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CPA BEC > Business 3 Financial Management > Flashcards

Business 3 Financial Management Flashcards

1
Q

What is the basic equation for calculating ROE?

A

= NI / Equity

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2
Q

What is the extended DuPont ROE formula (3)?

A

= Profit margin

  • Asset turnover
  • Financial leverage
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3
Q

What is the extended DuPont ROE formula (5)?

A

= Tax burden

  • Interest burden
  • Operating income margin
  • Asset turnover
  • Financial leverage
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4
Q

How do you calculate tax burden?

A

= NI / pretax income

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5
Q

How do you calculate interest burden?

A

= Pretax income / EBIT

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6
Q

How do you calculate operating income margin?

A

= EBIT / Sales

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7
Q

How do you calculate asset turnover?

A

= Sales / average total assets

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8
Q

How do you calculate financial leverage?

A

= Average total assets / equity

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9
Q

True or false.

In analyzing ROE, a lower tax burden is better.

A

False (Retention: the more profits a company retains after paying taxes the better)

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10
Q

In analyzing ROE, is a lower interest burden better?

A

NO (Retention: the more pretax income a company retains after paying interest to debt holders the better)

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11
Q

In analyzing ROE, is a lower operating income margin better?

A

NO (the more company profits earned on sales after paying operating costs the better)

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12
Q

Define tax burden.

A

The extent to which a company retains profits after paying taxes

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13
Q

Define interest burden..

A

Reflects how much in pretax income a company retains after paying interest to debt holders

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14
Q

Define operating income margin

A

A measure of company profits earned on sales after paying operating costs

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15
Q

What is the investment turnover formula?

A

= Sales / AVERAGE investment

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16
Q

What is the investment turnover formula?

A

= Sales / AVERAGE investment

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17
Q

What is the goal of working capital management?

A

Shareholder wealth maximization

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18
Q

Define net working capital.

A

= CA - CL

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19
Q

Define net working capital.

A

= CA - CL

20
Q

How do you calculate the current ratio?

A

= CA / CL

21
Q

What does the current ratio measure?

A
  • the # of times CA exceeds CL
  • Way of measuring ST solvency
  • Demos firm’s ability to generate cash to meet its ST obligations
22
Q

True or false.

In general, a lower current ratio is better.

A

False (higher is better)

23
Q

What does a deteriorating current ratio imply?

A
  • Reduced ability to generate cash
24
Q

What can a deteriorating current ratio be attributable to?

A
  • Increases in ST debt
  • Decreases in CA
  • Combo of both
25
Q

What does an improving current ratio imply?

A
  • Increased ability to pay off CL
26
Q

What can an improving current ratio be attributable to?

A
  • Using LT borrowing to repay ST debt (in cases in which a firm lacks cash to reduce current debts)
27
Q

What can an improving current ratio be attributable to?

A
  • Using LT borrowing to repay ST debt (in cases in which a firm lacks cash to reduce current debts)
28
Q

What is generally considered to be the best single indicator of a company’s ability to meet its ST obligations?

A

Current ratio

29
Q

What is the objective of the EOQ?

A
  • To compute the quantity to order

- Not to comprehensively plan the requirements of production inventories

30
Q

What does EOQ stand for?

A

Economic order quantity

31
Q

What type of model is EOQ?

A
  • Inventory model

- Attempts to minimize both ordering and carrying cost

32
Q

Is cycle counting an inventory control technique?

A
  • NO

- An inventory auditing procedure

33
Q

What is materials requirements planning (MRP)?

A
  • Inventory management technique

- Projects and plans inventory levels in order to control the usage of raw materials in the production process

34
Q

What does MRP primarily apply to?

A
  • WIP

- Raw materials

35
Q

Why would a firm generally choose to finance temporary assets with ST debt?

A

Matching the maturities of assets and liabilities reduces risk

36
Q

The amount of inventory a company would tend to hold in stock would increase as what decreases?

A

As cost of carrying inventory decreases

37
Q

True or false.

The amount of inventory that a company would tend to hold in stock would increase as the variability of sales decreases.

A

False.

Amount of inventory would DECREASE as variability of sales DECREASES

38
Q

What working capital financing policy subjects a firm to the greatest risk of being unable to meet the firm’s maturing obligations?

A

Permanent CA with ST debt

39
Q

Which inventory management approach orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory cost?

A

EOQ (economic order quantity)

40
Q

Why were JIT (just in time) models developed?

A

To reduce the lag time b/w inventory arrival and inventory use

41
Q

What does Kanban inventory control prevent?

A

Prevents either oversupply or interruption of the entire manufacturing process resulting from the lack of a component

42
Q

What effect would a lockbox provide for receivables management?

A
  • lockbox system expedites cash inflows (minimizes collection float) by having a bank receive payments from a company’s customers directly
43
Q

True or false.

Vacant land sold for less than the NBV would increase the current ratio and decrease net profit.

A

True

Sale of land would increase cash and therefore CA w/o increasing CL (this would increase current ratio)

Sale of land at a loss would decrease net profit

44
Q

Do capital budgeting decisions include the financing of ST working capital needs?

A

NO (these are more operational in nature)

45
Q

What is included in DCF analysis?

A
  • Future operating cash savings
  • Current asset disposal price
  • Tax effects of future asset depreciation
  • Future asset disposal price
46
Q

Should a project be accepted if NPV is negative?

A

NO

47
Q

In an inflationary environment, future cash flows (except for CF generated from the tax effect of depreciation) should be increased to the extent of what?

A

Predicted inflation (for internal consistency, an inflationary factor should also be added to the discount rate)

CPA BEC (26 decks)

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