FINN3120 Study

How do you standardize balance sheets and income statements?

Common size balance sheets: all accounts = %TA Common size income statements: all line items = %SLS

Book value

the balance sheet value. Last purchase price

Average tax rate

total taxes paid / taxable dollar

Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest and do not plan to invest anything further. What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education?

13.99%

Pyri Flours, a sole proprietorship, owes $9,741 in taxes on taxable income of $61,509. If the firm earns $100 more in income, it will owe an additional $22 in taxes. What is the average tax rate on income of $61,609?

15.85%

Based on the recognition principle, revenue is recorded on the financial statements when the: 1. payment is collected for the sale of a good or service. 2. earnings process is virtually complete. 3. value of a sale can be reliably determined. 4. product is physically delivered to the buyer.

2 & 3

Federal corporation tax rate in US

21%

Marginal tax rate

% tax paid on the next dollar earned

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

*A) Average tax rate - total tax / total taxable income B) Variable tax rate C) Marginal tax rate - % tax paid on next dollar earned D) Absolute tax rate E) Contingent tax rate

A firm's liquidity level decreases when:

*A) inventory is purchased with cash. B) inventory is sold on credit. C) inventory is sold for cash. D) an account receivable is collected. E) proceeds from a long-term loan are received.

You are due to receive a lump-sum payment of $1,750 in three years and an additional lump-sum payment of $1,850 in five years. Assuming a discount rate of 3.0 percent interest, what would be the value of the payments today?

3197.32

You deposit $1,675 into an account that earns 2.35 percent interest in two years. If you deposit an additional $1,950 in the same account 2 years later, how much would be in the account six years from now?

3880.81

You have $2,000 today in your savings account. How long must you wait for your savings to be worth $4,500 if you are earning 1.25 percent interest, compounded annually?

65.28 yrs

Firefly, Incorporated, has sales of $1,366,400, cost of goods sold of $897,575, and inventory of $148,630. What is the inventory turnover rate?

D - 6.04 times = 897,575 / 148,630

Assets

Left side, anything controlled or owned by business

4 basic areas of finance

Corporate/Business Finance, Investments, Financial Institutions, International Finance

What's the difference between simple interest and compounded interest?

Simple interest - interest earned only on the original principle FV = PV(1+r) * t Compound interest - interest earned on principal and on interest received FV = PV (1+r)^t

3 main forms of business organizations

Sole proprietorship, partnership, corporation

Investment Jobs

Stockbroker, financial advisor, portfolio manager, security analyst

Market value

The true value, price at which the assets, liabilities, or equity can be bought or sold.

2 Main goals of financial management

To maximize the current value per share of the company's existing stock and to maximize the market value of the existing owners equity.

EBIT

an indicator of a company's profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest. EBIT is also referred to as operating earnings, operating profit, and profit before interest and taxes.

What are the determinants of a firms growth potential?

profit margin, total asset turnover, financial leverage, dividend policy

Suppose you are offered... Invest $500 today and receive $600 in next 5 years. Low risk Invest $500, 4% annually

r = (600/500)^1/6 -1 = 3.14%, therefore the bank is higher at 4%

receivable turnover ratio

sales / AR

Trinity industries has sales of $179,600, depreciation of $14,900, costs of good sold of $138,200, and other costs of $28,400. The tax rate is 21 percent. What is the net income?

sales 279,600 - dep. 14,900 - COGS 138,200 - other costs 28,400 = -1,900 = net income When negative you don't add in the tax rate

Suppose you want to buy new furniture. You have $500 and the furniture costs $600. If you earn 6%, how long do you have to wait?

t = (ln(600/500))/(ln(1.06)) = 3.13 years

Al-Sadiq Plumbing Supply currently has $10,500 in cash. The company owes $26,900 to suppliers for merchandise and $47,500 to the bank for a long-term loan. Customers owe the company $33,000 for their purchases. The inventory has a book value of $62,400 and an estimated market value of $65,600. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

$10,500 cash + $33,000 purchases owed + $ 62,400 book value = $105,900 current assets

At 12.5 percent interest, how long does it take to triple your money?

9.33 years

PV =

FV / ((1 + r)^t)

Why is standardization useful?

It can compare year to year and companies of different sizes, within the same industry

FV =

PV ( 1 + r)^t

Total asset turnover

Sales / TA

Investments

Work with financial assets such as stocks and bonds. Value of financial assets, risks v returns, and asset allocation.

Donegal's has compiled the following information: Sales $406,300 Interest paid $21,200 Long-term debt $248,700 Owners' equity $211,515 Depreciation $23,800 Accounts receivable $24,400 Other costs $38,600 Inventory $41,500 Accounts payable $22,600 COGS $218,900 Cash $16,300 Taxes $34,100 What is the operating cash flow for the year?

$114,700

Gracie Art Gallery has total assets of $236,450, net working capital of $28,523, owners' equity of $128,659, and long-term debt of $105,000 What is the value of the current assets?

$263,400 total assets - $105,000 long-term debt - $ 238,659 owners equity = $2,791 current liabilities + $28,523 net working capital = $31,314 current assets

The Riverside Cafe has an operating cash flow of $83,770, depreciation expense of $43,514, and taxes paid of $21,590. A partial listing of it's balance sheet accounts is as following: beg. balance end balance Current assets. 138,590 129,204 Net fixed assets. 599,608 597,913 Current liabilities 143,215 139,927 Long-term debt 408,660 402,120 What is the amount of the cash flow from assets?

$47,949

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

$7,600

r =

(FV/PV)^(1/t) -1

t =

(ln(FV/PV))/(ln(1+r))

Which one of these statements is true concerning the price-earnings (PE) ratio?

*A) A high PE ratio may indicate that a firm is expected to grow significantly. B) A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. C) PE ratios are unaffected by the accounting methods employed by a firm. D) The PE ratio is classified as a profitability ratio. E) The PE ratio is a constant value for each firm.

If a firm has a negative cash flow from assets every year for several years, the firm:

*A) may be continually increasing in size. B) must also have a negative cash flow from operations each year. C) is operating at a high level of efficiency. D) is repaying debt every year. E) has annual net losses.

The balance sheet of Koehn, inc. has the following balances: beg. balance end balance cash 30,300 32,800 accounts receivable 48,200 1,600 inventory 126,500 129,200 net fixed assets 611,900 574,300 accounts payable 43,200 53,600 long-term debt 415,000 304,200 what is the amount of the change In net working capital?

-1,800

The Texas Rustler has total assets of $645,563 and an equity multiplier of 1.22. What is the debt-equity ratio?

.22

Suppose Healey Corporation has the following characteristics: Shares outstanding: 68,500 Current share price: $13.50 Total debt: $438,500 Total cash: $63,100 Based on the formula above, what is the enterprise value of this company?

1,300,150

A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend payout ratio of 60 percent. The current profit margin is 7.5 percent, and the firm uses no external financing sources. What must be the total asset turnover?

1.44

The DuPont identity can be used to help a financial manager determine the:

1.degree of financial leverage used by a firm. 2.operating efficiency of a firm. 3.utilization rate of a firm's assets. 4.rate of return on a firm's assets.

Mercier United has net income of $128,470. There are currently 32.67 days' sales in receivables. Total assets are $1,419,415, total receivables are $122,306, and the debt-equity ratio is .40. What is the return on equity?

12.67%

Sunshine Rentals has a debt-equity ratio of .67. The return on assets is 8.1 percent, and total equity is $595,000. What is the net income?

80,485.65

Zoey Pet Supply had $314,000 in net fixed assets at the beginning of the year. During the year, the company purchased $98,200 in new equipment. It also sold, at a price of $10,000 some old equipment that had a book value of $12,500. The depreciation expense for the year was $24,500. What is the net fixed asset balance at the end of the year?

= net fixed asset balance at the end of the year = 375,200

Corporation

A legal person distinct form owners and a resident of a state. Limited liability, seperation of ownership and management, double taxation.

Liquidity

A market's feature where an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold.

Balance Sheet

A snapshot of the firm's assets and liabilities at a given point in time

Which one of the following statements about a limited partnership is correct?

A) All partners have their losses limited to their capital investment in the partnership. B) All partners are treated equally. *C) There must be at least one general partner. D) Equity financing is easy to obtain and unlimited. - limited E) Any partner can transfer his or her ownership interest without ending the partnership. - difficult to transfer ownership

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

A) Cash purchase of inventory B) Cash payment on an account receivable C*) Cash payment of an account payable D) Credit sale of inventory at cost E) Cash sale of inventory at a loss

Which one of these is correct?

A) Depreciation has no effect on taxes. B) Interest paid is a non-cash item. C) Taxable income must be a positive value. *D) Net income is distributed either to dividends or retained earnings. E) Taxable income equals net income multiplied by (1 + Average tax rate).

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

A) Income statement B) Balance sheet *C) Common-size income statement D) Common-size balance sheet E) Statement of cash flows

What are some of the problems associated with financial statement analysis?

Conglomerates global competitors dif. accounting procedures, fiscal years, and capital structure seasonal variations and one time events

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas?

A) International finance - would be nondomestic B) Private placements - did not discuss C) Corporate finance - business finance D) Capital management - management * E) Investments - working with financial assets

Which one of the following is an intangible fixed asset?

A) Inventory - tangible fixed asset (can touch) B) Machinery - tangible fixed asset *C) Copyright - intangible fixed asset D) Account receivable - current asset E) Building - tangible fixed asset

Jordan and Carmen created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

A) Limited partnership - still have unlimited liability * B) Corporation - has limited liability and seperation of ownership C) Sole proprietorship - only one person owns D) General partnership - still have unlimited liability E) Public company - did not discuss

Which one of the following is included in the market value of a firm but not in the book value?

A) Raw materials B) Partially built inventory C) Long-term debt *D) Reputation of the firm E) Value of a partially depreciated machine

Scranton Paper Company generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?

A) Receivables turnover B) Equity multiplier C) Profit margin D) Return on assets *E) Total asset turnover

The DuPont identity can be accurately defined as:

A) Return on equity × Total asset turnover × Equity multiplier. *B) Equity multiplier × Return on assets. C) Profit margin × Return on equity. D) Total asset turnover × Profit margin × Debt-equity ratio. E) Equity multiplier × Return on assets × Profit margin.

Which one of the following statements concerning the balance sheet is correct?

A) Total assets equal total liabilities minus total equity. B) Net working capital is equal total assets minus total liabilities. *C) Assets are listed in descending order of liquidity. D) Current assets are equal to total assets minus net working capital. E) Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt.

The market value of:

A) accounts receivable is generally higher than the book value of those receivables. *B) an asset tends to provide a better guide to the actual worth of that asset than does the book value. C) fixed assets will always exceed the book value of those assets. D) an asset is reflected in the balance sheet. E) an asset is lowered each year by the amount of depreciation expensed for that asset.

When conducting a financial analysis of a firm, financial analysts:

A) cannot use accounting information as it is historical. B) rely solely on accounting information. *C) frequently use accounting information. D) ignore accounting information but do use marketing information. E) assume the future will be a repeat of the past as reflected in the firm's accounting reports.

Net working capital increases when:

A) fixed assets are purchased for cash. B) inventory is purchased on credit. C) inventory is sold at cost. D) a credit customer pays for his or her purchase. *E) inventory is sold at a profit.

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

A) had to increase. - positive for healthy firm *B) had to decrease. - net working capital = current assets - current liabilities C) remained constant. D) could have either increased, decreased, or remained constant. E) was unaffected as the changes occurred in the firm's current accounts.

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

A) pays cash for its inventory. B) has more than half its current assets invested in inventory. C) has more cash than inventory. D) has more current liabilities than it does current assets. *E) has positive net working capital.

If a firm has an inventory turnover of 15, the firm:

A) sells its entire inventory every 15 days. B) stocks its inventory only once every 15 days. C) delivers inventory to its customers every 15 days. D) sells its inventory by granting customers 15 days of free credit. *E) sells its entire inventory an average of 15 times each year.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period is called the:

A) statement of cash flows. - cash *B) income statement. - measures performance over a specific time, reports revenues first then deduct expenses. (net income = revenue - expenses) C) GAAP statement. - recognizes revenue when fully earned D) balance sheet. - snapshot of firms assets and liabilities at given point in time E) net working capital schedule.

Shareholders' equity is equal to:

A) total assets plus total liabilities. B) net fixed assets minus total liabilities. *C) net fixed assets minus long-term debt plus net working capital. D) net working capital plus total assets. E) total assets minus net working capital.

Financial institutions

Banks, insurance companies, brokerage firms

Accounting income vs cash flow - which should be used for decision making purposes?

Both

Sole Proprietorship

Business owned by one person. Easiest to start, unlimited liability.

Partnership

Business owned by two or more persons. More capital available, unlimited liability (general/limited partnership)

Financial Managers

CFO, treasurer, controller

Payables turnover ratio

COGS / AP

inventory turnover ration

COGS / inventory

What are some situations in which you might want to compute the implied interest rate?

Depending on what variables you have

SRC, Incorporated, sells its inventory in an average of 52 days and collects its receivables in 3.6 days, on average. What is the inventory turnover rate? Assume a 365-day year.

E - 7.02 = 365 / 52

For the year 2020, Precision Masters had sales of $42,900, cost of goods sold of $26,800, depreciations expense of $1,900, interest expense of $1,300, and dividends paid of $1,000. At the beginning of the year, net fixed assets were $14,300, current assets were$8,700 and current liabilities were $6,600. At the end of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400. The tax rate was 21 percent. What is the cash flow from assets for 2020?

EBIT = 2020 sales - 2020 COGS - 2020 depreciation expense = 42,900 - 26,800 - 1,900 = 14,200 Taxes = (EBIT - 2020 interest expense)*(tax rate) = (14,00 - 1,300)*(.21) = 2,709 OCF = EBIT + 2020 depreciated expense - taxes = 14,200 + 1,900 - 2,709 = 13,391 CFA = OCF - (end net fixed assets - beg. net fixed assets + depreciation expense) - (end current assets - end current liabilities) - (beg. current assets - beg. current liabilities) = 13,391 - (13,900 - 14,300 + 1,900) - (9,200 - 7,400) - (8,700 - 6,600) = 12,191

What's the relationship between present and future values?

FV increases if... longer time period = inc t higher interest rate = inc r PV decreases if... longer time period = inc t higher interest rate = inc r

What're the major categories of ratios and how do you compute specific ratios within each category?

Liquidity ratios current ratio = CA / CL quick ration = (CA - inventory) / CL cash ratio = cash / CL Financial leverage ratios total debt ratio = TA - TE / TA debt/equity ratio = TD / TE Equity multiplier = TA / TE = 1 + D / E Times interest earned = EBIT / interest Cash coverage = (EBIT + depreciation) / interest Asset management inventory ratios Inventory turnover = COGS / Inventory days sales in inventory = 365 / inventory turnover Asset management receivables ratios receivables turnover = sales / AR days sales in receivables = 365 / receivables turnover Asset management payables ratios Total asset turnover = sales / TA capital intensity ratio = 1 / TAT Profitability ratios profit margin = NI / sales ROA = NI / TA ROE = NI / TE

Average vs marginal tax rate - which should be used for decision making purposes?

Marginal - measuring additional dollar

Book vs market value - which should be used for decision making purposes?

Market value - it's the true value

Income Statement

Measures performance over a specified period of time. Reports revenues first then deducts any expenses for the period.

Suppose you need $15,000 in 3 years. If you can earn 6% annually, how much do you need to invest today? What about at 8%, which would be more?

PV = 15,000/1.06^3 = 12594.29 PV = 15000/1.08^3 = 11,907.48 686.81 difference

Liabilities & Owner's Equity

Right side, sacrifices to business

Kat Outfitting currently has $22,500 in cash. The company owes $49,500 to suppliers for merchandise and $52,500 to the bank for a long-term loan.Customers owe the company $41,000 for their purchase. The inventory has a book value of $76,800 and an estimated market value of $72,000. If the store compiled a balance sheet as of today, what would be the book value of the current assets

cash 22,500 + customers owe 49,500 + book value 76,800 = 140,300 = book value of current assets

Suppose you have $500 to invest and you believe you can earn 8% over 15 years, how much would you have at the end of 15 years using compounded OR simple interest?

compounded = 500(1.08)^15 = 1586.08 simple = 500(1.08)*15 = 1,100

Net) working capital

current assets - current liabilities. Increases when inventory is sold at a profit

Joie's Fashions has current liabilities of $45,600 and accounts receivable of $59,700. The firm has total assets of $275,000 and net fixed assets of $205,500. The owners' equity has a book value of $107,500. What is the amount of the net working capital?

net working capital = current assets - current liabilities current assets = 69,500 - current liabilities $45,600 = net working capital 23,900

Sources of cash flows

operations, investments, and financing