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FIN 701, Week 2-1 & 2.2 Exam Questions and Answers

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Standardized Financial Statements - Answer-Common-Size Balance Sheets All accounts = percent of total assets (%TA) ▪ Common-Size Income Statements All line items = percent of sales or revenue ▪ Are useful for: Comparing financial information year-to-year. Comparing companies of differen...

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  • August 23, 2024
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  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • fin 701 week 2 1 22 exam questions and answers
  • standardized financial statements answer common

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FIN 701, Week 2-1 & 2.2 Exam Questions
and Answers
Standardized Financial Statements - Answer-Common-Size Balance Sheets
All accounts = percent of total assets (%TA)

▪ Common-Size Income Statements
All line items = percent of sales or revenue
▪ Are useful for: Comparing financial information year-to-year. Comparing companies of
different sizes, particularly within the same industry

Common-Size Balance Sheet - Answer-expresses each account as a percent of total
assets

Common-Size Income Statement - Answer-express each item as a percent of sales

Ratio Analysis - Answer-Allow for better comparison through time or
between companies

Short-term solvency, or liquidity, ratios - Answer-The ability to pay bills in the short-run

Long-term solvency, or financial leverage, ratios - Answer-The ability to meet long-term
obligations

Profitability ratios - Answer-Efficiency of operations and how that translates to the
"bottom line"

Market value ratios - Answer-The market values of the firm relative to the book values

Liquidity ratios - Answer-provide information about a firm's liquidity
• ability to pay its bills over the short run without
undue stress.
• focus on current assets and current liabilities.

Current Ratio - Answer-a measure of short- term liquidity. (CA/CL)

Financial Leverage Ratio - Answer-address the firm's long- run ability to meet its
obligations

Total Debt Ratio - Answer-all debts of all maturities to all creditors
=TD/TA
=(TA-TE)/TA

, Times Interest Earned (Interest coverage ratio) - Answer-how well a company has its
interest obligations covered
=(EBIT/Interest)

EBIT - Answer-earnings before interest and taxes
=Sales-COGS-Depreciation

taxable income - Answer-income on which tax must be paid; total income minus
exemptions and deductions
=EBIT - Interest

net income - Answer-the difference between total revenue and total expenses when
total revenue is greater
= taxable income - taxes
= EBIT - interest - taxes
= sales - COGS - Depreciation - interest - taxes

Asset Management Turnover Ratios - Answer-how efficiently, or intensively, a firm uses
its assets to generate sales

Profitability Measures - Answer-measure how efficiently the firm uses its assets and
how efficiently the firm manages its operations.

Profit Margin (PM) - Answer-a measure of profit per dollar of sales.
= (NI / Sales)

Return on Assets (ROA) - Answer-a measure of profit perdollar of assets
= (NI / TA)

Return on Equity (ROE ) - Answer-a measure of profit per dollar of equity
= (NI / TE)
= PM * TAT * EM

Earnings per Share - Answer-the amount of net income after federal income tax
belonging to a single share of stock
= NI/(# of shares)

Market to Book Ratio - Answer-compares the market value of the firm's investments to
their cost.
= market value per share/book value per share
=PPS/book value per share

Market Value Measures - Answer-These measures examine how profitable the shares
are using accounting and market values.

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