C213 Test questions with 100% Correct Answers

C213 Test questions with 100% Correct Answers Financial statement analysis - Answer- Involves relationships and trends Analyzing financial statements, prognosis is - Answer- Prediction of how a business will perform in the future External users of financial statements use financial statement analysis for - Answer- Investing decisions Purpose of financial statement analysis - Answer- Diagnosis and Prognosis Liquidity - Answer- Ability a company has to pay its debts in the short run Asset turnover - Answer- Measures a firm's efficiency at using its assets Return on Equity (ROE) 1 - Answer- Fundamental measure of overall company performance Price-earnings ratio - Answer- Represents an indication of investor's expectations concerning a firm's growth potential Return on Equity (ROE) 2 - Answer- Calculated using numbers from both the income statement and the balance sheet Debt Ratio - Answer- used to measure a firm's leverage Return on Sales - Answer- Used to measure the profit earned on each dollar of sales in a firm Asset turnover equation - Answer- Sales revenue/Common stock + Total investments + Total PPE (property, plant, equip) Return on equity equation - Answer- Net income/Common stock + Add paid-in captial +Retained earnings Current Ratio - Answer- Measure of the liquid position of a corporation Return on Sales equation - Answer- Net Income/Sales Revenue Price-earnings ratio equation - Answer- Shares x Market price per share of common stock/Net income Payment of accounts payable - Answer- Could increase a firm's current ratio Debt Ratio equation - Answer- Total current liabilities + Total long-term liabilities/Common stock + Total investments + Total PPE Revenue - Answer- In a common-size income statement, each item on the statement is expressed as a % of Sales revenue - Answer- Common-size balance sheet, using the percent of sales method, each item on the balance sheet is typically expressed as a percentage of A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do? - Answer- Compare the mix of revenue, and expenses, and determine efficient use of resources within a company over time or between companies within a given industry without respect to relative size. When using common-size statements - Answer- Data may be selected for the same business as of different dates, or for two or more businesses as of the same date Sales revenue on a common-size income statement EQUATION - Answer- Sales revenue/Sales revenue Common-sized financial statements - Answer- Most useful in analyzing companies of different sizes Cost of goods sold on a common-size income statement EQUATION - Answer- Current assets/Sales revenue Net income/Equity - Answer- Return on equity ratio under the DuPont framework is computed as Net income/Sales - Answer- Used to measure a firm's profitability Inventory turnover EQUATION - Answer- Cost of goods sold/Average Inventory Number of days sales in inventory - Answer- 365 days in a year/Inventory turnover Leverage - Answer- Borrowing that allows a company to purchase more assets than its stockholders are able to pay for No stockholders' equity - Answer- When analyzing a company's debt ratio, if the ratio has a value that is equal to one, then the company has Times interest earned ratio - Answer- Net income + Tax expense + Interest expense/Interest expense Cash flow-to-net income - Answer- Cash flow ratio reflects the extent to which accrual accounting adjustments and assumptions have been included in net income Cash flow adequacy - Answer- Cash flow ratio reflects a company's ability to finance its capital expansion through cash from operations Greater than 1 - Answer- In general, most companies have significant noncash expenses that reduce net income and also cause the cash flow-to-net income ratio to be Cash flow-to-net income EQUATION - Answer- Cash from operations/Net income Cash times interest earned - Answer- Cash flow ratio reflects a company's ability to make its interest payments from cash generated through operations Cash flow adequacy ratio - Answer- Cash from operations ÷ Cash for investing activities Inventory - Answer- Generally is NOT considered to be a liability Dividends - Answer- Distributions by a corporation to its stockh