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AU60 - Assignment 3
Accounts Receivable Turnover - Credit Sales / Accounts Receivable - Measures how quickly a business collects the funds it is owed. The longer the amounts are outstanding, the greater the risk they will not be collected. The higher the ratio, the more efficiently the company is performing. Asset Turnover - Sales / Total Assets - Measures the use of assets. The more a company sells in proportion to its assets, the higher its asset turnover will be. Inventory Turnover - Cost of Goods Sold / Inventory - Relates the amount of cost of goods sold for a given period to the amount of inventory held at the end of the period. A low inventory turnover rate may indicate inefficiency and that inventory is not being sold quickly enough. Net Profit Margin - Net Income / Sales - Expressed as a percentage of sales. The higher the percentage, the better the net profit margin. Return on Assets (ROA) - Net Income / Total Assets - Shows how well a company has used its resources. The higher the ratio the more efficiently management has used assets. Return on Equity (ROE) - Net Income / Shareholders Equity - States the rate of return that shareholders are earning on their equity in, shows the rate of return that shareholders are earning their equity in the company's assets. Measure the actual return to stockholders net of the effect of financial leverage. DuPont Identity - Return on Equity - (Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Shareholders Equity) - Analyzes ROA and ROE by breaking them down into their component ratios. Current Ratio - Current Assets / Current Liabilities - Indicates the adequacy of an organizations working capital to meet its current financial obligations. Acid-Test, or Quick, Ratio - (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities - Measures that include only cash, marketable securities and accounts receivable in its numerator.
Debt-To-Equity Ratio - Long-Term Debt / Shareholders Equity - used to assess the relative extent of an organizations debt financing, compared with other organizations in the same industry. Debt-To-Assets Ratio - Total Liabilities / Total Assets - Shows the extent to which an organizations assets are financed by debt. If the ratio is greater than 0.5, then most of the organizations assets are financed this way. Equity Multiplier - Total Assets / Shareholders Equity - Emphasizes the efficiency of the company's use of debt to finance its assets. Current Assets are Made Up Of - Cash, accounts receivable, inventory, supplies, and marketable securities. Noncurrent Assets are Made Up Of - Property, plant, land, buildings, equipment MINUS depreciation, intangible assets, and goodwill. Current Liabilities are Made Up Of - Accounts payable, wages payable, taxes payable, and short-term debt. Noncurrent Liabilities are Made Up Of - Long-term debt. Shareholder Equity/ Owners Equity is Made Up Of - Assets MINUS liabilities. Net Income - Before Taxes Net Income - Income Taxes. Income Statements are Made Up Of - Revenue, expenses, cost of goods sold, gross profit, operating income, net income, and comprehensive income. Statement of Changes in Shareholders Equity - Shares in Common Stock x Par Value + Additional Paid in Capital = Total Paid Capital - Covers the entire period for each major component of related capital. Annual Percentage Change Income - (2015 Sales - 2014 Sales) / 2014 Sales = Sales %
Using trend analysis, an underwriter calculates the percentage change in certain items over time. If ABC Company's sales increased from $20 million in 20X5 to $35 million in 20X6, what is the percentage change? - 75% Underwriters must be careful when comparing financial statements using trend analysis because false impressions about a company can be created. Which one of the following might cause an underwriter to have a false impression about a company's health because of an inventories increase on the financial statement? - The inventory increase was caused by a change in the inventory valuation method. Which one of the following types of analysis helps an underwriter identify abnormal values reported by an organization? - Vertical analysis. Efficiency ratios measure - How well a company manages and uses its assets. ABC Retail shows the following amounts in its end of the year financial statements: credit sales = $10,000,000, accounts receivable = $500,000. Based on these figures, its accounts receivable turnover ratio is - 20 times (credit sales / accounts receivable = accounts receivable turnover ratio) The accounts receivable turnover ratio is calculated by taking - Credit sales divided by accounts receivable. Which one of the following ratios is calculated by taking net income divided by total assets? - Return on assets (ROA). An underwriter is trying to determine XYZ manufacturing efficiency using the accounts receivable (A/R) turnover ratio. XYZs income statement shows $10 million in sales (half of which is attributable to credit sales) and the balance sheet shows $200,000 in A/R. What is XYZs account receivable turnover ratio? - 25 times An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the company has $2 million in cash, $1 million in marketable securities, $2 million in inventory, $2 million in accounts receivable, and $7million in current liabilities. Which one of the following conclusions can the underwriter reach by calculating liquidity ratios? - The company may not be able to meet its short term obligations because its acid test ratio is less than one. ($2,000,000 + $1,000,000 + $2,000,000 - $7,000,000 = less than 1)
The most recent financial statement for Buddy's Burger Hut reveal the following: current liabilities = $50,000, marketable securities = $5,000, accounts receivable = $2,500, cash = $50,000. Based on this information, Buddy's Burger hut's acid-test ratio is - 1.15 (50,000 + 5,000 + 2,500) / $50,000 = 1. Which one of the following statements is true? - If a nonfinancial company has a debt-to-equity ratio greater than 100%, it indicates that the company is financed mostly by debt. Gross profit is reported on the income statement. How is gross profit calcualted? - Gross profit = sales - cost of goods sold. The "bottom line" of an income statement shows the organizations - Net income The Financial Accounting Standard Board (FASB) requires organizations to report comprehensive income. Comprehensive income includes an organizations net income and - Unrealized gains on securities available for sale. An insurers comprehensive income includes - Unrealized gains and losses on securities. Bob's Manufacturing has been in business for one year. Which one of the following is true regarding Bob's year-end financial statements? - The beginning balance on the statement of changes in shareholders equity will show as $0. Which one of the following describes a section of the statement of cash flow? - Cash flows from investing activities. Which one of the following is a major purpose of the statement of cash flow? - It is used to assess the ability to meet financial obligations Which one of the following describes a section of the statement of cash flows? - Cash flows from operating activities.
An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the company has $8 million in sales, $5 million in gross profit, and $2 million in net income. Which one of the following conclusions can the underwriter reach by calculating the company's net profit margin? - 25% of the company's sales is left after all expenses are paid. Sandford Co. and Burkhart Co. are both general merchandise stores. Sandford Co. has $5,000 as net income and $150,000 in sales at the end of the year. Burkhart Co. has $8,000 in net income and $130,000 in sales. The benchmark for the industry is a 2.8% profit margin. Which one of the following is true? - Burkhart Co. is more profitable than Sandford Co.
