Test 2

Question 1

ROE disaggregation is

Answer 1

Return on assets * Financial Leverage

Question 2

Equity is

Answer 2

assets minus liabilities

Question 3

ROA disaggregation is

Answer 3

Profit margin * asset turnover

Question 4

Full dupont aggregation is

Answer 4

ROE=Profit marginasset turnoverfinancial leverage

Question 5

For a company to be liquid, what current/quick ratio do they need.

Answer 5

Greater than 1.

Question 6

For a company to be solvent, what total liabilities to equity ratio do they need?

Answer 6

Greater than 1.5

Question 7

A good return on assets

Answer 7

higher number, more profit per asset.

Question 8

A good Return on equity

Answer 8

lower number, lower debt, lower risk.

Question 9

A good Financial Leverage

Answer 9

lower number, lower debt, lower risk.

Question 10

Working capital

Answer 10

current assets minus current liabilities

Question 11

cash conversion cycle

Answer 11

DSO+DIO-DPO

Question 12

A good cash conversion cycle is

Answer 12

lower, means that they are turning things into cash faster.

Question 13

EBIT stands for

Answer 13

earnings before interest and tax

Question 14

Vertical analysis on income statement

Answer 14

% of net sales

Question 15

Vertical analysis of balance sheet

Answer 15

% of total assets

Question 16

Horizontal analysis is

Answer 16

over a period of time. current balance-previous balance/previous balance (new-old) divided by old.

Question 17

Revenue recognition

Answer 17

recognized when received not when paid.

Question 18

cost-to-cost revenue recognition.

Answer 18

large projects, recognize some of the revenue as you go. what % of cost has been incurred.

Question 19

Sales allowance

Answer 19

right to return etc. NOT DISCOUNTS.

Question 20

unearned/deferred revenue

Answer 20

cash received in advance, shown as liability, moved to sales as used.

Question 21

Accounts receivable allowance

Answer 21

guess from previous years how much we won’t get paid.

Question 22

capitalizing means

Answer 22

inventory, property, things that don’t go directly to income statement until sold.

Question 23

Cost to be capitalized

Answer 23

purchase price or manufacturing cost including materials, labor, direct overhead.

Question 24

FIFO

Answer 24

first in first out, Cogs of original inventory as it is sold.

Question 25

LIFO

Answer 25

last in first out, reverse order.

Question 26

average cost

Answer 26

price per unit sold. ending inventory becomes beginning next year.

Question 27

LIFO reserve

Answer 27

difference between LIFO and FIFO inventory numbers.

Question 28

People use LIFO because

Answer 28

Lower taxes

Question 29

People use FIFO because

Answer 29

better GP numbers/looks better to investors.

Question 30

Lifo+lifo reserve=

Answer 30

Fifo

Question 31

DSO=

Answer 31

Accounts receivable

Question 32

Depreciation expense

Answer 32

Use up PPE as capitalized-moves to the income statement from the balance sheet.

Question 33

Straight line depreciation

Answer 33

evenly over a number of years.

Question 34

Land/construction process depreciation

Answer 34

Doesn’t happen!!!

Question 35

bad debt expense

Answer 35

bad debt-allowance

Question 36

net amount of accounts receivable

Answer 36

A/R-bad debt

Question 37

net of allowances

Answer 37

amount of money companies expect to receive

Question 38

amortization

Answer 38

similar to depreciation but for intangible assets

Question 39

depreciation expense=

Answer 39

price-salvage divided by expected life * actual life

Question 40

net book value is

Answer 40

original cost - depreciation