Fnan 307 Test 1 Ull

FNAN 307 Test 1 ULL Who uses financial statements and in what capacity or manner? - Management- Minimize cost of capitol, maximize shareholder's wealth What is the purpose of financial reporting? - For management to minimize the cost of capitol and maximize wealth of the firm Why should a firm use some debt with interest costs in its capital structure? - Lower cost in equity b/c tax deductions, Risk-return tradeoff Magnifies earnings Describe the adversarial nature of financial reporting. - Accountants- Give best possible outcome to make themselves seem important Customers- Want the most honest outcome to know where they stand Describe the goal of management in financial reporting. - Maximize shareholder's wealth Estimate the Age of Fixed Assets. - Accumulated Depreciation / Current Depreciation Expense When should revenues be recognized (2 conditions)? - Point of Sale Is the most common recognition of revenue at time of sale? Describe GAAP for revenue recognition. - Yes, point of sale. It must be a known amount and payment should be expected to be received. Who is interested in Liquidity Ratios? - Creditors and Bankers List some limitations of ratio Analysis. - Window Dressing, Seasonal Factors, Inflation, Benchmarking When evaluating a company, certain qualitative factors should also be considered. List some of these factors. - Number of products Number of significant products Where sales occur R & D Legal Environment A Common Size Income Statement is prepared by dividing all items of the Income Statement by Cost of Goods Sold. - False. Common Income Statement divides by SALES Ratio Analysis is really of little importance as the financial statements used are old so the analysis is stale. - False Comparative Ratio Analysis is comparing a firm's ratio over time to identify trends. - False It identifies strengths and weaknesses as well as evaluate its financial position The Liquidity Group analyzes the firm's use of Equity in its financing structure - False Analyzes how easily a firm can cover it's bills The Debt Ratio (TD/TA) is the most stringent examination