ACCY 200 ch. 11

Regular Dividend

A dividend that is likely to be declared on a repetitive, periodic (i.e., quarterly, semiannual, or annual) basis.

extra dividend

A dividend that is not likely to be incorporated as part of the regular dividend in the future.

common-size statement

A financial statement in which amounts are expressed in percentage terms. In a vertical common size balance sheet, total assets are 100 percent, and all other amounts are expressed as a percentage of total assets each year; for an income statement, sales are 100 percent each year. Horizontal common size financial statements are side-by-side comparisons of several years' data in relation to the selected base year data.

financial leverage

refers to the use of debt to finance the assets of the entity

turnover=

sales/ average assets

number of days' sales in accounts receivable

An indicator of the efficiency with which accounts receivable are collected.

number of days' sales in inventory

An indicator of the efficiency with which inventories are managed.

earnings multiple

Another term for price/earnings ratio; an indicator of the relative expensiveness of a firm's common stock.

A vertical common size income statement: A)uses the dollar amount of net sales in the base year as the denominator for the comparisons made to other items within any given year. B)expresses all items within any given year's income statement as a percentage of net sales for that given year. C)makes horizontal comparisons between years more difficult. D)is useful in estimating the impact of inflation. E)is useful in comparing the percentage increases from year to year in operating expenses.

B)expresses all items within any given year's income statement as a percentage of net sales for that given year.

A potential creditor's judgment about granting credit would be most influenced by the potential customer's: A)current ratio at the end of the prior fiscal year. B)most recent acid-test ratio. C)trend of acid-test ratio over the past three years. D)practice with respect to taking cash discounts offered by current suppliers. E)price/earnings ratio.

D)practice with respect to taking cash discounts offered by current suppliers.

The comparison of activity measures (such as turnover ratios) of different companies is complicated by the fact that: A)dollar amounts of working capital may be significantly different from company to company. B)dollar amounts of assets may be significantly different from company to company. C)only one of the companies may have preferred stock outstanding. D)the number of shares of common stock issued may be significantly different. E)different inventory cost flow assumptions may be used.

E)different inventory cost flow assumptions may be used.

financial leverage measures

The debt ratio and debt/equity ratio that indicate the extent to which financial leverage is being used.

book value per share of common stock

The quotient of total common stockholders' equity divided by the number of shares of common stock outstanding. Sometimes called net asset value per share of common stock. Not a very useful measure most of the time.

Price Earnings Ratio

an indicator of the relative expensiveness of a firm's common stock

turnover is frequently calculated for the following:

1. accounts receivable 2. inventories 3. plant & equipment 4. total operating assets 5. total assets

ratios used to facilitate the interpretation of an entity's financial position and results of operations are grouped into these 4 categories:

1. liquidity 2. activity 3. profitability 4. debt of financial leverage

Return on Investment (ROI) is computed as: A)Net income divided by average total assets. B)Net income divided by total sales. C)Net income divided by average total stockholders' equity. D)Sales divided by average total assets. E)Sales divided by average total stockholders' equity.

A)Net income divided by average total assets.

The dividend payout ratio describes: A)the proportion of earnings paid as dividends. B)the relationship of dividends per share to market price per share. C)the percentage change in dividends this year as compared to last year. D)dividends as a percentage of the price/earnings ratio. E)the relationship of dividends per share to average total assets.

A)the proportion of earnings paid as dividends.

Preferred dividend coverage ratio

The ratio of net income to the annual preferred stock dividend requirement.

Dividend payout ratio

The ratio of the annual dividend per share of common stock to the earnings per share.

times interest earned ratio

the ratio of earnings before interest & taxes top interest expense. an indicator of the risk associated with financial leverage

debt ratio

the ratio of total liabilities to the sum of total liabilities & total stockholders' equity. sometimes, long-term debt is the only liability used in the calculation

debt/equity ratio

the ratio of total liabilities to total stockholders' equity. Sometimes only long-term debt is used for the numerator of the ratio.

effect of the inventory cost flow assumption on working capital

when the cost of items being purchased for inventory is changing, the inventory cost flow assumption used influences the inventory account balance, total current assets, and working capital

Many financial analysts substitute one amount for another in making ratio analysis comparisons in order to better achieve inter-company or company-to-industry data comparability. Which of the substitutions described below would not achieve better data comparability (for the ratio indicated) under any situation?A)Cost of goods sold for sales—in the numerator of the inventory turnover ratio.B)Cost of plant and equipment for net book value—in the numerator of the plant and equipment turnover ratio. C)Expected future earnings per share for current earnings per share—in the denominator of the price/earnings ratio. D)Average net assets for average total assets—in the denominator of the return on investment ratio. E)Number of working days in a year for 365—in the denominator of the number of days' sales in accounts receivable ratio.

d. Average net assets for average total assets—in the denominator of the return on investment ratio.

LIFO reserve

difference between the inventory valuation as reported under the LIFO basis and the amount that would have been reported under the FIFO basis

If the trend of the current ratio is increasing, while the trend of the acid-test ratio is decreasing over a period of time, this could be a warning that the firm is: A)depleting its inventories. B)having trouble collecting its accounts receivables. C)purchasing too much treasury stock. D)paying "extra" dividends. E)carrying excess inventories.

e. carrying excess inventories

If management wanted to increase the financial leverage of the firm, it would: 'A)raise additional capital by selling common stock. B)use excess cash to build up its productive capacity to achieve better utilization of its buildings and equipment. C)raise additional capital by selling fixed interest rate long-term bonds. D)try to increase its ROI by increasing asset turnover. E)concentrate on improving the firm's working capital management.

C)raise additional capital by selling fixed interest rate long-term bonds.

An individual interested in making a judgment about the profitability of a company should: A)review the trend of working capital for several years. B)calculate the company's ROE for the most recent year. C)review the trend of the company's ROI relative to the trend of the industry average ROI for several years. D)compare the company's price/earnings ratio at the end of most recent year with the industry average price/earnings ratio at the end of the most recent year. E)review the trend in the company's book value per share for several years.

C)review the trend of the company's ROI relative to the trend of the industry average ROI for several years.

Which of the following is not a category of financial statement ratios? A)Financial leverage. B)Liquidity. C)Profitability. D)Reliability. E)Activity.

D)Reliability.