FIN 380 CH 2, Ch 3, CH4
true and false: for financial analysis, financial statements and accounting numbers are more important than cash flows
false
true or false: operating cash flow includes capital spending and working capital requirements
false
As long as all sales requests are being met, a ________ inventory turnover ratio is better
higher
The information needed to compute the profit margin can be found on the __________
income statement
The information needed to compute the profit margin can be found on the __________.
income statement
A(n) ___________ in net profit margin will increase ROE
increase
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will
increase
according to GAAP, when is income reported?
when it is earned or accrued
Financial managers use a common size income statement to determine ________.
which costs are rising or falling as a percentage of sales
Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?
$375,000/$3.5m = 10.71%
A firm has an operating profit (EBIT) o $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio?
$600/$250 = 2.40
If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:
-$50
Which of the following are sources of cash?
-A decrease in accounts receivable -An increase in notes payable
Which of the following are traditional financial ratio categories?
-Asset management ratios -Market value ratios -Profitability ratios
Which of the following items are among the items used to compute the current ratio?
-Cash -Accounts payable
Which of the following are used of cash?
-Increases in inventory -Decreases in accounts payable -Increases in property, plant and equipment
Financial statements are used to:
-asses a company's current financial position --communicate financial information to outsiders -communicate financial information within the firm
the cash flow identity reflects the fact that
-cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm -a firm generates cash through its various activities -cash flow from the firms assets equals the total of cash flow to creditors and cash flow to stockholders
marginal tax rates are the most important tax rates because:
-incremental cash flows are taxed at marginal tax rates -financial decisions are usually based on new cash flows
what are two classifications of costs used by financial accountants?
-product costs -period costs
Which of the following are most apt to create problems when comparing financial statements for multiple firms?
-seasonality -differing fiscal years -differing accounting methods
A firm has a total debt ratio of .30 times. This means the firm has _______ in total debt for every $1 in total assets
.30
the tax cuts and jobs act of 2017 set the corporate tax rate to be ________ regardless of the level of taxable income
21%
Which of these computes days' sales in receivables?
365/Receivables turnover
Cal's market has return on equity (ROE) of 15%. What does this mean?
Cal's generated $.15 in profit for every $1 of book value of equity
BC Corporation has sales of $1,000,000 and costs of goods sold of $450,000 for the year. Inventory at year end was $180,000. What is the inventory turnover?
Inventory turnover = cost of goods sold/ inventory $450,000/$180,000 = 2.5
Which one of the following equations defines the total asset turnover ratio?
Sales / Total assets
___________ financial statements provide for comparison of firms that differ in size
Standardized
What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?
The total asset turnover ratio will increase
What is the debt-equity ratio for a company with $3.5 million in total assets and $1.4 million inequity?
Total debt = Assets - Equity (3.5m-1.4m)=$2.1m Debt/Equity= $2.1m/$1.4m= 1.50
in the long run, _________ are variable
all costs
Financial statements report:
book values
Total capitalization equals total equity plus total:
long-term debt
How is market-to-book ratio measured?
market value per share/book value per share
___________ income is money earned after interest and taxes.
net
If a company's common-size income statement shows a lower percentage for cost of goods sold this period compared to last period, the company may be controlling its costs well or it has ________
raised its prices relative to costs
The EBITDA ratio is similar in spirit to:
the PE ratio
What does it mean when a firm has a days sales in receivables of 45?
the firm collects its credit sales in 45 days on average
What does a current ratio of 1.2 mean?
the firm has $1.20 in current assets for every $1 in current liabilities
what is the most important item that can be extracted from financial statements?
the firm's actual cash flows
A common-size balance sheet expresses accounts as a percentage of ___________
total assets
true and false: taxes can be a large cash outflow for a corporation
true
If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?
$100-10+25=$115
Assume cash = $120, inventory = $470, accounts payable = $811, accounts receivable = $510, and total assets = $21,400. There are no other current assets. What is the current ratio?
($120+510+470)/$811 = 1.36
the cash flow identity states that cash flow from assets equals cash flows to _________
creditors and stockholders
True or False: The interval measure indicates how ling a start-up company can operate until it needs more financing
true
A firm with a profit margin of 6.8 percent generates _________ cents in net income for every one dollar in sales
6.8
What is the main difference between the cash coverage ratio and the times interest earned ratio?
Non-cash expenses
in march, al's paid cash for a video game for the store's inventory. in april, it sold the game on credit. in may, al's received payment for the sale. based on matching principal, the expense should be recorded in ______ and the income should be reported in ______
april;april
When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:
common-size statements
the purpose of a(n) ________ is to measure performance over a set period of time.
income statement
When a company has negative earnings for an extended period of time,analysts will often resort to the:
price-sales ratio
Return on equity (ROE) is a measure of __________.
profitability
free cash flow is better described as ________
total distributable cash flow
how is the average income tax rate computed?
total tax bill/total taxable income
A times interest earned (TIE) ratio of 3.5 times means a firm has _________ that is (are) 3.5 times greater than the firms interest expense.
earnings before interest and taxes
the matching principle of GAAP requires revenues be matched with _________
expenses
AD Co. has net income of $4,250 on total sales of $28,400. Total assets are $145,000. What is the profit margin?
$,250/$128,400 = 3.31%
Alpha Manufacturing has interest expense of $1.2 million, total assets of $184 million, sales of $17.6 million, long-term debt of $16.4 million, and net income of $15 million. How will interest expense be recorded in the common-size income statement?
$1.2m /$17.6m = 6.82%
if ending net fixed assets are $100, beginning fixed assets are $40, and depreciation is $10, then the change in capital spending is _______
$100 -40+10=$70
if ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ______.
$100-$60+$10=$50
How is the inventory turnover ratio computed?
Cost of goods sold / Inventory
The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way
DuPoint
Ad corporation has a return on equity of 20% on total equity of $800,000. Ad generated $1.6 million in sales on $2.7 million in assets. Use the DuPoint identitiy to match each of the values below to its proper component. Profit Margin ROA Equity Multiplier
PM= 20%/ ($1.6m/.8m) = 10% ROA= 20%/ ($2.7m/.8m) = 5.93% EM= $2.7m/.8m = 3.38 times
Profitability measures such as return on assets (ROA) and return on equity (ROE) are _______ rates of return
accounting
if you make an extra $1,000 in income your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra ____________ in taxes
additional tax = (.30)($1,000) = $300
cash flow to stockholders equals _______
dividends paid minus net new equity raised
A common-base year financial statement presents items relative to a certain base, which is the:
dollar amount of each item during a common base year
period costs are the costs that are allocated to a specific ________
interval of time
Ad corporation had sales of $750,000 and costs of goods sold of $350,000. Inventory at year end was $87,500. What is the inventory turnover?
inventory turnover = COGS/Inventory 350,000/87,500 = 4 times
If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be _________
less than 1
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25%. This indicates the firm has increased its ___________
liquidity
Some financial ratios measure a firm's _______, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial __________, which demonstrates the portion of assets financed by long-term obligations
liquidity;leverage
For financial decision-making purposes, the most important tax rate is the ________ tax rate.
marginal
the ________ tax rate is the tax rate paid on the next dollar of income
marginal
if you earn an extra $100 of taxable income this year and owe taxes of $34 on that income, then your marginal tax rate is _________ percent
marginal tax rate = $34/$100 = 34
Whenever ___ information is available, it should be used instead of accounting data
market
The price-earning (PE) ratio is a _____________ ratio
market value
How is market--to-book ratio measured?
market value per share/book value per share
A common-size income statement helps compare financial results over time by controlling for changes in ______
sales
The profit margin is equal to net income dividend by _______.
sales
An official accounting statement that helps to explain the change in cash and cash equivalents is called the ______.
statement of cash flows
which of the following is true about the U.S modified flat-rate tax system?
the tax rate is flat at all income levels
On a common-size balance sheet all accounts are expressed as a percentage of __________
total assets
in the long run, all costs are ________
variable
Long-term solvency ratios are also known as:
financial leverage ratios
A ___________ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings
higher
An important accounting goal is to report financial information to users in a way that is useful for ________
decision making
__________________ are the prime sources of information about a firm's financial health
Financial statements
Which ratios use some information that is not contained in financial statements?
Market value ratios
Alpha has assets of $102 million, net income of $4.3 million, total sales of $97 million. Omega has assets of $12.4 million, net income of $.76 million, and total sales of $9.3 million. Based on common-size income statements, which company is more profitable?
Net profit margin = Net income/ sales Alpha = $4.3m/$97 = 4.4% Omega = $ .76/$9.3m = 8.2%
The current ratio hows the relationship between ___________.
current assets and current liabilities
net capital spending is equal to the change in net fixed assets plus:
depreciation
the U.S tax rate becomes a flat-rate tax in practice at approximately what corporate income level?
$0
Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?
$11,300/($54,800-45,000) = 1.15
if a firm's net working capital is $120 in 2014 and $100 in 2013, then the change in net working capital is:
$120-$100= +$20
BC Corporation has net income of 176,000, sales of 1,982,000 and total assets of 2.24 million. What is the return on assets?
$176,000/$2.24m = 7.86%
Vera's has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?
$30/$3 = 10 Times
BK Trucking has total equity of 25,380 and 1,500 shares outstanding. Its stock is currently selling at 38 dollars per share. What is the market-to-book ratio?
$38/($25,380/1,500) = 2.25
AD Co. has net income of $4,250 on total sales of $128,400. Total assets are $145,000. What is the profit margin?
$4,250/$128,400= 3.31%
AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity?
$51,750/($523,400-267,000) = 20.18%
BC Toys has total equity of $584,000. There are 35,000 shares outstanding at a market price of $54 per share. What is the market to book ratio?
$54/(584,000/35,000) = 3.24 times
Assume current assets = $8; fixed assets = $125, current liabilities = $42, and equity = $100. What is the total debt ratio?
($48 + 125 - 100)/($48 + 125) = .42
BT Tools has current assets totaling $9.2 million, including $4.3 million in inventory. The company's current liabilities total $8.1 million. What is the quick ratio?
($9.2m - 4.3m)/$8.1m = .60
Given the tax rates of 15% on Income from $0 to $50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000, approximately how much tax would a company pay on a taxable income of $60,000?
(.15)(50000)+(.25)(10000)= $10,000
if the federal marginal tax bracket is 21%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 taxable income?
(1-.21-.05-.01) x $1 mil = $730,000
Which of the following is the correct representation of cash coverage ratio?
(EBIT + Non-cash expenses)/ Interest expense
Which of the following is correct representation of the total debt ratio?
(Total assets-Total equity)/(Total assets)
Which of the following groups are most interested in liquidity ratios?
-bankers -suppliers
Increasing its non-cash liquid assets will enable a firm to do which of the following?
-increase its ability to avoid financial distress -increase its ability to meet short-term obligations
which of the following are period costs?
-selling costs -general expenses -administrative expenses
Under a flat-rate tax, all income levels are taxed at _____.
-the same average rate -the same marginal rate
when is revenue recognized on an income statement?
-when the earnings process is virtually completed -when the value of exchange of goods or services can be reliably determined
Better Life Corporation has sales of $500,000 on assets of $2,000,000. At year end accounts receivable were still 5% of assets. The firm's receivable turnover is _______ times.
2,000,000*.05 = $100,000 in Accounts Receivable. Turnover is thus $500,000/$100,000= 5
if the federal marginal tax bracket is 21%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, the overall marginal tax rate for the company will be ________%
21%+1%+5%=27%
How are firms classified into peer groups for ratio analysis?
According to Standard Industrial Classification codes
If Marley Company has a stock price of $12 per share, 100,000 shares outstanding, $432,000 in liabilities and $100,000 in cash, what is its enterprise value?
Enterprise Value = market value of stock + book value of liabilities -cash EV =12*100,000+432,000-100,000=$1,532,000
How is the price-earnings (PE) ratio computed?
Market price per share / Earnings price per share
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
What is the debt - equity ratio for a company with $3.5 million in total assets and $1.4 million in equity?
Total Debt = Assets - Equity ($3.5m - 1.4m) = $2.1 m Debt/Equity = $2.1m/$1.4m = 1.50
Although ______________ are often poor reflections of reality, they are often the best information available.
accounting numbers
the cash flow identity states that cash flows from ________ should equal cash flows to creditors and equity investors
assets
in finance, the value of a firm depends on its ability to generate __________
cash flows
if a firm's net working capital goes from $150 in 2013 to $130 in 2014, then the change in net working capital is:
change in NWC= $130-$150= -$20
A firm with a market-to-book value that is greater than 1 is said to have ________ value for shareholders.
created
The cash ratio is found by dividing cash by:
current liabilities
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ________.
increase
since new cash flows are taxed at _________ tax rates, those tax rates are the most important
marginal
a company's ________ cash flows reflect whether its cash flows from business operations can cover its everyday cash outflows
operating
an income statement reflects activity that occurs _______ while a balance sheet reflects values ________
over a period of time; as of a specific date
a positive operating cash flow indicates that the firm is generating enough cash to _________
pay operating costs
One of the most important uses of financial statement information within the firm is:
performance evaluation
A common-size income statement helps compare financial results over time by controlling for changes in ________.
sales
Common-size statements are used for comparing firms with differing _______.
sizes
At the most fundamental level, firms generate cash and:
spend it
