BEC Custom 8 Flashcards
Working Capital
current assets - current liabilities
Lock-box system
- firm leases post office boxes in areas where it has high volume of cash inflow by mail
- customer remits payment to the local post office box
- payments are collected and processed by the firm’s bank
- bank notifies the firm of sources and amounts received
Pre-Authorized Checks
Customers authorize checks in advance for payment of their obligation
Concentration Banking
Accelerates the flow of funds from multiple local banks to a firm’s primary bank by regular, usually automatic, transfer of funds
Bank Draft
An order to pay drawn by a bank on itself or on a correspondent bank with which the issuing bank has an account
Cashier’s Check
One-time order to pay drawn on the issuing bank
Certified Check
Order to pay drawn on a depositor’s account that is certified to be paid by the bank
Money Order
Like a certified check, but usually limited in amount for each order
Traditional Materials Requirement Planning (MRP) system
- supply push - goods are produced in anticipation of their sale
- inventory is maintained at every level as buffers against unexpected demand
- production based on long set-up time and long production runs; an inflexible system
- impersonal relationships with suppliers
- use of traditional cost accounting
Just-in-time inventory (JIT) system
- system is based on on obtaining (on the supply side) and delivering (on the sell side) inventory just as and only when it is needed
- demand pull - goods are produced only when and as needed by the end user
- inventory reductions - production and purchasing occur only as needed, therefore inventories are reduced or eliminated
- production in work centers (or cells) where workers operate multiple pieces of equipment or robotics are used
- close working relationship with limited number of suppliers
- quality is critical throughout the system
- uses simplified cost accounting
Economic Order Quantity Formula
square root of 2 TO/C
T = total demand O = per order cost C = per unit carrying cost
Inventory Reorder Point
Reorder point objective is to determine the inventory quantity at which goods should be reordered
Inventory Reorder Point Formula
delivery time stock + safety stock
What do the terms “to” and “on” indicate in ratio analysis?
To divide the first item described by the second item described
Return on assets
net income / assets
When using balance sheet value(s) with income statement value(s), what do you have to do?
Get average beginning and ending values for the balance sheet value(s)
Accounts receivable turnover
(net) credit sales / average accounts receivable
Liquidity Measures
assess the ability of a firm to pay its obligations as they become due
Working Capital Ratio
current assets/current liabilities
Acid test ratio (quick ratio)
cash + receivables + marketable securities / current liabilities
Defensive Interval Ratio
cash + receivables + marketable securities / average daily cash payments
Times interest earned (TIE)
net income + interest expense + income tax expense / interest expense
Times preferred dividends earned
net income / annual preferred dividend obligation
Accounts receivable turnover
- measures the number of times that accounts receivable are incurred and collected during a period
- net credit sales / average accounts receivable
of days’ sales in average receivables
- measures the average number of days required to collect receivables
- 360 days / accounts receivable turnover
Inventory turnover
- measures the number of times inventory is acquired and sold during a period
- cost of goods sold / average inventory
of days’ supply in inventory
- measures the # of days inventory is held before it is sold or used
- 360 / inventory turnover
Operating cycle length
- measures the average length of time to invest cash in inventory, convert the inventory to accounts receivable and collect the receivables
Operating cycle length equation
of days’ supply in inventory + # of days’ sales in average receivables = # of days in operating cycle
Gross Profit
- measures dollar amount of sales after subtracting cost of goods sold
- gross profit = sales - cost of goods sold
Gross Profit Margin
- measures how much of each sales dollar is available to cover operating expenses and provide profit
- gross profit margin = gross profit / net sales
Net Profit Margin
- measures how much of each sales dollar ends up as net income
- net profit margin = net income / net sales
Return on total assets (also return on investment)
- Measures the rate of return on total assets (or total investment) and indicates the efficiency with which invested resources are used
- return on total assets (or return on investment) = (net income + interest expenses + interest tax savings) / average total assets (or average total investment)
Return on owners’ equity
- measures the rate of return on all shareholders’ investment
- return on owners’ equity = net income / average stockholders’ equity
Residual Income (RI)
- Measures the excess of net income over the dollar amount of the required rate of return on average investment
- dollar amount determined using the firm’s rate of return, normally it’s hurdle rate
Required dollar return
Average invested capital x hurdle rate
Residual Income formula
net income - required dollar return
Economic Value Added (EVA)
- measures economic profit
- cost associated with capital financing is cost of long-term debt and shareholders’ equity
Economic Value Added Formula
earnings before interest - (rate of return x(long-term debt + shareholders’ equity))
Earnings Per Share (EPS)
- measures the income earned per average share of common stock
Earnings Per Share (EPS) Formula
net income - preferred dividend (current) / weighted average # of C/S outstanding
Price-Earning (P/E) ratio
- measures the price of a share of common stock relative to its latest earnings per share
P/E ratio formula
Market price for a common share / earnings per common share
Debt to equity ratio
- measures the relative amount of assets provided by creditors and shareholders
- debt to equity ratio = total liabilities / total shareholders’ equity
Owners’ Equity Ratio
- shows the proportion of assets provided by shareholders
- owners’ equity ratio = shareholders’ equity / total assets
Debt Ratio
- shows the proportion of assets provided by creditors
- debt ratio = total liabilities / total assets
Book value (BV) per common share
- Measures the claim per share of common stock to assets at BV
- BV per share C/S = common stock equity / # of common shares outstanding
Book Value (BV) per preferred share
- measures the claim per share of preferred stock to assets at BV
- BV per share P/S = preferred stock equity + dividends in arrear / # of preferred shares outstanding
