Business Finance exam 1
Which one of the following accounts is the most liquid?
Accounts Receivable
What is the equity multiplier ratio?
An equity multiplier of 2 means that half the company's assets are financed with debt, while the other half is financed with equity (higher the number the more debt a company is in)
Total income taxes divided by total taxable income equals the ______ tax rate.
Average
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
Balance sheet
______ are personally responsible for 100 percent of the firm's debts.
Both general partners and sole proprietors
Which form of business would be the best choice if it were necessary to raise large amounts of capital?
Corporation
A firm's liquidity is measured with which one of the following ratios?
Current ratio
Which one of the following is a use of cash?
Decrease in accounts payable
Which one of the following is a disadvantage of the corporate form of business?
Distributed profits may experience double taxation.
Cash Flow to Shareholders
Dividends - Net New Equity Raised
On the statement of cash flows, which one of the following is considered a financing activity?
Dividends paid
Operating Cash Flow
EBIT + Depreciation - Taxes
Change in Net Working Capital (NWC)
Ending NWC - Beginning NWC
Net New Equity Raised
Ending owners equity - Beginning owners equity) - Retained Earnings
Which one of the following accurately lists the three components of the DuPont identity?
Equity multiplier, net profit margin, and total asset turnover
Present Value
FV x 1 / (1+R)^t
what does the return on asset ratio measure?
For every 1$ invested, a company earned this as profit (5%-15%)
What does Total asset turnover measure?
For every dollar invested in assets, a company is able to generate the total asset turnover ratio is sales
Which one of the following determines the standards and procedures with which audited financial statements are prepared?
Generally Accepted Accounting Principles
Which one of the following is an agency cost?
Hiring outside accountants to audit the company's financial statements
What is the times interest earned ratio?
How many times a company can meet interest in current period with current income (Good ratio is 2-3)
Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time?
Income Statement
Cash Flow to Creditors
Interest - Ending Long Term Debt + Beginning Long Term Debt
What does the current ratio show?
It gives an indication of liquidity by showing how many times the current liabilities are covered by the current assets. (2 or higher is good)
The ______ tax rate is the percentage of the last dollar you earned that must be paid in taxes.
Marginal
Future Value
PV x (1+R)^t
A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:
Sales
Public offerings of debt and equity must be registered with the:
Securities and Exchange Commission.
Which one of the following statements is correct?
Taxable income earned by a partnership is treated as individual income.
what is the Receivables Turnover Ratio?
The average number of times a company collects receivables during the year
A positive cash flow to stockholders indicates which one of the following with certainty?
The dividends paid exceeded the net new equity raised.
What is the total debt ratio?
Total debt ratio = 0.46. In other words, for every dollar in equity, the firm has 46 cents in leverage. (The higher the ratio the more debt)
Which one of the following involves a working capital management decision?
What is the maximum level of cash to be kept in the firm's bank account?
What does the profit margin ratio measure?
a 20% profit margin indicates that a business retains $0.20 from each dollar of sales that it makes
What does days sales in inventory measure?
a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales
What does the DuPont Identity tell us?
an expression that breaks return on equity (ROE) down into three parts: profit margin, total asset turnover, and financial leverage
The book value of a firm is:
based on historical transactions.
Determining the number of shares of stock to issue is an example of a ______ decision.
capital structure
Net Working Capital
current assets - current liabilities
Net working capital is defined as:
current assets minus current liabilities.
Net Capital Spending Formula
ending net fixed assets - beginning net fixed assets + depreciation
What does the quick ratio measure?
firm's ability to pay off short term obligations without relying on the sale of inventories (1 or higher is good)
What is the cash coverage ratio?
if a company has a cash coverage ratio of 1 the company has exactly the same amount of current liabilities as it does cash and cash equivalents to pay off those debts
What is the debt to equity ratio?
if a financial corporation's ratio is 2.5 it means that the debt outstanding is 2.5 times larger than their equity (>1)
The cash coverage ratio directly measures the ability of a company to meet its obligation to pay:
interest to a lender.
When developing a common-size balance sheet to evaluate last year's performance, all accounts are expressed as a percentage of:
last year's total assets.
Decisions made by financial managers should primarily focus on increasing the:
market value per share of outstanding stock.
cash flow from assets
operating cash flow - net capital spending - change in net working capital
The cash flow that results from a company's ongoing, normal business activities is called:
operating cash flow.
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ______ ratios.
profitability
Ratios that measure a firm's liquidity are known as ______ ratios.
short-term solvency
What does cash ratio measure?
shows a company's ability to cover its short-term obligations using only cash and cash equivalents (.1 or higher is good) .70 means a company can cover 70% of liabilities with cash
The sources and uses of cash over a stated period of time are reflected on the:
statement of cash flows.
What does return on equity measure?
the income earned for each dollar in stockholders' equity
what is the Days' Sales in Receivables ratio?
the number of days it took on average to collect the company's accounts receivable during the past year
Shareholders' Equity
total assets - total liabilities