Chapter 2—Financial Statement and Cash Flow Analysis

MULTIPLE CHOICE 1. Which of the following items can be found on an income statement? a. Accounts receivable b. Long-term debt c. Sales d. Inventory ANS: C DIF: E REF: 2.1 Financial Statements

2. If you only knew a company’s total assets and total debt, which item could you easily calculate? a. Sales b. Depreciation c. Total equity d. Inventory ANS: C DIF: E REF: 2.1 Financial Statements

3. How do we calculate a company’s operating cash flow? a. EBIT - taxes + depreciation b. EBIT - taxes - depreciation c. EBIT + taxes + depreciation d. EBIT - Sales ANS: A DIF: E REF: 2.2 Cash Flow Analysis

4. Holding all other things constant, which of the following represents a cash outflow? a. The company sells a machine. b. The company acquires inventory. c. The company receives a bank loan. d. The company increases accounts payable. ANS: B DIF: E REF: 2.2 Cash Flow Analysis

5. Which of the following is a liquidity ratio? a. Quick ratio b. P/E- ratio c. Inventory turnover d. Equity multiplier ANS: A DIF: E REF: 2.3 Analyzing Financial Performance Using Ratio Analysis NARRBEGIN: Bavarian Sausage, Inc. Bavarian Sausage, Inc. Bavarian Sausage, Inc. posted the following balance sheet and income statement. Balance Sheet Cash Accounts Receivable Inventories Net Plant and $ 50,000 125,000 225,000 Accounts Payable Notes Payable Long-term debt $185,000 125,000 115,000

Equipment

525,000

Total Assets

$925,000

Common Stock Retained earnings Total liabilities and Stockholders’ Equity

350,000 150,000 $925,000

Income Statement Sales Cost of goods sold Depreciation Earnings before interest and taxes Interest expense Net profit before taxes Taxes (@ 40%) Net income NARREND

$525,000 215,000 65,000

245,000 35,000

210,000 84,000 $126,000

6. What is Bavarian Sausage, Inc.’s operating cash flow? a. $394,000 b. $191,000 c. $226,000 d. $359,000 ANS: C DIF: E NAR: Bavarian Sausage, Inc. REF: 2.2 Cash Flow Analysis

7. What is the Bavarian Sausage, Inc.’s quick ratio? a. 0.5645 b. 1.2903 c. 1.9565 d. 0.8871 ANS: A DIF: E REF: 2.3 Analyzing Financial Performance Using Ratio Analysis NAR: Bavarian Sausage, Inc. 8. What is the Bavarian Sausage, Inc.’s average collection period? a. 14.39 days b. 4.20 days c. 122.56 days d. 86.90 days ANS: D DIF: E REF: 2.3 Analyzing Financial Performance Using Ratio Analysis NAR: Bavarian Sausage, Inc. 9. Bavarian Sausage, Inc. has 100,000 shares of common stock outstanding, but no preferred stock. The current price of Bavarian’s common stock is $15. What is the company’s P/E-ratio? a. 119.00

1.96 c.26 c. Inc.60 ANS: C DIF: M REF: 2.’s net profit margin? a. 0.25 c. 1. Inc. 11.3 Analyzing Financial Performance Using Ratio Analysis NAR: Bavarian Sausage. a.50 d. Calculate the Bavarian Sausage. 12. 24% ANS: D DIF: E REF: 2.51 ANS: B DIF: E REF: 2.76 d. 25. a.47% ANS: C DIF: E REF: 2.85 ANS: A DIF: E REF: 2.3 Analyzing Financial Performance Using Ratio Analysis NAR: Bavarian Sausage. If Bavarian Sausage. Inc.23 b. Inc. Inc.’s debt-equity ratio? a. 10. 1. 14.52 c. $3.3 Analyzing Financial Performance Using Ratio Analysis NAR: Bavarian Sausage.90 d. 47% c. has 100.00 b. $9. 16.’s return on assets. What is Bavarian sausage. Inc.b. what is the book value per share? a.3 Analyzing Financial Performance Using Ratio Analysis NAR: Bavarian Sausage. 40% b. 13. 13. 0.62% d. 15% d. 0. Inc. Calculate the Bavarian Sausage. Inc. 0. $5. $1.’s inventory turnover. Inc.000 shares outstanding. 11.3 Analyzing Financial Performance Using Ratio Analysis NAR: Bavarian Sausage. 0. What is Bavarian Sausage.50 ANS: A DIF: E REF: 2.20% b. 12.35% c.05 b.25 d. 1. Inc. 8.3 Analyzing Financial Performance Using Ratio Analysis .

12.632 ANS: B DIF: M REF: 2. Calculate the Bavarian Sausage.NAR: Bavarian Sausage.53% ANS: A DIF: E REF: 2.3 Analyzing Financial Performance Using Ratio Analysis NAR: Bavarian Sausage. 15.62% c. 70. 17.00% d. Inc.000 18.333 .875 c. 25. $47.43% c.333..20% ANS: D DIF: E REF: 2. 7.333.000 100. $43.. common stock equity = $175. 15.000 10...333 NARREND Not over 50.000.000 75. 17. If a company’s net profit margin is 5% and its total asset turnover is 3.000 18. ROE = 12.. a. Tax Rate 15% 25% 34% 39% 34% 35% 38% 35% $ ..5..000. 1. Inc.000 15.000.. Inc..5%.3 Analyzing Financial Performance Using Ratio Analysis NARRBEGIN: Tax table Tax Table Taxable income over $ 0 50.74% d.000 335.000 15.. Inc..000.000 100.000.000 335.60 b.00% b.00 d.00 c.’s times interest earned ratio? a. what is its ROA? a.3 Analyzing Financial Performance Using Ratio Analysis NAR: Bavarian Sausage.50% b..750 b. You have the following information about a firm: total asset = $350. 13. 3.. 16.000 d. What is the Bavarian Sausage. 15.3 Analyzing Financial Performance Using Ratio Analysis 18. 6.00 ANS: B DIF: E REF: 2. $50. What is the firm’s earnings available for common stockholders? a.000 75.’s return on equity.000 10.000. $21.. Inc. 24.

Refer to Tax Table. has a pretax income of $325. $563. Inc. 39% d.75% d. $325. What is the company’s average tax rate? a. has a pretax income of $3. $1.4 Corporate Taxes 23. Inc. Bavarian Sausage.000. $1.19. 34% ANS: D NAR: Tax table DIF: E REF: 2. Refer to Tax Table.000 c. has a pretax income of $325.548 d. Inc. $110.4 Corporate Taxes 20. Inc. 33. 35% d. First Watch. $126.755. 15% c.4 Corporate Taxes 22.785 b. Inc. Bavarian Sausage. $1. 26. 29.250 d.756 b. Refer to Tax Table.808 . A company has an average collection period of 52 days and accounts receivables of $250.464.85% ANS: D NAR: Tax table DIF: E REF: 2. $1. 25% b.390.000.754. First Watch. What is the company’s tax liability? a. Bavarian Sausage.00% b.4 Corporate Taxes 24.750 b.000. What are the company’s annual sales? a. 34% b. Refer to Tax Table.4 Corporate Taxes 21.234.755. 39% c.000. What is the company’s average tax rate? a. has a pretax income of $3.000 ANS: B NAR: Tax table DIF: E REF: 2. has a pretax income of $325. 25% ANS: B NAR: Tax table DIF: E REF: 2. $2.571 c. What is the company’s tax liability? a. What is the company’s marginal tax rate? a.250.55% c. Refer to Tax Table.288 ANS: A NAR: Tax table DIF: E REF: 2. $81.276.250. 39.

$500. What is the company’s current ratio? a.000 c. depreciation expenses of $250.000.000 .56 d.543.2 Cash Flow Analysis 29. $250.3 Analyzing Financial Performance Using Ratio Analysis 25.000 ANS: B DIF: M REF: 2.000 worth of fixed assets and took on a new $500. $415.000 and current assets = $375.000.000.000 c. $50. 1. 2.c. 1. cost of goods sold of $750. purchased $350.000 $200.3 Analyzing Financial Performance Using Ratio Analysis 26. what is this firm’s operating cash flow? a. $285. What is the net change of the company’s cash as a result of these transactions? a. A company has sales of $1.000 b.823 d.000 d.000 ANS: C DIF: M REF: 2.85 b. $1. inventory = $125. $750.000 d. 0. If the company’s tax rate is 34% and the income statement is complete. In a given year a company decreased its inventory by $250. $400.000 ANS: B DIF: M REF: 2. calculate the company’s long-term debt. $165.700 b.85.250.28 ANS: D DIF: M REF: 2.000 c.000 $250. What is the company’s total assets? a. Given the following information. $250.000.000 and interest expenses of $55. -$100.000 b. A company has a total asset turnover of 2 and sales of $500. $1.3 Analyzing Financial Performance Using Ratio Analysis 27.000 ANS: B DIF: E REF: 2.000 $ 85. $433.700 c.05 c.000. You have the following information about a company: quick ratio = 0. $183.000 loan. Current assets: Current liabilities: Net fixed assets: Total equity: a.000. $375.000 d. -$400.000 b.000.2 Cash Flow Analysis 28. $100.000 $125.

c. the statement of retained earnings c. c.1 Financial Statements 35. the Financial Accounting Standards Board. b. 1. The balance sheet entry that represents the cumulative total of the earnings that a firm has reinvested since its inception is a.5%. Inc. Financial professionals prefer to focus on an accounting approach that focuses on a. none of the above ANS: C DIF: M REF: 2.6042 c.000 ANS: D DIF: E REF: 2. the balance sheet ANS: A DIF: E REF: 2. b. $27 c. $90. ANS: D DIF: M REF: 2. c. an equity multiplier of 2.1 Financial Statements 34. 2 d. Company X had sales of $120 with a cost of goods sold equal to 25% of sales. paid-in-capital. Last National. What is Last National’s total asset turnover? a.1 Financial Statements .3 Analyzing Financial Performance Using Ratio Analysis 31. $20 b. retained earnings. the Securities and Exchange Commission. In addition. Not enough information. Which of the following statements is not required by the SEC for publicly traded firms? a. par value.1 Financial Statements 33. the New York Stock Exchange. ANS: B DIF: M REF: 2. Congress. the statement of cash flows d. has a net profit margin of 12%. ANS: B DIF: E REF: Introduction 32. 0. current and prospective cash flows. d. Generally accepted accounting principles are developed by a. X had total other operating expenses of $50 with an interest expense of $20.6042 b. b. sales of $575. If X pays a flat 40% of its pre-tax income in income taxes. d.d. governmental accounting methods. $12 d. common stock. what is X’s net income? a. international accrual accounting standards. d. ANS: B DIF: E REF: 2.000 and a ROE of 14. the statement of cost of goods sold b.2 Cash Flow Analysis 30. economically based accruals.

000 and had a depreciation expense of $200. the Income Statement b. $150 b. what was Park’s operating cash flow for the year? If you need to. operating flows b.000 c.(. $305. net cash flow d.000) + 200.000 .000 DIF: H REF: 2. gross cash flow ANS: B DIF: E REF: 2. $1. If the firm was subject to an average tax rate of 30%.550 d.000 this last year. investment flows c. If you are looking to review a firm’s sources and uses of cash flows over the year.3 * 500. $550 c.1 Financial Statements 37. assume that Park’s interest expense was zero for the year. what section is the best source within the Statement of Cash Flows? a. $450. not enough information to calculate ANS: A OCF = EBIT .000 .000 while its tax bill was $300. If you start with earnings before interest and taxes and then subtract a firm’s tax expense while adding back the amount of depreciation expense for the firm during the year. financing flows d. the Statement of Cash Flows d. a.000 = 550.2 Cash Flow Analysis . the Balance Sheet ANS: C DIF: E REF: 2. free cash flow b.300 + Depreciation 150 = Depreciation DIF: H REF: 2. total net cash flows ANS: C DIF: M REF: 2.000 ANS: D 500. $550. $350.000 b. the easiest place to find that information is a.2 Cash Flow Analysis 39.Taxes + Depreciation 850 = 1. In order to identify the amount of funds that a firm borrowed during the preceding year. Edison Bagels had operating cash flow equal to $850 for 2004.2 Cash Flow Analysis 38. the Statement of Retained Earnings c. If its earnings before interest and taxes was $1. The Park Corp. the resulting figure is called a.36. what was Edison’s depreciation expense for the year? a.2 Cash Flow Analysis 40.000 d. had earnings before interest and taxes of $500. operating cash flow c.

NARREND 43. none of the above ANS: C $1.000 d.200 is included in the total expense number listed above.200 5. b. A list of some balance sheet items for CWS for end of fiscal year 2002 and 2003 is as below. What is Cold Weather Sports’ operating cash flow for 2003? a.000 $1.2 Cash Flow Analysis NARRBEGIN: Cold Weather Sports Cold Weather Sports. the accounting method for reporting such expenses may be different from that reported to the taxing authority.41. amortization and depletion expense and allowances because a. d. 2002 Current Assets Net Long-Term Assets Accounts Payable Accrued Expenses Short-Term Debt Long-Term Debt 2003 Current Assets Net Long-Term Assets Accounts Payable Accrued Expenses Short-Term Debt Long-Term Debt No fixed assets were disposed of during the year.200 . (CWS) just completed its 2003 fiscal year. they are unrelated to the amount of taxes paid during the year. CWS had sales of $10. d.100 3. the current and prior year’s gross fixed assets b. the current and prior year’s net fixed assets c. When calculating the dollar amount of fixed assets purchased during the year what information is required? Assume that no fixed assets were disposed of during the year.000 3. When calculating a firm’s free cash cash flow from earnings before interest and taxes we must add back depreciation. a. Assume that CWS pays 30% of its EBIT in taxes and that deprececiation expense of $1. they approximate the value of fixed asset purchases during the year.2 Cash Flow Analysis 42.000 5. Inc.600 800 600 2. c.000. During the year. either a or c will suffice ANS: D DIF: H REF: 2.800 c. they are non-cash expenditures.000 and total expenses (no interest expenses were incurred) of $6. ANS: A DIF: M REF: 2. $2. $4. Inc.000 600 500 2.400 b. (CWS) Cold Weather Sports. $2. the current and prior year’s net fixed assets plus the firm’s depreciation expense for the year.

(200 .200 c.2 Cash Flow Analysis NAR: Cold Weather Sports 46.5.000 .000 DIF: M REF: 2. 3.800 DIF: M REF: 2.000. 2.2 Cash Flow Analysis NAR: Cold Weather Sports 45.10.600 = 200 Change in Accrued = 600 . an inflow of cash. Granny’s Jug Herbal Shop has total current liabilities of $2.000 sales .600 .500 = 100 OCF = 10. What was the dollar amount of fixed assets purchased during the year for Cold Weather Sports? a.000 expense . $1. assuming that the current asset portion of the balance sheet remains the same.Change FA .000 .300 DIF: H REF: 2.000 EBIT . is a.000 + 1.200 tax + 1. c.2 Cash Flow Analysis NAR: Cold Weather Sports 44.1.2 Cash Flow Analysis 47.1.000 + 1.200 . What is the amount of free cash flow generated by Cold Weather Sports in 2003? a.000 ====> CA = 5.000 EBIT 4.1.600 .200 FCF = OCF .100 c. a decrease in the equity of the firm.100) = 2. $1.000 sales .0 b.5 c.000 Change in FA = 5. an outflow of cash.000 and an inventory of $1.200 = 1. none of the above ANS: C Change in CA = 1. 2.200 depreciation expense = 4.1.(Change in CA .300 d.5.0 d.200 depreciation expense = 4. The effect of an increase in a firm’s accounts payable during the year. If its current ratio is 2. $100 b. none of the above ANS: C 5.5 = CA/ 2. $600 b.Change in AP . $2. d.6. neither an inflow nor an outflow of cash.Change in Accrued) = 4.800 . b.000 expense = 4.000 = 200 Change in AP = 800 .200 .5 ANS: A 2. $2.6.800 d. ANS: B DIF: M REF: 2. 3. then what is its quick ratio? a.5.200 tax + 1.

000 last year and on average had $33.33 d.000 c.5 days d. ANS: C DIF: M REF: 2.000 DIF: H REF: 2.500 asset-to-equity = 5.3 Analyzing Financial Performance Using Ratio Analysis 50.000 d. c. 3. none of the above ANS: A 3. $16.67 = (365 / inventory turnover) ===> inventory turnover = 2. $1.9992 = (CGS/ inventory) ===> 2. 3. has total liabilities equal to $3. 1.000) ====> CGS = 11.43 b. If its end of year inventory level is $4.04 = 3. the greater the financial leverage it uses.500. the less financial leverage it uses.3 Analyzing Financial Performance Using Ratio Analysis 48. then what does that imply for the cost of goods sold during the year? (round to the nearest dollar) a. The firm that you work for had credit sales of $3.000 in its accounts recievable during the year. In general.Inv)/CL = (5.589.589. 3 days b.500 and total assets equal to $5. the more debt a firm uses in relation to its total assets a.44 days c.000 / 9.04 average sales per day ====> average collection period = 33. the greater extent to which it uses equity. has an average age of inventory equal to 121.000 ====> Equity = 5.1.67 days.quick ratio = (CA .000.3. b.999. What is Devil’s asset-to-equity ratio? a.0 DIF: M REF: 2. $12.992 = (CGS/4. the less risk there is to the equity holders of the firm. 3.33 .33 c. none of the above ANS: C TA = 5.000.500.000 .000 / 365 = 9.333 b. What is its average collection period? a.000 ANS: C 121.67 ===> 12. $3.000)/2.000 = 2. d.000/ 1. Devil Inc.9992 2. 2.44 days DIF: E REF: 2. Wunder Boy Bat Co.3 Analyzing Financial Performance Using Ratio Analysis 49.500 = 1.500 = 3.3 Analyzing Financial Performance Using Ratio Analysis 51.000 .

92% b.000) (10.3 Analyzing Financial Performance Using Ratio Analysis 53.5% d. It also has total assets of $20.90% b.000 = 2. If Straw has no interest expense and currently pays 35% of its operating profits in taxes and $200 per year in preferred dividends. 3. none of the above ANS: A ROE = (earnings avail for common/sales) (sales/TA) (TA/ equity) .3 Analyzing Financial Performance Using Ratio Analysis NARRBEGIN: Import Import.800 = 5.35 DIF: M 1.75% c. 7. 5. What is Import Inc.20% ANS: A [1. 7. What is Import Inc.000. Inc.35 DIF: M 1.200 ] / 20. 17.DIF: E REF: 2. Inc. 5.96% d. then what is Straw’s net profit margin? a.(.’s return on assets? a.90% c.5.0% b. If Straw has no interest expense and currently pays 35% of its operating profits in taxes and $200 per year in preferred dividends.’s return on common equity? a.035 DIF: E NAR: Import (sales/TA) REF: 2. Straw Corp has an operating profit of $1.96% c. Import.200) .000 in total assets. Straw Corp has an operating profit of $1. 7% c.200 ] / 9. 7.(. 3. then what is Straw’s net profit margin? a.000) = . 10.90 % REF: 2.200 produced from $20.000/20. 8. none of the above ANS: C ROA = (earnings avail for common/sales) = (700/10. 14% b.800 in sales.3 Analyzing Financial Performance Using Ratio Analysis 52. none of the above ANS: A [1.92 % REF: 2.200 .5% d.200 .3 Analyzing Financial Performance Using Ratio Analysis 55. 2. has earnings available for common shareholders of $700 produced by sales of $10.0% d.200 produced from $9.200) .000 and an assets to equity ratio of 2. NARREND 54.

$.15 b.680 2003 .680 2003 40 60 130 230 580 810 40 130 700 830 1.000/8. What is the financial ratio that measures the price per share of stock divided by earnings per share? a. $.000)= . Return on assets b. a. If it is selling at a P/E ratio of 50. calculate FactorMax’s recent earnings per share.50 DIF: M REF: 2.000) DIF: H NAR: Import (10. Price-earnings ratio ANS: D DIF: E REF: 2.000 2004 2003 80 315 415 810 870 1.= (700/10.67 c. Debt-equity ratio d. $1.3 Analyzing Financial Performance Using Ratio Analysis 57.3 Analyzing Financial Performance Using Ratio Analysis NARRBEGIN: Stone Cold Stone Cold Incorporated Balance Sheet: 12/31/04 Assets Cash and Marketable Securities Accounts Receivable Inventories Total Current Assets Net plant and equipment TOTAL ASSETS Liabilities and Equity Accounts Payable Notes Payable Accruals Total Current Liabilities Long Term Bonds TOTAL DEBT Preferred Stock Common Stock Retained earnings TOTAL COMMON EQUITY TOTAL LIABILITIES AND EQUITY Income Statement: 12/31/04 2004 10 375 615 1.000 2004 60 140 110 310 754 1. FactorMax is currently selling for $75 per share.000 2.000) (20.3 Analyzing Financial Performance Using Ratio Analysis 56.0875 REF: 2.50 d.000/20. none of the above ANS: C P/E = market price per share / earnings per share 50 = 75/EPS ====> EPS = 1. Return on equity c.064 40 130 766 896 2.000 1.

9. 20. Refer to Stone Cold.40% c. 12.44% DIF: E NAR: Stone Cold REF: 2. For 2004.8 58.2/2000= 9.Net Sales Operating Costs (excludes Dep/Amortization) EBITDA Depreciation Amortization Depreciation and Amortization EBIT Less Interest EBT Taxes (40%) NET INCOME (before Preferred Dividends) Preferred Dividends NET INCOME Common Dividends Addition to Retained Earnings NARREND 3.36% b.8 4 117.19 ANS: A =754/(896+40) = . 15. 0. 12. what was the return on assets? a.700 500 100 0 100 400 88 312 124. 0. For 2004.8 187. Refer to Stone Cold.98 d. what was the return on common equity? a. 1.2 121. 20. Refer to Stone Cold.00% ANS: A =183.81 DIF: H NAR: Stone Cold REF: 2. For 2004.40% c.2/896 = 20.60% d.2 117 66.3 Analyzing Financial Performance Using Ratio Analysis 59.200 2.3 Analyzing Financial Performance Using Ratio Analysis 60.8 53 64.3 Analyzing Financial Performance Using Ratio Analysis .44% d. what was the debt-to-equity ratio? a.90% ANS: C 183.16% DIF: E NAR: Stone Cold REF: 2.497 353 90 0 90 263 60 203 81.16% b.850 2.81 b.84 c. 20.2 2. 9.2 4 183. 0.

what was the times interest earned ratio for 2004? a.000 .00 ANS: A FCF = OCF . For 2004. 1. What was the free cash flow in 2004 for Stone Cold Incorporated? a. 0. 3.55 DIF: E NAR: Stone Cold REF: 2.77 DIF: M NAR: Stone Cold REF: 2. Refer to Stone Cold. For 2004.chAccruals) where OCF = EBIT – Taxes + Depreciation OCF = $400 .$810 = $190 .20 d.55 d. 1.77 c.80 b.8 + $100 = $375. $215. 4.3 Analyzing Financial Performance Using Ratio Analysis 64.20 b. Refer to Stone Cold. 6.77 days c. -$55.80 c.2 chFA = Change in Gross Fixed Assets = Change in Net Fixed Assets + Depreciation chFA =($1. 51. what was the average collection period for the firm in 2004? a.000 . 1.61.chA/P .$124.3 Analyzing Financial Performance Using Ratio Analysis 62. 42.60 ANS: D =3200/2000 = 1. -$44. Refer to Stone Cold. $145. 2.55 ANS: D =400/88 = 4.13 b.767 = 42. 8.$870) + $100 = $230 chCA = Change in Current Assets chCA =$1.60 DIF: M NAR: Stone Cold REF: 2.20 c. 2. For 2004.chFA – (chCA .3 Analyzing Financial Performance Using Ratio Analysis 63.84 days b.22 days ANS: C =3200/365 = 8.40 d.767 =375/8. what was the total asset turnover for 2004? a.77 days d.

Consider the following financial information for Classic City Ice Cream Corporation: 2004 Financial Data Net Income Total Assets Total Shareholder Equity Net Sales If the return on equity is 20%.33% DIF: M REF: 2.chA/P = Change in A/P chA/P = $60 .000 c.$230 . $65.$130 = -$20 FCF = OCF .000 $300.000 X= $40.000 66.00% ANS: C =100000/300000=33.2 .000 ANS: B .000 $200.000 $100. 25.000 DIF: M REF: 2. 33. Consider the following financial information for Classic City Ice Cream Corporation: 2004 Financial Data Net Income Total Assets Total Shareholder Equity Net Sales What is the total asset turnover for the firm in 2004? a.3 Analyzing Financial Performance Using Ratio Analysis $ 50.000 b. what was Net Income for 2004? a.00% c. chAccruals = $$110 . 40. 16. $25.67% b.chAccruals) FCF = $375. $50.2 Cash Flow Analysis NAR: Stone Cold 65.000 $100.chA/P .$190 FCF = -$44.3 Analyzing Financial Performance Using Ratio Analysis $ ???.chFA – (chCA .000 $200.$230 .33% d.8 DIF: H REF: 2.000 d.000 NARRBEGIN: Titans Electronics Titans Electronics . $40.($190 -$20 --$20) FCF = $375.??? $250.$40 .$20 chAccruals = Change in Accruals.20 = X / $200.2 .

67 ANS: D = $20/($480.000.000 $ 20 NARREND 67.000/400.333 NARREND Not Over 50. 8.000 $120.000 $ 80.3 Analyzing Financial Performance Using Ratio Analysis NAR: Titans Electronics NARRBEGIN: Exhibit 2-1 Exhibit 2-1 The tax schedule for corporate income is shown in the table below: Taxable Income Over $ 0 50..00 c. The bank will have concerns.333..67 DIF: M REF: 2.000 75.000 # of Common shares Total Dividends Paid Current Assets Current Liabilities Market Price of Common equity 400..50 ROA of 5%.00% $ . ANS: B DIF: M REF: 2. To issue the credit.000 100. as the current ratio does not meet requirements.3 Analyzing Financial Performance Using Ratio Analysis NAR: Titans Electronics 68. 16.000 335.000 18.000.50 d.000. The bank will have concerns.00% 38.. Tax Rate 15..000 $ 480.00% 25..000.000 15..00% 34. as the TIE ratio does not meet requirements.333 .000. c.000 $6.000 75. Titans Electronics is applying for a new line of credit from their banking partner.00% 35.000)=16. 10.000 $ 60.Titans Electronics reports the following data for the past year: EBIT Net Income Interest Paid Total Assets $1...000 10. The bank will have concerns.00 b. 15..25 Current Ratio of 1.000 15.000 335. as the ROA is not high enough..000 500.00% 39..000 100. The bank will have reservations..00% 34. as two or more of the requirements are not met.000 18. b. d.000 $ 200..00% 35. What is a likely response from the bank to the application? a. What is the current P/E ratio for the Titans? a. the bank requires the following cutoffs for certain financial ratios: TIE ratio of 4.333.

34+100000*. $56. Pale Rider Corporation reports taxable income of $500. 25. $56.000 in 2004. Big Diesel Incorporated reports taxable income of $200.4 Corporate Taxes NAR: Exhibit 2-1 72.34 DIF: E REF: 2. $61.3063 DIF: E REF: 2.650 c. $200. 34.000 in 2004. What was the average tax rate they paid for the year? a. What was their tax liability for the year? a.15+25000*.100 b.00% c.4 Corporate Taxes NAR: Exhibit 2-1 70.69. Refer to Exhibit 2-1.25% b. Times interest earned ratio c. 34. 29. $91.500 c. $91. $45.34=170000 170000/500000=. what will be the tax liability for Big Diesel? a.000 in 2004.34=170000 DIF: E REF: 2.25+25000*.39+165000*.39+165000*. 23.650 ANS: C Taxes Paid=50000*.15+25000*. If this is their actual income.34+100000*.40% d.250 b. Activity ratio b. Refer to Exhibit 2-1.34+235000*.4 Corporate Taxes NAR: Exhibit 2-1 73. 30. What ratio measures the ability of the firm to satisfy its short term obligations as they come due? a.40% c. 25. Inventory turnover ratio .00% ANS: D Taxes Paid=50000*.4 Corporate Taxes NAR: Exhibit 2-1 71. Refer to Exhibit 2-1.15+25000*.250 d.39=61250 61250/200000=. What was the average tax rate they paid for the year? a. Pale Rider Corporation reports taxable income of $500.25+25000*.000 ANS: C =50000*.00% ANS: C Taxes Paid=50000*.000 d. $170.34+235000*. 29.39=61250 DIF: E REF: 2. Big Diesel Incorporated currently predicts taxable income of $200.25+25000*.25+25000*.00% b. Refer to Exhibit 2-1.000 for the next year.63% d.15+25000*. Current ratio d.

000. The asset to equity ratio for a firm is 1. Consider the following working capital information for Full House Corporation: Year Accounts Receivable Inventory Accounts Payable 2003 $ 0 $100 $ 0 2004 $100 $100 $ 50 .50.000.3 Analyzing Financial Performance Using Ratio Analysis 76.25 ANS: D DIF: H REF: 2.000.ANS: C DIF: E REF: 2.000. Gross profit margin b. 0.000/Y.000 = $4 DIF: M REF: 2. and the earnings per share for the firm was reported as $0.5=3. When the firm issues equal amounts of long term debt and common stock. X=shareholder equity=$2. d. What is the current book value per share for the firm? a. c. net income for the firm was $250.000. Last year.000/500. Which financial ratio measures the effectiveness of management in generating returns to common stockholders with its available assets? a.000. $6 d. When the firm issues no dividends for a given time period.000 Book value per share = $2. When the firm only issues equity to finance its borrowing. and the firm has total assets of $6.5. 1.000/x.000 EPS=$0. If the current price-to-earnings ratio is 20. Return on assets d. 1. When is the return on assets equal to the return on equity? a. ANS: D DIF: M REF: 2.50=$250. Return on equity c.1 Financial Statements 77.80 c.50. Current ratio ANS: C DIF: M REF: 2. net income for the firm was $250. and the firm has total assets of $3. When the current ratio of the firm equals 1. $2 b. Last year. $4 c.60 b. and the earnings per share for the firm was reported as $0.000.1 Financial Statements 78.3 Analyzing Financial Performance Using Ratio Analysis 75. what is the current market-to-book ratio for the firm? a.3 Analyzing Financial Performance Using Ratio Analysis 74. The asset to equity ratio for a firm is 1.000.5. 0.000. b. Y= # of shares = 500. $8 ANS: B 1.00 d.

Decrease of $50 d. what is the average age of their inventory? a.500 c. $1.63 days c. The average age of the inventory for a firm is 10 days old. $36.24 days d.500 d.000 New RE = $2. If the current dollar amount of inventory is $1. The firm has total current assets of $4.change in CL change in CA = ($200-$100)= $100 change in CL = ($50-$0) = $50 change in NWC = +$50 Effect on free cash flow = -$50 DIF: H REF: 2. CL=$2000 Quick = 1.000 DIF: M REF: 2.000. Decrease of $100 ANS: C change in NWC = change in CA . Increase of $150 c.625 Average age = 365/15.125.000 + $375. 12. The most recent balance sheet for the reports retained earnings of $2.3 Analyzing Financial Performance Using Ratio Analysis 81. $26.500 b. $16.000 c.000.2 Cash Flow Analysis 79.000*(1-.625=23.2. $32. $2. Increase of $100 b.25)=$375. If the firm reports cost of goods sold at $25.500.1 Financial Statements 80. 15.000.875.375. $2.2 = ($4000-INV)/$2000 INV = $1.000. 23.000 ANS: C Addition to RE = $500.35 days b.000.000 b. The firm will pay out 25% of net income as dividends. What will the new balance be for retained earnings? a.000 d. what is a good estimate for the cost of goods sold over the last year? a.500 ANS: D . $2. A firm reports net income of $500.000 for the given year.36 days ANS: D Current = 2 = CA/CL = $4000/CL.What was the effect on free cash flow for the firm this past year? a.000 for 2004.600 Inventory turn = $25000/$1600=15. 18. A firm reports a current ratio of 2 and a quick ratio of 1.36 DIF: H REF: 2.

10 = 365/Inv turn.5 = COGS/ INV = COGS / $1000 COGS = $36500 DIF: H REF: 2. Inventory turn = 36.3 Analyzing Financial Performance Using Ratio Analysis .5 36.