FIN 335 TIPS REVIEWS ANSWERS AND QUESTIONS
SET A+
✔✔GAAP Matching Principle - ✔✔- recognize revenue when its fully earned
- match expenses required to generate revenue to the period of recognition
✔✔Noncash items - ✔✔- expenses charged against revenue that do not affect cash
flow
- depreciation = most important
✔✔Data is life - ✔✔- publicly traded companies must file regular reports with the
Securities and Exchange Commission
- these reports are usually filed electronically and can be searched at the SEC public
site called EDGAR
✔✔marginal tax rate - ✔✔the extra taxes paid on an additional dollar of income
- the percentage paid on the next dollar earned
✔✔average tax rate - ✔✔total taxes paid divided by total taxable income
✔✔Corporate taxes in the united states - ✔✔21%
✔✔cash flow from assets - ✔✔the total of cash flow to creditors and cash flow to
stockholders, consisting of the following: operating cash flow, capital spending, and
change in net working capital
CFFA= cash flow to creditors + cash flow to stockholders
CFFA= operating cash flow - Net capital spending - Changes in NWC
✔✔OCF (operating cash flow) - ✔✔EBIT + Depreciation - Taxes
✔✔NCS (net capital spending) - ✔✔ending net fixed assets - beginning net fixed assets
+ depreciation
✔✔Change in NWC (net working capital) - ✔✔Ending NWC - Beginning NWC
, ✔✔common size balance sheets - ✔✔compute all accounts as a percent of total assets
✔✔Common Size Income Statement - ✔✔Compute all line items as a percent of sales
✔✔standardized statements... - ✔✔make it easier to compare financial information,
particularly as the company grows
- they are also useful for comparing companies of different sizes, particularly within the
same industry
- allow for better compariso through time or b/w companies
✔✔ratio analysis - ✔✔- ratios are used both internally and externally
- short term solvency or liquidity rations
- long term solvency or financial leverage ratios
- asset management or turnover ratios
- profitability ratios
- market value ratios ( only important when buy/selling a company or have public
shareholders)
✔✔Current ratio - ✔✔CA/CL
(liquidity ratio)
✔✔quick ratio - ✔✔(CA- inventory) / CL
(liquidity ratio)
✔✔cash ratio - ✔✔cash/ CL
(liquidity ratio)
✔✔Computing Leverage Ratios - ✔✔total debt ratio = (TA-TE) / TA
debt/equity = TD/TE
Equity multiplier = TA/TE = 1 + D/E
✔✔Computing Coverage Ratios - ✔✔times interest earned = EBIT / Interest
cash coverage = (EBIT + Depreciation & amort.) / interest
✔✔computing inventory ratios - ✔✔inventory turnover = COGS/ Inventory
Days sales in inventory = 365 / inventory turnover
✔✔Computing Receivables Ratios - ✔✔receivables turnover = sales/accounts
receivables
days sales in receivables = 365 / receivables turnover
✔✔computing asset turnover - ✔✔asset turnover = sales / total assets
- measure of asset use efficiency
- not unusual for AT = <1, especially if a firm has a large amount of fixed assets
SET A+
✔✔GAAP Matching Principle - ✔✔- recognize revenue when its fully earned
- match expenses required to generate revenue to the period of recognition
✔✔Noncash items - ✔✔- expenses charged against revenue that do not affect cash
flow
- depreciation = most important
✔✔Data is life - ✔✔- publicly traded companies must file regular reports with the
Securities and Exchange Commission
- these reports are usually filed electronically and can be searched at the SEC public
site called EDGAR
✔✔marginal tax rate - ✔✔the extra taxes paid on an additional dollar of income
- the percentage paid on the next dollar earned
✔✔average tax rate - ✔✔total taxes paid divided by total taxable income
✔✔Corporate taxes in the united states - ✔✔21%
✔✔cash flow from assets - ✔✔the total of cash flow to creditors and cash flow to
stockholders, consisting of the following: operating cash flow, capital spending, and
change in net working capital
CFFA= cash flow to creditors + cash flow to stockholders
CFFA= operating cash flow - Net capital spending - Changes in NWC
✔✔OCF (operating cash flow) - ✔✔EBIT + Depreciation - Taxes
✔✔NCS (net capital spending) - ✔✔ending net fixed assets - beginning net fixed assets
+ depreciation
✔✔Change in NWC (net working capital) - ✔✔Ending NWC - Beginning NWC
, ✔✔common size balance sheets - ✔✔compute all accounts as a percent of total assets
✔✔Common Size Income Statement - ✔✔Compute all line items as a percent of sales
✔✔standardized statements... - ✔✔make it easier to compare financial information,
particularly as the company grows
- they are also useful for comparing companies of different sizes, particularly within the
same industry
- allow for better compariso through time or b/w companies
✔✔ratio analysis - ✔✔- ratios are used both internally and externally
- short term solvency or liquidity rations
- long term solvency or financial leverage ratios
- asset management or turnover ratios
- profitability ratios
- market value ratios ( only important when buy/selling a company or have public
shareholders)
✔✔Current ratio - ✔✔CA/CL
(liquidity ratio)
✔✔quick ratio - ✔✔(CA- inventory) / CL
(liquidity ratio)
✔✔cash ratio - ✔✔cash/ CL
(liquidity ratio)
✔✔Computing Leverage Ratios - ✔✔total debt ratio = (TA-TE) / TA
debt/equity = TD/TE
Equity multiplier = TA/TE = 1 + D/E
✔✔Computing Coverage Ratios - ✔✔times interest earned = EBIT / Interest
cash coverage = (EBIT + Depreciation & amort.) / interest
✔✔computing inventory ratios - ✔✔inventory turnover = COGS/ Inventory
Days sales in inventory = 365 / inventory turnover
✔✔Computing Receivables Ratios - ✔✔receivables turnover = sales/accounts
receivables
days sales in receivables = 365 / receivables turnover
✔✔computing asset turnover - ✔✔asset turnover = sales / total assets
- measure of asset use efficiency
- not unusual for AT = <1, especially if a firm has a large amount of fixed assets
