FIN 3400 Finances Chapter 2-3 Financial Statements
inflow
: Cash received, often from income or sale of an investment.
time line
A graphical representation showing the size and timing of cash flows through time.
Which of the following statements is correct?
A high average payment period and a low accounts payable turnover are a sign of good management.
Preferred stocks
A hybric security a form of ownership of a corporation that gives stockholders certain privileges
Which action fit with the definition of retained earnings
A major sale to the customer was purposely delayed one day to be registered in next month.
Which of the following will increase a firm's quick ratio assuming no other accounts change?
A. A reduction in accounts payable. B. An increase in accounts receivable. C. An increase in inventory. D. All of these statements will increase a firm's quick ratio.
Common-size financial statements:
A. Allow for an easy comparison of balance sheets and income statements across firms in the industry. B. Provide quantitative clues about the direction that the firm is moving. C. Are obtained by dividing all income statement accounts by net sales and all balance sheet accounts by total assets. D. All of these.
Which of the following statements is correct?
A. The use of debt in the capital structure results in tax benefits to the firm. B. Debt is referred to as "financial leverage" because it magnifies returns to shareholders. C. Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing. D. All of these statements are correct.
These ratios measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets.
A. debt management ratios
Which of the following assets has concerted in cash within A YEAR
ACCOUNT RECEIVABLE
Which of this assets are converted in cash within one year?
Account receivables Inventory
Financial statement
Accounting base picture of a firm financial position.
Term: Rule of 72
An approximation for the number of years needed for an investment to double in value.
A stream of level of cash flow paid at the end of each time period- often referred to as ordinary annuity.
Annuity.
What of the this statement best illustrate the definition of marginal tax rate?
Antonio will pay 0.28 cent more in taxes if his taxable income increase by 1 dollar or 28 percent
What statement regarding liquidity is correct
As the liquidity of the assets increase, both the firm's probability of financial distress and its profits on those assets decrease.
Market value
Assets are listed at the amount the firm would get if it sold them
Book (or historical cost) value
Assets are listed on the balance sheet at the amount the firm paid for them
What is the definition of current assets
Assets that can be converted in cash within a one year
Stockholder equity can define as
Assets- liabilities
All of the following are users of financial ratios except ___________.
Auditors
Which of the actions listed below would cause a firm's current ratio to increase?
B) Notes payable are paid off with cash.
The term "capital structure" refers to
. the amount of debt versus equity on the balance sheet.
An investor wanting large returns will be interested in companies that have ____.
B. high ROEs
Which ratio measures the operating return on the firm's assets irrespective of financial leverage and taxes?
Basic earning power ratio
This measures the operating return on the firm's assets, irrespective of financial leverage and taxes.
Basic earnings power ratio
What of these are long term debts?
15 years mortgage 10 years bonds
Example of current assets
Cash
Which ratio measures the number of dollars of operating cash available to meet each dollar of interest and other fixed charges that the firm owes?
Cash coverage ratio
A statement of retained Earnings showed a beginning retained earning balance of 24 and an end balance of 22. Net income was positive . What do you know given the information?
Cash dividend paid exceeded net income
Cash flow for investing activities
Cash flow associates with purchase or sales of fixed or other long term assets.
Cash flow from operations
Cash flow that are the direct result of the production and sale on the fir's product.
Cash flow for financing activities
Cash flow that result from debt and equity financing transactions.
Term: outflow
Cash payment, often a cost or the price of an investment or deposit.
Balance sheets list the assets in declining order of liquity
Cash, account receivable, inventory, plant, and equiptment
Which of these are added or subtracted from net income to compute the net cash flow from operating activities
Changes in accrued wages and taxes are operating activities Depreciation Increase inventory
Which of the following transactions, when considered by itself, will not change the current ratio?
Collecting an account receivable that was previously written off through the allowance for doubtful accounts
Which statement is correct in straight line depreciation?
Commonly used when compiling financial statements
Capital structure
Compares firm's debt with the total equity
Which of the following are likely to have the reported amounts on the balance sheet being close to their current value?.
Current Assets
Net working capital
Current assets minus current liabilities
Report the firm amount of money owes its creditors within next year
Current liabilities
Current assets DIVIDED BY current liabilities is the
Current ratio
Which of the following ratios would not be classified as an asset management ratio?
Current ratio
Which of these is NOT considered a coverage ratio?
Current ratio
Term: compounding
Def: The process of adding interest earned every period on both the original investment and the reinvested earnings.
Which of these questions can be answered by monitoring a firm balance sheet for last and this year
Did the firm issue additional shares of stock this year Is the firm more a\or less liquid this year
What formula in correct relate with income statement
EBT= Gross income - Depreciation - Other operating expenses EBT= Dividends paid + Addition to Retained Earnings + Taxes Gross profit= Net sales - Less Cost of Goods Sold
EBIT
Earnings before interest taxes
EBITDA
Earnings before interest, taxes, depreciation and amortization
EBT
Earnings before taxes
What of the following identify a balance sheet
Equity= Assets -Liabilities
Which formula define FCF(free cash flow)
FCF= OCF (Operating cash flow) - IOC (investment in operating capital
Free cash flow is the cash provided by operating activities minus the cash used by financing activities.
False
Statement of Retained Earnings
Financial Statement that reconciles net income earned during a given period and any cash dividends paid with the change in retained earnings over the period.
Income Statement
Financial statement that reports the total revenues and expenses over specific period of time
Statement of Cash Flow
Financial statement that shows the firm's cash flow over a period of time.
Which company has the most risk from an investor's standpoint? Firm A has a PE of 92 times and Firm B has a PE of 16 times. Assume both firms operate in the same industry. Firm A has fewer shares outstanding than Firm B.
Firm A because it has the higher PE ratio.
Firm A and Firm B have the same total assets, ROA and profit margin. However, Firm B has a higher debt ratio and interest expense than Firm A. Which of the following statements is correct?
Firm B must have a higher ROE than firm A.
Which ratio assesses how efficiently a firm uses its fixed assets?
Fixed asset turnover
This ratio measures the number of dollars of operating earnings available to meet the firm's interest dollars and other fixed charges.
Fixed charge coverage ratio
Which of these characteristics apply to the definition of preferred stock?
Fixed period payments Ownership interest in the firm
Stock equity
Funds provide for the firm preferred and common
According to the structure of Income Statement
Gross profit= Net sales-Cost of Goods Sold EBIT=Gross profit - Depreciation - Operating Expenses EBT= Dividends paid + Addition to Retained Earnings + Taxes
Which of the following statements is correct?
Holding extremely high levels of liquidity to guard against liquidity crises is an inappropriate goal for the firm.
Preferred stock
Hybrid securities that has characteristics of both long term debt and common stock
Which of the following statements is correct?
If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity.
Which of these statements is true?
In general, the higher the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be.
Which of these are cash flow for financing activities?
Increase common stock Preferred stock dividend Decrease in long term-debt
What statement is correct concerning the structure of cash flow
Increase in amount payable is an addition to the cash flows from operating activities A decrease in fixed assets is an addition to the cash flow from the investing activities.
Which of these are resources of cash
Increase in long term debt Decrease inventory
Cash flow from financing activities
Increase in note payable Increase in long term debt Increase in common and preferred stock Decrease in note payable Decrease in long term debt Decrease in common and preferred stock Dividends paid
Source of cash
Increase long term debt Decrease in inventory
Which of these are addition to the cash flow from financing activities?
Increase long term debt Increease common stock
Which statement regarding the federal taxation of interest income earned by a corporation is correct
Interest earned by a corporation bond is taxable Interest earned of a bond issue by a city is tax-exempt
simple interest
Interest earned only on the original deposit.
The quick ratio EXCLUDES which of the following?
Inventory
What is the definition of marketable security
It is a short term low rate investment security.
Long term debt
It is defined as obligations of the firm that are due in more than one year.
What is the definition of net income
It is the after-tax profits or loss earned over specific period of time
What is the best definition of retained earnings
It is the cumulative earnings a firm has reinvested rather than paid out as dividends
Earning management
It is the process of controlling a firm earnings
Which of these is the best definition non cash flow
It summarizes the resources of cash by type of cash flow.
Which one of the following is unlikely to have a high capital intensity ratio?
Law firm
Liabilities definition
Liabilities are funds provide by lenders to a firm
Price at common stock can sold
Market value per share
For publicly traded firms, these ratios measure what investors think of the company's future performance and risk.
Market value ratios
Which of the following is NOT a quick asset?
Merchandise inventory
What examples best defines liquid assets
Mia sold 100 shares of stock today at the going market price
These ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm.
Profitability
This ratio measures the overall return on the firm's assets inclusive of financial leverage and taxes.
ROA
Which of the following ratios is a measure of profitability, operating results, and efficiency?
Rate of return on total assets
The formula for which of the following ratios has a denominator of total liabilities?
Ratio of stockholders' equity to total liabilities
Balance sheet
Report firm's asset, liabilities, and equity at a particular point of time.
Sarbanes-Oxley Act 2002
Requires that firm senior management must sign off of the financial statements of the firm certifying the statement as accurate and representative of the firm's financial condition during the period covered.
Which party has a residual claim to the firm's cash flow?
Stockholders
Cash flow that result from debts and equity financing are cash flow from financing activities
TRUE
The decrease in a long term asset account balance is a cash flow for investing activities
TRUE
Which of these statements is true?
The age of a firm's fixed assets will affect the fixed asset turnover ratio level.
present value (PV)
The amount a future cash flow is worth today
Marginal Taxes Rate
The amount of additional a firm must pay out for every additional dollar of taxable income it earns.
Capital structure
The amount of debt versus equity financing held on the balance she
Net change in cash and marketable securities
The sum of cash flows from operating, investing, and financing activities.
future value (FV)
The value of an investment after one or more periods.
This ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt.
Times interest earned
Which of the following statements is correct?
To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry.
Single period future value
Today cash flow + interest earned
Intangible long term assets
Trademark
Current asset MINUS current liabilities is the
Working Capital
Which is true? Ratio analysis:
can provide useful information on a firm's current position and hint at future performance.
Current ratio
capital structure
These can be used by interested parties to identify changes in corporate performance.
common-size financial statements
The term "spreading the financial statements" refers to _____________.
creating common-size financial statements
his ratio measures the percentage of total assets financed by debt.
debt
An decrease in financial leverage means
decrease the risk faced by the firm.
The maximum growth rate that can be achieved by financing asset growth with internal financing or retained earnings is called the ____________.
internal growth rate
Another name for Gross Profit
is EBIT
Book Value per share (BVPS)
is based on the equity of the firm that is attributable to the common shareholders
. The maximum growth rate that can be achieved financing asset growth with new debt and retained earnings is called the __________.
sustainable growth rate
This is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings.
sustainable growth rate
Cash flow from operations is defined as
the cash flow that are the direct result of the production and sale of the firm's products
A strong liquidity position means that ______________.
the firm is able to meet its short-term obligations
Common stocks and paid in surplus
the fundamental ownership claim in a public and private company
To interpret financial ratios, managers, analysts, and investors use the follow type of benchmarks:
time series analysis
Cash flow for operating activities
Decrease in account payable
What of these is cash flow for financing activities
Decrease in loan payable
Which ratio measures how many days inventory is held before the final product is sold?
Days' sales in inventory
Sources of Cash
Net income Depreciation Decrease a non-cash current assets Decrease a fixed asset Increase a current liability Increase a long term debt Sell common or preferred stock
Retaining Earnings formula
Net income= Dividends paid + Change in Retained Earnings
Uses of cash
Net looses Increase a non cash current assets Increase a fixed asset Decrease a current liability Decrease a long term debt Repurchased common or preferred stock Pay dividends
Net operation profit after taxes (NOPAT)
Net profit a firm earns after taxes but before of any financing cost.
Gross profit
Net sales lminus cost of the goods sold
Which of these are included in net working capital
Notes payable Inventory
What of these account are current liabilities
Notes payable account payable Accrued Wages
Current liabilities are debts of the firm must paid within --
One year
Fixed assets is a asset that is defined as having a useful life in excess of which time periods
One year
Net income
The bottom line of income statement
Free Cash Flow
The cash that is actually available for distribution to the investors in the firm after the investments that are necessary to sustain the firm's ongoing operation are made.
Retained earnings
The cumulative earning in the firm reinvested rather than paid dividends
Networking capital
The difference between form current assets and current liabilities
Financial leverage
The ext which debt security is used by the firm
A firm that is efficient in inventory management will have ____________.
The firm has a different capital structure.
discount rate
The interest rate used to discount future cash flow(s) to the present.
Average Tax rate
The percentage of each dollar of tax payable income that the firm pay in taxes
discounting
The process of finding present value by reducing future values using the discount, or interest, rate.
This measures the number of dollars of sales produced per dollar of fixed assets.
fixed asset turnover ratio
Cash flow for financing activities are defined as the cash flow resulting
from debt and equity financing transactions
