Study guide FIN 300 Exam 1 PDF

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Download Study guide FIN 300 Exam 1 PDF

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Multiple choice, 40 questions definitions and mathematical calculations. You may use ONE 3-inch by 5-inch index card, front and back, with your notes. You may use a calculator and ONE page of scratch paper.

Chapter 4  Common size balance sheet- A common-sized balance is created by dividing each asset or liability by a base number like total assets or sales. Such common-size or standardized financial statements allow one to compare firms that are different in size. Each asset and liability item on the balance sheet is standardized by dividing it by total assets. This results in these accounts being represented as percentages of total assets.  Common size income statement – Each income statement item is standardized by dividing it by the dollar amount of sales. Each income statement item is now indicated as a percentage of sales.  Financial statement analysis – Identify whose perspective you are using to analyze a firm —management, shareholder, or creditor. Use only audited financial statements if possible.  Trend analysis – Perform analysis over a three- to five-year period. This benchmark is based on a firm’s historical performance. It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm.  Industry analysis –is another way of developing a benchmark. Firms in the same industry are grouped by size, sales, and product lines to establish benchmark ratios.  Peer group analysis – Instead of selecting an entire industry, management may choose to identify a set of firms that are similar in size or sales, or who compete in the same market. The average ratios of this peer group would then be used as the benchmark.  Standard Industrial classification (SIC) system –  Benchmark – This involves comparing it to one or more of the most relevant competitors like Boeing with Piper Aircraft.  Financial ratio – Financial ratios are used in financial analysis because they eliminate problems caused by comparing two or more companies of different size, or when looking at the same company over time as the size changes. Financial ratios can be divided into five categories: liquidity, efficiency, leverage, profitability and market value indicators.  Liquidity ratios – measure the ability of the firm to meet short-term obligations with short-term assets without putting the firm in financial trouble. There are two commonly used ratios to measure liquidity—current ratio and quick ratio.  Current ratio – calculated by dividing the current assets by current liabilities. It tells how many dollars of current assets the firm has per dollar of current liabilities. The higher the number, the more liquid the firm and the better its ability to pay its short-term bills.  Quick ratio – calculated by dividing the most liquid of current assets by current liabilities. Inventory that is not very liquid is subtracted from total current assets to determine the most liquid assets. It tells us how many dollars of liquid assets the firm has per dollar of

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current liabilities. The higher the number, the more liquid the firm and the better its ability to pay its short-term bills. Efficiency ratios – This set of ratios, sometimes called asset turnover ratios, measures the efficiency with which a firm’s management uses the assets to generate sales. While management can use these ratios to identify areas of inefficiency that require improvement, creditors can use some of these ratios to determine the speed with which inventory can be converted to receivables, which can then be converted to cash and help the firm to meet its debt obligations. These efficiency ratios focus on inventory, receivables, and the use of fixed and total assets. Inventory turnover- is calculated by dividing the cost of goods sold by inventory. Yearend inventory can be used or, if a firm experiences significant changes in the inventory level during the year, the average inventory level can be used. It measures how many times the inventory is turned over into saleable products. The more times a firm can turn over the inventory, the better. Too high a turnover or too low a turnover could be a warning sign. Days’ Sales in Inventory – It is defined as (365 days / Inventory turnover). It measures the number of days the firm takes to turn over the inventory. The smaller the number, the faster the firm is turning over its inventory and the more efficient it is. Accounts Receivable Turnover- measures how quickly the firm collects on its credit sales. It is defined as (Net sales / Accounts receivable). The higher the frequency of turnover, the quicker it is converting its credit sales into cash flows. Days’ Sales Outstanding – It is defined as (365 days / Account receivable turnover).It measures in days the time the firm takes to convert its receivables into cash. The fewer days it takes the firm to collect on its receivables, the more efficient the firm is. Recognize, however, that an overzealous credit department may turn off the firm’s customers. Financial leverage – refers to the use of long-term debt in a firm’s capital structure. Debt-to-Equity ratio – Total debt / Total equity. It measures the amount of debt per dollar of equity. Profitability ratios – measure the financial performance of the firm. Gross profit margin- (Net sales – Cost of goods sold) / Net sales. measures the amount of gross profit generated per dollar of net sales operating profit margin- EBIT earnings before interest and taxes / Net sales. measures the amount of operating profit generated by the firm for each dollar of net sales. net profit margin – Net income / Net sales. measures the amount of net income after taxes generated by the firm for each dollar of net sales. In each case, the higher the ratio, the more profitable the firm. While management and creditors are likely to focus on these profitability measures, shareholders are likely to concentrate on two others. Limitations of Financial Statement Analysis – based on current market values, more closely effect. Difficult to say.

Chapter 3  Balance sheet – The balance sheet identifies all the assets and liabilities and stockholder’s equity of a firm at a point in time. The left-hand side of the balance sheet

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shows all the assets that the firm owns and uses to generate revenues. The right-hand side represents the liabilities and stockholder’s equity of the firm. While assets are listed in their order of their liquidity, the liabilities are listed in the order in which they must be paid. Current assets- All assets that are likely to be converted to cash within a year are considered to be current assets. These include cash and marketable securities, accounts receivables, and inventory. Current liabilities- All liabilities that have to be paid within a year are listed as part of the current liabilities. Long-term assets- Long-term assets are the real assets that the firm acquires to generate most of its income. These include land, buildings, plant, and equipment. Depreciated. Long-term liabilities- consist of the long-term debt of the company. They include bank loans, mortgages, bonds, and other types of liabilities, such as pension obligations, that have a maturity of one year or longer. Equity - There are two sources of equity funds—common equity and preferred equity. Common equity represents the true ownership of the firm. Multiple accounts identify the various sources of equity funds—par value, additional paid-in capital, retained earnings, and treasury stock. Par value and paid-in capital represent the outside equity capital raised by the firm by issuing shares. Retained earnings result from the funds that the firm has reinvested in the firm from its earnings. These funds are not cash since they already have been put to work. The treasury stock account reflects the value of the shares that the firm repurchased from investors. The other source of equity capital is preferred stock. It has features that make it a combination of a fixed income security and an equity security. In the event of bankruptcy, it has a higher claim that common stock but a lower claim than debt. Net working capital – is a measure of the liquidity of a firm, which is the ability of the firm to meet its obligations as they come due. Income statement – The profitability of a firm for any reporting period is measured in this financial statement. Statement of Retained Earnings – This financial statement shows the changes in this account from one period to the next. This account will show changes whenever a firm reports a loss or profit and when a cash dividend is declared....