Study.com Business & Finance 276 Ch. 9

Which of these is NOT true regarding the equity ratio?

A favorable equity ratio occurs when the company has a lot of debt.

Lesson Summary 6

A financial statement ratio is calculated by using two or more line items from a financial statement, and then drawing a conclusion of the results. While the calculations may be somewhat simple to calculate, it's important to recognize some issues with financial statement analysis. The first challenge with financial statement analysis is comparison. Once a ratio is calculated, it's important to compare it to a prior period, industry average, or competitor. A second challenge includes ensuring a company is using the same inventory valuation method. If a company is using LIFO, last in first out, but comparing it to a company using FIFO, first in first out, their inventory and profitability will be skewed. The last issue with financial statement analysis is ensuring you're comparing monthly data to monthly data of a prior period due to seasonal factors.

Chapter 9 Lesson 4

Financial Tools, Strategies & Systems Used in Market Planning

Lesson Summary 1

Financial management involves the allocation of a company's resources to maximize its potential for profit and wealth. Financial management involves capital budgeting, which includes making decisions about investment of company resources. Financing involves decisions about bringing external sources of money into the company. Dividend policy involves determining whether profits should be distributed to shareholders and in what amount. Larger companies will have a financial management team specializing in particular roles, including controllers, treasurers, risk managers, credit managers and cash managers. On the other hand, small companies may have just one employee or owner fulfilling all these roles.

_ _ are important to evaluate the financial health and performance of a company. The users of this information include management, investors, and banks.

Financial ratios

What four things make up a SWOT analysis?

Strengths, weaknesses, opportunity, threats Next

One commonly used profitability ratio is _ _ _

gross profit margin

The _ _ _ shows how much of each dollar of sales is left over to pay selling and administrative expenses. It is calculated by taking the company's gross profit and dividing it by sales.

gross profit margin

Gross profit margin is calculated by taking the company's gross profit and divide it by sales. You can find both line items on the _ _. The higher the ratio is, the more money a company has left to pay its selling and administrative expenses.

income statement.

The higher the percentage, the more _ , or in debt the company is. There are different leverage measurements based on the industry; however the bank prefers a debt ratio of 40% or less.

leveraged

The word _ is the ability to turn assets into cash. Assets are items we own that have value. Examples of assets are savings accounts and stock.

liquidity

The current ratio is an example of a _ _

liquidity ratio

Some small businesses may not have a full-time financial manager. The company's _ or president may fulfill this role. On the other hand, very large corporations will have a team of financial managers that fulfill specialized roles.

owner

What type of data does a pie chart produce?

percentages

A commonly used _ _ is the gross profit margin, which explains how much money we have left to pay other expenses after buying our supplies or products to sell.

profitability ratio

A financial statement _ is calculated by using two or more line items from a financial statement, performing a mathematical operation, and drawing a conclusion of the results.

ratio

A _ is set of questions given to a subject group about a topic Will need a sampling of several customer types. Current customer, past customers, potential customers and even experts, like chefs and cooks. A large sample is probably best. Too small and the results may not represent a total picture. She can include questions about her current offerings and a few new choices she is considering adding to her line. Once the sample completes the survey, she can tally up the results. The data may reveal the reason for her lower sales.

survey

We can break down financial management activities into _ broad categories: capital budgeting, financing, and dividend profitability.

three

The people at the top of the financial management food chain are typically the _ and _ _ of the company. These folks are involved in overseeing and directing the budgets and investments of the company. They are also involved in strategy formulation.

treasure; finance officers

_ means the ability to convert assets into cash.

Liquidity

_ _ measure a company's efficiency in generating a profit.

Profitability ratios

You should consider the role that the _ _ will have on your entry into a market.

five forces

For a financial report, how would $5.49 be posted using rounding up or down?

$5.00

The Five Forces are:

1. If there is enough competition among suppliers to get you a fair deal on products. 2. If any other companies are entering the market 3. How competitive the market is currently 4. If companies are healthy 5. If buyers can really deal with another firm

A company has liabilities that are equal to $75,000, while its assets are $150,000. What is its current ratio?

2 ( (150,000/75,000=assets/liabilties)

Management, investors and banks like to see a debt ratio of less than _ and this company has more than doubled the standard, signifying that it owns less of their assets than it owes.

40%

A company has $175,000 in total assets and $150,000 in total liabilities. What is the company's debt ratio?

85.71% (150,000/175,000 = liabilities/assets)

How are the responsibilities of a credit manager different from the responsibilities of a cash manager?

A credit manager is responsible for collection of unpaid debt, while a cash manager accounts for money coming in and going out.

Chapter 9 Lesson 5

Analyzing Financial Statements Using Solvency Ratios

Case studies are based on the experiences of others. Case studies:

Are somewhat reliable

Choose the best answer to explain assets.

Assets are items with value.

Chapter 9 Lesson 3

Basic Techniques of Quantitative Business Analysis

_ are similar to an I.O.U.; investors loan the company money by purchasing bonds and expect interest payments and the repayment of the loan at maturity.

Bonds

_ _ _ looks at the level of fixed costs relative to the profit earned by each additional unit produced and sold.

Break-even analysis

_ _ is a roadmap that shows what your company does, how it does it, and how much money it intends to make.

Business plan

_ _ involves decisions about what investments a business will make with its resources. For example, a financial manager may help the president of his company figure out if a new business is worth the investment in financial terms.

Capital budgeting

Which part of financial management involves making decisions about the long-term investments the company will make?

Capital budgeting (Capital budgeting involves making decisions about the long term investments of the company, such as the purchase of factories or the pursuit of particular business ventures.)

Which part of financial management involves making decisions about the long-term investments the company will make?

Capital budgeting (missed quiz)

_ _ are stories of real-life situations that others have encountered. They may also provide tested solutions for the problem. They are based on the experiences of others, and are not as measurable as surveys or data retrieved from reports. They are reliable to an extent but not highly reliable.

Case studies

Chapter 9 Lesson 2

Commonly Used Financial Ratios

The issue in comparing inventory ratios to the industry or a competitor is

Companies who use LIFO but compare their ratios to a company who uses FIFO will appear to sell their inventory faster than a competitor, but their profitability may appear lower. Therefore, it's imperative that when comparing inventory ratios you make sure you understand their inventory valuation methods.

A financial manager is responsible for his company's accounting activities, such as reporting and analysis of the company's earnings, expenses, and overall financial position, he is serving as _.

Controller. Controllers also play an important role in regulatory reporting.

Many businesses extend credit to their customers. _ _ are responsible for overseeing a company's issuance of credit to customers, determining who gets credit, the credit limits and collection of unpaid debt.

Credit managers

The _ _ shows how quickly we can pay our current liabilities with current assets

Current ratio

The _ _ shows the ability to sell current assets to pay current liabilities. The formula is current assets divided by current liabilities. These line items can be found on the balance sheet. If the ratio is equal to or greater than one, then the better the company's ability to pay its current liabilities with its current assets. If the ratio is lower than one, a company may have trouble paying its obligations. (assets/liabilities)

Current ratio

The _ _ shows what percentage of assets is financed with liabilities. Liabilities are obligations a company owes, like a loan, and assets are items we own, such as a truck. For example, we might wonder what percentage of the company truck we financed with a loan. The debt ratio gives us this answer by taking total liabilities divided by total assets. Example: If a company has $150,000 in total assets ad $125,000 in total liabilities, its debt ratio would be 83% (125,000/150,000).

Debt ratio

Which ratio measures the leverage of a company?

Debt ratio (Debt = Leverage)

The _ _ _ ratio, calculated by taking total liabilities divided by total equity. The ratio measures the percentage of debt and equity used in financing. The higher the ratio, the more of the company's assets are financed with debt.

Debt-to-equity

What is a break-even analysis?

Determining at what point a company begins to make pure profit

_ _ is the decisions about profits to be distributed to equity investors, such as shareholders. Milton may help determine if there is sufficient revenue to cover the company's expenses and anticipated investments and still provide for a dividend distribution.

Dividend policy

Vocabulary & Definitions of Chapter 9 Lesson 6

Financial statement ratio - calculated by using two or more line items from a financial statement, performing a mathematical operation and drawing a conclusion of the results. Ratio - A ratio is found by using two or more line items from a financial statement and performing a mathematical calculation. Compare - Contrast your Calculations with another period or with someone. else to be sure you are correct. Inventory valuation - Inventory valuation, such as LIFO, and FIFO, are several methods that may be used to evaluate inventory. Season factors - issues related to the season that affect sales ratios.

How are financial statement ratios calculated?

Financial statement ratios are calculated by using two or more line items from a financial statement and performing a mathematical operation.

Which of the following is true regarding calculating financial statement ratios?

Financial statement ratios must be compared to a prior period, industry average, or competitor in order to provide an accurate analysis.

_ involves decisions about what external resources should be brought into the business to be used for investment in profitable enterprises. Examples of outside resources include funds acquired from investors from purchase of company stock and funds acquired from creditors through loans.

Financing

Which financial management activity involves determining the external resources that come into the company?

Financing (One of the responsibilities of financial management involves ensuring that the company has sufficient funds to operate. Financing can involve bringing in resources from sources such as investors and bank loans.)

What are the Five Forces in business?

Five external conditions that affect the chances of your business succeeding

Example of Gross profit margin

For example, if Henry's Lumber Yard has a gross profit of $100,000 and sales of $400,000, then its gross profit margin is $.25 ($100,000 divided by $400,000). This means that for every dollar in sales, the business has $.25 left over to pay its selling and administrative expenses. $.25 of every dollar seems to be a little low; however, it's important to understand industry standards to make an accurate analysis.

_ represents a share of a corporation. Investors purchase shares in return for voting rights, appreciation, and dividends.

Stock

Which of the following BEST defines gross profit margin?

Gross profit margin shows how much money per dollar of sales is left over to pay selling and administrative expenses.

Lesson Summary 2

In this lesson, we discussed three of the common financial ratios: current ratio, debt ratio, and gross profit margin. We calculated the current ratio as current assets over current liabilities. We categorized the current ratio to be a liquidity ratio. Liquidity refers to the ability to convert assets to cash. The current ratio shows a company's ability to convert current or short-term assets to cash to pay for current liabilities. The higher the ratio is, the better the company's ability to pay their short-term obligations. Next, we reviewed the debt ratio, which is calculated by taking total liabilities divided by total assets. The debt ratio answers the question of how much or what percentage of a company's assets is financed with liabilities or loans. A company having a high debt ratio shows it owes more on its assets than it owns. Lastly, we examined a profitability ratio, the gross profit margin. The gross profit margin is calculated by taking gross profit divided by sales. This ratio shows how much money per dollar of sales is left over to pay selling and administrative expenses. We discussed that a gross profit margin of pennies on the dollar would leave a little amount to pay for a company's other expenses. However, it's important to analyze the ratio against the industry standard.

_ is unable to pay debts owed.

Insolvent

Why can inventory valuations cause a problem with financial statement analysis?

Inventory valuations may be different for every company and comparing ratios may result in an inaccurate analysis.

Chapter 9 Lesson 6

Issues with Financial Statement Analysis

Why would a survey be useful in quantitative analysis?

It asks specific questions about a topic to a sample of people

Why is the debt ratio used?

It shows what percentage of total assets are financed with total liabilities.

Which of the following statements is TRUE regarding financial statement analysis?

It's somewhat easy to calculate financial statement ratios and difficult to complete a thorough analysis.

What are the two main types of inventory valuation?

LIFO - Last in first out FIFO - First in first out

Lesson Summary 4

Let's review. In this lesson, we took a look at some of the tools and strategies to evaluate if a market was worth entering. We started by reexamining our business plan, the roadmap that shows what your company does, how it does it, and how much money it intends to make. From there we looked at break-even analysis to find when a company will have recovered the cost of investing in the new market and when it will start making pure profit. Then we examined the ideas of SWOT analysis, looking at strengths, weaknesses, opportunities, and threats before finally examining the Five Forces of if there is enough competition among suppliers to get you a fair deal on products, if any other companies are entering the market, how competitive the market is currently, if companies are healthy, and if buyers can really deal with another firm.

_ is a company's ability to pay short term obligations, whereas solvency is more long term in nature.

Liquidity

_ _ calculate a business's ability to turn its assets into cash to pay current liabilities. Liabilities are obligations a business owes, such as a loan on a building or truck. One of the most common liquidity ratios the current ratio.

Liquidity ratios

What are the financial ratio categories?

Liquidity, debt, and profitability

_ - relies on using mathematics to solve business issues with measurements based on verifiable information, like the data found in sales reports or income statements. What makes quantitative analysis so valuable to financial people is that much of the data can only be interpreted one way. It's not subjective.

Quantitative analysis

Lesson Summary 3

Quantitative analysis really only requires basic math skills and an understanding of how to interpret the numbers to reveal information that is helpful in business situations. Fractions, decimals or percentages are used to measure things. Fractions take a whole number and divide it into smaller pieces. A decimal is any number, whole or not and based on a 10-number set. A percentage is a part of 100. Measurements can be presented in charts, graphs and pie charts. Surveys involve asking a sample of people questions about a topic and logging the outcomes. The same applies to case studies. Surveys involve asking a sample of people questions about a topic and logging the outcomes. The same applies to case studies.

Who on a financial management team is in charge of making sure the company is appropriately insured?

Risk manager

Financial management also involves managing risk. _ _ fill this role. For example, a risk managers job is to reduce and mitigate the financial risks the company is exposed to dire to its business, such as ensuring the company is adequately insured.

Risk managers

_ _ _ _ _ stands for strengths, weaknesses, opportunities, and threats and is a look at what your company's current state is. Obviously, you want to find new business opportunities that play to your company's strengths. However, you also want to make sure that any threats to your company don't directly target your weaknesses. That could be a recipe for disaster.

SWOT analysis

Which of the following statements is true regarding seasonality and financial statement ratios?

Seasonality should be taken into account when calculating financial statement ratios.

_ is the ability to pay obligations long term.

Solvency

Choose the BEST answer to explain the difference between solvency and liquidity.

Solvency describes a more long term ability to pay debts, whereas liquidity focuses on short term ones.

Lesson Summary 5

Solvency is the ability to pay obligations long term. There are three solvency ratios: debt, equity, and debt to equity. The debt ratio measures how much of the company's assets are finance with debt. It is calculated by total liabilities divided by total assets. A high debt ratio is considered unfavorable. The equity ratio is calculated by taking total equity divided by total assets, and answers what percentage of the company's assets are financed with stockholder's equity. A high ratio is positive. Lastly, the debt-to-equity ratio calculates the assets financed with debt and equity. It's calculated by taking total liabilities divided by total equity. A lower ratio indicates the company is financed with more stockholders' investment, which is considered positive.

Five Forces Summary

That's a lot to take in, so let's look at it one by one. First of all, you want to make sure that your firm can secure a good price on what it needs to do business. If you're looking for a place to sell cheap, low quality goods, then you probably want to make sure that the person you're renting or buying the shop from can charge you a low enough rent to make it worthwhile. After all, there aren't many thrift stores on Times Square. What about other companies entering the market? There could only be so much market share available, and if too many companies enter the market, not all will survive. This happened in the 1990s when everyone suddenly wanted a home computer. For a time, almost a dozen major manufacturers existed, and almost half of them are gone today. Next, you'll want to see if the market is competitive. If you are going up against a monopoly, you'll have to be able to quickly sap away a great deal of its customers. Think about setting up a professional football team in a city that already has one. You'll have to make sure to capture a lot of its fan base or else your seats will be unfilled. Also, see if companies are healthy. If competition has made it such that companies are just competing to survive, not to thrive, that's not a market you want a piece of. Finally, is there enough demand for your products? In an example we saw earlier, we talked about setting up a professional sports team in a new city. But what if instead of Chicago or New York, you were setting one up in the middle of Wyoming? Would there be enough fans there to make it worthwhile?

Which of these cities would NOT be the best place to put a hot new restaurant?

The North Pole

Chapter 9 Lesson 1

The Role and Responsibilities of Financial Managers

Which answer explains the analysis of the debt ratio?

The higher the debt ratio, the more unfavorable.

What is a business plan?

The roadmap that shows what your company does, how it does it, and how much money it intends to make

How many people should be included in a survey sample?

There is no specific amount but it should not be too small or the results may not paint a complete picture

Debt to equity ratio is calculated by _____.

Total liabilities / total equity

What seasonal issues can affect ratios? Seasonal factors: winter, spring, summer, and fall, and how sales are affected by each season.

When we compare monthly or quarterly ratios, its important to make sure we take seasonality into account.

You can find that a _ _ _ can show when your company will have recovered the cost of investing in the new market and when it will start making pure profit.

break-even analysis

Once you _ the ratio, find the same ratio from last month, last year, or five years ago. How does it compare to those prior periods? Has it increased, decreased, or remained the same? Once you figure that out, you need to find out why. This may require you to do some digging. You may want to speak to department heads to find out what happened during that time period in the company You can also pull industry statistics and compare the ratio to what's happening in your industry. Ratio analysis for the technology industry will have different results than for the healthcare industry, so make sure you're reviewing industry-specific data.

calculate

Some companies have _ _ who are responsible for managing the flow of cash in a company. They will account for the money coming in, called receipts, and money going out, called disbursements.

cash managers.

You must _ your calculation to a prior period, industry average, or competitor to gain a true understanding of the ratio results.

compare

Saanya is a member of the financial management team of Crux Company Ltd. She deals exclusively with the company's accounting and financial reporting. What is Saanya's role?

controller

The _ _ is classified in the debt category and shows what percentage of our assets is financed with liabilities.

debt ratio

The _ _ measures how much of the company's assets are financed through debt (loans and bonds). The debt ration is calculated by total liabilities dived by total assets.

debt ratio

To calculate how much of a company's assets are financed with shareholder's equity, we calculate the _ _ by taking total equity divided by total assets. High equity ratios encourage other potential shareholder to invest in the company and show less debt, hence less risk.

equity ratio

In _ _ involves allocating the financial resources of a company in a way that maximizes its wealth and profitability.

financial management

A _ _ is calculated by finding two or more line items from a financial statement, making a mathematical operation, and analyzing the results.

financial ratio