Ch 3- Class Notes

Question 1

Uses of cash

Answer 1

-buying
-increase in asset, decrease in cash
-decrease in liability or equity account

Question 1

Sources of cash

Answer 1

-selling
-decreasing in asset but increas ein cash
-increase in liability or equity

Question 2

SOCF:
operating actiivtiy

Answer 2

net income and changes in most current accounts

Question 3

Investment Activity

Answer 3

changes in fixed assets

Question 4

Financing Acitivity

Answer 4

changes in notes payable, long term debt and equity accounts, and dividedns

Question 5

Regarding current liability
-if you let it buuild up for a little bit of time?
-if you let it build up for a looooooooooooooooon time?

Answer 5

its good for cash! so you have cash and socf is looking good

its really bad for your company

Question 6

Is interest deducted form operating or financing sections in socf?

Answer 6

generally deducted from operating activities section

Question 7

How to get socf elements from sofp

Answer 7

break down the elements present into operating, investing, and financing activitiy section

Question 8

Common-size statement value of invenetory

Answer 8

Inventory/Assets (Current + fixed)

Question 9

What do Asset Managemnt or turnover ratios tell you

Answer 9

if you are working your assets better

Question 10

5 types of ratios

Answer 10

1. short term solvency/liquidity
2. long term solvency/ financial leverage
3. asset management or turnover ratios
4. profitability raitos
5. market value ratios

Question 11

short term solvency/liquidity ratios

Answer 11

DO YOU HAVE ENOUGH MONEY TO PAY THE BILLS?
1. current ratio= ca/cl
2. quick ratio= (Ca-inventory)/CL
-do we have enough current assets to pay our liabilities if we take inventory out
3. Cash ratio= cash/CL

basicallly you determine how many dollrs of current asset you have to current liability

Question 12

Long term solvency ratios

Answer 12

Total debt Ratios= TA-TE/TA
-how much is financed with debt

Debt/Equity= TD/TE

Equity Multiplier

Times Interest Earned= ebit/interest
-how much money is covering in in comparison to the interest we have to pay? (higher? then we can pay interest multiple times over!! 15.5= 15.5 times over)
Cash Coverage= (ebit+ depreciaiton)/interest

Question 13

What is a good amount of TImes Interest Earned

Answer 13

5x OR HIGHER to be investment grade

Question 14

Cash Coverage- what amount should it be to be good

Question 15

Asset MANAGEMENT ratios

Answer 15

Inventory Turnover= cogs/inventory

days sales in inventory= 365 days/Inventory turnover
-how often does the asset stay in inventory

recieveables turnover= sales/ account recievable

days’ sales in recievables/ 365 recievabales turnover

NWC turnover= Sales/NWC

Fixed Asset Turnover= Sales/Net Fixed Assets

Total Asset Turnover= Sales/Total Assets

Question 16

What is a good total asset turnover

Answer 16

Dependant on industry!!!

Question 17

What are good profitability ratios

Answer 17

Profit Margin= Net Income/Sales

ROA= net income/total assets

ROE= Net income/Total Equity

Question 18

DuPont Identity

Answer 18

Return on equity= equity mulitplier * profit margin * total asset turnover

Question 19

why do businesses use debt ?

Answer 19

if you use debt then you increase the equity going to shareholders

Question 20

what is the equity multiplier

Answer 20

• always 1 or bigger
• total assets/equity

Question 21

FUNDAMENTAL FIRM ANALYSIS!!!

Answer 21

how can we increase return on equity?? can you make net income bigger or equity smaller

Question 22

LIFO

Answer 22

last in first out (usually the most expensive product gets sold first)

results in higher cost of goods sold

Question 23

FIFO

Answer 23

the oldest IS OSLD FIRST, HIGHER INVENTORY, LOWER cogs