Impact + Important Flashcards
If a company owns less than 20% shares, it will be reflected in the company’s statements as
Investment Assets
Trade debtors is recorded in balance sheet as
Current Assets
How are stocks valued in the assets section?
1) Cost of stock
2) Net realisable value of stock
whichever is LOWER
Recording prepayment
1) Deduct the prepaid amount from expenses ==> Expenses recorded in I/S for that year
2) The prepaid amount in the balance sheet under Current Assets (may be under other receivables)
Gross Profit
Revenue - COGS
If the bond is selling at par value, this means
yield to maturity = coupon rate
Long term credit ratings by MARC
What are the investment grade category?
AAA - BBB
What are the non investment grade category for long term credit ratings by MARC
BB-D
A firm has a higher quick (or acid test) ratio than the industry average, which implies.
The firm is more likely to avoid insolvency in short run than other firms in the industry.
The firm may be less profitable than other firms in the industry.
Current assets earn less than fixed assets; thus, a firm with a relatively high level of current
assets may be less profitable than other firms. However, its high level of current assets makes
it more liquid.
Balance sheet provides a snapshot of ____
financial condition of the firm at a particular time.
If you wish to compute economic earnings and are trying to decide how to account for
inventory
LIFO is better than FIFO
LIFO reflects the current cost of goods sold, and thus is a better determinant of economic
earnings.
Given the results of the study by Clayman, you would __________ the stocks of firms
with high ROEs and __________ the stocks of firms with low ROEs.
not want to buy, want to buy
Clayman found that investing in firms with high ROEs produced results inferior to those
obtained by investing in stocks with lower ROEs.
Over a period of thirty-odd years in managing investment funds, Benjamin Graham used
the approach of investing in the stocks of companies where the stocks were trading at less
than their working capital value. The average return from using this strategy was
approximately ______.
20%
If the interest rate on debt is higher than ROA, then a firm will __________ by increasing
the use of debt in the capital structure.
decrease the ROE
If ROA is less than the interest rate, then ROE will decline by an amount that depends on the
debt to equity ratio.
Interest rate on debt lower than ROA –> increase the ROE
A firm has a market to book value ratio that is equivalent to the industry average and an
ROE that is less than the industry average, which implies _______.
The relationship P/E = (P/B) / ROE indicates that A is possible.
In periods of inflation, accounting depreciation is __________ relative to replacement cost
and real economic income is ________.
understated, overstated
Fixed assets are depreciated based on historical costs and, as a result, are understated relative
to replacement costs during periods of inflation; as a result, real economic income is
overstated.
If a firm has a positive tax rate, a positive ROA, and the interest rate on debt is the same
as ROA, then ROA will be ________.
Greater than ROE. If interest rate = ROA; ROE = (1 - tax rate)ROA; ROA > ROE.
During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes ________.
higher incomes taxes. In inflationary periods, the use of FIFO causes overstated earnings, which result in higher taxes.
Return on total assets is a function of _______.
the after-tax profit margin and the asset turnover ratio
FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm _________.
A. utilizes assets effectively
B. has too much equity in the capital structure
C. has relatively high current liabilities
D. has a relatively low dividend payout ratio
E. none of the above
C. has relatively high current liabilities
Total debt includes both current and long term debt; the above relationships could occur only if FOX Company has a higher than average level of current liabilities.
A firm’s current ratio is above the industry average; however, the firm’s quick ratio is below the industry average. These ratios suggest that the firm _________.
A. has relatively more total current assets and even more inventory than other firms in the industry
B. is very efficient at managing inventories
C. has liquidity that is superior to the average firm in the industry
D. is near technical insolvency
E. none of the above
A is the only possible answer; total current assets are high, and inventory is a very large portion of total current assets, relative to other firms in the industry.
Which of the following ratios gives information on the amount of profits reinvested in the firm over the years:
Retained earnings/total assets
Only retained earnings reflect profits reinvested over the years.
Effect of LIFO vs FIFO on inventory and current ratio
A firm using LIFO will have lower priced inventory, thus resulting in a lower current ratio. If inflation continues, these differences will increase over time.
During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were used
During periods of inflation, the use of LIFO results in lower priced inventory remaining in stock; thus the balance sheet understates the actual inventory values.
The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of high inflation, the level of reported depreciation tends to \_\_\_\_\_\_\_\_\_\_ income, and the level of interest expense reported tends to \_\_\_\_\_\_\_\_\_\_ income. A. understate, overstate B. understate, understate C. overstate, understate D. overstate, overstate E. There is no discernable pattern.
C. overstate, understate
Depreciation is based on historic costs; thus during periods of inflation depreciation is understated, which results in the overstatement of income. In periods of inflation, interest rates are high, and thus result in the understatement of the firm’s long term earning capacity.
