Chapter 3
what are some common methods for analyzing financial statements?
-Comparative financial statement -Horizontal analysis -Vertical analysis -ratio analysis
The SEC requires disclosures on compensation for which of the following?
-Directors -Executives
The acid test (quick ratio) excludes what accounts?
-Inventories -Prepaid items -Restricted cash - Deferred taxes
examples of intangible assets on the balance sheet.
-Patents -copyrights -franchises -trademarks
The numerator of the Acid test ratio takes what accounts into consideration
-Unrestricted cash -Short term investments -Accounts receivable the "quick Assets"
Which of the following are included in inventory?
-Work in process -Raw materials -Finished goods
what is the industry average for debt to equity ratio
.95
What are 2 types of liquidity ratios
1- Current ratio 2- Acid test ratio
Solvency Ratio types
1- Debt to equity ratio 2- times interest earned ratio
Reasons that book value will NOT equal Market value
1- Many assets are measured at their historical costs 2-Many aspects of a company represent valuable resources but are not recorded as assets in the balance sheet
If a company has total assets of $2,000, current assets of $500, current liabilities of $750, and total liabilities of $1,200, what is the company's debt-to-equity ratio?
1.500 1) Find SE= Total asset - Total Liab. =800 2DTE ratio = Total liabilities/ SE = 1200/800
The ending balance of retained earnings increased by $3.2 million from the beginning of the year. The company declared a dividend of $1.3 million during the year. What was the amount of net income during the year?
4.5 million. All this is asking us is what is our total revenue before our expenses (dividends). before we distributed our dividends
Debt to equity ratio
= Total liabilities / shareholder's equity
The Acid test or also known as the quick ratio what is the equation?
= quick assets / Current liabilities
What does a higher Debt to equity ratio mean
A higher risk
Financial Flexibility
ABility to alter cash flows in order to take advantage of unexpected investment opportunities and needs
Long-term solvency
Ability to pay all labilities.
Liquidity most often refers to.
Ability to pay current liabilities.
The auditor has specific knowledge that financial statements or disclosures are seriously misstated or misleading. is known as what type of auditors report
Adverse
The financial statement that displays a firm's financial position on a particular date is the _______ __________ .
Balance sheet
The financial statement that provides information about liquidity and long-term solvency is the
Balance sheet
In a balance sheet, how are assets classified?
Current and noncurrent.
Liquidity Ratio = liquidity is the ability to convert assets to cash to pay its short term debts:
Current assets - Current liabilities = Working capital
Current Ratio Formula
Current assets / current liabilities
The risk that a company will not be able to pay its obligations when they come due is referred to as ______________ risk.
Default
represents cash received from customers for goods or services to be provided in a future period?
Deferred revenues
The auditor is not able to gather sufficient information that financial statement are in conformity with GAAP is known for what type of auditors reports
Disclaimer
The basis used to classify assets as current or long-term is:
Expect to be convert to cash or consumed in more than one year
True or false: Accounts receivable result from the sale of goods or services for cash.
False. ITs a current asset because it normally is sold within the operating cycle
What is the principle that requires that financial statements provide all material relevant information concerning the entity?
Full disclosure
Goodwill on the balance sheet arises when one company acquires another company. what is this equation
Goodwill = Acquisition price - Fair value
What refers to the riskiness of a company with regard to the amount of liabilities in its capital structure?
Long term Solvency
Machinery the comapny intends to use over the next 7 years is classified as what type of asset
Long term asset
On the balance sheet, deferred income taxes and other assets referrences to what
Long term prepaid expenses`
An analysis provided by the company's management is included in the
Management discussion and analysis
Who is responsible for the information in the annual report?
Management of the company.
Responsibility for the financial statements and other information found in the annual report lies with
Managment
The full-disclosure principle requires financial statements to provide all _______ ___________ information regarding the company.
Material Relevant
How do you find income before interest and taxes
Net income + Interest expense + income taxes
Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of inventory with cash affect each ratio?
No change to the current ratio and decrease the acid-test ratio. (The current ratio equals current assets dividend by current liabilities. The purchase of inventory with cash results in no change to current assets or current liabilities, so the current ratio remains the same. The acid-test ratio (or quick ratio) divides current assets readily convertible to cash (cash, short-term investments, and accounts receivable) by current liabilities. The purchase of inventory with cash reduces the amount of quick assets and has no effect on current liabilities, so the acid-test ratio declines.)
Liabilities are seen as
Obligations of a company
What does a liability represent?
Obligations owed to other entities
The ___________ cycle refers to the period of time necessary to convert cash to raw materials, raw materials to a finished product, the finished product to receivables, and then receivables back to cash.
Operating
In Balance Sheet the category of long-term assets include a catchall classification of noncurrent assets that were not reported separately in one of the _____________ long-term classifications
Other
Market value
Price that something could be sold in a given market
There has been a departure from GAAP, but it not of sufficient seriousness to invalidate the financial statement as a whole is known as what type of auditor's report.
Qualified
Overall market value =
Share price x Number of shares outstanding
Current assets include
Short term investments Cash
A company's ability to pay its long-term debts- an important measure of risk is
Solvency
If a company has a large amount of long-term debt in its capital structure, this will affect the firm's _____
Solvency
Accounts receivable represents which of the following?
The amount owed by customers.
The net amount of property, plant, and equipment reported in the balance sheet generally is equal to:
The assets' original costs - their accumulated depreciation since purchased.
The Management Discussion and Analysis section of the financial statements includes a perspective on what
-Capital resources -Operations -liquidity
Which of the following is true regarding disclosure notes? Multiple choice question. -They explain or elaborate on data presented in the financial statements. -They are presented as part of Management Discussion and Analysis in the annual report. -They are required for each line item on the financial statements. -They outline the business plan of the company.
They explain or elaborate on data presented in the financial statements.
what is the purpose of the "Times interest earned ratio "
This indicates the margin of safety provided to creditor.
What is the role of the auditor's attest function?
To provide an opinion on the financial statements.
Market value IN A PUBLIC CORPORATION =
Trading price of a share of a corporation stocks
True or false: The operating cycle for most firms is 1 year or less.
True
The auditor believes the financial statments are in conformity with GAAP but there is a going concern situation. Is known as what type of auditors report
Unqualified with explanatory paragraph
The auditor believes the financial statements are in conformity with GAAP but wishes to draw attention to events subsequent to the balance sheet date is known for what type of auditor's report.
Unqualifies with emphasis on Paragraph
Current _____________ include cash and other items that will be converted to cash or consumed within the coming year.
assets
The higher the percentage of a company's liability to its equity results in
deficulty in borrowing more funds
True or false: The balance sheet will directly measure the company's market value.
false
An asset that has no physical substance is referred to as a(n) ______ asset.
intangible
Patents, copyrights, and franchises are examples of what?
intangibles
Assets not used directly in the operations of the business are referred to as ________________
investments
The balance sheet provides useful information about a company's _____________ and long-term solvency.
liquidity
Assets minus liabilities, measured according to GAAP, is not likely to be representative of the _____________ value of the entity.
market
Default risk refers to the ability of a company to Multiple choice question.
pay its obligations when they come due.
Which document is required to provide information on executive and director compensation?
proxy statement
A ratio used to measure liquidity is the
quick ratio.
By eliminating current assets that are less readily convertible into cash, the acid test ratio provides a more ___________ indication.
rigorous
Investments in stock and debt securities of other corporations are included as _____ if the company has the ability and intent to sell them within the next 12 months.
short-term investments
In general the less financial flexibilty means
the higher the risk the enterprise will fail
The compensation of directors and top executives is disclosed in:
the proxy statement
Which of the following are common characteristics of property, plant, and equipment?
used in normal operations long-lived tangible
Which financial statements shows a firm's financial position on a particular date?
balance sheet
A company's assets minus its liabilities shown on the balance sheet is referred to as its ______ value.
book
The two classifications used for assets and liabilities on the balance sheet are ______ and ______.
current; noncurrent
How should liquid investments expected to be converted to cash within the current operating cycle be reported in the balance sheet?
As a short-term investment in the current asset section.
how to find the shareholders equity
Assets - Liabilities
Equation to Copanaies Book value; This will not directly measure a companys market value
Assets- Liabilites
Times interest earned ratio
Income before interest and taxes / Interest expense
Ownership of an exclusive right to something such as a product, a process, or a name is called what?
Intangible Asset
___________ consist of assets that a retail or wholesale company acquires for resale or goods that manufacturers produce for sale.
Inventory
Assets not used directly in the operations of the business are referred to as ______________.
Investment
Cash set aside for future plant expansion and a 3 year note receivable are both examples of what on a company's balance sheet?
Investment
Land held for speculation, noncurrent receivables, and cash set aside for future plant expansion are all examples of
Investment
Assets not used directly in the operations of the business are called what?
Investments
Which of the following items should be classified as a short-term investment?
Investments to be sold in 12 months
If current ratio is reading anything above (>) 1.0 what does that mean ?
It means the company could have difficulty paying its liabilities.
How does the increase of the risk that a company will not beable to pay its debt effect Liabilities relative to equity
It will also increase
