Finance Lecture 2

Question 1

What are the 4 categories in an annual report?

Answer 1

balance sheet

income statement

statement of retained earnings

statement of cash flows

Question 2

What is a balance sheet?

Answer 2

it provides a SNAPSHOT of a firm’s financial position at one point of time

Question 3

What is an income statement?

Answer 3

it summarizes a firm’s revenue and expenses over a given period of time

Question 4

what is a statement of retained earnings?

Answer 4

shows how much of the firm’s earnings were retained, rather than paid out as dividends

Question 5

what is a statement of cash flows?

Answer 5

it reports the impact of a firm’s activities on cash flows over a given period of tine

Question 6

what is the difference between book values and market values?

Answer 6

book values are determined by GAAP

market values are determined by current trading values in the market

Question 7

what is the formula for enterprise value?

Answer 7

enterprise value = market value of equity + debt - cash

Question 8

what is enterprise value?

Answer 8

the enterprise value of a firm assesses the value of the underlying business assets( however financed), and separate from the value of any-non operating cash ( excess cash) and marketable securities that the firm may have

Question 9

what are outstanding capital stock?

Answer 9

shares held by outsiders

Question 10

what are Treasury stocks?

Answer 10

shares bought back & held by company

Question 11

what are the 3 major categories in the statement of cash flows

Answer 11

Operating activities - includes net income and changes in most current accounts ( AP AR Inc)

Investment activities - includes changes in fixed assets

Financing activities - includes changes in notes payable, long term debt and equity account as well as dividends

Question 12

what does operating working capital mean and consist of?

Answer 12

operating working capital is working capital stemming from our operating policies AND removed from our financing decisions

accounts receivable

inventory

accounts payable

Question 13

what is operating working capital?

Answer 13

OWC is working capital string from operating policies and removed from financing decisions

Question 14

what are the 2 types of current liabilities? which one are we interested in?

name examples from both type of current liabilities!

Answer 14

1) Interest Bearing Liabilities ( financing activities)

• Short Term Loans ( less than 1 year)
• Notes Payables

2) Non interest bearing Liabilities ( operating activities)
- accounts payables

Question 15

What are the 5 Major Categories of Ratio

Answer 15

i) Liquidity ratios
ii) Long-Term Solvency (Financial Leverage) Ratios
iii) Asset Management
iv) Profitability Ratios
v) Market value ratios

Question 16

What is Liquidity Ratio?

Answer 16

Liquidity ratios measure the firm’s ability to pay bills in the short run,

It indicates a firm’s ability to meet its maturing short-term obligations

Question 17

What is Long-Term Solvency? What is another term for it?

Answer 17

Financial Leverage

It relates to the extent that a firm relies on debt financing rather than equity.

The more debt a firm has, the more likely it is the firm will become unable to fulfil its contractual obligations.

Question 18

What is Asset Management Ratios? What is another term for it?

What are the 3 sub- activities under Asset Management Ratio?

Answer 18

Activity Ratios

i) Inventory Ratios measure how quickly inventory is produced and sold
ii) Receivable ratios provide information on the success of the firm in managing its collection from credit customers
iii) Fixed asset and total asset turnover ratios show how effective the firm is in using its assets to generate sales.

Question 19

What is Profitability Ratios?

Answer 19

Measures the firm’s return on its investments

Question 20

What is current ratio?

Answer 20

Current ratio is current assets/ current liabilities

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations

Question 21

What is Quick Ratio

Answer 21

(Current Asset - Inventory) / Current Liabilities

The quick ratio is a measure of how well a company can meet its short-term financial liabilities.

Question 22

What is total debt ratio?

Answer 22

Total Debt/Total Assets

Question 23

What is fixed asset and total asset turnover ratios?

Answer 23

It shows how effective the firm is in using its assets to generate sales.

Question 24

What is the Dupoint Equation?

Answer 24

ROE = Profit Margin x Total Asset Turnover X Equity Multiplier

Question 25

What is the formula for Profit margin?

Answer 25

Net Income/ Sales

Question 26

What is the formula for Total Asset Turnover?

Answer 26

Sales / Total Assets

Question 27

What is the formula for equity multiplier?

Answer 27

Total Assets/ Total equity OR 1 + Debt/Equity ratio