FIN 300 Exam 1 Study Guide/Notes/In class examples
FIN 300 Exam 1 Study Guide/Notes/In class examples FIN 300
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This 36 page Study Guide was uploaded by Nicolle Desmarais on Monday February 16, 2015. The Study Guide belongs to FIN 300 at Arizona State University taught by Smith in Spring2015. Since its upload, it has received 301 views.
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FIN 300 Chapter 1 02102015 Three key roles nancial decisions of a nancial manager 0 Capital budgeting decide which longterm assets to acquire that will yield the greatest net bene ts for the rm Affects longterm assets 0 Financing decide how to pay for short and longterm assets nance assets with the optimal combination of shortterm debt longterm debt and equity Determine rm s capital structure longterm debt and stockholder s equity 0 Working capital decide how to manage shortterm resources and obligations adjust current assets and current liabilities as needed to promote growth in cash flow Affects current assets current liabilities and new working capital current assetscurrent liabilities Poor decisions of the above three can lead to bankruptcy or business failure Residual cash ows money left over after paying wages suppliers tax etc can be reinvested in business or paid in dividends to stockholders Basic forms of Business Organization 0 Sole proprietorship owned by a single person who is nancially responsible for the actions and obligations of the business 0 Advantages easiest to create easiest to control easiest to dissolve right to all pro t 0 Disadvantages owner s personal assets at risk owner s unlimited liability for the rm s obligations equity only from owner or business pro t business income taxed as personal income dif cult to transfer ownership Partnership A business owned by more than one person one or more of them nancially responsible for the actions and obligations of the business 0 Advantages vs sole proprietorship limited protection of owner s personal assets owner s limited liability for the rm s obligations more sources of equity more sources of expertise o Disadvantages shared control shared pro t harder to dissolve Corporation a business owned by more than one person none of them nancially responsible for the actions and obligations of the business The corporation is responsible for its obligations and actions 0 Advantages protects personal assets no shareholder liability for business easiest to change ownership greatest sources of funds 0 Disadvantages most dif cult and expensive to establish dilutes individual control over the rm overall higher taxes on income for shareholders Hybrid forms of business organizations 0 Limited liability partnerships LLPs 0 Limited Liability Companies LLCs 0 Professional Companies PCs o All have the limited liability of a corporation and tax advantage of a partnership Chief Executive Of cer CEO chief manager of the rm 0 Ultimate power to make decisions and ultimate responsibility for decisions 0 Reports directly to the board of directors who protect shareholder s interests Chief Financial Of cer CFO The VP of FinanceCFO is responsible for the quality of the nancial reports received by the CEO Key Financial Reports 0 The Treasurer manages and reports on the collection and disbursement of cash The risk manager manages and reports on activities to limit the rm s risks in nancial and commodity markets The controller is the rm s accountant and prepares its nancial reports The internal auditor controls and reports activities to limit the rm s exposure to internal threats such as fraud and inef cient use of resources External Auditor conducts n independent audit of a rm s nancial activities Provides an opinion about whether the nancial reports the rm prepared are reasonably accurate and conform to generally accepted accounting principles Lead partner must change every ve years There are limits on consulting nonaudit services that external auditors can provide Board of Directors Board has duciary responsibility to represent the best interest of shareholders rm s owners Majority of board must be outside independent directors Firm is required to have a code of ethics which must be approved by board Must establish ethics program with complaint hotline and whistle blower protection that BOD must approve Separation of chairman and CEO positions is recommended Board members can be ned or receive jail time if they d not ful ll responsibilities Audit Committee External Auditor internal auditor and compliance of cer s duciary responsibilities are to audit committee Audit committee approves the hiring ring and fees paid toe external auditors CEO and CFO must certify nancial statements All audit committee members must be outside independent directors One member must be nancial expert The goal of the rm DO NOT maximize market share 0 Giving away goods and services for free will maximize a rm s market share for a while but the rm will not be able to pay its bills and stay in business DO NOT maximize pro t 0 Accounting pro t differs from economic pro t 0 Pro t earned may not equal cash received cash not received cant pay bills 0 The strategy ignored the timing of future cash ows 0 The strategy ignores the risks associated with having to wait for cash ows Maximize shareholder s wealth 0 Future cash ows are considered 0 The timing of future cash ows is considered 0 The risks associated with having to wait for cash ows are considered 0 Maximizing the price of a rm s stock will maximize the value of a rm and the wealth of its shareholders Its all about cash ows 0 Positive residual cash ow may be paid to rm owners as dividends or invested in the rm 0 The larger the positive residual cash ow the greater the value of the rm 0 Negative residual cash ow over the long run leads to bankruptcy or closing of a business Agency relationships 0 An agency relationship is created when the owner a principal of a business hires an employee an agent 0 The owner surrenders some control over the enterprise and its resources to the employee 0 Separating ownership from control creates the potential for agency con icts o In large corporations shared ownership among many shareholders may result in relatively little control over management Ownership and control 0 Shareholders own the corporation but managers control the rm s assets and may use them for their own bene t Managers exercise little control over 0 Economic shocks wars natural disasters 0 Business environment antitrust laws environment regulations safety regulations taxes 0 The economy level of activity interest rates consumer sentiment Current stock market conditions Manager can control 0 The rm line of business 3 nancial management decisions product qualitycost marketingsales RnD 0 Expected cash ows magnitude timing risk Stock price Agency costs 0 Arise from incurring and preventing con ictsof interests between a rm s owners and its managers 0 May reduce positive residual cash ow stock price and shareholder wealth Managers tend to focus on wealth maximization when their compensation depends on the stock price 0 Other agent incentives want to keep jobs oversight by BOD oversight by large block holders potential to take over rm the legal and regulatory environment SarbanesOxley and regulatory reform Better corporate governance reduces agency costs by requiring o More effective monitoring of managers activities 0 Programs that promote appropriate behavior by managers 0 Penalties for executive who do not ful ll their duciary responsibilities Ethics society s standards for judging whether an action is right or wrong Business ethics society s standards for acceptable behavior applied to business and nancial markets Ethical con ict 0 Agency cost employee s unacceptable use of employee s computer 0 Con ict of interest mortgage contract which a home buyer is unlikely to ful ll but earns a mortgage broker more money 0 Information asymmetry seller knows about prior damage to the vehicle but potential buyer does not Business behavior 0 Regulation and market forces are not enough to maintain integrity in marketplace Business norms must be based on ethical beliefs customs and practices Consequences of unethical behavior 0 lnef ciency in the economy and costs to society 0 Hugh legal and social costs 0 Problems such as the recent nancial crisis in the US A good capital budgeting decision is one in which the bene ts are worth more to the rm than the cost of the asset True 5 Question 2 5 out of 5 points Bonds represent debt so bondholders are lenders to the rm a True Selected Answer Question 3 5 out of 5 points The greatest number of businesses in the United States are corporations False Selected Answer Question 4 5 out of 5 points Corporate income taxes decrease the value of the rm to its stockholders True Selected Answer Question 5 5 out of 5 points A corporate Treasurer usually handles the cash management function while the corporate Controller handles accounting and taxes 3E Selected Answer True Question 6 5 out of 5 points What are the two basic sources of funds for all businesses 3E Selected Answer Debt and equity Question 7 5 out of 5 points What is net working capital 3E Selected Answer a Current assets minus current liabilities Question 8 5 out of 5 points What are the three major decisions that most concern nancial managers Selecte Q d Answer Capital budgeting decision nancing decision and working capital decision Question 9 5 out of 5 points What are the three forms of business organization discussed in this chapter 3E Selected Answer sole proprietorship partnership and corporation Question 10 5 out of 5 points Which of the following is an advantage of the soleproprietorship Select ed Answer The owners keep all of the pro ts and do not have to share decisionmaking authority Question 11 5 out of 5 points Who are the owners in a corporation and how is their ownership represented Sel Kaiser The owners of a corporation are its stockholders and the 39 evidence of their ownership is represented by shares of common stock Question 12 5 out of 5 points What is double taxation 3E Selected Answer It means there are taxes on corporate pro ts AND dividends Question 13 5 out of 5 points What is the primary responsibility of the corporate board of directors Selected Answer to represent the interests of the stockholders Question 14 5 out of 5 points What is the appropriate goal of the nancial manager 3E Selected Answer To help maximize the value of the company39s stock price per share Question 15 5 out of 5 points One of the major advantages of debt nancing is 5 Selected Answer The interest on debt is tax deductible for the corporation Question 16 5 out of 5 points What is an agency relationship Selec tEd Answer An agency relationship develops when a principal hires an agent to work on the principal39s behalf Question 17 5 out of 5 points How can agency con icts be reduced in a corporation Selected Answer By linking manager compensation to stock price improvement Question 18 5 out of 5 points What is meant by the term quotinformation asymmetryquot in a corporation Selec ted Answer It means that company insiders and managers have information that stockholders do not have Question 19 5 out of 5 points What are three factors that managers can control that affect the rm39s stock price 5 Selected Answer the magnitude timing and risk of the rm39s cash ows Question 20 5 out of 5 points Net working capital is equal to 5 Selected Answer current assets minus current liabilities Financial markets and institutions 0 Financial markets include markets for trading nancial assets such as stocks and binds 0 Financial institutions include banks credit unions insurance companies and nance companies The Financial system at work Financial system is competitive Money is borrowed in small amounts and loaned in large amounts The system directs money to the best investment opportunities in the economy Lenders earn pro t from the spread between lending and borrowing rates Move funds from lender to borrower o The primary function of a nancial system is to ef ciently transfer funds from one lendersavers to borrowerspenders 0 Basic mechanisms by which funds are transferred in the nancial system 0 Direct nancing 0 Indirect nancing Direct nancing 0 Direct transfer of funds 0 Lendersaver contracts with a borrowerspender 0 Minimum transaction 1 million 0 Investment banks and money center banks help with origination underwriting and distribution of new debt and equity 0 Underwriting is a service to assist rms in selling their debt or equity securities in a direct nancing market Types of nancial markets 0 Primary market wholesale market were rms new securities are issued and sold for the rst time 0 Secondary market retail market where previously issued securities are resold traded o Marketability ease with which a seller or buyer for an asset can be found 0 Liquidity ease with which an asset can be converted into cash without loss of value 0 Financial markets increase marketability and liquidity of securities 0 Financial markets lower the costs of making transactions and make participants more willing and able to pay higher prices 0 Broker A broker brings a seller and a buyer together but does not buy or sell n the transaction 0 Broker does not take on risk 0 Dealer participates in trades as a buyer or seller using her own inventory of securities 0 Dealer takes on risk 0 Exchange location where sellers and buyers meet to conduct transactions NYSE Chicago Board Options Exchange 0 Over the Counter Market dealers conduct transactions over the phone or via computer national association of securities dealers automated quotations NASDAQ 0 Money market market for low risk securities with maturities of less than one year Treasury bills commercial paper 0 Capital market market for securities with maturities longer than one year bonds common stock Market ef ciency 0 Ef cient market 0 Current prices of securities incorporate the knowledge and expectations of all participants 0 Security prices are correct securities are not overvalued or undervalued 0 Participants are con dent they pay or receive the intrinsic air value of a secur y Operational ef ciency extent to which transaction costs are minimized o Informational ef ciency extent to which security prices re ect all relevant information Ef cient market hypothesis a theory about how ef ciently the stock market processes and incorporates information available from Private sources of information public sources of information historical stock prices Strongform ef ciency security prices always re ect all information from every source Even inside or con dential information is re ected Semistrongform ef ciency security prices always re ect all public information Inside or con dential information is not re ected o Weakform ef ciency security prices always re ect the information in past prices No other information is re ected 0 Public markets are more ef cient than private due to the information provided by a large number of participants and effective regulation Indirect nancing an institution is both a borrower and lender o Borrows money from a saver lends money to a borrower must repay funds to the saver whether or not it is repaid by the borrower banks and insurance companies Financial markets 0 Provide lending and borrowing opportunities at the retail level for small customers and wholesale level for large customers 0 Ef ciently collect funds in small amounts and lend them in larger amounts 0 Tailor loan amounts and contract terms to t the needs of consumers corporations and small businesses Interest rate the fee for borrowing money expressed as a percentage of a loan 0 Real rate of interest interest rate that would exist in the absence of in ation de a on o Determinants of real rate of interest expected return on productive assets time preference for consumption 0 Nominal rate of interest interest rate adjusted for in ation de ation o Equilibrium rate of interest 0 A function of supply and demand Savers supply more funds at higher rates spenders borrow demand less at higher rates 0 Is the interest rate at which the quantity of funds supplied equals the quantity of funds demanded 0 In ation and loan contracts 0 Lenders want the interest rates in loan contracts to include compensation for the in ation predicted to occur over the life of the contract 0 Compensation for expected in ation adjusts loan rates to offset the higher prices for goods and services expected to exist when a loan is repaid and a lender spends the money 0 Fisher equation 2 H39APe HAPe 2391 or simpli ed to rAPe 22 i nominal interest rate r real rate of interest deltaP expected annualized pricelevel change rdeltaP adjustment for expected pricelevel change 0 Cyclical and Long term interest rates 0 Interest rates tend to rise and fall with changes in the rate of in ation 0 Rates tend to rise when the growth rate of the economy increases and tend to fall when the growth rate of the economy slows 0 Interest rates tend to follow the business cycle 0 Interest rates tend to increase during an economic expansion 0 Interest rates tend to decrease during an economic contraction Governments are the principal lendersavers in the economy Selected Answer False Answers True False Question 2 3 out of 3 points A primary market is any nancial market in which owners of outstanding securities can resell them to other investors E Selected Answer False Answers True False Question 3 3 out of 3 points The existence of an active secondary market for a security will help enhance the price for a security in the primary market E Selected Answer True Answers True False Question 4 3 out of 3 points Equities are generally traded in the capital market 3E Selected Answer True Answers True False Question 5 3 out of 3 points Real rates of interest are perfectly observable 5 Selected Answer False Answers True False Question 6 5 out of 5 points What is the role of the nancial system 5 Selected Answer39 To channel money from savers to borrowers Answers To make sure there is full employment in the economy To channel money from savers to borrowers To set interest rates and borrowing costs for the economy To collect income taxes from individuals and corporations Question 7 5 out of 5 points What are the two major components of the nancial system Q Selected Answer Financial markets and nancial institutions Answers Financial markets and nancial institutions Banks and insurance companies The NYSE and AMEX stock exchanges The national USA and global banks and the international monetary fund Question 8 5 out of 5 points What does a competitive nancial system imply about interest rates Selec teal Answer It implies that you will receive the highest possible rate for money invested with a bank and the lowest possible interest rate when borrowing money Answ It implies that interest rates are xed by the government ers It implies that many banks will go out of business from making bad loans Q It implies that you will receive the highest possible rate for money invested with a bank and the lowest possible interest rate when borrowing money It implies that bank CEOs will become rich at the expense of the depositors 3E Question 9 5 out of 5 points What is a primary market Selected Answer Answers Question 10 5 out of 5 points One in which new securities are sold for the rst time One in which new securities are sold for the rst time One where old securities are sold to new investors One where previously issued bonds are sold One where 30year government bonds are sold to foreign investors What is a money market Selecte d Answer Answers Markets in which shortterm debt with maturities of less than one year are bought and sold Markets in which shortterm debt with maturities of less than one year are bought and sold Markets in which money is exchanged for nancial advice Markets in which money is exchanged for insurance products This is the market for options and futures traded on the NYSE Question 11 5 out of 5 points What are the main types of securities in the money markets 3E Selected Answer Treasury bills bank negotiable CDs and commercial paper Answers Stocks and bonds Treasury bills bank negotiable CDs and commercial paper Cash stocks options and oil futures Insurance and real estate including REITS Question 12 5 out of 5 points If a rm sells common stock to the public for the very rst time it is known as E Selected Answer a An IPO Answers An underwriting An IPO A LIBOR Financial intermediation Question 13 5 out of 5 points What is the theory that security prices re ect all information whether public or private 3E Selected Answer Strongform efficiency Answers Weakform efficiency Semistrongform efficiency Strongform efficiency Nominalform efficiency Question 14 5 out of 5 points Which of the following is the process by which investment bankers purchase new securities directly from the issuing company and resell them to the SE public Selected Answer Underwriting Answers Agency marketing Underwriting Distribution Private placement Question 15 0 out of 5 points If the supply of loanable funds decreases relative to the demand for those funds then we would expect I Selected Answer J Interest rates to remain unchanged Answers Interest rates to remain unchanged Interest rates to increase Interest rates to decrease The price of money to remain unchanged Question 16 5 out of 5 points If you are a borrower which would you prefer to occur during the life of yourloan Selected Answer a level of in ation that is higher than that anticipated at the outset of the loan Answers a level of in ation that is higher than that anticipated at the outset of the loan a level of in ation that is lower than that anticipated at the outset of the loan a level of in ation that is exactly as anticipated at the outset of the loan no in ation at all Question 17 5 out of 5 points The real rate of return can be justi ed at a basic level by E Selected Answer a compensation for deferring consumption Answers compensation for in ation compensation for deferring consumption compensation for risk compensation for expected in ation Question 18 5 out of 5 points One of the main services offered by investment banks to companies is E Selected Answer helping companies sell new debt or equity issues in the security markets Answers helping companies sell new debt or equity issues in the security markets making loans to companies taking deposits from companies all of the above Question 19 0 out of 5 points Cranjet Inc is issuing 10000 bonds and its investment banker has guaranteed a price of 985 per bond The investment banker sells the entire issue to investors for 10150000 How much did Cranjet raise in dollars Selected Answer 300 000 Correct Answer 9850000 985100009850000 Answer range 100 98499000 98501000 Question 20 5 out of 5 points The current oneyear Treasury bill rate is 450 percent On the Fox Business website several economists at leading investment and commerical banks predict that the annual in ation rate is going to be 075 percent higher than originally expected What is the CURRENT in ation premium if the real rate of interest is 325 percent Selected Answer Q 125 Correct Answer Q 125 450325125 Answer range 005 120 130 Question 21 0 out of 5 points The current oneyear Treasury bill rate is 450 percent On the Fox Business website several economists at leading investment and commerical E 3 banks predict that the annual in ation rate is going to be 075 percent higher l than originally expected What is the NEW in ation premium if the real rate of interest is 325 percent Selected Answer J 25 Correct Answer 2 Answer range 005 195 205 Question 22 0 out of 5 points The current oneyear Treasury bill rate is 450 percent On the Fox Business website several economists at leading investment and commerical 3 banks predict that the annual in ation rate is going to be 075 percent higher l than originally expected What is the NEW Treasury bill rate if the real rate of interest is 325 percent Selected Answer J 325 correct Answer a Answer range 005 520 530 Monday February 9 2015 82701 PM MST Purpose of nancial statements 0 Provide stakeholders a foundation for evaluating the nancial health of a rm 0 Creditors employees management stockholders customers general public regulators suppliers 0 Evaluate a rm s internal environment 0 Ef ciency effectiveness risk level 0 Evaluate a rm s interaction with the external environment 0 Corporate citizenship social responsibility assessment of the external environment response to the external environment 0 Provide information about the performance of the rm 0 Stakeholders want to compare actual vs potential performance GAAP Generally accepted accounting principles 0 Accounting rules and standards that public companies must adhere to when they prepare nancial statements and reports 0 Established by the nancial accounting standards board FASB and authorized by the securities and exchange commission SEC 0 Guidelines not rules rms have discretion on how nancial information is presented 0 No two rms are required to have identical statements 0 Alternative terms on nancial statements 0 Balance sheet statement of nancial condition 0 Income statement statement of operations pro t and loss statement 0 Cost of goods sold cost of sales cost of revenue cost of services sold International GAAP Uniform accounting rules and procedures promoted by the international accounting standards board Firms in the European union are moving toward a quotEuropean GAAP Economic and political pressure is building in the united states and Europe to develop a uni ed accounting system 5 important accounting principles assumption of arms length transaction 0 parties involved in an economic transaction arrive at a decision independently and rationally cost principle 0 asset values are recorded at the cost for which they were acquired o realizing principle 0 revenue is recognized when a transaction is completed although cash may be received earlier or later 0 matching principle 0 revenue is match with the expense incurred to generate it 0 going concern assumption 0 assume a company will continue to operate for the predictable future annual report 0 summarizes the overall performance of a rm for the most recent scal year 0 information o the company its products its activities and its future summary of nancial performance for the most recent year 0 audited nancial statements veyear summary of nancial data THE BALANCE SHEET Firm assets and funding at a point in time Left side of balance shows assets a rm owns and uses to generate revenue Right side of the balance sheet shows sources of he funds used to acquire assets 0 Total assets current liabilities stockholder s equity Item order 0 Assets listed in order of liquidity o Liabilities listed in order in which they are due to be paid 0 Stockholders equity listed last Common stock holders are entitled to assets remaining after all other providers of funds are paid Current assets 0 Assets likely to be converted to cash within a year or one operating cycle Marketable securities accounts receivable inventory Current liabiltiies o Liabilities scheduled to be paid within a year or one operating ycle Account payable accrued wages debt with less than one years maturity taxes Net working capital current assets minus current liabilities Inventory accounting inventory least liquid current asset reported using one of two methods 0 FIFO assumes merchandise is sold in order it was acquired by a rm 0 LIFO assumes merchandise is sold in the reverse of the order it was acquired by the rm Inventory accounting 0 when the cost of inventory is increasing FIFO reporting that a rm sold the less expensive inventory and leads to higher balance in inventory lower COGS higher taxable income higher income taxes higher net income LIFO reports that a rm sold the more expensive rst and leads to lower balance in inventory higher COGS lower taxable income lower income taxes lower net income 0 When the cost of inventory is decreasing FIFO reporting FIFO sold more expensive inventory rst and leads to lower balance in inventory higher CIGS lower taxable income lower income taxes lower net income LIFO reporting says a rm sold the less expensive and leads to higher balance in inventory lower cogs higher taxable income higher income taxes higher net income Firms may switch from one inventory accounting to another under extraordinary circumstance but not frequently Long term assets 0 Real assets land building equipment 0 Intangible assets goodwill patents copyrights 0 Real assets declines with use and are depreciated Depreciation expense reduces taxable income and income taxes Assets are depreciated using either the straight line method or accelerated depreciation method 0 Intangible assets lose value over time and are amortized equivalent to depreciated Long term liabilities 0 Long term debt bank loans mortgages bonds with a maturity longer than one year Equity 0 Common stock ownership with control in a rm 0 Preferred stock ownership without control in a rm features make it an equity security that resembles debt 0 Other balance sheet accounts 0 Retained earnings pro t kept and used to acquire assets 0 Treasury stock shares of its own stock a rm holds rather than sell them to the public MARKET VALUE vs BOOK VALUE Recording asset value c Assets are traditionally reported at historical cost on a balance sheet 0 Balance sheet amount does not re ect current market value only the acquisition cost Asset valuation 0 Better information is provided to management and investors by marketing to market reporting balance sheet items at current market values 0 Dif cult to determine market values of assets 0 The difference between market values of assets and liabilities is realistic estimate of the market value of shareholder s equity Income Statement Overview 0 Measures the pro tability of a rm for a reporting period 0 Revenue is income from selling products and services for cash or credit 0 Expenses include costs of providing products and services and asset utilization depreciation and amortization 0 Net income revenues expenses Depreciation The cost of a physical asset such as plant or machinery is written off over its lifetime This is called depreciation a noncash expense 0 Firms use one of these depreciation methods 0 straightline depreciation o accelerated depreciation Firms may choose to use one for internal purposes and another for tax purposes or for statements released to the public Amortization o Amortization expense is related to using intangible assets 0 goodwill o patents o Hcenses Like depreciation it is a noncash expense Extraordinary Item 0 Income or expense associated with events that are infrequent and abnormal o separated from the results of ordinary income 0 shown separately on the income statement EBITDA and EBIT Earningsbeforeinteresttaxesdepreciationandamortization EBITDA 0 income from selling goods and services minus the cost of providing them 0 Earningsbeforeinterestandtaxes EBIT o EBITDA minus depreciation and amortization EBT and NI 0 Earningsbeforetaxes EBT o EBIT minus interest expense 0 taxable income 0 Net income NI 0 EBT minus taxes STATEMENT OF RETAINED EARNINGS Retained earnings 0 Shows cumulative effect of adjustments to shareholders equity resulting from pro t losses and paying dividends Shows changes in the account for a period based on pro t loss or dividend paid Net Cash Flows versus Net Income Accountants focus on net income and shareholders focus on net cash ows These are not the same because of delays in in ows and out ows and noncash revenues and expenses Cash Flows to investors Cash ows available to investors from operating activities CFOA CFOA EBIT Current Taxes Noncash expenses 34 Cash Flows to Working Capital 0 To compute the net cash ows into or out of working capital CFNWC NWC NWC 35 Current Period Previous Period Statement of Cash Flows Summarizes cash out ows and cash in ows during a period 0 Cash ows result from operating activities investing activities and nancing activities 0 Net cash ows equals cash in ows minus cash out ows Statement of Cash Flows organization 0 Operating Activities 0 cash in ows o sell goods and services 0 cash out ows o raw materials 0 in ventOIy 0 salaries and wages o utilities 0 rent Statement of Cash Flows Organization 0 Investing Activities 0 cash out ows and in ows due to buying and selling longterm assets such as plant and equipment buying and selling bonds and stocks issued by other rms Statement of Cash Flows organization 0 Financing Activities 0 cash in ow issue debt issue equity borrow money 0 cash out ow pay interest or dividends repay loan principal purchase treasury stock Corporate Income Tax 0 US has a progressive tax with rates ranging from 15 percent to 39 percent 0 higher taxable income higher the tax liability Average versus Marginal Tax Rate 0 Average tax rate 0 total taxes paid divided by taxable income for the period c Marginal tax rate 0 rate paid on the last dollar earned or the next dollar that will be earned Dividends and Interest are not equal 0 US tax code 0 allows interest payments on debt to reduce rms taxable income 0 does not allow dividend payments to equity to reduce rms taxable income debt nancing has a lower cost relative to equity nancing Accounting pro ts include noncash revenues eg prepaid rent and noncash expenses eg depreciation whereas cash ows do not include these items Selected Answer True Answers True False Question 2 5 out of 5 points The income statement identi es the major sources of revenues generated by the rm and the corresponding expenses that were needed to generate those 3E revenues Selected Answer True Answers True False Question 3 5 out of 5 points The book value of an asset is the historical cost of the asset less the accumulated depreciation 3E Selected Answer True Answers True False Question 4 5 out of 5 points The current market value of an asset is the amount of cash that a rm would receive for the asset if the asset was sold on the open market 3E Selected Answer True Answers True False Question 5 5 out of 5 points Cash ows from operating activities relate to the buying and selling of longterm assets 3 Selected Answer False Answers True False Question 6 5 out of 5 points The generally accepted accounting principles GAAP are Sele trssdwer rules and procedures that de ne how companies are to 39 maintain nancial records and prepare nancial reports Ans rules that outline how a rm can operate ethically wers rules on how the rm will be valued in the event of a merger rules and procedures that de ne how companies are to maintain nancial records and prepare nancial reports rules for how a company can issue stock to raise money Question 7 5 out of 5 points On June 23 2008 Sunshine Cosmetics sold 250000 worth of its products to Rynex Corporation with the payment to be made in 90 days on September 20 3E The rm39s accountants should recognize the sale on Selected Answer June 23 2008 Answers June 23 2008 July 2 2008 September 20 2008 When the payment from the customer is actually received 5 Question 8 5 out of 5 points The cost principle states that an asset should be recognized on the balance sheet at Select its historical cost ed Answer Answe the market value of the asset rs the market value of the asset less the accumulated depreciation on the asset its historical cost its historical cost plus any expected revenue on the asset Question 9 5 out of 5 points The conventional way of preparing a balance sheet is to list all assets in the order of their Selected Answer Answers liquidity market value risk liquidity historical cost Question 10 5 out of 5 points Which one of the following is NOT true for a corporation Selec ted Answer Commonstock dividends to be paid this year will be tax deductible if the rm has a net loss for the year Answ Interest paid on bonds issued last year is tax deductible ers Commonstock dividends to be paid this year are not tax deductible Commonstock dividends to be paid this year will be tax deductible if the rm has a net loss for the year Preferred stock dividends to be paid this year are not tax deductible Question 11 5 out of 5 points Total stockholders39 equity Total assets Total Selected Answer a iabiities Correct Answer Evaluation Method Correct Answer Case Sensitivity Exact Match liabilities Exact Match liablties Exact Match liabtlies Question 12 5 out of 5 points stock has features of both common stock and longterm debt 7 Selected Answer Correct Answer a preferred Evaluation Method Correct Answer Case Sensitivity Exact Match Prefermd Exa ct Match Prefe FEd Question 13 5 out of 5 points The stock account represents stock that the rm has repurchased back from investors 7 Selected Answer treasury Correct Answer Evaluation Method Correct Answer Case Sensitivity Exact Match treasury Exact Match tresury Question 14 5 out of 5 points The tax rate is the tax rate that is paid on the last dollar of income earned a Selected Answer a marginal Correct Answer Evaluation Method Correct Answer Case Sensitivity Exact Match marginal Question 15 5 out of 5 points The average tax rate is equal to total taxes paid divided by income 7 Selected Answer taxable Correct Answer Evaluation Method Correct Answer Case Sensitivity Exact Match taxable Question 16 5 out of 5 points Laurel Electronics reported the following information at its annual meeting The company had cash and marketable securities worth 1235455 accounts payable worth 4159357 inventory of 7121599 accounts receivable of 3488121 notes payable worth 1151663 and other current assets of 121455 What is the company s net working capital Selected 5555610 Answer Correct 5555610 Answer 11966630 123545571215991151357121455 l1966630415935711516636655610 Answer 5 66556050 66556150 range Question 17 5 out of 5 points Hillman Corporation reported current assets of 3495055 for the year ending December 31 2011 and current assets of 3103839 for the year ending December 31 2010 Current liabilities for the rm were 2867225 and 2760124 at the end of 2011 and 2010 respectively Compute the cash ow invested in net working capital at Hillman Corporation during 2011 Selected Answer 284115 Correct Answer 284115 34950552867225627830 31038392760124343715 627830343715 284115 Answer range 5 2841100 2841200 Question 18 5 out of 5 points Tim Dye the CFO of Blackwell Automotive Inc is putting together this year s nancial statements He has gathered the following information The rm had a cash balance of 23015 accounts payable of 163257 common stock of 313299 retained earnings of 512159 inventory of 212444 goodwill and other assets equal to 78656 net plant and equipment of 711256 and short term notes payable of 21115 It also has accounts receivables of 141258 and other current assets of 11223 How much longterm debt does Blackwell Automotive have SGIECtEd Answer corrECt Answer 23015141258212444112237112567865611 77852 117785216325721115313299512159168022 Answer 10 1680120 1680320 range Question 19 5 out of 5 points Nimitz Rental Company provided the following information to its auditors For the year ended March 31 2011 the company had revenues of 878412 general and administrative expenses of 352666 depreciation expenses of 131455 leasing expenses of 108195 and interest expenses equal to 78122 If the company s tax rate was 34 percent what is its net income after taxes SGIECtEd Answer corrECt Answer 39 87841235266613145510819578122 207974 207974347071116 207974707111613726284 137263 Answer range 10 1372530 1372730 Question 20 0 out of 5 points Columbia Construction Company earned 451888 during the year ended June 30 2011 After paying out 225794 in dividends the balance went into I 3 retained earnings If the rm s total retained earnings were 846972 what was l the retained earnings on its balance sheet on July 1 2010 Selected Answer 521178 Correct Answer Q 520 878 451888225794226094 846972226094620878 Answer range 5 6208730 6208830 Monday February 9 2015 95313 PM MST Perspectives for analysis Stockholder focuses on net cash flows risk rate of return market value of rm s stock 0 Manager focuses on rate of return ef cient use of assets controlling costs increasing net cash ows increasing market value for rm s stock job security Creditor Focuses on predictability of revenues and expenses ability to meet shortterm obligations ability to make loan payments as scheduled no unanticipated change in risk Commonsize nancial statements 0 Show the dollar amount of each item as a percentage of a reference value 0 Commonsize balance sheet may use total assets as the reference value each item is expressed as a percentage of total assets 0 Commonsize income statement may use net sales as the reference value each item is expressed as a percentage of net sales commonsize balance sheet Standardizes the amount in a balance sheet account by converting the dollar value of each item to its percentage of total assets 0 Dollar values on a regular balance sheet provide information on the number of dollars associated with a balance sheet account 0 Percentage values on a commonsize balance sheet provide information on the relative size or importance of the dollars associated with a balance sheet account Ratios in nancial analysis Ratios establish a common reference point across rms even though the numerical value of the reference point will differ from rmto rm o Ratios make it easier to compare the performance of large rms to that of small rms 0 Ratios make it easier to compare the current and historical performance of a single rm as the rm changes over time Ratios used vary across rms occupancy ratios hotel salespersquare foot retailing loanstoassets banking medical cost ratio health insurance Categories of Common Financial Ratios 0 Liquidity ratios 0 Ef ciency ratios 0 Leverage ratios 0 Pro tability ratios 0 Market Value ratios Liquidity ratios 0 Indicate a rm39s ability to pay shortterm obligations with shortterm assets without endangering the rm In general higher ratios are a Current Ratio current assets 41 Current liabilites Current assets Inventory Quick Ratio 2 favorable indicator Current liabilites Ef ciency ratios 0 Indicate a rm39s ability to use assets to produce sales These are also called turnover ratios In general higher numbers are a favorable 42 Inventory Turnover COSt Of GOOdS SOId 43 Inventory Total Asset Turnover M 47 indicator Total Assets Efficiency ratios 0 For the ef ciency ratio below a lower number is generally a positive Days Sales in Inventory 2 365 Days 44 signa Inventory Turnover Leverage debt ratios 0 Indicate whether a rm is using the appropriate amount of debt nancing In general higher ratios indicate greater potential return and Total Debt Total Debt Ratio 49 Total Assets Debt to Equity M 410 g reater ban kru ptcy risk Total EqUIty Leverage debt ratios 0 For the ratio below a higher number generally indicates less bankruptcy risk and possibly lower potential return Times Interest Earned Earnings Before Interest amp Taxes Interest Expense Profitability ratios 0 Indicate whether a rm is generating adequate pro t from its assets In general higher ratios indicate better performance Netlncome 416 Net Sales 412 Net Profit Margin Return on Assets w 418 Total Assets Net Income Return onE Uit 419 q y Total Equity Market value ratios 0 Indicate how the market is valuing the rm39s equity Higher ratios indicate greater shareholder wealth Price Per Share Pr ce Earn n s Rat o 421 I I g I Earnings Per Share Market to Book 2 Pnce Per Share 422 Book Value of Equity Per Share The DuPont system 0 Diagnostic tool for evaluating a rm39s nancial health 0 Uses related ratios that link the balance sheet and income statement 0 Based on two equations that connect a rm39s RCA and ROE Used by management and shareholders to understand factors that drive ROE The DuPont Equation 0 In ratio form Equation 426 0 Shows that returnonequity is driven by pro tability operating ef ciency and amount of leverage ROE Net Income Net Sales Total Assets Net Sales Total Assets Total Equity Benchmark Relevance 0 A ratio or ratio analysis is relevant only when compared to an appropriate benchmark 0 Trend Analysis comparison to the rm s historical performance 0 Peer Group Analysis comparison to a select group of rms in the same industry 0 Industry Analysis comparison to the aggregate of rms in the same industry 0 A ratio or a ratio analysis is relevant only when compared to the appropriate benchmarks Benchmarks may be used in combination 0 Level and trend should be considered when evaluating a rm39s performance and its future Financial statement analysis 0 Weaknesses 0 not an exact science 0 relies on accounting data and historical costs 0 few guidelines or principles for determining whether a ratio is high or quotlowquot or is a reason for con dence or for concern
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