Mgmt science FA 1, 2, cash flow

Midterms

Financial analysis is primarily a matter of making relevant mechanical computations

true

Percentage changes usually are computed by use of the amounts for the oldest accounting periods as base

true

The peso amount of change during an acckunting period for an item appearing in FS is less significant than the change measured as a percentage

true

A business enterprise’s earnings performance and its financial conditions are the two primary concerns of the financial analyst

true

An increase in sales volume generally is accompanied by a proportionate increase in net income

FALSE

On a common size net income statement, sales is given an equivalent of 100%

true

The peso amount of change during a period in a certain item appearing in FS is probably less significant than the change measured as a percentage

true

It is possible that a decrease in gross profit rate may be offset by a decreade in expenses, thus resulting in an increase in net income

true

Industry standards tend to place the performance of a company in a mlre meaningful perspective.

true

The data from comlparative financial statements are useful

a.to analyze changes in gross and net earnings over a number of accounting periods,

b.to analyze the sources of increase in assets,

c. to indicate trends and costs trends for the firm

d. all the above

d. all the above

index numbers are used in

a. trend analysis

b. ratio analysis

c. verticl analysis

d. common size sta.atements

a. trend analysis

“trading on equity” ( financial leverage) is likely to be a good financial strategy for shareholders of corporations with: a.

rapidly growing amounts of net income

b. staedy but low amounts of net income

ac. widely fluctuating net incomeover a short period of time

d. steadily declining amounts of net incoome

rapidly growing amounts of net income

W/c of the ff would probably not be found in a company’s annual report

A. The auditor’s report

B. A five or ten year summary of operations

C. Interim financial statements

D. Analysis of the past years operations

C. Interim financial statements

What is the first step in an analysis of financial statements

A. Check the auditor’s report

B. Check the references containing financial information

C. Specify the objectives of the analysis

d. Do a common size analysis

C. Specify the objectives of the analysis

What is a creditor’s objectives in performing an analysis of Financial statements

a. to decide whether the borrower has the ability o repay the interest and prinicipal on borrowed aaaccounts

b. to determine the firm’s capital structure

c. to determine the firm’s futue earnings system

d. to decide whther the fir has operated profitably in the past.

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To decide whether the borrower has the ability to repay interest and principal on borrrowed funds

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what is the investor’s objective in the financial statement analysis?

a. to determine if the firm is risky

b. to determine the stability of earnings

c. to determine the chanchanges necessary to improve the future performance

d. to determine whether an investment is warraned by estimating a company’s future earnings stream

To determine whether an investment is warranted by estimating a company’s future earnings stream.

W/c of the ff is not a tool or technique used by a financial statement analyst

A. Common size financial statements

B. Trend analysis

C. Random sampling analysis

D. Industry comaparisons

C random sampling analysis

Hollys corp. Net income was 400k in 2018 and 160 k in 2019. What percentage in net income must Holly achieve in 2020 to offset the decline in profits in 2019? in percentages

a. 60

b.150

c.600

d.67

B. 150%

In financial statement analysis, the most difficult of the ff items to prwdict whether:

A. The company’s market share is increasing or declining

B. The company will be solvent in six mos.

C. Profits will increase in the coming year.

D. The market price of the share capital will rise or fall over the next mos.

D. The market price of share capital will rise or fall over tge next mos.

Key performance indicators

profitability

stability

liquidity

sound capital structure

risk exposure

This refers to the analysis of the company’s ability to meet near term demand for cash and normal operating requirements.

Short term sovency analysis or Liquidity

This pertains to the evaluation of the amount and proportion of debt in a firm’s capital structure to assess its ability to service debts.

Capital structure and long term solvency analysis

This involves the evaluation of how well assets have been employed by mgmt. in terms of generating revenues and maximizing returns on such resources

Operating efficiency and profitability analysis

The practice of carefully timing the recognition of revenues and expenses to even out the amount of reported earnings from one year to the next

To even out income

Measures taken by mgmt. to make the company appear as strong and profitable as possible

Window dressing

could also be commited by enterprises who would want to obtain gov. subsidies or exemptions from tariff and taxes.

reverse window dressing

This ivolves timing its transactions so that one large time gains and losses occur in the same period resulting in smooth upward trend in reported earnings.

Strategic matching

One of the often used techniques in managing earnkngs to show more favorable results is

Fraudulent reporting or deliberate violation of accounting rules.

This technique could involve deliberate recording of non existent revenue transactions and customers or reporting sales when contracts are not fully completed and goods not yet delivered.

Ficititious Transactions

Techniques to evaluate financial statements

Hosorizontal Analysis of Comparative Statements( increase - decrease method)

Trend Percentages

Common size financial statements

Financial rati

horizontal analysis of comparative statements (increase-decrease method)

trend percentages

common size financial statements

financial ratios

The study of prcentage changes in comparative statements

Horizontal Analysis

Are index numbers showing relative changes in finacial data resulting with the passage of time

Trend percentages

To adjust to size differences, analysts and accoubtants s have developed

common size financial statements

Translate peso amounts to percentages which indicate the relative size of an item in proportion to the whole.

Common size fincial statements

The preparation of common size statements is known as

VERTICAL ANALYSIS

Is a comparison in fraction, proprtion,, decimal or percentage form of two significant figures taken from financial statements

Financial ratio

It expresses the direct relationship between two or more quantities in the statement of financial position and income atatement of a business firm

Financial ratios

Are ratios that measure the firms abilty to meet cash needs as they arise

Liquidity ratios

are ratios that measure the liquidity of specific assets and efficiency in managing assets such as accounts receivable, inventory and fixed assets

activity ratios

Ratios that measure the extent of a firms financing with debt relative to equity and its ability to cover jnterests and other fixed charges such as rent and sinking funds.

Leverage ratios

Ratios that measure the overall performance of the firm and its efficiency managing assets, liabilities, and equity.

Profitability ratios

Is widely regarded as a measure of short term debt paying ability.

Current ratio

Is a much more rigorous test of a company’s ability to meet its short term debts

Acid or quick test ratio

Considers cash flow from operating activities in addition to the truly liquid assets, cash and marketavle securities

Cash flow liquidity ratio

Roughly measures how many times a comlany’s accounts receivable have been turned into cash during the year.

Accounts receivable turnover

Helps evaluate the liquidity of accounts receivable and the firms credit policies

Average collection period

Measures the efficiency of the firms in managing and selling inventory

Inventory turnover

The number of days being taken to sell the entire inventory one time( called the average sale or conversion period)

Average sale period

Another approach to assessing managements effectiveness in generating sales from investments in fixed asstes particularly for a capital intensive firm.

Fixed asset turnover

Is a measure of the efficiency of mgmt to generate sales and thus earn more profit for the firm

Total asset turnover

measures the proportion of all assets that are financed with debt.

Debt ratio

The amount and proportion of debt and equity in a companys capital structure are extremely important to the financial analyst because of trade off between risk and return.

Dwbt to equity ratio.

Is the most common measure of the ability of a firms operations to provide protection to long term creditors

Times interests earned

Measures the firms coverage capability to cover not only interest paymemts but also the fixed payment associated with leasing which must be met annually

Fixed charge coverage

Shows the relationship between sales and tge costs of products sold

Gross profit margin

Measure of overall operating efficiency and incorporates all of the expenses asssociated with ordinary or normal business activities

Operating profit margin

Measures tge profitability after considering all revenue and expenses

Net profit margin

Two ratios that measure the overall efficiency of the firm in managing its total investment in assets and in generating return to shareholders.

ROA AND ROE

Statements that express each account on the statement of financial position as a percentage of total assets and each account on the income statement as apercentage of net sales

Common size financial statements

W/c of the ff. Is nkt revealed on a common size statementof financial position

A. The debt structure of a firm

B. The capital structure of a firm

c. The peso amount of assets and liabilities

D. The distribution of assets in which funds are knvested

C. The peso amounts of assets and liabilities

what is a serious limitation of financial ratios

a. ratios are screening devices

b.ratios can be used only by themselves

c. ratios indicate weaknesses only

d.ratios are not predicticve

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Ratios are not predictive

What is the most widely used liquidity ratioc

a. quick ratio

b. current raio

c. inventory turnover

d. debt ratio

Current ratio

What is a limitation common to both the current and the quick ratio

a. acounts receivable may not be truly liquid

b/ inventories may nkot be truly liquid

c. marketable securities are not liquid

d. prepaid expenses are potential sources of cash

Accounts receivable may not truly liquid

Why is the quick ratio a more riiogorous test of short run solvency than the current ratio

a. the quick ratiio considers only cash and marketable securities as current asstes

b.the quick ratio eliminates prepaid expenses for the numerator

c. the quick ratio eliminaes prepaid expense for the denominator

d. the quick ratio eliminates inventories from the numerator

The quick ratio eliminates iventories from the numerator

what does an icreasing collection period for accounts receivable suggest about a firm credit policy

a. the credit policy are too restrictive

b/ the firm is probably loosing qualified customers

c. the credit policy may be too lenient

d. the collection period has no realtionship to a firm’s credit pocyy

The credit poolicy may be too lenient

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Which of the ff is not a reason for a high inventory turnover ratio

a. stockpiling inventory

b. decrease in prices

c. understoking inventory

d. shortage of materials

Stockpiling inventoryy

what do the asset turnover ratios measure

a. the liquidity of the firm’ s current assets

b. management’s effectiveness and profitability of the return

c. the overall efficiency and profitability of the firm

the distribution of asstes in which funds are invested

Mgmts effectiveness in generating sales from investments in assets

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a. debt ratio

b. debt to equity ratio

c. times interest earned

d. long term deb to total caapitalization

This ratio would not be used to measure the extent of a firms debt financing

Times interest earned

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a. debt implies stock

b. debt is less costly thn equity

c. equity is riskier than debt

d. debt is total to total assets

Why is the amount of debt in a company capital structure important to the financial analyst

Because debt implies stock

Why is the fixed charge coverage ratio a broader measure of a firms coverage capabilities than the times interest earned ratio

Because the fixed charge ratio includes lease payments as well as interest payments

which profit margin measures overall operating efficiency of the firm

a. gross profit margin

b operating profit argin

c. net profit marin

d. return o equity

d.

Operating profit margin

Which ratio measures the overall efficiency of the firm in managing its investments in assets and in generating return to sharegolders

ROI AND ROE

What does an financial leverage index greater than 1 indicate about a firm

Operating returns more than sufficient to cover interest payments on borrowed funda.

What does the price to earnings ratio measure

a. the multiple which stock mrket places on a firms earnings

b. the relationship between the devidends and market prices

c. the earnings for one ordinary share

d. the percentage of dividends paid to net earnings of the firm

The multiple which the stock market places on a firms earnings

Which of the ff usually os least important as a measure of short term liquidity

A. Quick ratio

B. Current ratio

C. Debtcratio

D. D. Cash flows from operating activitiesc

C. Debt ratio

If a companys current ratio declined in a year during which its quick datio improved , which is the most likely explanation of this

Inventory is increasing

A firms current ratio qt the end of any given accounting period

* is generally greater than the acid test ratio of that firm for the same period
* Is never smaller than the acid test ratio for the same period
* Is always equal to the working capital ratio for that date
* all the above

all the above

A comlany has a current ratio of two is to one at the end of year one. Which of the fd transactions will increase this ratio

a. sale of bnds payable at a discount

b. declaration of a 50% stock dividend

c.collection of large recceivabl

d.borrows cash fombank, issuing a six mot note

Sale of bonds payable at a discount

In projecting the future profitability of a merchandising company, investors generally will be least concerned with potential increases in the

Quick ratio

A conversion of a company short term note payable into a long term note payable would

Icrease both working capital and the current ratio

A company has two is to one current ratio . This ratio will decraese if the company

Borrows cash on a six month note

Assuming stable business conditions, a decline in the number of days sales outstanding in accounts receivable at year end from one year to the next might indicate

Stiffening of credit policies

What is the effect of the collection of acckubts receivable on the current ratio and net working capital

Both has no effect

A corporation purchased its own shares of stocks in the open market at a price greater than book value per share. Its book valuevper share and earnings per share would be affected to the extent that

Book value and EPS decrease

Providea information about cas i flows and outflows as well as the net change in cash from the operating , investing and financing activities

The statement of cash flows required by PAS 7

Consist of short term , highly liquid investments such as t bills ,sec registered commercial papers and money market funds

Cash equivalents

Classification of cash flow activities

* operating activities-CA/CL


* investing activities-NCA, INVESTMENT PROPERTIES
* financing activities-NCL/E

operating activities-CA/CL

investing activities'-NCA,INVESTMENT PROPETIES

financing activities-NCL/E

Which of the ff items is included in the adjustments of net income to obtain cash flow from operating activities

* Depreciation expense for the period
* The change in deferred taxes
* the amount by which eauity income recognized exceeds cash received
* All of the above

All of the above

Which statement is tru for gains and losses from capital asset sales

a. they dot affect cah and are excluded from the statement of cah flows

b/ they are included in operating activities

c.they are included in cash flows from investing activities

d. they are included in cash flows frofinancing activities

They are included in the cash flow s from ivesting activities

Which of the ff assets is included in the adjustments of net income to obtain cash flow from operating activities

* Accounts receivable
* inventory
* prepaid expenses
* all of the above

All of the above

Which of the ff current liability accounts is included in the adjustments of expenses to obtain cash flow from operating activities

* accoubts payable
* Notes payable and current maturities of long term debt
* accrued liabilities
* both a and C

Both a and c

How is it possible for a firm to be profitable and still go bankrupt.

The firm has positive net income but has failed to generate cash from operations

Why has cash flow from operations become imcreasingly i.portant as an analytical tool

* Inflation has distorted the meaningfulness of net income
* High interest rates can put the cost of borrowing to cover short term cash needs out of reach for many firms
* firms may have uncollected accoubts receivable and unstable inventory on the books
* all of the above

All of the above

Which of the ff statements is false

* a negative cash flow can occur in a year in which net income is positive
* an i crease in accounts payable represents accounts not yet collected in cash
* An increase in accounts receivable represents accounts not yet collected in cash
* to obtain cash flow operations the reported net income must be adjusted

An increase in acckunts payable reprezents notvyet collected in cash

Which of the ff could lead to cash flow problems

Slow moving inventory , accounts receivable of inferior quality ,tightening of credit by suppliers