FALSE: the income statement measures the increase in the assets of a firm over a period of time

FALSE: the P/E ratio provides no indication of investors expectations about the future of a
company
Asset accounts are listed in order of their liquidity TRUE
FALSE: marketable securities are temporary investments of excess cash & are valued @ original
purchase price
FALSE: book value per share & market value per share are usually the same $ amount
FALSE: retained earnings shown on the balance sheet represent available cash on hand generated
from prior years earnings but not paid out in dividends
FALSE: cash flow consists of illiquid cash equivalents that are difficult to convert to cash within
90 days
FALSE: an increase in an asset represents a source of funds
Interest expense is deductible b4 taxes & therefore has an after-tax cost = interest paid(1-tax rate)
TRUE
FALSE: a cash flow statement is considered correct if the net cash flow ties to the ending cash
balance
Basic financial statements: income statement, balance sheet, statement of cash flows
Income statement: measure profitability over time; Sales- CGS=Gross Profit-expenses=Earnings
before interest &taxes interest = earnings before taxes taxes = net income
3 primary sources of capital: bondholders, preferred stockholders, common stockholders
earnings per share: (earnings after taxes) / outstanding shares
statement of retained earnings: indicated disposition of earnings; Beginning RE + earnings
available to common stockholders cash dividends = Ending RE
price earnings ratio (P/E): multiplier applied to earnings per share to determine current value of
common stock; (price per share/ earnings per share) ; factors that influence P/E: earnings & sales
growth of the firm, risk, debt-equity structure of the firm, dividend payment policy, quality of
management; allows comparison of the relative market value of many companies based on $1 of
earnings per share
balance sheet: indicates what the firms owns & how the assets are financed in the form of
liabilities or ownership interest; items stated at original cost
market value: primary concern of financial managers, security analyst & stockholders
statement of cash flows: emphasizes critical nature of cash flow to the operations of the firm ;
represents cash/cash equivalents items easily convertible to cash within 90 days
operations activities: translation of income from operations from an accrual to a cash basis
net cash flow from operations activities: net income + deprecation increase in current assets
+decrease in current assets +increase in current liabilities decrease in current liabilities =net cash
flow
increase/ decrease rules: increase asset, decrease cash / decrease asset, increase cash /
increase liability, increase cash / decrease liability, decrease cash
investing activities: long-term investment activities in mainly PP&E; increasing = use of funds,
decreasing = source of funds
financing activities: apply to sale/ retirement of bonds, common stock, preferred stock, other
corporate securities, payment of cash dividends; sale of firms securities is source of funds, payment
of dividends & repurchase securities is a use of funds
free cash flow: cash flow from operating activities capital expenditures CS dividendspreferred dividends ; capital expenditures maintain productive capacity of firm & dividends
maintain necessary payout on common stock & to cover any preferred stock obligations ; used for
special financing activities (leveraged buyout)
Liquidity ratios indicate how fast a firm can generate cash to pay bills TRUE
FALSE: a banker or trade creditor is most concerned about a firms profitability ratios
The DuPont system of analysis emphasizes that profit generated by assets can be derived by a
combination of profit margin & asset turnover TRUE
FALSE: ROE will not change if the firm increases its use of debt
FALSE: a current ratio of 2:1 is always acceptable for a company in any industry
During disinflation, stock prices tend to go up b/c the investors required rate of return goes down
TRUE

FALSE: intangible assets are becoming an important part of the assets in a companys financial
statements b/c accountants are recognizing the growing impact of brand names
FALSE: absolute values taken from financial statements are more useful than relative values
A company can improve their ROE by changing their capital structure TRUE
FALSE: times interest earned is an example of a profitability ratio
Financial ratios: used to weigh & evaluate the operating performance of a firm; used to compare
performance record against similar firms
Profitability ratios: measurement of the firms ability to earn an adequate return on sales assets,
invested capital
Asset utilization ratios: measure the speed @ which the firm is turning over accounts
receivable ; how many times a company sells it inventory or collects all AR
Liquidity ratios: emphasizes the firms ability to pay off short-term obligations on time
Debt utilization ratios: estimates the overall debt position of the firm; evaluates in the light of
asset base & earning power
Profit margin: (net income) / (sales)
Return on assets: (net income) / (total assets) ; profit margin x asset turnover; generates __ in
sales for every __ in total assets
Return on equity: higher the better; (return on assets) / (1-debt/asset ratio) ; (net income) /
(stockholders equity)
DuPont system of analysis: a satisfactory return on assets might be derived through a high
profit margin, a rapid turnover of assets or both; a satisfactory return on equity might be derived
through a high return on total assets, a generous utilization of debt, or both
Receivables turnover: higher the better; (sales {credit}) / receivables ; # of times company
issued & collected trade credit @ level of its AR balance
Average collection period: smaller the better, (AR) / avg daily credit sales (sales/360)
Inventory turnover: sales / inventory ; the higher the better
Fixed asset turnover: sales / fixed assets
Total asset turnover: sales / total assets
Current ratio: current assets / current liabilities
Quick ratio: current assets inventory / current liabilities
Debt to total assets: total debt / total assets
Times interest earned: income before taxes & interest / interest ; higher the better ; # of times
that income before interest & taxes covers the interest obligation
Fixed charge coverage: income before fixed charges & taxes / fixed charges (interest + lease
payments) ; measures firms ability to meet all fixed obligations rather than interest payments
alone, on assumption that failure to meet any financial obligation will endanger the position of the
firm
Trend analysis: analysis of firms performance over a # of years ; compare to the industry
Elements of distortion in the financial evaluation of a company: changing prices, tax writeoff policies, treatment of nonrecurring items & methods of reporting revenue
Bondholders are primarily influenced by: debt utilization ratios
Investors primary importance: profitability ratios
Book value: total assets total liabilities = SHE preferred stock = net worth available to common
/ common shares outstanding = book value per share