chapter 7

Question 1

what’s the link between the balance sheet and income sheet

Answer 1

the retained earnings part

Question 1

define loan covenants

Answer 1

the terms and conditions of a loan that require the borrower to meet certain requirements established by the lender

Question 2

what does the analysis on balance sheet reference to

Answer 2

the income statement and specific line item’s relationship with it - we are examining dependencies as the main way on the balance sheet

Question 3

what’s a good ratio

Answer 3

it’s dependent on what ratio is being calculated, etc

relative to the industry, their competitors, and the state of the economy

Question 4

what’s the formula to return on assets (ROA)

Answer 4

(net income + interest expense)/Average total assets

Question 5

what’s the formula to average total assets

Answer 5

(total assets, beginning period + total, end of period)/2

Question 6

even if a company generates net income that doesn’t mean it’s ______ profitable

Answer 6

efficiently

Question 7

why is interest expense in ROA

Answer 7

to show the company’s cost of borrowing from lenders (shareholders + loans)

Question 8

define ROA

Answer 8

metric to understand how effective management is in using borrowed money to invest in business assets and generate a return

Question 9

define ROE

Answer 9

performance measure that demonstrates how effectively a company uses equity holders’ investments to generate profit - how good a company is turning cash from investors into profit

Question 10

what’s the ROE formula

Answer 10

ROE = net income/average shareholders’ equity

Question 11

what’s hte formula to average shareholders’ equity

Answer 11

(shareholders’ equity at the beginning of the period, shareholders’ equity at the end of the period)/2

Question 12

what’s a good ROE?

Answer 12

relative, must be compared to the company’s historical performance, their competitors

Question 13

define Asset turnover

Answer 13

a profitability metric that examines how well a company is managing its assets - in the context of generating sales rather than net income - it doesn’t consider operating costs and it’s purely focused on measuring sale generation ability - ratio is the amount of sales generated for each dollar invested in assets

Question 14

what’s the formula to asset turnover

Answer 14

revenue or sales / average total assets

Question 15

what’s a good asset turnover ratio

Answer 15

dependent on the industry, the company’s competitors, and it’s historical performance

Question 16

how to build a budget from a balance sheet

Answer 16

approach is based on relationships between financial statement line items - budget should reflect what the company expects will happen to the business but also those actions the business knows it will take in the budgeted period