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Exam 7: Analysis of Financial Statements

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Question 51

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Financial statement analysis involves the analysis of a firm's financial position to identify its current strengths and weaknesses and to clearly identify the course of action to take advantage of those strengths and correct any weaknesses.

A) True
B) False

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Question 52

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We can be sure that, in and of itself, a stock dividend will not affect which of the following financial aspects of the firm? (Assume the stock has a par value.)

A) Market value per share.
B) Book value per share.
C) Common stock account.
D) Paid-in capital account.
E) Total assets.

F) C) and D)
G) A) and C)

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Question 53

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When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt.

Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit.However, the firm has noticed a recent increase in its collection period.Last year, total sales were $1 million, and $250,000 of these sales were on credit.During the year, the accounts receivable account averaged $41,664.It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent.If the resulting increase in accounts receivable must be financed by external funds, how much external funding will Cannon need?

The income statement measures the flow of funds into (i.e.revenue) and out of (i.e.expenses) the firm over a certain time period.It is always based on accounting data.

Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan.Alumbat's annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent.If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result.What is Alumbat's current TIE ratio?

In order to accurately estimate cash flow from operations, depreciation must be added back to net income.The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.

As a short-term creditor concerned with a company's ability to meet its financial obligation to you, which one of the following combinations of ratios would you most likely prefer? Current Debt Ratio TIE ratio

Which of the following statements is correct?

A(n) ____ is a statement summarizing the firm's revenue and expenses over an accounting period.

Velcraft Company has 20,000,000 shares of common stock authorized, but to date, has only 12,000,000 shares outstanding, each with a $1.00 par value.The company has $24,000,000 in additional paid-in capital and retained earnings are $96,000,000.What is Velcraft's current book value per share?

Which of the following statements is correct?

Changes in balance sheet accounts are necessary for

A firm has total assets of $1,000,000 and a debt ratio of 30 percent.Currently, it has sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000.If the firm's before-tax cost of debt is 10 percent and the firm's tax rate is 40 percent, what is the firm's ROE?

Since ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

Recently the M&M Company has been having problems.As a result, its financial situation has deteriorated.M&M approached the First National Bank for a badly needed loan, but the loan officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank would even consider granting the credit.Which of the following actions would do the most to improve the ratio in the short run?

Lombardi Trucking Company has the following data: What is Lombardi's TIE ratio?

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5.Calculate the market price of a share of the company's stock.

The current ratio and inventory turnover ratio measure the liquidity of a firm.The current ratio measures the relation of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash.

The ____ provides a good indication of the firm's ability to meet its current obligations.