Study Guide FIN 300 Exam # 1 Fall Tempe 2021 PDF

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FIN 300 – Tempe Exam #1 Study Guide This is a study guide ONLY and is only meant to assist you in preparation for Exam #1. It should cover most of the material on the exam, Chapters 3, 4 and a very small part of 14. However, I reserve the right to ask additional questions from all material covered in class and assigned as reading. It is on Canvas and will be available on Canvas during our regular class hours, 6:00 – 8:45 PM Arizona time Wednesday 9/22/2021. You have that entire time in which to complete it. It will be administered through Respondus Lockdown Browser and will be monitored. You do not need to be on campus to take the exam and there will be no class that evening but you must take the exam. Exam format is multiple choice, approximately 40 questions definitions and mathematical calculations. You may use ONE 3-inch by 5-inch index card, front and back, with your notes on that card. No other notes or sources of information. NO CELL PHONES. You may use a calculator and ONE page of scratch paper.

Chapters 3, 4 & a small part of 14

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Balance sheet – Definition, what does it tell the financial analyst, and the balance sheet identity formula. Know how to prepare one. A balance sheet provides a summary of a firm’s financial position at a particular point in time. -

The left-hand side of the balance sheet shows all the assets that the firm owns and uses to generate revenues.

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The right-hand side represents the liabilities and stockholder’s equity of the firm.

The balance sheet identity is: Total assets = Total liabilities + Total stockholders’ equity.

Stockholders’ equity represents ownership in the firm 

Total stockholders’ equity = Total assets – Total liabilities.

Current assets/Long-term assets – Which are which. 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.

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All liabilities that have to be paid within a year are listed as part of the current liabilities.

Long-term assets are the real assets that the firm acquires to generate most of its income. These include land, buildings, plant, and equipment. 

Current Liabilities/Long-term Liabilities – Which are which Current liabilities (or short-term liabilities) are obligations that the firm expects to pay off in a year or less.

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accounts payable, short-term debt, dividends, and notes payable as well as income taxes owed.

Long-term liabilities, or non-current liabilities, are liabilities that are due beyond a year or the normal operation period of the company 

bonds payable, long-term loans, capital leases, pension liabilities,

Equity items.

There are two sources of equity funds—common equity and preferred equity.

Common equity represents the true ownership of the firm.

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.

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In the event of bankruptcy, it has a higher claim that common stock but a lower claim than debt.

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Net working Capital – Definition and how to calculate it. NWC = current assets - current liabilities. -

NWC is important because it is a measure of liquidity and represents the net shortterm investment the firm keeps in the business

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Statement of retained earnings – Definition and how to balance one as done in class. statement of retained earnings -

identifies the changes in the retained earnings account from one accounting period to the next.

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This account will show changes whenever a firm reports a loss or profit and when a cash dividend is declared.

Balance of retained earnings (December 31, 2016) Add: Net income (2017) Less: Dividends to common stockholders, (2017) Balance of retained earnings (December 31, 2017)

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Common size balance sheet and income statement – Know the definitions, why it is done, and how to prepare them. A common-sized balance is created by dividing each asset or liability by a base number like total assets or sales.

Common-Size Balance Sheets -

Each asset and liability item on the balance sheet is standardized by dividing it by total assets.

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we divide each of the asset accounts by total assets. We also divide each of the liability and equity accounts by total assets since Total assets = Total liabilities + Total equity

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each asset account and each liability and equity account is expressed as a percentage of total assets.

Common-size statements allow financial analysts to compare firms that are different in size and to identify trends within a single firm over time.

Common-Size Income Statements -

Each income statement item is standardized by dividing it by the dollar amount of sales

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express each account as a percentage of net sales. Net sales are defined as total sales less all sales discounts and sales returns and allowances

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Financial statement analysis – definition. process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future

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Trend analysis – definition. 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

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Industry analysis – definition. -

Firms in the same industry are grouped by size, sales, and product lines to establish benchmark ratios

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Peer group analysis – definition. 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. -

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Average is used as a benchmark

Standard Industrial classification (SIC) system – definition. Standard Industrial Classification (SIC) System - widely used system for identifying industry groups -

The SIC codes are four-digit numbers established by the federal government for statistical reporting purposes.

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The first two digits describe the type of business in a broad sense (for example, firms engaged in building construction, mining of metals, manufacturing of machinery, food stores, or banking). Diaz's two-digit code is 35: “Industrial and commercial machinery and computer equipment manufacturing.”

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a numerical system developed by the U.S. government to classify businesses according to the type of activity they perform

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Benchmark – definition. Benchmarks are used to provide a standard for evaluating the financial performance of a firm. -

a standard against which performance is measured

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benchmark comparisons involve competitors that are roughly the same size and that offer a similar range of products.

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Financial ratio – definition 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 change -

A financial ratio is simply one number from a financial statement that has been divided by another financial number.

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Liquidity ratios – definition. -

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measure the ability of a company to cover its current bills.

Current ratio – definition/what it tells the financial analyst, formula, how to calculate it. Current ratio = current assets / current liabilities. -

It tells how many dollars of current assets the firm has per dollar of current liabilities.

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The higher the number, the more liquid the firm and the better its ability to pay its short-term bills

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Quick ratio – definition/what it tells the financial analyst, formula, how to calculate it.

Quick ratio or acid-test ratio = most liquid of current assets / current liabilities. -

Inventory that is not very liquid is subtracted from total current assets to determine the most liquid assets.

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It tells us how many dollars of liquid assets the firm has per dollar of current liabilities.

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The higher the number, the more liquid the firm and the better its ability to pay its short-term bills.

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Efficiency ratios – definition. This set of ratios, sometimes called asset turnover ratios, measures the efficiency with which a firm’s management uses the assets to generate sales. -

management can use these ratios to identify areas of inefficiency that require improvement

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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.

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These efficiency ratios focus on inventory, receivables, and the use of fixed and total assets

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Inventory turnover & Days’ Sales in Inventory – definitions/what they tell the financial analyst, how to calculate them. Inventory turnover ratio = cost of goods sold / inventory. -

It measures how many times the inventory is turned over into saleable products.

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The more times a firm can turn over the inventory, the better.

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Too high a turnover or too low a turnover could be a warning sign.

Days’ sales in inventory = (365 days / Inventory turnover). -

It measures the number of days the firm takes to turn over the inventory.

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The smaller the number, the faster the firm is turning over its inventory and the more efficient it is.

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Accounts Receivable Turnover & Days’ Sales Outstanding – definitions/what they tell the financial analyst, how to calculate them. Accounts receivables turnover ratio = (Net sales / Accounts receivable). -

measures how quickly the firm collects on its credit sales.

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The higher the frequency of turnover, the quicker it is converting its credit sales into cash flows.

Day’s Sales Outstanding = (365 days / Account receivable turnover) -

It measures in days the time the firm takes to convert its receivables into cash.

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The fewer days it takes the firm to collect on its receivables, the more efficient the firm is.

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Financial leverage – definition. Financial leverage - the use of long-term debt in a firm’s capital structure. -

The use of debt increases shareholders’ returns thanks to the tax benefits provided by the interest payments on debt.

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Debt-to-Equity ratio – definition/what it tells the financial analyst, how to calculate it. debt-to-equity ratio = Total debt / Total equity -

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It measures the amount of debt per dollar of equity

Profitability ratios – definition. Profitability ratios - measure the financial performance of the firm

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Gross profit and Gross profit margin – definition, what it tells the financial analyst. How to calculate it. See page 4-18 in your textbook.

The gross profit margin measures the percentage of net sales remaining after the cost of goods sold is paid. It captures the firm's ability to manage the expenses directly associated with producing the firm's products or services. -

Diaz Manufacturing has 30.86 percent of the sales amount remaining to pay other expenses

Gross Profit Margin = (net sales – COGS)/net sales

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Limitations of Financial Statement Analysis -

The major limitations to financial statement and ratio analysis are the use of historical accounting data and the lack of theory to guide the decision maker

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Trade credit – Definition. -

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Days Payables Outstanding –Definition. Understand that it represents Accounts Payable. -

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credit extended by one business to another

How long a firm takes to pay off its suppliers for the cost of inventory.

Cash Conversion Cycle – Definition and know the formula. Cash Conversion Cycle = days inventory outstanding + days sales outstanding - days payables outstanding.

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expresses how many days it takes a company to convert cash into inventory, and then back into cash via the sales process

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Income statement – Definition, what does it tell the financial analyst, and the income statement equation. Know how to prepare one. The income statement illustrates the flow of operating activity and tells us how profitable a firm was between two points in time.

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summarizes the revenues, expenses, and the profitability (or q losses) of the firm over some period of time, usually a month, a quarter, or a year

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The profitability of a firm for any reporting period is measured in this financial statement

Net Income = Revenues – Expenses 

Gross Profit = Revenues – Cost of Goods Sold

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Operating Income = Gross Profit – Operating Expenses

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Net income = Operating Income + Non-operating Items...