FIN: Ch 3 Working with Financial Statements

Total capitalization equals total equity plus total:

Long-term debt

Which of the following items are among the items used to compute the current ratio?

- Accounts Payable - Cash

Financial statements are used to:

- Communicate financial information to outsiders - Communicate financial information within the firm - Assess a company's current financial position

Which three of the following are most likely to create problems when comparing financial statements for multiple firms?

- Differing fiscal years - Differing accounting methods

How is market-to-book ratio measured?

Market value per share / book value per share

Which ratios use some information that is not contained in financial statements?

Market value ratios

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times respectively. Explaining the upward trend in the inventory turnover ratio requires:

- Further investigation - Examining whether the trend is because of increased sales or decreased inventory.

Which of the following are uses of cash?

- Increases in property, plant and equipment - Decreases in accounts payable - Increases in inventory

One of the most important uses of financial statement information within the firm is:

- Performance evaluation

Which of the following are traditional financial ratio categories?

-Market value ratios -Profitability ratios -Asset management ratios

Which two of the following groups are most interested in liquidity ratios?

-Suppliers -Bankers

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?

1.36 ($120 + $510 + $470)/$811 = 1.36

What is the debt-equity ratio for a company with $3.5 million in total assets and $1.4 million in equity?

1.50 assets-total equity=3.5/1.4=1.50

BC Corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2 million and equity of $1.5 million. What is the PE ratio if the stock is currently selling at $18 per share?

12 times $18/($2,700/$1,800) = 12 times

Nestor's has net income of $315,000, total sales of $3.52 million, total assets of $4.4 million, and total equity of $1.98 million. What is the return on equity?

15.91% 315,000 / 1.98m

A firm has an operating profit (EBIT) of $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio?

2.40 $600/$250 = 2.40

Return on assets is 15%, equity multiplier is 1.4, what is the return on equity?

21.00% 15% x 1.4

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?

3.24 times $54 / (584,000/ 35,000)

AD Co. has net income of $4,250 on total sales of $128,400. Total assets are $145,000. What is the profit margin?

3.31% $4,250/$128,400

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 firms receivable turnover is _____ times.

5 2,000,000 * .05 = $100,000 (accounts receivable) 5000.000 / 100,000 = 5

Alpha Co. has cost of goods sold of $61.2 million, net income of $9.6 million, sales of $120 million, and total assets of $150 million. A common-size income statement will show costs of goods sold of _____________ percent and a net profit of _______________ percent.

51; 8

Rock Construction has current assets of $45 million, total liabilities and equity of $67 million, and sales of $59 million. How would current assets be expressed on a common-size balance sheet?

67% $45m/$67m = 67%

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?

7.86% $176,000/2.24m = 7.86%

How are firms classified into peer groups for ratio analysis?

According to Standard Industrial Classification codes

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

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

If Marley Company has a stock price of $12 per share, 100,00 shares outstanding, $432,000 in liabilities and $100,000 in cash, what is its enterprise value?

$1,532,000

Which of the following is the correct representation of the cash coverage ratio?

(EBIT + Non-cash expenses) / interest expense

Which of the following is the correct representation of the total debt ratio?

(Total assets- Total equity) / (Total assets)

_________ __________ are the prime source of information about a firm's financial health.

Financial statements

AD Corporation has a return on equity of 20% on total equity of $800,00. AD generated $1.6 million in sales on $2.7 million in assets. Use the DuPont Identity to match each of the values below to its proper component.

Profit Margin= 10% ROA= 5.93% Equity Multiplier= 3.38 times

A common-size income statement helps compare financial results over time by controlling for changes in __________.

Sales

Which one of the following equations defines the total asset turnover ratio?

Sales / total assets

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

At the most fundamental level, firms generate cash and:

Spend it

_________________ financial statements provide for comparison of firms that differ in size.

Standardized

The EBITDA ratio is similar in spirit to:

The PE ratio

Although _____________ ____________ are often poor reflections of reality, they are often the best information available.

accounting numbers

Financial statements report:

book values

The cash ratio is found by dividing cash by:

current liabilities

Long-term solvency ratios are also known as:

financial leverage ratios

A(n) ______________ in net profit margin will increase ROE.

increase

If a company has inventory, the quick ratio will always be ___________ the current ratio.

less than

The profit margin is equal to net income divided by ______________.

sales

Financial managers use a common-size income statement to determine _____________.

which costs are rising or falling as a percentage of sales

Whenever _______________ information is available, it should be used instead of accounting data.

market

The price-earnings (PE) ratio is a ___________ ratio.

market value

Return on equity (ROE) is a measure of ___________.

profitability

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