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Finance - Chapter 3
| Question | Answer |
|---|---|
| Balance Sheet | displays what the company owns and owes |
| Income Statement | shows you the company's income and expenditure |
| Ratio Anaylsis | involves methods of calculating and interpreting financial ratios to analyze and monitor the firm's peformance |
| cross-sectional analysis | involves the comparison of different firms' financial ratios at the same point in time |
| benchmarking | compare its ratio values with those of a key competitor, a group of competitors, or even top-preforming firms from other industries |
| time-series analysis | evaluates performance over time |
| What are cautions about using ratio analysis? | 1. Ratios that reveal large deviations from the norm merely indicate the possibility of a problem 2. A single ratio does not generally provide sufficient information on which to judge the overall performance of the firm |
| What are cautions about using ratio analysis? (pt 2) | 3. Analysts should not care to use financial statements dated at the same point in the year before calculating ratios for different companies 4. It is preferrable to use audited financial statements for ratio analysis. |
| What are cautions about using ratio analysis? (pt 3) | 5. The financial data being compared should have been constructed using the same set of accounting principles 6. Results can be distorted by high inflation |
| The liquidity of a firm | reflect its ability to satsify its short-term obligations as they come due |
| The current ratio | measures liquidity by comparing a firm's current assets to its current liabilities. |
| the quick (acid-test) ratio | is similar to the current ratio except that it excludes inventory, which is generally the least liquid current asset |
| Activity ratio | measures the speed with which various asset and liability accounts are converted into sales or cash |
| Inventory turnover ratio | is a metric used by analysts to judge the effectiveness of inventory management practices |
| total asset turnover | is a measure of the efficiency with which the firm uses its assets to generate sales |
| financial leverage | refers to the degree to which a firm uses debt financing and to the effects of debt financing |
| The degree of indebtness | measures the amount of debt relative to other significant balance sheet amounts |
| coverage ratios | help analysts assess whether a company can service their debts |
| debt ratio | measures the proportion of total assets financed by the firm's creditors |
| debt-to-equity ratio | measures the relative proportion of total liabilities to common stock equity used to finance the firm's assets |
| times interest earned ratio (interest coverage ratio) | measures the firm's ability to make contractual interest payments |
| fixed-payment coverage ratio | measures the firm's ability to meet all fixed-payment obligations such as loan interest and principal lease payments. and preferred stock dividends |
| gross profit margin | measures the percentage of each sales dollar remaining after the firm has paid for its cost of goods sold |
| operating profit margin | measures the percentage of each sales dollar remaining after deducting all costs and expenses other than interest, taxes, and preferred stock dividends |
| net profit margin | measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted |
| Return on total assets (ROA) ((Return on Investment (ROI))) | measures the overall effectiveness of managements in generating profits with its available assets |
| Return on Equity (ROE) | focuses on the earnings that a company generates relative to the equity invested in the firm rather than the assets invested |
| What is book value? | the value of any item listed on the balance sheet |
| What is market value | the price an asset fetches in the market and it commonly used to refer to market capitalization |
| What is liquidity? | how quicky we can convert assets to cash without losing value |
| Current assets minus inventories over current liabilities is called the: | acid-test ratio |
| The three main financial statements are the balance sheet, the income statement and the statement of cash flows. However, there is a fourth financial statement known as the: | statement of stockholders’ equity |
| Which type of income may be distributed to the company’s owners or reinvested in the company? | Net income |
| Financial statements also have extensive notes where companies provide additional information such as: | accounting policies for revenue recognition. |
| The key ratio linking ROA to ROE in the modified DuPont formula is the: | financial leverage multiplier. |
| A statement of cash flows has which three parts? | Operating, investing and financing |
| The Sarbanes-Oxley Act attempts to improve the accuracy of information given to both boards and shareholders by: | stiffening penalties for false information |
| Any publicly-traded U.S. firm must file quarterly financial statements and annual financial statements with the __________ and also send an annual report that includes their financial statements to their stockholders. | U.S. Securities and Exchange Commission |
| Accountants prepare financial statements using a set of guidelines established by the profession to ensure that all financial statements are comparable. These guidelines are known as: | generally accepted accounting principles |
| Accounts receivable are: | credit sales that have not been collected |
| The term ______ refers to the degree to which a firm uses debt financing (or other types of fixed-cost financing) to fund its operations. | financial leverage |
| A firm's annual stockholders' report ________. | summarizes and documents the firm's financial activities during the past year |
| A(n) ________ provides a financial summary of a firm's operating results during a specified period. | income statement |
| Net profit after taxes is ________. | EBIT minus interest and taxes |
| The ________ represents a summary statement of a firm's financial position at a given point in time. | balance sheet |
| On the balance sheet, net fixed assets represent ________. | gross fixed assets at cost minus accumulated depreciation |
| Which of the following is TRUE of benchmarking? | It is an analysis in which a firm's ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate. |
| The ________ of a business firm is measured by its ability to satisfy its short-term obligations as they come due. | liquidity |
| Which of the following is TRUE of the current ratio? | A higher current ratio indicates a greater degree of liquidity. |
| A(n) ________ is useful in evaluating credit policies. | average collection period |
| Which of the following ratios is difficult for the creditors of a firm to analyze from the published financial statements? | average payment period |
| The ________ ratio indicates the efficiency with which a firm uses its assets to generate sales. | total asset turnover |
| The higher, the value of the ________ ratio, the better able a firm is to fulfill its interest obligations. | times interest earned |
| The ________ is a popular approach for evaluating profitability in relation to sales by expressing each item on the income statement as a percent of sales. | common-size income statement |
| If a firm has no liabilities or debt of any kind on its balance sheet, then which of the following is TRUE? | ROE = ROA |
| A firm with a low net profit margin can improve its return on total assets by ________. | increasing its total asset turnover |
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