BA 240 Ch 1, 2, 3, 4

The U.S. tax rate becomes a flat-rate tax in practice at approximately what corporate income level?

$0

A firm has a total debt ratio of 0.30 times. This means the firm has ________ in total debt for every $1 in total assets.

$0.30

If Marley Company has a stock price of $12 per share, 100,000 shares outstanding, $432,000 in liabilities and $100,000 in cash, what is its enterprise value?

$1,532,000

Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?

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

Vera's has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?

$30/$3 = 10 times

A firm has an operating profit (EBIT) of $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio?

$600/$250 = 2.40

If the Federal marginal tax bracket is 21%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 in taxable income?

$730,000

Which of the following is the correct representation of the cash coverage ratio?

(EBIT + depreciation) / Interest expense

Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?

- 10.71%- Profit Margin = Net income / Sales

BC Toys has total equity of $584,000. there are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratio?

- 3.24 times- $54 / ($584,000 / 35,000) = 3.24 times

AD corporation had sales of $750,000 and cost of goods sold of $350,000. Inventory at year end was $87,500. the firm's inventory turnover is ______.

- 4.00

Cal's market has return on equity (ROE) of 15%. What does this mean?

- Cal's generated $.15 in profit for every $1 of book value of equity.

What is the main difference between the cash coverage ratio and the times interest earned ratio?

- Non Cash Expenses

If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be:

- less than or equal to 1

Current assets on the common size balance sheet over the past three years have increased from 32 to 35% while current liabilities have decreased from 29 to 25%. This indicates the firm has increased its _____.

- liquidity

Return on equity (ROE) is a measure of _____.

- profitability

if interest paid is 100 and net new borrowing is 150, then cash flow to creditors equals:

-50

BT Tools has current assets totaling $9.2 million, including $4.3 million in inventory. The company's current liabilities total $8.1 million. What is the quick ratio?

.60

Long-term liabilities represent obligations of the firm lasting over ____.

1 year

Rank these (from easiest to hardest) of turning the following assets into cash.

1. Cash Equivalents 2. Accounts Receiveable 3. Inventory 4. Plant and Equipment

What is the debt-equity ratio for a company with $3.5 million in total assets and $1.4 million in equity?

1.5

given the tax rate of 15% on income from 0 to 50,000, 25% on income from 50,001 to 75,000 and 34% on income from 75,001 to 100,000, approximately how much tax would a company pay on a taxable income of 60,000?

10,000

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

115

Omega Co. has annual sales of $250,000, costs of goods sold of $168,000, and assets of $322,000. Accounts receivable are $86,200. What is the receivables turnover?

2.90

AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity (ROE)?

20.18

How long will take for $40 to grow to $240 at an interest rate of 6.53% compounded annually?

28.33 years

days sales in receivables formula:

365 / receivables turnover

Assume current assets = $48; fixed assets = $125, current liabilities = $42, and equity = $100. What is the total debt ratio?

42

if ending net fixed assets are 100 beginning net fixed assets are 60 and depreciation is 10 then the change in capital spending is

50

If you wish to find the future value of $100 invested at 10% for 5 years, which of the following would be the correct Excel function?

=FV(0.10,5,0,-100)

suppose your company taxable income is 235,000. what is the income tax due, the average tax rate, and the marginal tax rate?

>74,900 >32% >39%

Which of the following are components of cash flow from assets?

>Capital spending >Change in net working capital >Operating cash flow

The cash flow identity reflects the fact that:

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

Categories of assets:

>Current and fixed >Tangible and intangible

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

>Differing fiscal years >Seasonality >Differing accounting methods

which should you keep in mind when examining an income statement?

>GAAP >time and costs >cash versus non-cash items

The use of financial leverage can

>Increase the chance of financial distress and business failure. >Greatly magnify both gains and losses. >Increase the potential reward for investors.

Which of the following are uses of cash?

>Increases in property, plant and equipment >Decreases in accounts payable >Increases in inventory

For a mature firm, operating cash flow:

>Is usually positive >Is a sign of trouble if negative over a long period of time

Which of the following are traditional financial ratio categories?

>Market value ratios >Profitability ratios >Asset management ratios

The short run for a firm is the period of time during which ___.

>Output can vary. >Some costs are fixed.

Which one of the following can be determined using the future value approach to compound growth development in this chapter?

>Population Growth >Dividend Growth >Sales Growth

Which two of the following groups are most interested in liquidity ratios?

>Suppliers >Bankers

Time value of money tables are not as common as they once were because

>They are available for only a relatively small number of interest rates >It is easier to use inexpensive financial calculators instead

Assets can be described as items that

>a firm owns >provide market value to the firm >generate revenue

which of the following are current assets?

>accounts >inventory

which of the following are period costs?

>administrative expenses>general expenses >selling costs

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

>cash >accounts payable

which two of the following are most likely to create problems when comparing financial statements for multiple firms

>differing fiscal years >differing accounting methods

increasing its non-cash liquid assets will enable a firm to do which of the following?

>increase its ability to avoid financial distress >increase its ability to meet short term obligations

marginal tax rates are important because

>incremental cash flows are taxed at marginal tax rates >financial decisions are based on new cash flows

marginal tax rates are the most important tax rates because:

>incremental cash flows are taxed at marginal tax rates>financial decisions are usually on new cash flows

which of these items do not appear on a balance sheet?

>knowledge that has no patent >good management >favorable economic conditions

residual value is the amount left over after paying

>other debt holders >bondholders >accounts payable >preferred stockholders

examples of fixed assets:

>plant >patents >land

what are the two classifications used by financial accountants?

>product costs >period costs

what are true concerning product costs?

>product costs are reported as costs of goods sold >product costs contain both fixed and variable costs

following are true about the difference between the income statement and cash inflows and outflows:

>sales on credit are accounts relivable rather than cash inflows until they are collected which may be in a different period >income taxes are often deferred so the amount on the income statement may not represent the amount of the check to the IRS >cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period

under a flat-rate tax, all income levels are taxed at___

>the same marginal rate >the same average rate

which of the following 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

when is revenue recognized on an income statement?

>when the earnings processed is virtually completed >when the value of an exchange of goods or services can be reliably determined

How are firms classified into peer groups for ratio analysis?

According to Standard Industrial Classification codes

What does a balance sheet reflect about a firm?

Accounting value on a specific date

Which one of these is a correct version of the balance sheet equation?

Assets = Liabilities + Stockholder's Equity

Liquidity refers to the ease of changing ___.

Assets to cash

A company's _______________ tax rate is its tax bill divided by its total taxable income, and its ___________ tax rate is the tax rate it pays on the next dollar of income

Average; marginal

The short run is a period when there are ______________ costs

Both fixed and variable

Product costs are usually shown on the income statement under the heading of _______________

Cost of goods sold

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

Net working capital plus current liabilities equal ___.

Current assets

Calculating the present value of a future cash flow to determine its worth today is commonly called ____ valuation

Discount Cash Flow (DCF)

When a firm smooths earnings to please investors, its called:

Earnings management

What does GAAP stand for?

Generally Accepted Accounting Principles

The price at which willing buyers and sellers would trade is called ____________ value.

Market value

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 [revenues with expenses]

Alpha has assets of $102 million, net income of $4.3 million, and total assets of $97 million. Omega has assets of $12.4 million, net income of $0.76 million, and total sales of $9.3 million. Based on common-size income statements, which company is more profitable?

Omega

Return on assets (ROA) is a measure of _____.

Profitability

Which of the following equations defines the total asset turnover ratio?

Sales / Total Assets

Who is entitled to the residual value of a firm's cash flows?

Shareholders

__________ financial statements provide for comparison of firms that differ in size.

Standardized

An official accounting statement that helps to explain the change in cash and cash equivalents is called the ___.

Statement of cash flows

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase.

A common-size balance sheet expresses accounts as a percentage of _____.

Total Assets

True or false: Operating cash flow does not include depreciation or interest

True

According to GAAP, when is income reported?

When it is earned or accrued

what does stockholders equity represent

a residual claim against the book value of the firm's assets

firms are classified into peer groups for ratio analysis

according to standard industrial classifications codes

Although ______________ _____________ are often poor reflections of reality, they are often the best information available.

accounting numbers

although___ ___ are often poor reflection of reality, they are often best information available

accounting numbers

in the long run___ are variable

all costs

Net working capital will be negativing when current assets:

are less than current liabilities

The cash flow identity states that cash flows from ___________ should equal cash flows to creditors and equity investors

assets

on the balance sheet, assets are listed at their

book value

In finance, the value of a firm depends on its ability to generate:

cash flows

when a combining common size and common base year analysis the effect of overall growth in assets can be eliminated by first forming the:

common-size statements

the cash flows identify states that cash flow from assets equals cash flows to

creditors and stockholders

the current ratio shows the relationship between

current assets and current liabilities

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

assets are listed on balance sheet in order of:

decreasing liquidity

an example of non-cash items on an income statement:

depreciation

Cash flow to stockholders equals:

dividends paid minus net new equity raised

a common base year financial statements presents items relative to a certain base which is the

dollar amount of each item during a common base year

Net capital is equal to

ending net fixed assets - beginning net fixed assets + depreciation

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

equipment

true or false: for financial analysis, financial statements and accounting numbers are more important than cash flows

false

true or false: operating cash flow includes capital spending and working capital requirements

false

true or false: the corporate tax code is simplistic and makes good economic sense

false

true or false: there is only one method for preparing the statement of cash flows

false

Long-term solvency ratio are also known as:

financial leverage ratios

As long as all sales requests are being met, a __________ inventory turnover ratio is better.

higher

when the typical stock in the s&p 500 index has a PE ratio 12 a company with a PE ratio of 15 may have___ than average growth prospects given similar earnings per share

higher

the information needed to compute the profit margin can be found on the ___

income statement

A(n)______________in net profit margin will increase ROE.

increase

why is it important for accounting standards to become more comparable across countries?

increased globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards

assets are recorded at historical cost, not market value because:

it is hard to keep up with the market value

why is positive net working capital important?

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

what will happen to the current ratio if current assets increase while everything else remains unchanged

it will increase

If a company has inventory, the quick ratio will always be ______ the current ratio

less than

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

liquidity

some financial ratios measure a firms___ which shows ability meet short term obligations without undue stress while others measure firms financial___ which demonstrates the proportion of assets financed by long term obligations

liquidity; leverage

the quick ratio provides a more reliable measure of liquidity than the current especially when the company inventory takes a ___ time to sell

long

for financial decision-making purposes, the most important tax rate is the ___tax rate

marginal

new cash flows are taxed at

marginal tax rates

Whenever _________ information is available, it should be used instead of accounting data.

market

whenever___ information is available it should be used instead of accounting data

market

the price earnings pe ratio is a___ ratio

market value

which ratios use some information that is not contained in financial statements

market value ratios

non-cash items are expenses that directly affect___ but do not directly affect___

net income; cash flow

what is the main difference between the cash coverage ratio and the times interest earned ratio

non-cash expenses

book value of assets is generally:

not what the assets are actually worth

a positive operating cash flow indicates that the firm is generating enough cash to:

pay operating costs

when a company has negative earnings for an extended period of time analysts will often resort to the

price sales ratio

return on assets is a measure of

profitability

if a company common size income statement shows a lower percentage for costs of goods sold this period compared to last period the company may be controlling its costs well or it has___

raised its price relative to costs

The profit margin is equal to net income divided by _______

sales

total asset turnover ratio

sales / total assets

interval measure

shows how long a business could keep running until it needs another round of financing

at the most fundamental level, firms generate cash and

spend it

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

statements of cash flows

the last residual claimants to be paid by a firm are the:

stockholders

the EBITDA ratio is similar in spirit to:

the PE ratio

what does it mean when a firm has a days sales in receivables of 45

the firm collects its credit sales in 45 days on average

a current ratio of 1.2 means

the firm has 1.20 in current assets for every 1 dollar in current liabilities

For a given time period (t) and interest rate (r), the present value factor is

the reciprocal of 1 divided by the future value factor

in the us modified flat-rate tax system:

the tax rate becomes flat at very high income levels

what is the purpose of the income statement?

to measure performance over a set period of time

which one of the following is one way in which managers use a common-size balance sheet

to track changes in a firms capital structure

free cash flow is better described as:

total distributable cash flow

Total Capitalization formula

total equity + total long-term debt

true or false: free cash flow is the total of cash flow to cash flow to stockholders

true

true or false: taxes can be a large cash outflow for a corporation

true

an income statement reflects activity occurs over a period of time while a balance sheet reflects:

values as of a specific date