financial management
to maximize current share value
in a common-size income statement, each item is expressed as a percentage of
total sales
How many owners does a partnership have?
two or more
What kind of liability does a sole proprietorship have?
unlimited
financial leverage refers to a firm's
use of debt in its capital structure
a good financial decision will increase what
value of firms existing stock market value of shareholders' equity
according to GAAP when is revenue recognized on an income statement
when earnings process is virtually completed when the value of an exchange of goods or services is known or reliably determined
Common-size statements are best used for comparing:
year-to-year for your firm firms of different sizes competitors
what is true of a sole proprietorship
It is the simplest type of business to form. A proprietorship has a limited life.
a balance sheet reflects a firm's
accounting value on a specific date
net earnings refers to income earned
after interest and taxes
If you hire a real estate company to sell your house, you are most apt to encounter?
agency problem
the conflict of interest between an agent and a principal is called
an agency problem