Exam 7: Analysis of Financial Statements

Retained earnings is the cash that has been generated by the firm through its operations which has not been paid out to stockholders as dividends.Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm.

Lone Star Plastics has the following data: What is Lone Star's EBIT?

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

A stock dividend will, in and of itself, affect the amounts in which of the following accounts? (Assume the stock has a par value.)

The accrual method of accounting recognizes revenue when ____, and recognizes expenses when ____.

Funds supplied by common stockholders mainly include capital stock, paid-in capital, and retained earnings, while total equity is comprised of common equity plus preferred stock.

A firm has a profit margin of 15 percent on sales of $20,000,000.If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?

The ____ is a statement reporting the effects of a firm's operating, investing, and financing activities on cash flows over an accounting period.

Ducheyne Electric recently declared a 15 percent stock dividend.On the date of the stock dividend Ducheyne had 16 million shares outstanding priced at $46 per share in the market.An accounting entry was required on the balance sheet transferring some retained earnings to the common stock account.If retained earnings were $280 million prior to the transaction, what was the dollar amount of retained earnings after the transfer?

The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus, some firms must meet more than just their scheduled interest payments out of earnings.Therefore, the fixed charge coverage is more inclusive than the TIE ratio.

Collins Company had the following partial balance sheet and complete income statement information for 2010: The industry average DSO is 30 (360-day basis).Collins plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold.If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a 10% interest rate), what will Collins' debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the balance sheet?

A positive number in the retained earnings account indicates that according to GAAP in the past the firm has earned income excess of all dividends paid.

Two firms have the same current ratio, 0.75, and the same amount of sales.However, Firm A has a higher inventory turnover ratio than Firm B.Therefore, we can conclude that the quick ratio of Firm A will be smaller than that of Firm B.

Which of the following actions will cause an increase in the quick ratio in the short run?

The Amer Company has the following characteristics: What is Amer's ROE?

A fire has destroyed a large percentage of the financial records of the Carter Company.You have the task of piecing together information in order to release a financial report.You have found the return on equity to be 18 percent.If sales were $4 million, the debt ratio was 0.40, and total liabilities were $2 million, what was the return on assets (ROA)?

Even if a stock split has no information content, and even if the dividend per share adjusted for the split does not increase, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

From management's standpoint, financial statement analysis is useful

Suppose two firms with the same amount of assets pay the same interest rate on their debt and earn the same rate of return on their assets, and that ROA is positive.However, one firm has a higher debt ratio.Under these conditions, the firm with the higher debt ratio will also have a higher rate of return on common equity.

Stock dividends