Exam Prep 2 for Accounting 230
Terms
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- Which of the following would be helpful to an analyst evalutaing the performance of a firm?
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Understanding the economic and political enviroment in which the company operates, reviewing the annual reports ofa company's suppliers, customers and competitors, preparig common-size financial statements and calculating key financial ratios for the company being evaluated.
All of the above - Which of the following is not required to be discussed in the MD&A of the Financial Condition and Results of Operations
- Earnings projections
- What type of information found in supplementary schedules is required for inclusion in an annual report
- Segmental data
- What is Form 10-K
- A document filed with the SEC by companies selling securities to the publicm containing much of the same information as the annual report as well as additional detail
- What info can be gained from sources such as Industry Norms and Key Business Ratios, Annual Statement Studies, Analyst's Handbook and Industry Surveys
- A company's relative position within it's industry
- Which of the following is not a tool or technique used by a financial statement analyst
- Random Sampling analysis
- What do liquiduty ratios measure
- A firm's ability to meet cash needs as they arise
- Which category of ratios is useful in assessing the capital structure and long-term solvency of a firm?
- Leverage ratios
- What is a serious limitation of financial ratios?
- Ratios are not predictive
- What is the most widely used liquidity ratio
- Current ratio
- What is a limitation common to both the current and the quick ratio?
- Accounts receivable may not be truly liquid
- Why is the quick ratio a more rigorous test of short0run solvency than the current ratio
- The quick ratio considers only cash and marketable securites as current assets
- What does an increasing collection period for accounts receivable suggest about a firm's credit policy?
- The credit policy may be too lenient
- Which of the following statements about inventroy turnover is false
- A low inventory turnoer is generally a sign of efficient inventory management
- Which would cause the cash conversion cycle to decrease
- Increasing days payable outstanding
- What do the asset turnover ratios measure
- Management's effectiveness in generating sales from investments in assets
- Which of the following ratios would not be used to measure the extent of a firm's debt financing
- Times interest earned
- Why is the amoung of debt in a company's capital structure important to the financial analyst
- Debt implies risk
- Why is the fixed charge coverage ratio a broader measure of a frim's coverage capabilities than the times interest earned ratio
- The fixed charge ratio includes lease payments as well as interest payments
- Which profit margin measures the overall operating efficiency of the firm
- Operating profit margin
- Which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and in generating return to shareholders
- Return on investment and return on equity
- What does a financial everage index greater than one indicate about a firm
- Operating returns more than sufficient to cover interest paymetns on borrowed funds
- What does the price to earnings ratio measure
- The "multiple" that the stock market places on a firm's earnings
- Effective Tax Rate
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Decrease
Used to determine "effective" tax rates for companies based on income statement data - Current Ratio
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CA/CL- Increase
Measures short-term liquidity, the ability of a firm to meet needs for cash as they rise - Cash-flow liquidity Ratio
- Measures short term liquidity by considering as cash resources
- Average collection period
- Decrease Indicates days required to convert receivables into cash
- Days inventory held
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Decrease
Indicates days required to sell inventory - Days payable outstanding
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Increase
Indicates days required to pay suppliers/vendors - Cash conversion Cycle
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Decrease
Indicates how many times receivables are collected during a year, on average - Accounts Receivable Turnover
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Increase
Indicates how many times receivables are collected during a year, on average - Inventory Turnover
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Increase
Measures efficiency of the firm in management and selling of inventory - A/P Turnover
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Decrease
Measures the efficiency of the firm paying it's suppliers - Fixed Asset Turnover
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Depends
Measures efficiency of the firm in managing fixed assets - Total Asset Turnover
- Measures efficiency of the firm in managing all assets
- Return on assets
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Increase
Measures overall efficiency of firm in managing asset and generating net profits/net income/net earnings. Reflects firm's ability to generate Net income/net profit from its total resources (assets) - Debt Ratio
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Depends
Shows proportion of all assets that are financed with debt - Long term debt
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Depends
Measures the extent to which long-term debt is used for permanent financing - Debt to equity
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Depends
Measures the capital structure of the company, how much total debt they have relative to equity - Financial Leverage
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depends
Indicates if a firm is employing debt successfully - Times interest earned
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Increase
Measures how many times interest expense is covered by operating earnigns/operating profit - Cash interest earned
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Increase
Measure how many times interest payments are covered by cash flow from operating activites - Fixed Charge coverage
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Increase
Measures coverage capability more broadly than times interest earned by including operating lease payment as a fixed expense - Cash flow adequacy
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Increase
Measures how many times capital expenditures, debt repayments, and cash dividends are covered by operating cash flow - Operating Leverage
- The sue of fixed costs to increase net income as sales/revenue increase