Chap 3 - Working With Financial Statement

Question 1

Sources of cash

Answer 1

Cash inflow - occurs when we “sell”something and we add to the cash account

Decrease in asset account - accounts receivable, investments and net FA

Increase in liability or equity account - accounts payable, other current liabilities and common stock.

Cash + other assets = L + E
Cash = L + E - other assets

Question 2

Uses of cash

Answer 2

Cash outflow - occurs when we “buy” something.

Increase in asset account - cash and others current assets.

Decrease in liability or equity account - Notes payable and long-term debt.

Question 3

Statement of cash flow, 3 activities

Answer 3

1. Operating activity
   Includes Net Income and changes in most current accounts
2. Investment activity
   Includes changes in FA
3. Financing activity
   Includes changes in notes payable, LTD, equity accounts, as well as dividends

Statement of CF = re arrangement to understand the change in cash

Question 4

Standardized financial statement

2 dimensions of comparison

Answer 4

Common size BS compute all accounts as a percent of total assets (everything is divided by TA)

Common size IS compute all lines items as a percent of sales (everything is divided by sales)

COMPARISON

1. Time
2. Between companies

Question 5

Ratios analysis

Answer 5

Goal : take numerous line from the BS and the IS and to interpret them in a meaningful way.

They allow better comparison through time OR between companies.

They are used both internally and externally

Question 6

5 categories of financial ratios

Answer 6

1. Short term solvency (ability to pay LTD) or liquidity ratios (CA to create liquidity ratios)
2. LT solvency or financial leverage ratios
3. Assets management or turnover ratios (CA + FA + TA)
4. Profitability ratios (sales + costs)
5. Market value ratios

Question 7

Computing liquidity ratios

Current ratio 
Quick ratio
Cash ratio 
NWC to TA 
Interval measure

Answer 7

CR = CA / CL

QR = (CA - Inv) / CL

$R = cash / CL

NWC to TA = NWC / TA

Interval measure = CA / average daily operating costs (=(COGS + exp + D)/365)

Question 8

LT solvency ratios

Total debt ratio
Debt/Equity
Equity multiplier
Long term debt ratio

Answer 8

Total debt ratio = TD/TA

Debt / Equity = TD/TE

EM = TA/TE = (1+ TD) / TE

Long term debt ratio = LTD / (LTD + TE)

Question 9

Coverage ratios

Times interest earned
Cash coverage
Inventory turnover
Day’s sales in inventory

Answer 9

Times interest earned = EBIT / interest

Cash coverage = (EBIT + dépréciation) / interest

Inventory turnover = COGS/INV

Days sales in Inventory = 365 / inv turnover

Question 10

Receivable ratios

Receivable turnover
Days in sales receivables

Answer 10

Receivables turnover = sales / accounts receivable

Days’ sales in receivables = 365 / receivables turnover

Question 11

Total asset turnover

Total asset turnover
NWC turnover
Fixed asset turnover

Answer 11

TAT = sales / total assets

NWC turnover = sales / NWC

Fixed asset turnover = sales/NFA

Question 12

Profitability measure

Profit margin
Return on asset
Return on equity

Answer 12

PM = NI / Sales

ROA = NI / TA

ROE = NI / TE