FIN 300 Lecture Notes - Lecture 3: Asset Turnover, Inventory Turnover, Reserve Requirement

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20 Mar 2016

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Net income; always goes one of two places-it either paid out to shareholders in the form of dividends, or it is reinvested (or plowed back) into the irm in the form of addiions to retained earnings. Addiions to retained earnings= net income- dividends paid. Addiion to r/e is the amount of money being reinvested in the irm for that one year. The r/e on the statement of financial posiion is the collecion of all the addiions to r/e that have accumulated over the years since the incepion of the irm. Sources: cash inlow- occurs when we sell something, decrease in asset account, increase in liability or equity account. Uses: cash ouflow- occurs when we buy something, increase in asset account, decrease in liability or equity account. Statement that summarizes the sources and uses of cash. Common-size statements of inancial posiion: compute all accounts as a percent of total assets.

Related Questions

1.The concept that an item is not large enough to influence the users of a financial statement is

A, cost effectiveness

b. Materiality

c. reliability

d. relvance

e. none

2. The quality that allows quantitative assessment of the similarities and differences among enterprises is known as

a.comparability

b. consistency

c. reliability

d. relevance

e. none

3. Profit margin and asset turnover can be combined to create

a. return on assets

b return on equity

c. earnings per share

d. price earnings ratio

e. none

4.which of the following increases cash

a. issuance to long term debt

b. acquisition of property plant and equipment

c. payment of divdends

d decrease in short term debt

e. none

5. if a company pays out more than the income tax incurred as shown in the income tax liability decrease, the effect on cash is a

a. decrease

b. increase

c.no effect

d. none of the above

6. which of the following increases cash

a. increase in inventory

b. increase in accounts receivable

c. increase in the accounts payable

d. none

7.Grayson is saving for a used car. He needs $14,000. How much he invest at 3% annual interest rate to have $ 14,000 in two years? Round to the nearest dollar.

a. 12,983

b.12,417

c. 13,720

d. 13.196*

e, none

8.ellen fetter invested $5,000 in a savings account that paid 5% interest compounded annually. She kept the account for three years. At the end of the three years, ellen will have approimentely

a. $6,103

b. $5,444

c.5,414

d.5,788*

e. none

9. Which of the following is a snapshot of the financial position of a company

a. Balance sheet

B.income statement

C. statement of retained earnings

D. cash flow statement

e. none

10.which of the following rations is not useful for comparison purposes?

a. return on assets

b. price earnings ratio

c. return on equity

d. earnings per share

e. none*

11.elsie Jackson is saving for a down payment on a condo. She needs 20,000. How much must she invest in a savings account that pays 5% annually to have the 20,000 in 8years? Round to the nearest dollar.

a. 13,206

b $12,983

c. 13,616

d. 13,537

e. none

12.which of the following is added to net income to calculate cash flow?

a. depreciation

b. increase in accounts receivable

c. increase in inventory

D. decrease in accounts payable

e. none

13. which of the following increase cash?

a.issuance of long term debt

b. acquisition of property plant and equipment

c. payment of divdends

d. decrease in short term debt

e. none

14. profit margin and asset turnover can be combined to create

a. return on assets

b. return on equity

c. earnings per share

d. price earnings ratio

e. none

15.Bart is saving for college. He needs 20,000 for the first year. How much must he invest at a 5% annual interest rate to have 20,000 in five years? Round to the nearest dollar?

a. 14.982

b.15,016

c.15,023

d 15,671

e none

16.which of the following are added to net income to determine cash flow from operating activities?

a. depreciation

b. amortization

c. both a and b*

d. gain on asset sale

e. none

17. which of the following ratios is coverage ratio

a. return on assets

b. return on equity

c. earnings per share

d. times interest earned

e. none

18. ellis industries is a large, multinational company located in the us. Ellisâs financial statements are in us dollars. This GAAP is known as

a. monetary concept

b. economic entity

c.conservatism

d. matching

e. none

19.ginger Ellison invested $10,000 in a bank account at offshore bank. The account pays 3% interest compounded annually. How much will Ginger have in five years? Round to the nearest dollar?

a. 11,593

b. 11,108

c. 10,213

d. 12,619

e. none

20.which ratio is wall streetâs favorite

Inventory turnover

B. receivables turnover

Current

D. price- earnings*

E. none

21. ginger Ellison invested $10,000 in a bank account at offshore bank. The account pays 3% interest compounded annually. How much will Ginger have in five years? Round to the nearest dollar?

a. 11,593

b. 11,108

c. 10,213

d. 12,619

e. none

22.information that can make a difference to the decision at hand is considered to be

a. a reliable

b. a comparable

c. relevant

d. understandable

c. none

23. Blackson incorporated signed a 3 year lease for the building that blackson occupies and paid the first 6 months in advance. The account that should be debited is

a. prepaid expenses

b. cash

c. building

d. accounts payable

e. none

24.right-hand entries increase

a. asset accounts

b owners equity accounts

c. liabilities

d. both b and c

e. none

25.The quality that ensures that information is reasonably free from error is

a. reliability

b. relevant

c. understandability

d. consistent

e. none

26. a customer pays on an account receivable. The account that should be credited is

a. inventory

b. cash

c. accounts payable

d. accounts receivable

e. none

27. which of the following ratios measures liquidity?

a. current

b. payout

c. gross margin

d. asset turnover

e. none

28. Jesse Ellis invested $4,000 in a savings account that paid 6% interest compounded annually for 6 years. At the end of 6 years, Jesse will have approximately.

A. 5,103

b. $5,674

c. 5,506

d.4,903

e.none

29. which of the following is not a functional area of accounting?

a. Managerial accounting

b. tax accounting

c.economic accounting*

d. financial accounting

e. none

30.John Vincent invested $10,000 in a savings account. The account pays 4,5% annual interest. John will have much in the account at the end of 10 years? Round to the nearest dollar.

a. 15,530

b. 14,984

c. 16,010

d. 16,311

e none

31.capital stock is a part of which of the following accounts?

a. ownersâ equity

b. liabilities

c. current assets

d. long term assets

e. none

32.The stock market values a company based on which of the following accounts?

a. assets

b. liabilities

c. capital stock

d. retained earnings*

e none

33. The following accounts are listed in order of liquidity

a. current assets

b. current liabilities

c. both a and b

d. long term assets

e. none

34. When shares are sold from one shareholder to another in the open market: the following accounts is impacted

a. capital stock

b. retained earnings

c. long term liabilities

d. current assets

e. none*

35. The accounts that reflects the amount the owners have invested in the business is

a. capital stock

b. retained earnings

c. long term liablilties

d. long term assets

d. none

36. Karen Quigley is saving for new car. The car cost $22,000. How much must Karen invest in a savings account that pays 4% annually to have the $22,000 in three years? Round to the nearest dollar.

a. 20,147

b. 19,107

c. 19,558

d.19,328

e. none

37. Agr corporation signed a two-yr lease for the building that the company occupies. The account that should be debited is

a. prepaid expense

b.cash

c. accounts payable

d. building

e. none

38. left-hand entries DECREASE

a. asset accounts

b. liability accounts

c. ownerâs equity accounts

d. both b and c*

e.none

39. which of the following is a source of cash? (question 42 different choices)

a. issuance of long-term debt

b. increase in inventories

c. decrease in accounts payable

d. increase in accounts receivable

e. none

REPEAT Different choice 40. which of the following increases cash?

Issuance of long-term debt

Acquition of property plant and equipment

Cpaymentof divdends

D. decrease in short term debt

none

41.The ratio that shows how much in excess of current earnings investors are willing to pay for company stock is.

A payout

b.current

c, price-earnings*

d.return on equity

e none

42. which of the following is a source of cash?

A increase in accounts recievable

b. increase in inventories

c. increase in accounts payable

d. none*

43. A gain on the sale of an asset is subtracted from net income to determine cash flow from operating activities because of

a. double counting

b. asset sales require a basis

c. losses are cash flow neutral *

d. none

44. which of the following is an expense allocation scheme?

a. cost of goods sold

b. amortization

c. Depreciation

D. Band C*

e. none

45.The account that reflects the amount the owners have invested in the business is

a. capital stock

b. retained earnings

c. long term liabilies

d. long term asset

e. none

46. which of the following statements represents a flow concept?

a. balance sheet

b. income statement*

c. statement of retained earnings

d. inventory statement

e. none

47. left- hand entries INCREASE

a. asset accounts

b. liability accounts

c. ownersâ equity accounts

D. both B and C

e. none

48.which of the following ratios measures operating performance?

a. price-earnings

b. current

c. receivable turnover*

d. operating cycle

e. none

49. credit sales increase

a. cash

b. land

c. ownersâ equity

d. accounts payable

e. none*

50.Projecting inventory levels for next year would be an example of

a. financial accounting

b managerial accounting*

c. tax accounting

d. none

51. investments representing long term holdings of securities would appear on the balance sheet as

a. long term liabilities

b long-term asset

c. capital stock

d. retained earnings

e. none*

52. which organization is recognized today as the authoritative voice of accounting rules and principles?

a. sec

b. aICPA

c.FASB *

d.AAA

e. none

53. which account below would be credited to record this transaction: purchase merchandise for resale on credit

a. inventory

b. cash

c. accounts payable *

d.accounts receivable

e. none

54. Formis, Inc. estimates the useful life of each asset purchased and depreciates the asset over the useful life. This GAAP is known as

a. Monetary concept

b. economic entity

c. going concern

d. matching*

e. none

55. which of the following is one gauge of the companyâs ability to meet its short-term obilgations?

a. gross margin

b. asset turnover

c. profit margin

d. working capital*

e. none

Thank you in advance for your help. If you will, please explain to me how you came up with the answer for "a". I wasn't sure where to look. I can see the differences in balance sheets.

Donna Jamison was recently hired as a financial analyst by Computron Industries, a manufacturer of electronic components. Her first task was to conduct a financial analysis of the firm covering the last two years. To begin, she gathered the following financial statements and other data.

Balance Sheets 2013 2014

Assets

Cash $ 52,000 $ 57,600

Accounts receivable 402,000 351,200

Inventories 836,000 715,200

Total current assets $1,290,000 $1,124,000

Gross fixed assets 527,000 491,000

Less accumulated depreciation 166,200 146,200

Net fixed assets $ 360,800 $ 344,800

Total assets $1,650,800 $1,468,800

Liabilities and Equity

Accounts payable $ 175,200 $ 145,600

Notes payable 225,000 200,000

Accruals 140,000 136,000

Total current liabilities $ 540,200 $ 481,600

Long-term debt 424,612 323,432

Common stock (100,000 shares) 460,000 460,000

Retained earnings 225,988 203,768

Total equity $ 685,988 $ 663,768

Total liabilities and equity $1,650,800 $1,468,800

(continued)
Income Statements 2014 2013

Sales $3,850,000 $3,432,000

Cost of goods sold (3,250,000) (2,864,000)

Other expenses ( 430,300) ( 340,000)

Depreciation ( 20,000) ( 18,900)

Total operating costs $3,700,300 $3,222,900

EBIT $ 149,700 $ 209,100

Interest expense ( 76,000) ( 62,500)

EBT $ 73,700 $ 146,600

Taxes (40%) ( 29,480) ( 58,640)

Net income $ 44,220 $ 87,960

EPS $0.442 $0.880

Statement of Cash Flows (2014)

Operating Activities

Net income $ 44,220

Other additions (sources o f cash)

Depreciation 20,000

Increase in accounts payable 29,600

Increase in accruals 4,000

Subtractions (uses of cash)

Increases in accounts receivable ( 50,800)

Increase in inventories (120,800)

Net cash flow from operations $( 73,780)

Long-Term Investing Activities

Investment in fixed assets $( 36,000)

Financing Activities

Increase in notes payable $ 25,000

Increase in long-term debt 101,180

Payment of cash dividends ( 22,000)

Net cash flow from financing $104,180

Net reduction in cash account $( 5,600)

Cash at beginning of year 57,600

Cash at end of year $ 52,000

(continued)
Other Data 2014 2013

December 31 stock price $6.00 $8.50

Number of shares 100,000 100,000

Dividends per share $ 0.22 $0.22

Lease payments $40,000 $40,000

Industry average data for 2014:

Ratio Industry Average

Current 2.7x

Quick 1.0x

Inventory turnover 6.0x

Days sales outstanding (DSO) 32.0 days

Fixed assets turnover 10.7x

Total assets turnover 2.6x

Debt ratio 50.0%

TIE 2.5x

Fixed charge coverage 2.1x

Net profit margin 3.5%

ROA 9.1 %

ROE 18.2%

Price/earnings 14.2x

Market/book 1.4x

Assume that you are Donna Jamisonâs assistant and that she has asked you to help her prepare a report that evaluates the companyâs financial condition. Answer the following questions:

a. What can you conclude about the companyâs financial condition from its statement of cash flows?

b. What is Computronâs inventory turnover, dayâs sales outstanding, fixed assets turnover and total assets turnover ratios? How does the firmâs utilization of assets stack up against that of the industry?

c. What are the firmâs debt, times-interest-earned, and fixed charge coverage ratios? How does Computron compare to the industry with respect to financial leverage? What conclusions can you draw from these ratios?

d. Calculate and discuss the firmâs profitability ratiosâthat is, its net profit margin, return on assets (ROA), and return on equity (ROE).

e. WHAT ARE COMPUTRONâS INVENTORY TURNOVER, DAYS SALES OUTSTANDING, FIXED ASSETS TURNOVER, AND TOTAL ASSETS TURNOVER RATIOS? HOW DOES THE FIRMâS UTILIZATION OF ASSETS STACK UP AGAINST THAT OF THE INDUSTRY?

1. Which of the following would result in a decrease in cash flow and a use of cash? A. A decrease in notes payable B. An increase in long-term debt C. A decrease in inventory D. A decrease in common stock

2. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded an average rate of A. 15%. C. 39%. B. 35%. D. 34%.

3. A firm has assets of $60,000 and ownersâ equity of $33,000. Which of the following is the correct balance of the firmâs liabilities? A. $33,000 C. $93,000 B. $27,000 D. $60,000

4. Which of the following would result in an increase in cash flow and a source of cash? A. A decrease in notes payable B. A decrease in long-term debt C. An increase in inventory D. An increase in common stock

5. A firm has current assets of $10,000 and current liabilities of $7,000. Which of the following is the correct net working capital for the firm? A. $10,000 C. $3,000 B. $7,000 D. $13,000

6. If a firm has an accounts receivable balance of $18,800 at the end of 2007 and $16,500 at the end of 2008, which of the following statements about accounts receivable is correct? A. Accounts receivable decreased by $2,300 and represented a use of cash. B. Accounts receivable increased by $2,300 and represented a source of cash. C. Accounts receivable decreased by $2,300 and represented a source of cash. D. Accounts receivable increased by $2,300 and represented a use of cash.

7. If a firm has revenues of $15,090 and expenses of $8,850, what is the firmâs taxable income? A. $15,090 C. $6,240 B. $8,850 D. $23,940

8. Which of the following statements about the issuance of an initial public offering (IPO) is correct? A. IPOs may be either underpriced or overpriced. B. IPOs are never overpriced. C. IPOs are never underpriced. D. IPOs are always correctly priced.

9. If a firm has revenues of $15,090, operating expenses of $8,850, and a tax expense of $2,120, what is the firmâs net income? A. $8,850 C. $6,240 B. $4,120 D. $8,360

10. When youâre preparing a common-sized balance sheet, which of the following measures is set to equal 100 percent? A. Total liabilities C. Total ownersâ equity B. Total assets D. Cash Examination, Lesson 1 35

11. Suppose that a corporation has a taxable income of $200,000. What is the firmâs corporate income tax for the current tax year? (You can use the following table to calculate the firmâs U.S. federal corporate tax.) Taxable Income More Than Taxable Income Less Than Tax Rate $0 $50,000 15% $50,001 $75,000 25% $75,001 $100,000 34% $100,001 $335,000 39% $335,001 $10,000,000 34% $10,000,001 $15,000,000 35% $15,000,001 $183,333,334 38% $18,333,334 35% A. $78,000 C. $39,000 B. $6,250 D. $61,250

12. Using the same table and information provided in Question 11, what is the firmâs average tax rate? A. 39% C. 34% B. 30.625% D. 31.625%

13. Using the same table and information provided in Question 11, what is the firmâs marginal tax rate? A. 39% C. 34% B. 30.625% D. 31.625%

14. Dilution refers to the loss of shareholder value, and may be represented by all of the following except dilution of A. ownership percentage. B. market value. C. the firmâs current ratio. D. book value per share.

15. If a firm has $6,940 in earnings before interest and taxes, $650 in depreciation expense, and $2,120 in taxes, what is the firmâs operating cash flow? A. $4,120 C. $6,240 B. $5,470 D. $9,710

16. The type of financial statement that summarizes the sources and uses of cash over a specified period of time is called the A. statement of cash flows. B. income statement. C. balance sheet. D. inventory ratio statement.

17. The current ratio falls within which of the following classifications of financial ratios? A. Long-term solvency measures B. Asset management or turnover measures C. Short-term solvency or liquidity measures D. Profitability measures

18. If a firm has an accounts payable balance of $34,400 at the end of 2007 and $31,200 at the end of 2008, which of the following statements about accounts payable is correct? A. Accounts payable decreased by $3,200 and represented a use of cash B. Accounts payable increased by $3,200 and represented a source of cash C. Accounts payable decreased by $3,200 and represented a source of cash D. Accounts payable increased by $3,200 and represented a use of cash

19. Which of the following is not one of the six costs of issuing securities? A. Rights offering C. Green Shoe option B. Abnormal returns D. Gross spread 20. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded a marginal rate of A. 15%. C. 39%. B. 35%. D. 34%.

20. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded a marginal rate of A. 15%. C. 39%. B. 35%. D. 34%.

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FIN 300 Lecture Notes - Lecture 3: Asset Turnover, Inventory Turnover, Reserve Requirement

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