Accy 306 exam 2

Merchandising/Retailing

Inventory is a principal asset Sales may be primarily for cash or on credit

Manufacturing

Large inventory holdings Substantial investment in plant assets Cost of sales often represents the major expense Consider push vs pull strategies for sales Impacts of contract manufacturing

Purpose of Vertical Analysis

- Common-size financial statement analysis is useful in understanding the internal makeup of financial statements. After completed it is also useful for comparison with internal forecasting, competitors, industry averages, etc. - Comparisons can highlight differences in account makeup and distribution

Asset Management (Utilization) Ratios

- Used to measure a company's use of assets to generate revenue and income. - Relate to liquidity; sometimes called activity ratios -Frequency -Turnover is key

All turnover ratios involve:

- an income statement account and a related balance sheet account.

vertical analysis

All amounts of a year expressed as a percentage of a base amount of the same.

Liquidity Analysis

Analysis of short-term debt paying ability

Purpose of Horizontal Analysis

Assess Financial Performance to determine financial trends within the company's multi-year performance. Also known as "year-to-year" or "year-over-year" change

Why are a company and its creditors concerned about liquidity?

Because the company needs liquid current assets to repay current liabilities.

Horizontal Analysis

Comparative financial statement analysis by reviewing consecutive balance sheets, income statements, or statements of cash flows from period to period. Generally performed by reviewing multiple-year financial results from a specific compan

Current Assets are what % of Total Assets?

Current assets / Total Assets = %

Working Capital and Current Ratio

Determines: Ability of a company to pay its short-term debts as they come due. -Too little working capital (or in the extreme, negative working capital), may signal the inability to pay creditors on a timely basis - Too much working capital could indicate that the company is not investing enough of its available funds in productive resources, such as new equipment

Which of the following actions is likely to reduce the length of a firm's cash operating cycle? a. Adopting a new inventory system that increases the inventory conversion period. b. Changing credit policies to reduce the receivables conversion period. c. Increasing the average days sales outstanding on its accounts receivable. d. Reducing the amount of time the firm takes to pay its suppliers.

a. Adopting a new inventory system that increases the inventory conversion period.

The purpose of a horizontal analysis is to determine: a. Financial trends b. Percentages c. Understanding of financial statement makeup d. Corporate working capital

a. Financial trends

When computing a ratio: Balance Sheet accounts are related to an Income Statement account in computing a ratio because: a. The balance sheet amounts should be converted to an average for the year. b. The income statement amount should be converted to an average for the year. c. Both amounts should be converted to market value. d. Comparisons with industry ratios are not meaningful. e. None of the above

a. The balance sheet amounts should be converted to an average for the year.

Accounts receivable turnover will typically decrease due to: a. The write-off of an uncollectible account (using the allowance for doubtful accounts method) b. A significant sales volume decrease near the end of the accounting period. c. An increase in cash sales in proportion to credit sales. d. A change in credit policy to lengthen the period for cash discounts.

a. The write-off of an uncollectible account (using the allowance for doubtful accounts method)

To determine the cash operating cycle for a retail department store, which one of the following pairs of items is needed? a. Days' payables outstanding and average merchandise inventory. b. Cash turnover and net sales. c. Accounts receivable turnover and inventory turnover. d. Asset turnover and return on sales.

c. Accounts receivable turnover and inventory turnover.

Which inventory cost flow assumption will generate the highest gross profit if costs are consistently rising a. Average cost b. LIFO c. FIFO d. All methods will generate the same gross profit

c. FIFO

Which of the following categories measures the ability of a firm to meet its current obligations? a. Profitability b. Solvency c. Liquidity d. Valuations e. Cash Flow

c. Liquidity

The percentage of accounts receivable to total assets is an example of: a. Profitability analysis b. Solvency analysis c. Vertical analysis d. Horizontal analys

c. Vertical analysis

The percentage of change in cost of sales between two accounting periods is an example of: a. Vertical analysis b. Solvency analysis c. Profitability analysis d. Horizontal analysis

d. Horizontal analysis

A retailing firm will have which of the following types of inventory? a. Raw materials b. Work in process c. Finished goods d. Merchandise inventories

d. Merchandise inventories

The percentage analysis of increases and decreases in individual items in comparative financial statements is called: a. Vertical analysis b. Solvency analysis c. Profitability analysis d.Horizontal analysis e.None of the above

d.Horizontal analysis

Which of the following would indicate that the firm may be carrying excess inventory? a. A rise in total asset turnover b. A decline in the current ratio c. A decline in days' sales in inventory d. A decline in sales e. A stable current ratio with a declining quick ratio

e. A stable current ratio with a declining quick ratio

The cash conversion period (CCP)

is the length of time between the payment for inventory and the collection of receivables.

Accounts Receivable Turnover ratio:

measures how quickly the company collects outstanding receivables

Inventory Turnover ratio:

measures how quickly the company sells inventory

Days' Sales in Receivables Ratio

Purpose: o Compute the average number of days an account is outstanding, or the average collection period. o Management can evaluate how efficiently they are managing accounts receivable by understanding the number of days it takes to collect receivables.

T or F Typically, the largest expense to a manufacturing firm is cost of goods sold

T

Analysis in which all the components of an income statement are expressed as a percentage of net sales is called: a. vertical analysis b. horizontal analysis c. liquidity analysis d. comparative analysis

a. vertical analysis

Solvency ratios:

analyze a company's long-term viability

Liquidity ratios:

analyze a company's short-term viability

Which inventory cost flow assumption will generate the highest gross profit if costs are steadily falling a. Average cost b. LIFO c. FIFO d. All methods will generate the same gross profit.

b. LIFO

A manufacturing firm, such as The Hershey Company, typically has a substantial long-term investment in which type of assets: a. Cash b. Property, plant and equipment c. Accounts receivable d. Investments e. Inventory

b. Property, plant and equipment