KIN 3804 Midterm Zvosec Exam Latest Update
financial statement - ANSWER The primary source of information used to
evaluate the financial health and performance of an organization
Three basic types of financial statements - ANSWER · Balance sheet
· Income statement
· Statement of cash flows
Balance sheet - ANSWER A picture or snapshot of the financial condition of an
organization at a specific point in time
Income Statement - ANSWER Shows an organization's income (or loss) over a
specified period of time, often on an annual or quarterly basis
Statement of Cash flows - ANSWER Financial statement that tracks cash flowing
into and out of an organization over a period of time
Reasons why financial managers engage in ratio analysis - ANSWER · To
evaluate how well a company is operating in the current time period
· To compare current to past performance
· To compare current and historical performance to industry standards
· To study efficiency of operations
Current ratio - ANSWER The organization's ability to meet its current liabilities
with its current assets
Quick ratio (a.k.a. acid test ratio): - ANSWER The organization's ability to meet
its current liabilities with current assets other than inventory
Inventory turnover ratio - ANSWER How often the organization sells and
replaces its inventory over a specified period of time
Debt ratio - ANSWER How the organization finances its operation with debt and
equity; this analyzes a business' leverage from the standpoint of assets
Interest coverage ratio - ANSWER The organization's ability to pay the interest
on its debt owed
Total asset turnover ratio - ANSWER How efficiently the organization is using its
assets to make money
, Net profit margin - ANSWER The percentage of the organization's total sales or
revenues that was net profit or income; this helps to measure how profitable a
business is
Return on equity - ANSWER The return rate that the organization's owners or
shareholders are receiving on their investment
Market value - ANSWER An estimate of the organization's worth according to the
stock market
Price-to-earnings ratio - ANSWER An estimate of how much investors will pay for
each dollar of the organization's earnings
concept of the time value of money - ANSWER o Represents the concept that the
value of money in today's dollars decreases in value the further out into the
future it is expected to be received
liquidity - ANSWER The readiness with which an asset can be converted to cash.
perpetuity - ANSWER A single cash flow per year forever into the future
annuity - ANSWER A constant stream of payments that is received for a fixed
number of periods
Sole Proprietorship - ANSWER A business owned by a single person
Sole Proprietorship advantages - ANSWER · Total control over decision making
· Revenues taxed only once
· Great flexibility
· Easy to form
· All profits retained by owner
· Less concern about confidentiality
· Easy to sell
· Fewer government restrictions
Sole Proprietorship disadvantages - ANSWER · Limited managerial experience
· Unlimited personal liability
· Lasts only as long as the owner lives
· Limited access to capital funds
General partnerships - ANSWER Individuals or groups combine resources to
share in operating, managing, and controlling as well as profits and liabilities.
limited partnerships - ANSWER One partner manages; others are financial
partners only (limited partners).
financial statement - ANSWER The primary source of information used to
evaluate the financial health and performance of an organization
Three basic types of financial statements - ANSWER · Balance sheet
· Income statement
· Statement of cash flows
Balance sheet - ANSWER A picture or snapshot of the financial condition of an
organization at a specific point in time
Income Statement - ANSWER Shows an organization's income (or loss) over a
specified period of time, often on an annual or quarterly basis
Statement of Cash flows - ANSWER Financial statement that tracks cash flowing
into and out of an organization over a period of time
Reasons why financial managers engage in ratio analysis - ANSWER · To
evaluate how well a company is operating in the current time period
· To compare current to past performance
· To compare current and historical performance to industry standards
· To study efficiency of operations
Current ratio - ANSWER The organization's ability to meet its current liabilities
with its current assets
Quick ratio (a.k.a. acid test ratio): - ANSWER The organization's ability to meet
its current liabilities with current assets other than inventory
Inventory turnover ratio - ANSWER How often the organization sells and
replaces its inventory over a specified period of time
Debt ratio - ANSWER How the organization finances its operation with debt and
equity; this analyzes a business' leverage from the standpoint of assets
Interest coverage ratio - ANSWER The organization's ability to pay the interest
on its debt owed
Total asset turnover ratio - ANSWER How efficiently the organization is using its
assets to make money
, Net profit margin - ANSWER The percentage of the organization's total sales or
revenues that was net profit or income; this helps to measure how profitable a
business is
Return on equity - ANSWER The return rate that the organization's owners or
shareholders are receiving on their investment
Market value - ANSWER An estimate of the organization's worth according to the
stock market
Price-to-earnings ratio - ANSWER An estimate of how much investors will pay for
each dollar of the organization's earnings
concept of the time value of money - ANSWER o Represents the concept that the
value of money in today's dollars decreases in value the further out into the
future it is expected to be received
liquidity - ANSWER The readiness with which an asset can be converted to cash.
perpetuity - ANSWER A single cash flow per year forever into the future
annuity - ANSWER A constant stream of payments that is received for a fixed
number of periods
Sole Proprietorship - ANSWER A business owned by a single person
Sole Proprietorship advantages - ANSWER · Total control over decision making
· Revenues taxed only once
· Great flexibility
· Easy to form
· All profits retained by owner
· Less concern about confidentiality
· Easy to sell
· Fewer government restrictions
Sole Proprietorship disadvantages - ANSWER · Limited managerial experience
· Unlimited personal liability
· Lasts only as long as the owner lives
· Limited access to capital funds
General partnerships - ANSWER Individuals or groups combine resources to
share in operating, managing, and controlling as well as profits and liabilities.
limited partnerships - ANSWER One partner manages; others are financial
partners only (limited partners).
