Working with Financial Statements

Uses of cash

Activities involving spending cash. A firm's activities in which cash is spent. Also called applications of cash.

Sources of cash

Activities that bring in cash. A firm's activities that generate cash.

Short-term solvency ratios

As a group are intended to provide information about a firm's liquidity, and these ratios are sometimes called liquidity measures. Primary concern is firm's ability to pay its bills over short run without undue stress. Ratios focus on current assets and liabilities.

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio? a. accounts payable b. cash c. inventory d. accounts receivable e. fixed assets

D

Which one of the following is a source of cash? a. increase in accounts receivable b. decrease in common stock c. increase in fixed assets d. decrease in inventory

D

Which one of these identifies the relationship between the return on assets and return on equity? a. profit margin b. profitability determinant c. balance sheet multiplier d. DuPont Identity e. Debt-equity ratio

D

DuPont identity

Popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage. ROE is affected by three things: 1. operating efficiency (as measured by profit margin) 2. Asset use efficiency (as measured by total asset turnover) 3. Financial leverage (as measured by equity multiplier)

financial ratios

Relationships determined from a firm's financial information and used for comparison purposes. Ways of comparing and investigating the relationships between different pieces of financial information. Using ratios eliminates the size problem because the size effectively divides out.

All-State Moving had sales of $899,000, in 2017 and $967,000, in 2018. The firm's current accounts remained constant. Given this information, which one of the following statements must be true? a. total asset turnover rate increased b. days' sales in receivables increased c. the net working capital turnover rate increased d. fixed asset turnover decreased e. receivables turnover rate decreased

c

Ratios that measure a firm's liquidity are know as _______ratios. a. asset management b. long-term solvency c. short-term solvency d. profitability e. book value

c

A firm has an interval measure of 48. This means firm has sufficient liquid assets to do which of the following? a. pay all of its debts that are due within the next 48 hours b. pay all of its debts that are due within the next 48 days c. cover its operating costs for the next 48 hours d. cover its operating costs for the next 48 days e. meet the demands of its customers for the next 48 hours

d. cover its operating costs for the next 48 days.

A common-size income statement is an accounting statement expressing all of a firm's expenses as a percentage of: a. total assets b. total equity c. net income d. taxable income e. sales

e.

total debt ratio

takes into account all debts of maturities to all creditors. (Total assets - total equity)/total assets

The most acceptable method of evaluating the financial statements is to compare the company's current financial: a. Ratios to the company's historical ratios b. statements to the financial statements of similar companies operating in other countires c. ratios to the average ratios of all companies located within the same geographic area. d. statements to those of larger companies in unrelated industries e. statements to the projections that were created based on Tobin's Q

A

Standard Industrial Classification (SIC) codes

A U.S. gov't code used to classify a firm by its type of business operations. Four digit codes established by the US gov't for statistical reporting. Firms with same code are frequently assumed to be similar.

Statement of cash flows

A firm's financial statement that summarizes its sources and uses of cash over a specified period.

common-size statements

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.

common base year statement

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

Which one of the following statements is correct? a. If the total debt ratio is greater than 0.50, then the debt-equity ratio must be less than 1.0 b. long-term creditors would prefer the times interest earned ratio to be 1.4 rather than 1.5 c. the debt-equity ratio can be computed as 1 plus the equity multiplier d. an equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity. e. An increase in the depreciation expense will not affect cash coverage ratio.

E