finance exam I
Which one of these identifies the relationship between the return on assets and the return on equity?
DuPont Identity
How do you calculate net working capital?
current assets - current liabilities
The growth of both sole proprietorships and partnerships is frequently limited by the firm's:
inability to raise cash
T/F: the life of a sole proprietorship is limited
true
What is a disadvantage of a sole proprietorship?
unlimited liability
What is a disadvantage of partnership?
unlimited liabiltiy
A firm's short-term assets and its short-term liabilities are referred to as the firm's...
working capital
Canine Supply has sales of $2,800, total assets of $1,900, and a debt-equity ratio of .5. Its return on equity is 15 percent. What is the net income?
$190 Return on equity = .15 = (Net income / $2,800) × ($2,800 / $1,900) × (1 + .50) Net income = $190
Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 4.7, and a current ratio of 2.9. What is the cost of goods sold?
$2,056,250 Current assets = 2.9 × $350,000 = $1,015,000 ($1,015,000 - Inventory)/$350,000 = 1.65; Inventory = $437,500 Costs of goods sold = 4.7 × $437,500 = $2,056,250
If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
.5
What two financial statements are there?
10K and 10Q
Lassiter Industries has annual sales of $328,000 with 8,000 shares of stock outstanding. The firm has a profit margin of 4.5 percent and a price-sales ratio of 1.20. What is the firm's price-earnings ratio?
26.7
What type of accounts are liabilities & equity?
Accounts payable, notes payable, current liabilities, long-term debt, owners' equity
What is on a common size balance sheet?
All accounts = percent of total assets (%TA)
What is on the common size income statement?
All line items = percent of sales (%SLS)
How often are 10K reports?
Annual
What order are liabilities and owner's equity in on the balance sheet?
Ascending order of when due to be paid
How do you calculate shareholders' equity?
Assets - liabilities
Another way to express equity multiplier
Assets/total equity
A firm has a debt-equity ratio of .62, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,600. What is the amount of the net income?
B. $50,159 Return on equity = .051 × 1.24 × (1 + .62) = .1024 Net income = $489,600 × .1024 = $50,159
Who is responsible for the financial statements?
CEO
What long-term investments or projects should the business take on is describing what type of financial management decision?
Capital budgeting
How should we pay for our assets? Should we use debt or equity? These questions are asked during what type of financial management decision?
Capital structure
What type of accounts are assets?
Cash, accounts receivable, inventory
What is a disadvantage of corporation?
Double Taxation
how to calculate EBT
EBT = Net income/(1 − Tax rate)
what three tasks does the DuPont approach divide a firm into?
Expense management, asset management, and debt management
What long term _________ should the firm take on?
Investments
What is an advantage of corporations?
Limited liability / easier to raise capital
Measure of the ability of the firm to meet its short-term financial obligations
Liquidity ratios
What is the major focus of the Sarbanes-Oxley Act of 2002
Make sure publicly-traded corporations accurately present their financial statements
If considering a project that will increase taxable income by $1 million, which tax rate should you use in your analysis?
Marginal
what is the price at which the assets, liabilities, or equity can actually be bought or sold?
Market value or true value
What is the primary financial goal of the corporation?
Max current value of stock / firm
Another way to express profit margin
Net income/Sales
What are expenses charged against revenue that do not affect cash flow?
Noncash items
Does an income statement measure performance at a point in time or over a period of time?
Period of time
Does a balance sheet show the amount of the firm's assets and liabilities at a point in time or in a period of time?
Point in time
Davis Company has provided the following financial data: Total Asset Turnover = .245 Net Income = $400,000 Equity Multiplier = 1.20 Net Sales = $1,300,000 What is the Return on Equity?
Profit Margin = Net Income/Net Sales Profit Margin = $400,000/$1,300,000 = .31 ROE = Profit Margin × Total Asset Turnover × Equity Multiplier ROE = .31 × .245 × 1.20 = .0911 ROE = 9.1%
The three parts of the Dupont equation are:
Profit margin, Total asset turnover, & Equity Multiplier.
Measure the overall effectiveness of the firm's management
Profitability ratios
How often are 10Q reports?
Quarterly
If Roten Rooters, Inc., has an equity multiplier of 1.56, total asset turnover of 1.70, and a profit margin of 6.6 percent, what is its ROE?
ROE = (PM)(TAT)(EM) ROE = (.066)(1.70)(1.56) ROE = .1750, or 17.50%
Return on equity can be calculated as ROA × Equity multiplier. What is another way to express this equation?
ROE = ROA × (1 + Debt − Equity Ratio)
How do you calculate net income?
Revenues - Expenses
what are the two types of corporation (form of business organization)
S-Corp and Limited Liability Company (LLC)
A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:
Sales
Another way to express total asset turnover
Sales/Assets
Who are dividends paid to?
Shareholders
Which form of business organization is easiest to start?
Sole Proprietorship
T/F: corporations have an unlimited life
True
RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following?
Utilizing its total assets more efficiently than Sam's
What type of questions do creditors ask?
What is the firm's capital/structure? How leveraged are they? How will they pay it back?
When does an agency relationship exist?
Whenever a principal hires an agent to act on their behalf
Managing day-to-day finances at a firm is what type of financial management decision?
Working capital management
Can debt ratio be > 1?
Yes
Are corporate dividends taxed?
Yes-- taxable income of the recipient even though that income was previously taxed.
total tax bill / taxable income
average tax rate
what is the balance sheet value of the assets, liabilities, and equity?
book value
is depreciation on the income statement or balance sheet?
both
What is the most important noncash item?
depreciation
what is sole proprietorship limited to?
life of owner-- can take personal liabilities
Mortgage lenders probably have the most interest in the ______ ratios.
long-term debt and times interest earned
Which one of the following terms is defined as the management of a firm's long-term investments?
capital budgeting
what are three financial management decisions?
capital budgeting, capital structure, working capital management
the mixture of a firm's debt and equity financing?
capital structure
A business created as a distinct legal entity and treated as a legal "person" is called a(n):
corporation
Who has unlimited liability for a firm's debts based on their ownership interest?
general partners and sole proprietors
A business owned by a solitary individual who has unlimited liability for the firm's debt is called a:
limited partnership
% tax paid on the next dollar earned
marginal tax rate
What is the goal of the financial manager?
maximize shareholder wealth
Who is responsible for a company's debt?
owner of a sole proprietorship
What determines a firm's value?
present value of all future cash flows
The most acceptable method of evaluating the financial statements is to compare the company's current financial:
ratios to the company's historical ratios.
What is the GAAP matching principle?
recognize revenue when it is fully earned and match expenses required to generate revenue to the period of recognition
Within a corporation, agency relationships exist between
shareholders and managers
What are the three major forms of business organization in the united states?
sole proprietorship, partnership, and corporation
A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:
general partnership
The top manager within a firm is usually
Chief Financial Officer (CFO)
EBIT
earnings before interest and taxes
EBT
earnings before taxes
what are the two types of partnership?
general and limited
Which one of the following best states the primary goal of financial management?
Maximize the current value per share