CHAPTER3/WORKING WITH FINANCIAL STATEMENTS

Question 1

WHAT IS A SOURE OF CASH?

Answer 1

A FIRMS ACTIVITIES THAT GENERATE CASH.

Question 2

WHAT IS A USE OF CASH? WHAT ELSE IS IT CALLED?

Answer 2

A FIRMS ACTIVITIES THAT INVOLVE SPENDING CASH. APPLICATIONS OF CASH.

Question 3

INCREASE IN INVENTORY . IS IT A SOURCE OR USE OF CASH?

Answer 3

USE OF CASH.

Question 4

DECREASE IN ACCOUNTS RECIEVABLE. IS IT A SOURCE OR USE OF CASH?

Answer 4

SOURCE OF CASH

Question 5

DECREASE IN ACCOUNTS PAYABLE . IS IT A SOURCE OR USE OF CASH?

Answer 5

USE OF CASH

Question 6

INCREASE IN NOTES PAYABLE . IS IT A SOURCE OR USE OF CASH?

Answer 6

SOURCE

Question 7

1. WHAT IS AN ACCOUNTS RECEIVABLE?

2. WHAT TYPE OF ACCOUNT IS IT ( ASSET/LI/SE)?

Answer 7

1. MONEY OWED TO A COMPANY BY ITS CUSTOMERS FOR SERVICES THAT HAVE BEEN RENDERED ON CREDIT.
2. CURRENT ASSET ACCOUNT.

Question 8

1. DEFINE ACCOUNT PAYABLE?

2. WHAT TYPE OF ACCOUNT IS IT ( ASSET/ LI/SE)?

Answer 8

1. MONEY OWED BY A FIRM TO SUPPLIERS.

2. LIABILITY.

Question 9

WHAT IS A NOTE PAYABLE?

Answer 9

MONEY OWED TO FINANCIERS.

Question 10

IDENTIFY THE THREE SCENARIOS FOR SOURCES OF CASH AND PROVIDE REASONS FOR THE INCREASE?

Answer 10

assets decrease (firm sold assets ).
liabilities increase( firm borrowed cash).
equity increases( selling share for cash).

Question 11

IDENTIFY THE THREE SCENARIOS FOR USE OF CASH AND PROVIDE REASONS FOR ?

Answer 11

ASSETS INCREASE (FIRM IS BUYING ASSETS)
LIABILITIES DECREASE (FIRM IS PAYING BACK DEBT)
EQUITY DECREASE (FIRM IS REPURCHASING SHARES)

Question 12

COMMON STOCK INCREASE. IS IT A SOURCE OR USE OF CASH?

Answer 12

SOURCE OF CASH.

Question 13

IDENTIFY THE THREE SCENARIOS FOR USES OF CASH ?

Answer 13

ASSETS INCREASE (FIRM BUYING ASSETS).
LIABILITY DECREASE (FIRM PAYING BACK DEBTS).
EQUITY DECREASE (FIRM REPURCHASE SHARES IN EXCHANGE FOR CASH).

Question 14

WHY IS IT OFTEN NECESSARY TO STANDARDIZE FINANCIAL STATEMENTS?

Answer 14

BECAUSE COMPANIES ARE DIFFERENT SIZES AND WOULD BE DIFFICULT TO COMPARE WITHOUT BEING STANDARDIZED.

Question 15

NAME TWO TYPES OF STANDARDIZED STATEMENTS ?

Answer 15

COMMON SIZE STATEMENTS

COMMON BASE YEAR STATEMENTS

Question 16

DESCRIBE HOW A COMMON SIZE STATEMENT IS FORMED?

Answer 16

EXPRESS EACH ITEM ON STATEMENT AS A PERCENTAGE OF TOTAL ASSETS ( FOR BALANCE SHEETS).
EXPRESS EACH ITEM ON INCOME STATEMENT AS A PERCENTAGE OF SALES

Question 17

CALCULATE THE COMMON BASE YEAR WITH THE FOLLOWING INFORMATION :

FINANCIAL STATEMENT FOR INVENTORY ON A BALANCE SHEET AND GET THE FOLLOWING ANSWER ( 2008: 1 AND 2009 : 1.07 ) WHAT DOES THE 1.07 MEAN?

Answer 17

IT MEANS INVENTORY ROSE BY 7 PERCENT DURING THE YEAR.

NOT FINISHED

Question 18

WHAT IS A FIRMS LEAST LIQUID CURRENT ASSET?

Answer 18

INVENTORY.

Question 19

WHAT IS THE FORMULA FOR OUTSTANDING SHARES?

Answer 19

ISSUED STOCK - TREASURY STOCK

Question 20

WHAT IS THE REASON FOR FINANCIAL STATEMENT ANALYSIS ( THE REASON WE LOOK AT ACCOUNTING INFORMATION?).

Answer 20

THE MAIN REASON WE LOOKING AT ACCOUNTING INFORMATION IS THAT WE OFTEN DONT HAVE MARKET INFORMATION.

Question 21

IF WE HAVE ACCOUNTING DATA AND MARKET DATE WHICH DATA SHOULD BE GIVEN PRECEDENCE?

Answer 21

MARKET DATA SHOULD BE GIVEN PRECEDENCE.

Question 22

WHAT ARE SOME REASONS FOR FINANCIAL STATEMENT ANALYSIS ?

Answer 22

1. THE MAIN REASON WE LOOKING AT ACCOUNTING INFORMATION IS THAT WE DONT HAVE MARKET INFORMATION.
2. THERE ARE INTERNAL USES (PERFORMANCE EVALUATION/ FUTURE PLANNING/ COMPARING DIVISIONS IN A FIRM) AND EXTERNAL USES( CREDITORS/INVESTORS/EVALUATING COMPETITORS) OF ACCOUNTING INFORMATION AS WELL

Question 23

IF WE HAVE ACCOUNTING DATA AND MARKET DATA WHICH DATA SHOULD BE GIVEN PRECEDENCE?

Answer 23

MARKET DATA SHOULD BE GIVEN PRECEDENCE.

Question 24

WHAT ARE THE FIVE GROUPS OF FINANCIAL RATIOS?

Answer 24

1. SHORT TERM SOLVENCY OR LIQUIDITY RATIOS.
2. LONG TERM SOLVENCY( FINANCIAL LEVERAGE RATIOS).
3. ASSET MANAGEMENT RATIOS ( TURNOVER RATIOS).
4. PROFITABILITY RATIOS.
5. MARKET VALUE RATIOS.

Question 25

NAME THE SHORT TERM SOLVENCY RATIOS?

Answer 25

1. CURRENT RATIO 2. QUICK RATIO. 3. CASH RATIO. 4. NWC TO TOTAL ASSETS. 5. INTERVAL MEASURE.

Question 26

1. HOW IS THE CURRENT RATIO COMPUTED? 2. WHAT IS IT INTENDED TO MEASURE? 3. WHAT IS THE UNIT OF MEASURE? 4. WHAT MIGHT A HIGH OR LOW VALUE TELL US?

Answer 26

1. current assets/ current liabilities. 2. SHORT TERM LIQUIDITY. 3. MEASURED IN DOLLARS OR TIMES.CURRENT RATIO OF 1.31 MEANS FIRM HAS 1.31 IN CURRENT ASSETS FOR EVERY DOLLAR IN CURRENT LIABILITIES. 4. WE WOULD EXPECT TO SEE A CURRENT RATIO OF 1. LESS THAN 1 WOULD MAKE NET WORKING CAPITAL NEGATIVE SO LOWER THAN 1 WOULD INDICATE TROUBLE.A RATIO OF 3 IS TOO HIGH( TOO. MUCH CASH NOT BEING PUT TO PRODUCTIVE USE).

Question 27

1. HOW IS THE QUICK RATIO COMPUTED? 2. WHAT IS IT INTENDED TO MEASURE? 3. WHAT IS THE UNIT OF MEASURE? 4. WHAT MIGHT A HIGH OR LOW VALUE TELL US?

Answer 27

1. CURRENT ASSETS - INVENTORY/ CURRENT ASSETS. 2. SHORT TERM SOLVENCY WITH INVENTORY REMOVED. 3. DOLLARS OR TIMES. 4. WE WOULD EXPECT TO SEE A CURRENT RATIO OF AT LEAST 1. LESS THAN 1 WOULD MAKE NET WORKING CAPITAL NEGATIVE SO LOWER THAN 1 WOULD INDICATE TROUBLE.A RATIO OF 3 IS TOO HIGH( TOO. MUCH CASH NOT BEING PUT TO PRODUCTIVE USE).

Question 28

WHY DO WE SAY THAT FINANCIAL STATEMENT ANALYSIS IS MANAGEMENT BUY EXCEPTION?

Answer 28

the practice of examining the financial and operational results of a business, and only bringing issues to the attention of management if results represent substantial differences from the budgeted or expected amount. For example, the company controller may be required to notify management of those expenses that are the greater of $10,000 or 20% higher than expected.

Question 29

WHAT ARE SOME PROBLEMS THAT CAN COME UP WITH FINANCIAL STATEMENT ANALYSIS?

Answer 29

1. THE MAIN PROBLEM IS THERE IS NO THEORY THAT TELLS US WHICH NUMBERS TO LOOK AT AND HOW TO INTERPRET THEM. .THE CONSOLIDATED FINANCIAL STATEMENTS OF A CONGLOMERATE DONT FIT ANY ONE CATEGORY OF SIC CODES. .IT IS DIFFICULT TO COMPARE FINANCIAL STATEMENT FROM COUNTRY TO COUNTRY.

Question 30

1. HOW IS THE QUICK ( ACID TEST) RATIO COMPUTED? 2. WHAT IS IT INTENDED TO MEASURE? 3. WHAT IS THE UNIT OF MEASURE? 4. WHAT MIGHT A HIGH OR LOW VALUE TELL US?

Answer 30

1. CURRENT ASSETS - INVENTORY / CURRENT LIABILITIES. 2. IF WE HAVE ENOUGH CURRENT ASSETS ( MINUS INVENTORY) TO PAY FOR CURRENT LIABILITIES. 3. DOLLARS AND TIMES. 4.HIGH VALUE= TOO MUCH CURRET ASSETS. LOW VALUE = NOT ENOUGH CURRENT ASSETS.

Question 31

1. HOW IS THE QUICK ( ACID TEST) RATIO COMPUTED? 2. WHAT IS IT INTENDED TO MEASURE? 3. WHAT IS THE UNIT OF MEASURE? 4. WHAT MIGHT A HIGH OR LOW VALUE TELL US?

Answer 31

1. CASH / CURRENT LIABILITIES. 2. WHETHER WE HAVE ENOUGH CASH TO MEET CURRENT LIABILITIES. 3. DOLLARS OR TIMES. 4. SAME AS THE OTHER SHORT TERM RATIOS.

Question 32

NAME THE LONG TERM SOLVENCY RATIOS:

Answer 32

1. TOTAL DEBT RATIO. 2. DEBT TO EQUITY RATIO. 3. EQUITY MULTIPLIER. 4. TIMES INTEREST EARNED RATIO. 5. CASH COVERAGE RATIO.

Question 33

1. HOW IS THE TOTAL DEBT RATIO COMPUTED? 2. WHAT IS IT INTENDED TO MEASURE? 3. WHAT IS THE UNIT OF MEASURE? 4. WHAT MIGHT A HIGH OR LOW VALUE TELL US?

Answer 33

1. TOTAL ASSETS - TOTAL EQUITY/ TOTAL ASSETS. 2. THE AMOUNT OF DEBT A FIRM HAS COMPARED TO EVERY DOLLAR IN ASSETS. 3. $ OR PERCENT. 4. HIGH VALUE INDICATES THE FIRM HAS TOO MUCH DEBT. LOW VALUE SHOWS LOW DEBT COMPARED TO EACH DOLLAR IN ASSETS.

Question 34

1.HOW IS THE EARNINGS PER SHARE COMPUTED?

Answer 34

1. NET INCOME / SHARES OUTSTANDING.

Question 35

DEFINE OUTSTANDING SHARES ?

Answer 35

THE TOTAL NUMBER OF SHARE A FIRM HAS ISSUED TO INVESTORS.

Question 36

WHAT ISNT INCLUDED IN CALCULATING OUTSTANDING SHARES ?

Answer 36

TREASURY STOCK ISNT INCLUDED IN THE CALCULATION OF SHARES OUTSTANDING.

Question 37

ON WHICH FINANCIAL STATEMENT CAN OUTSTANDING SHARES BE FOUND? WHAT SECTION?

Answer 37

ON BALANCE SHEET UNDER THE HEADING OF CAPITAL STOCK.

Question 38

1. TURNOVER RATIOS ALL HAVE ONE OF TWO FIGURES AS THE NUMERATOR. WHAT ARE THEY? 2. WHAT DO THEY MEASURE? 3. HOW DO WE INTERPRET THE RESULT?

Answer 38

1. COST OF GOODS SOLD OR SALES. 2. HOW EFFICIENTLY A FIRMS USES ITS ASSETS. 3. THE HIGHER THE NUMBER THE MORE EFFICIENT WE ARE AT MANAGING INVENTORY.

Question 39

1. HOW IS INVENTORY TURNOVER COMPUTED? 2. WHAT IS IT INTENDED TO MEASURE? 3. WHAT MIGHT A HIGH OR LOW VALUE TELL US?

Answer 39

1. COST OF GOODS SOLD /INVENTORY. 2. HOW EFFICIENTLY A FIRM USES ITS ASSETS TO GENERATE SALES. 3. ?

Question 40

1. HOW IS THE CASH RATIO COMPUTED? 2. WHAT IS IT INTENDED TO MEASURE? 3. WHAT IS THE UNIT OF MEASURE? 4. WHAT MIGHT A HIGH OR LOW VALUE TELL US?

Answer 40

1. CASH / CURRENT LIABILITIES 2COMPANY'S ABILITY TO COVER ITS SHORT-TERM OBLIGATIONS USING ONLY CASH. 3. DOLLARS OR PERCENT 4. A 1.00 MEANS WE HAVE THE SAME AMOUNT OF CASH AS CURRENT LIABILITIES. IF WE HAVE LESS THAN 1.00,IT MEANS WE HAVE MORE CURRENT LIABILITIES THAN WE HAVE DOLLARS.ECT.