Unit 3

Question 1

Types of financial statements

Answer 1

Balance sheet, income statement, statement of cash flows. Statement of shareholders equity

Question 2

Balance sheet

Answer 2

Assets, liabilities, and equities; snapshot of financial condition at specific point in time; assets listed in order of liquidity

Question 3

Income statement

Answer 3

Revenue, expenses, net income; period of time; profit and loss statement

Question 4

Statement of Cash flows

Answer 4

Cash in and out- operating, investing, financing; short term viability; starting cash + net income - changes in balance statement assets

Question 5

Statement of shareholders equity

Answer 5

Changes in equity in reporting period; retained profit/surplus

Question 6

Who uses financial statements?

Answer 6

Owners, managers, investors, creditors, lenders

Question 7

Nonoperating expenses

Answer 7

Nonbusiness activities, infrequent, unusual, interest expenses, income tax expenses

Question 8

4 basic principles

Answer 8

Historical cost, matching, revenue recognition, full disclosure

Question 9

Historical cost principle

Answer 9

Account and report based on acquisition cost not fair market value

Question 10

Revenue recognition principle

Answer 10

Requires companies record when revenue is realized or realizable OR revenue is earned not when cash is received

Question 11

Matching principle

Answer 11

Match revenue to expenses

Question 12

Full disclosure

Answer 12

Amount and kinds of info disclosed based on trade off analysis

Question 13

Noncash items

Answer 13

Depreciation, amortization, investing, financing; affects difference between income statement and cash flow statement;

Question 14

Working capital

Answer 14

Operating liquidity; current assets-current liabilities

Question 15

Operating cash flow

Answer 15

Cash flow dealing with actual operations of business

Question 16

Cash flow from investing

Answer 16

Cash flow from activities related to purchase or sale of assets or investments

Question 17

Cash flow from financing

Answer 17

Borrowing, raising, repaying money

Question 18

Overall cash flow

Answer 18

Funds flow statement; positive cash flow = company may be solvent

Question 19

Free cash flow

Answer 19

How much cash can be extracted from company without causing issues in day to day operations

Question 20

Profitability ratios

Answer 20

Use of assets and control of expenses to generate acceptable rate of return; gross profit margin, net profit margin, ROE, ROI, ROA

Question 21

Liquidity ratios

Answer 21

Measures availability of cash to pay debt; ability to pay short term debt as it becomes due; quick ratio, current ratio

Question 22

Activity ratios

Answer 22

Efficiency ratios- use of assets and resources

Question 23

Debt/Leverage Ratios

Answer 23

Firm’s ability to repay long-term debt; less than 0.5 means most debt finances thru equity

Question 24

Market Ratios

Answer 24

Relative value of companies; price-earnings ratio

Question 25

Types of ratios

Answer 25

Profitability, liquidity, market, activity, debt

Question 26

Benchmarking

Answer 26

Comparing financial ratios of a company to those of the top performer in its class

Question 27

Trend analysis

Answer 27

Forecast or inform future events; spot trend or pattern in same metric historically

Question 28

Limits of ROA

Answer 28

No indication of how assets are financed, assets based on carrying value not market value, not metric for good vs bad ROA

Question 29

Limitations of ROE

Answer 29

Irrelevant if earnings are not reinvested or distributed; between 15 and 20% is acceptable

Question 30

Dividends

Answer 30

Form of cash, store credit, or shares in company; investment income taxable to recipient; fixed amount per share; may declare at any time; deducts retained earnings on balance sheet

Question 31

Sustainable growth rate

Answer 31

Max growth rate a firm can achieve without issuing new equity or changing debt-to-equity ratio

Question 32

Financial forecasting

Answer 32

Looking ahead at future expenses and revenue; creating game plan based on precise and legit data

Question 33

Forecasting Inputs

Answer 33

Time series, cross-sectional, longitudinal, judgemental methods

Question 34

time series

Answer 34

sequence of data points measured at uniform time intervals - ex: Dow Jones Index

Question 35

Cross-sectional

Answer 35

data collected by observing many subjects at the same time or without regard to differences in time; snapshot of population at one point in time

Question 36

Longitudinal Data

Answer 36

repeated observations of the same variables over time, usually decades

Question 37

judgemental forecasting

Answer 37

intuitive judgements, opinions, and subjective probability estimates

Question 38

Pro forma statement

Answer 38

assumptions/ hypothetical conditions about events that may have occurred in the past or may occur in the future

Question 39

challenges of financial forecasting

Answer 39

most difficult to predict revenue

Question 40

Percentage of Sales Forecasting

Answer 40

calculate how much financing is needed to increase sales

Question 41

Spontaneous Accounts

Answer 41

balance sheet items that grow in proportions to sales-ex: inventory, A/R, A/P

Question 42

Sustainable Growth Rate

Answer 42

Max rate of growth a company can sustain without having to finance growth with additional equity or debt

Question 43

Limitations to sustainable growth rate

Answer 43

consumer trends, economic conditions, poor long-term planning, need to reinvest in themselves

Question 44

Discretionary Financing Needed

Answer 44

external financing needed- issue common stock or borrow money

Question 45

What happens when you increase dividend payout?

Answer 45

Decrease in the firm’s stock price