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Exam 3: Financial Analysis

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Question 61

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A firm with heavy long-term debt can benefit during inflationary times,as debt can be repaid with "cheaper" dollars.

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Question 62

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Ratios are used to compare different firms in the same industry.

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Question 63

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The Bubba Corp.had net income before taxes of $200,000 and sales of $2,000,000.If it is in the 50% tax bracket its after tax profit margin is:

Replacement cost accounting (current cost method) will usually:

Under International Financial Reporting Standards,two companies with identical operating results may not report identical net incomes.

$\begin{array}{l}\text { LIABILITIES AND SHAREHOLDERS' EQUITY }\\\begin{array} { l r } \text { Accounts payable } & \$ 60,000 \\\text { Accrued expenses } & 40,000 \\\text { Long-term debt } & 130,000 \\\text { Common stock } & 80,000 \\\text { Retained earnings } & \underline { 100,000 } \\\text { Total Liabilities and Shareholders' Equity } & \underline { \$ 410,000 }\end{array}\end{array}$ -Megaframe's debt to asset ratio is:

If accounts receivable stays the same,and credit sales go up:

As defined by the text,list each of the 2 liquidity ratios and explain the information they provide about a firm.

Return on equity will be higher than return on assets if there is debt in the capital structure.

Jones and Co.,reported average receivables of $550,000 in its most recent annual report.If total credit sales were $3,000,000 what was Jones and Co.'s average collection period? (Use 365 days in a year.)

Given the balance sheet and income statement for Simmons Maintenance Company,compute the ratios below.The "right answer" refers to the question of whether a particular ratio for Simmons is better or worse than the industry average.

Asset utilization ratios relate balance sheet assets to income statement sales.

Heavy use of long-term debt can be of benefit to a firm.

In addition to comparison with industry ratios,it is also helpful to analyze ratios using:

During disinflation,stock prices tend to go up because the investor's required rate of return goes down.

Ratio analysis is not useful for:

FIFO inventory valuation is responsible for much of the inventory profits caused by inflation.

Income can be distorted by factors other than inflation.The most important causes of distortion for inter-industry comparisons are:

A firm has total assets of $2,000,000.It has $900,000 in long-term debt.The shareholders' equity is $900,000.What is the total debt to asset ratio?

Ratios are only useful for those areas of business that involve investment decisions.