FIN 3403 CHAPTER 3 EXAM REVIEW
QUESTIONS WITH VERIFIED SOLUTIONS
What are questions we can answer using financial statements?
- Can we repay creditors?
- Are there trends within the firm's revenues and expenses?
- How is the firm preforming relative to competitors?
- What part of the firm's operations are the most/least efficient?
How does the financial statements help you understand what part of the firm's operations
are the most/least efficient?
- It helps you make assumptions
- Can take inspiration from other firms in the industry
At its most basic level a firm does two things
- generates cash
- spends cash
cash flow from asset =
cash flow from assets = cash flow to creditors + cash flow to owners
sources of cash
activities that bring cash
uses of cash
activities that involve spending cash
An increase in assets account means that the firm on a net basis, bought some asset, is this
a use or source of cash?
use of cash
left side of the account
asset
right side of the account
liability or equity
An increase on the left side of the account is a
use of cash
A decrease in a right side of the account is a
, use of cash
a decrease on the left side of the account is
a source of cash
an increases in the right side of the account is a
source of cash
What does it mean to standardize financial statements?
because all companies are different (even if they are in the same industry) its hard to get a good
comparison so you have to standardize it
Common-size financial statements
they present all items as a percentage range to be used when comparing companies
Common base year statements
used to allow for trend analysis when looking at trends
combined common-size and base year assets
show the total growth or change in an asset account relative to its growth in total assets over a
period of time
Financial ratios
are relationships determined from a firm's financial information and used for comparison
purposes
What do ratios assist managers in
determining strengths and weaknesses
What are the financial ratios traditionally grouped into?
- short-term solvency, or liquidity, ratios
- long-term solvency, or financial leverage, ratios
- asset management, or turnover, ratios
- profitability ratios
- market value ratios
What are the characteristics of short-term solvency, or liquidity, measures?
- Intended to provide information about a firm's liquidity
- primary concern is ability to pay bills over the short run
- used by short-term lenders (banks)
- focus on current asses and current liabilities
Current Ratio (measure of short-term liquidity)
QUESTIONS WITH VERIFIED SOLUTIONS
What are questions we can answer using financial statements?
- Can we repay creditors?
- Are there trends within the firm's revenues and expenses?
- How is the firm preforming relative to competitors?
- What part of the firm's operations are the most/least efficient?
How does the financial statements help you understand what part of the firm's operations
are the most/least efficient?
- It helps you make assumptions
- Can take inspiration from other firms in the industry
At its most basic level a firm does two things
- generates cash
- spends cash
cash flow from asset =
cash flow from assets = cash flow to creditors + cash flow to owners
sources of cash
activities that bring cash
uses of cash
activities that involve spending cash
An increase in assets account means that the firm on a net basis, bought some asset, is this
a use or source of cash?
use of cash
left side of the account
asset
right side of the account
liability or equity
An increase on the left side of the account is a
use of cash
A decrease in a right side of the account is a
, use of cash
a decrease on the left side of the account is
a source of cash
an increases in the right side of the account is a
source of cash
What does it mean to standardize financial statements?
because all companies are different (even if they are in the same industry) its hard to get a good
comparison so you have to standardize it
Common-size financial statements
they present all items as a percentage range to be used when comparing companies
Common base year statements
used to allow for trend analysis when looking at trends
combined common-size and base year assets
show the total growth or change in an asset account relative to its growth in total assets over a
period of time
Financial ratios
are relationships determined from a firm's financial information and used for comparison
purposes
What do ratios assist managers in
determining strengths and weaknesses
What are the financial ratios traditionally grouped into?
- short-term solvency, or liquidity, ratios
- long-term solvency, or financial leverage, ratios
- asset management, or turnover, ratios
- profitability ratios
- market value ratios
What are the characteristics of short-term solvency, or liquidity, measures?
- Intended to provide information about a firm's liquidity
- primary concern is ability to pay bills over the short run
- used by short-term lenders (banks)
- focus on current asses and current liabilities
Current Ratio (measure of short-term liquidity)
