Chapter 10

Question 1

Sustainable income

Answer 1

Most likely level of income to be obtained in the future

Question 2

How does sustainable income differ from net income

Answer 2

By the amount of unusual revenues, expenses, gains and losses included in the current years income

Question 3

What are the two parts of reporting discontinued operations on an income statement

Answer 3

1. income/loss from operations net of tax

2. gain/loss on disposal of the component net of tax

Question 4

Comprehensive income

Answer 4

Net income and other comprehensive income items (unrealized gains/losses)

Question 5

Trading securities

Answer 5

Unrealized gains and losses are reported in the other expenses and losses section of income statement

Question 6

Available for sale securities

Answer 6

Unrealized gains and losses are reported as other comprehensive income in stockholders equity

Question 7

A high quality of earnings provides…

Answer 7

Full and transparent information that will no confuse or mislead users

Question 8

Pro forma income

Answer 8

Income that excludes items the company thinks are unusual or non-recurring

Question 9

3 types of comparisons

Answer 9

Intracompany, intercompany, industry average

Question 10

Horizontal analysis, aka…

Answer 10

Trend analysis

Question 11

Vertical analysis, aka…

Answer 11

Common size analysis

Question 12

Liquidity ratios

Answer 12

Measure short term ability of the company to pay its maturing obligations and meet unexpected needs for cash

Question 13

Profitability ratios

Answer 13

Measure the income of operating success of a company for a given time period

Question 14

Solvency ratios

Answer 14

Measure the ability of the company to survive over a long period of time

Question 15

Current ratio

Answer 15

Tells us how many dollars of assets for every dollar of liabilities

Question 16

Accounts receivable turnover

Answer 16

Measures how many times on average the company collects receivables during the period

Question 17

Average collection period

Answer 17

Assess effectiveness of a company’s credit and collection policies

Question 18

Inventory turnover

Answer 18

Faster = less cash tied up in inventory

Question 19

Debt to assets ratio

Answer 19

Tells us how good the company can withstand losses without impairing interested of its creditors

Question 20

Times interest earned

Answer 20

Tells us company’s ability to meet interest payments when due

Question 21

Free cash flow

Answer 21

Amount of excess cash generated after investing in capital expenditures and paying dividends

Question 22

Return on common stockholders equity

Answer 22

Shows how many dollars of net income the company earned for each dollar invested by owners

Question 23

Return on assets

Answer 23

Measures the overall profitability of assets in terms of the income earned on each dollar invested in assets

Question 24

Profit margin

Answer 24

Measures the percentage of each dollar of sales that results in net income

Question 25

Asset turnover

Answer 25

How efficiently a company uses assets to generate sales

Question 26

Gross profit rate

Answer 26

A company’s ability to maintain an adequate selling price above its cost of goods sold

Question 27

Price earning ratio

Answer 27

Reflects investors assessments of a company’s future earnings

Question 28

Payout ratio

Answer 28

Measures the percent of earnings distributed in the form of cash dividends