Chapter 3

Question 1

Sources of Cash Uses of Cash

Answer 1

Source of Cash = generate cash ↓ Debit or ↑ Credit Use of cash = Cash spent/application of cash ↑ Debit or ↓Credit

• Current Ratio
• Quick Ratio
• Cash Ratio
• Net Working Capital to Total ASsets
• Interval Measure

Question 2

Common-Size Statements

Answer 2

Common-Size Statement = presenting all items in %. These are isolated to describe ONLY a particular year -Balance Sheet = % of Assets or %Liabilities+SE -Income Statement = % of Sales (what happened with each dollar of sales, ∴ easier than BS for comparison)

Question 3

Common-Base Year Statements

Answer 3

Common-Base Year Statements = present all items relative to certain base-year amount -Pattern of operations, comparison good to self-evaluate

Question 4

Combined Common-Size and Base-Year Analysis

Answer 4

As total assets grow, most other accounts grow too so common size statements often consider this aggregated growth. ∴ Combined Analysis = to isolate growth of a specific account and analyze its trend only 1) Calculate account as a percentage of total (Common-Size)

Question 5

5 Categories of Financial Ratios

Answer 5

Financial Ratios = relationships determined from financial information and used to compare and investigate relationships -Eliminates size problem by using ratios 1) ST Solvency 2) LT Solvency 3) Asset Management/Turnover 4) Profitability 5) Market Value

Question 6

Short-Term Solvency Ratios

Answer 6

Short-Term Solvency Ratios= (Liquidity measures) Primary concern is firm’s ability to pay bills in SR without stress. Focus on CA and CL.

• Current Ratio
• Quick Ratio
• Cash Ratio
• Net Working Capital to Total Assets
• Interval Measure

Question 7

Long-Term Solvency Ratios

Answer 7

Long-Term Solvency Ratios= (Leverage Ratios) Ability to meet obligations in LR, ability to meet financial leverage

• Total Debt Ratio
• Debt-Equity Ratio
• Equity Multiplier
• Long-term Debt Ratio
• Times Interest Earned Ratio
• Cash Coverage Ratio

Question 8

Asset Management/Turnover Ratios

Answer 8

Asset Management/Turnover Ratios= (Asset Utilization) how efficiently or intensively a firm uses assets to generate sales

• Inventory Turnover and Days’ Sales Inventory
• Receivables Turnover and Days’ Sales Receivables
• Net Working Capital Turnover
• Payables Turnover
• Asset Turnover Ratios
  
  • Fixed Asset Turnover
  • Total Asset Turnover

Question 9

Profitability Ratios

Answer 9

Profitability Ratios=how efficiently a firm uses assets and manages operations, focus on bottom line/net income

• Profit Margin
• Return on Assets
• Return on Equity

Question 10

Market Value Ratios

Answer 10

Market Value Ratios = Calculated only for public companies

• Price-Earnings Ratio
  
  • Price-Earnings Growth Ratio
• Price-Sales Ratio
• Market-to-Book Ratio
  
  • Tobin’s Q Ratio
• Enterprise Value - EBITDA Ratio

Question 11

DuPont Identity

Answer 11

DuPont Identity = famous way of decomposing ROE into its component parts

-Using it to elicit relationship between ROE and ROA