ACCT 5320 Exam 1 Understanding the Ratios & Concepts questions with correct answers., Exams of Oil Engineering

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ACCT 5320 Exam 1 Understanding the

Ratios & Concepts questions with correct

answers

In the Z-score, what does WC/TA measure? - CORRECT ANSWER- ✔✔✅ It measures the liquidity of the company In the Z-score, what does RE/TA measure? - CORRECT ANSWER- ✔✔✅ It measures the long-term profitability of the company In the Z-score, what does the EBIT/TA measure? - CORRECT ANSWER- ✔✔✅ It measures the current profitability of the company In the Z-score, what does MVE/TL measure? - CORRECT ANSWER- ✔✔✅ The perception of value of the firm by the market In the Z-score, what does Sales/TA measure? - CORRECT ANSWER- ✔✔✅ It measures the ability to generate sales from the company's assets What does liquidity measure? - CORRECT ANSWER- ✔✔✅ It measures how much money a company has on hand and can generate on short notice. How is liquidity measured? - CORRECT ANSWER- ✔✔✅ The current ratio, which looks at current assets over current liabilities. We are looking to se if a company has the liquid assets available to meet its liabilities that will be coming due within the year. What can be concluded about working capital? - CORRECT ANSWER- ✔✔✅ If there is an excess of current assets over current liabilities, it implies that there will be more expected cash inflows in the short-run. What does a good current ratio typically look like? - CORRECT ANSWER- ✔✔✅ Most companies would prefer their current ratio to be at least 1.0. Alternatively, retailers hold inventory close to the same

amount as A/P. This means their current ratio will be closer to 0, which is not necessarily bad for this industry. Why would we be concerned with an excessively high current ratio? - CORRECT ANSWER- ✔✔✅ It indicates that there is an inefficient use of assets. What does the quick ratio measure? - CORRECT ANSWER- ✔✔✅ Assets that can be quickly converted to cash within a short period of time to gauge a company's ability to meet it's liabilities that will be coming due within a year, without the need to liquidate inventories that may require write-downs. What does solvency measure? - CORRECT ANSWER- ✔✔✅ It looks to see if a company has the ability to meet its debt obligations. It also measures how reliant a company is on creditor financing compared to its equity financing. What is the average solvency ratio for publicly traded companies? - CORRECT ANSWER- ✔✔✅ 1. What does a high liabilities-to-equity ratio indicate? - CORRECT ANSWER- ✔✔✅ The company is less solvent, which means that it relies more on debt for financing, making the company higher risk. What is the purpose of the the tax shield? - CORRECT ANSWER- ✔✔✅ Interest reduces income before taxes. But when considering the net operating profit before taxes, it is only the operating portion, which does not consider the interest expense. Therefore to arrive at strictly net OPERATING profit after tax, the tax that would have been charged, had the interest expense not reduced income, is added back to the tax expense. How to consider the key drivers of ROA? - CORRECT ANSWER- ✔✔✅ Find the Profit Margin and Asset Turnover and see which seemed to impact ROA more significantly. What does profit margin measure? - CORRECT ANSWER- ✔✔✅ The amount of profit a company earns from each dollar of sales. What does asset turnover measure? - CORRECT ANSWER- ✔✔✅ The amount of sales that a company generates from each dollar invested in assets.

How does industry competition affect a company's income statement? - CORRECT ANSWER- ✔✔✅ It will cause their expenses to go up. They will incur costs, hiring and training competitive workers. They must advertise their product, and they will incur costs related to R&D to improve their product to make a it competitive. How does the bargaining power of buyers affect a company's income statement? - CORRECT ANSWER- ✔✔✅ If buyers have a high bargaining power, they can negotiate lower prices or a higher level of service for the price, causing sales to be lower. How does the bargaining power of buyers affect cash flows? - CORRECT ANSWER- ✔✔✅ They may negotiate longer payment terms, causing the inflow of cash to be delayed, which will also affect cash outflow to suppliers. How does the bargaining power of suppliers affect the income statement? - CORRECT ANSWER- ✔✔✅ They can negotiate for the company to pay higher prices, causing their COGS to be higher. How does the bargaining power of suppliers affect cash flows? - CORRECT ANSWER- ✔✔✅ They can negotiate earlier payment terms causing the need for cash outflow to occur sooner. Also when sellers negotiate higher asking prices, buyers must also pay more for the company's products as a result. How does the threat of substitution affect the income statement? - CORRECT ANSWER- ✔✔✅ When there are more threats of substitution, the company cannot raises their prices as high, which means that their sales cannot cover as much of their COGS. How does the threat of entry affect the income statement? - CORRECT ANSWER- ✔✔✅ It creates competition. The company must incur costs such as new technology, promotion, and human development in order to create barriers to entry. This cost is necessary because without it, their sales will take a big hit. What is big bath behavior? - CORRECT ANSWER- ✔✔✅ Management manipulates a company's income statement to make poor earnings look even worse. What is an example of big bath behavior? - CORRECT ANSWER- ✔✔✅ Timing the recognition of restructuring expenses to be incurred in the period where earnings are weak.

Why would creditors and investors be concerned with big bath behavior? - CORRECT ANSWER- ✔✔✅ It does not show the true financial condition of the company. Further, it will cause earnings to be underestimated in the period the expense is recognized and will be reversed in the current period, causing earnings to be overestimated. What equations is minority or noncontrolling interest not considered? - CORRECT ANSWER- ✔✔✅ It is not considered in calculating NOA because it is a component of equity and not liabilities. Any equations that use SE must exclude the noncontrolling portion of equity in order to arrive at the figure for stockholder's equity. What equation is minority or noncontrolling interest considered? - CORRECT ANSWER- ✔✔✅ NNO, it is considered to be a nonoperating obligation. Why do technology companies keep low debt and high equity? - CORRECT ANSWER- ✔✔✅ Technology is risky and future cashflows are uncertain. Therefore, they cannot support high debt. What is the implication of negative investing activities? - CORRECT ANSWER- ✔✔✅ Management is investing in long-term assets to further their business commitments. What is the implication of negative financing activities? - CORRECT ANSWER- ✔✔✅ This means that the company has paid off some if its long-term debt. How does repurchase of stock affect ROE? - CORRECT ANSWER- ✔✔✅ It causes SE to decrease, but also it causes NI to decrease. NI decreases because there is a forgone profit associated with the cash used to repurchase the stock. SE is decreased more, therefore ROE will be higher.