Finance Exam 1 Ch 3

common-base year statement

A financial statement presenting all items relative to a certain base year amount

common-size statement

A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales.

SDJ, Inc., has net working capital of $1,560, current liabilities of $4,270, and inventory of $1,775. What is the current ratio? What is the quick ratio?

(a)What is the current ratio? 1.37 times (b)What is the quick ratio? .95 times Explanation (a)Using the formula for NWC, we get: NWC = CA - CL CA = CL + NWC = $4,270 + $1,560 = $5,830 So, the current ratio is: Current ratio = CA / CL = $5,830/$4,270 = 1.37 times (b)The quick ratio is: Quick ratio = (CA - Inventory) / CL = ($5,830 - 1,775) / $4,270 = .95 times

A firm has sales of $4,300, net income of $320, total assets of $4,800, and total equity of $2,950. Interest expense is $65. What is the common-size statement value of the interest expense?

1.51 percent Common-size interest = $65 / $4,300 = .0151, or 1.51 percent

If the debt ratio is .25, what is the debt/equity ratio?

1/3 If the debt ratio (debt/assets) is 0.25, then the equity ratio is has to be 1- debt ratio or 1-0.25 = 0.75. Therefore, the debt equity ratio is debt ratio/equity ratio = 0.25/0.75 or 1/3.

Relationships determined from a firm's financial information and used for comparison purposes are known as:

financial ratios

The combined common-size and common base-year balance sheet

is a statement that shows the change of the percentages of total assets.

Standardized Financial Statements

make it easier to compare financial info (particularly as the company grows) and are also useful for comparing companies of different sizes (particularly within the same industry) B/S = compute accounts as % of total assets I/S = compute all line items as % of sales

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

sales

On a common-size balance sheet all accounts for the current year are expressed as a percentage of:

total assets for the current year

On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?

Base-year accounts receivables.

Financial Ratios

calculations typically used to track a business's liquidity (cash), efficiency, and profitability over time compared to other businesses in its industry

Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?

common-base year statements