Test 4

Question 1

quick ratio & minimum?

Answer 1

CA - Inventory / CL

measures immediate liquidity of the firm; ability to pay ST debts using most liquid assets
- minimum = 1.00

Question 2

cash ratio & good measure?

Answer 2

Cash + Marketable Secur. / CL
how quickly can the company pay back ST debt using only cash (immediately)
- 0.3 = good measure

Question 3

current ratio & good range?

Answer 3

CA / CL
ST ability of company to pay ST debts
- should be between 1.5-2

Question 4

TIE

Answer 4

EBIT / Interest expense
how many times operating profit can cover its interest expenses

Question 5

debt ratio

Answer 5

TL / TA
what percentage of assets are financed by debt

Question 6

debt to equity ratio & above/under 1?

Answer 6

TL / equity
how much debt the company uses relative to equity
- above 1: higher liabilities
- below 1: higher equity
- lower = better

Question 7

return on assets

Answer 7

Net Income / TA
how efficiently businesses use assets to generate profit

Question 8

return on equity

Answer 8

Net Income / E
how much return shareholders are recievingfor money invested

Question 9

GPM

Answer 9

GP / Revenue (Sales)
How much of each euro of sales the firm keeps after covering COGS (the cost of producing the goods)

Question 10

NPM

Answer 10

NP / Revenue (Sales)
how much each euro of sales becomes final profit

Question 11

Operating Profit Margin

Answer 11

EBIT / Revenue (Sales)
how much revenue remains after covering COGS + operating expenses, before interest and taxes

Question 12

credit line 1. UPFRONT FEE

Answer 12

D: (626) Bank commission/fees
C: (572) Cash

Question 13

credit line 2 DRAWDOWN (if credit line is used)

Answer 13

D: (572) cash
C: (5201) current payables for drawdowns on credit facilities

Question 14

credit line 3 PAYMENT INTEREST

Answer 14

D: (662) Interest Expense
C: (572) Cash

Question 15

credit line 4 (TERMINATION)

Answer 15

D: (5201) current payables for drawdowns on credit facilities
C: (572) cash

Question 16

equity equation

Answer 16

assets-liabilities

Question 17

equity definition

Answer 17

residual value of the company that belongs to the owners

Question 18

what does equity represent

Answer 18

• what owners own economically
• “left over” value after paying debts
• a permanent source of financing (no maturity date)

Question 19

equity includes

Answer 19

1. share capital
2. share premium
3. reserves
4. retained earnings

Question 20

share capital

Answer 20

par value of all issued shares (legal minimum value of a share written in company’s official documents)
- not physical amount of money
- accounting number representing owners permanent contribution

Question 20

share capital equation

Answer 20

par value x # of issued shares

Question 21

reserves

Answer 21

profits from previous years that the company keeps instead of paying out as dividends. they stay in equity and strengthen the company’s financial position.

Question 21

share premium

Answer 21

extra amount paid above par
- in capital increases investors pay more than par because the company has grown in value
- actual (current) value of each share is higher than original legal value (par) -> new investors pay more -> extra amount (not par value) = share premium

Question 21

3 types of reserves

Answer 21

1. legal
2. statutory
3. voluntary

Question 22

why have reserves

Answer 22

force companies to keep some profits to stay financially safe

Question 23

retained earnings

Answer 23

all accumulated profits that the company has not distributed as dividends. this is the pool of profit before it is allocated as reserves or payed out

Question 24

RE equation

Answer 24

last years/opening retained earnings + this years profit (dividends, amounts transferred to reserves)

Question 25

how equity changes over time

Answer 25

1. incoporation 2. capital increases 3. profit distribution 4. capital reduction 5. non-cash share insurance

Question 26

incorportation

Answer 26

- owners invest/put in cash -> company issues shares - equity created = share capital

Question 27

capital increases

Answer 27

- company issues new shares to make money - equity rises = share capital + share premiums

Question 28

profit distribution (after year ends)

Answer 28

- profit can be kept (retained earnings / reserves) OR - profit can be paid out as dividends Order of priority for allocating profit: legal > statutory > dividends > reserves

Question 29

capital reduction

Answer 29

company reduces share capital

Question 30

non cash share insurance

Answer 30

shares issued for something other than cash (eg. assets, services)

Question 31

book vs. market value

Answer 31

book: based on historical cost accounting (value on balance sheet) market: reflects investor expectations, growth, etc.

Question 32

why equity matters for investors

Answer 32

- gives voting rights - gives claims on profit (dividends) - risk: can lose everything through bankruptcy

Question 33

why equity matters for company

Answer 33

- its permanent financing (no repayment obligation) - higher equity strengthens the balance sheet and reduces leverage (using debt to finance company)

Question 34

vertical analysis

Answer 34

each item is a percentage of the base figure in the same year

Question 35

VA Income Statement

Answer 35

base = sales (total income) ALWAYS DIVIDE BY TOTAL INCOME

Question 36

what is the VA useful for

Answer 36

marginal analysis (how much of a euro of sales becomes cost, profit, etc)

Question 37

VA balance sheet

Answer 37

base = total assets

Question 38

horizontal analysis

Answer 38

compares same item across different years, always relative to the base year

Question 39

index method horizontal analysis equation

Answer 39

(year x / base year) x 100

Question 40

what is HA useful for

Answer 40

useful because it shows growth trends, improvement and/or deterioration

Question 41

HA base year

Answer 41

100%

Question 42

cost definition

Answer 42

resources you give up (money) to achieve something (produce a product, provide a service)

Question 43

direct cost

Answer 43

you can trace it directly to a product

Question 44

indirect cost

Answer 44

needed for production but cannot be traced to a single product

Question 45

product cost

Answer 45

sum of costs related to manufacturing

Question 46

trade of product costs

Answer 46

go to inventory on BS -> when sold they become an expense

Question 47

period costs

Answer 47

costs not assigned to products but treated as a cost of the period in which they incurred

Question 48

variable costs

Answer 48

change with output

Question 49

fixed costs

Answer 49

remain constant regardless of output

Question 50

step-fixed costs

Answer 50

fixed up to a certain capacity, then jump

Question 51

semi-variable cost

Answer 51

fixed+variable (eg. phone call bill w/ fixed usage)

Question 52

Contribution margin equation

Answer 52

Unit Selling Price (USP) - Unit Variable Cost (UVC)

Question 53

Total CM

Answer 53

UCM x Q

Question 54

CM Ration (CM%)

Answer 54

UCM/USP

Question 55

Contribution margin definition

Answer 55

how much each unit contributes to covering fixed assets and generating profit

Question 56

Breakeven point definition

Answer 56

level at which company's total revenues equal its total costs. It shows the minimum amount of sales needed to cover all expenses.

Question 57

breakeven equation revenues

Answer 57

FC/CM%

Question 58

breakeven equaion units

Answer 58

FC/UCM

Question 59

what does higher UCM mean

Answer 59

breakeven happens earlier

Question 60

multiproduct CVP contribution margin

Answer 60

SUM of amount 1xUCM1+ amount2xUCM2...

Question 61

multiproduct breakeven

Answer 61

FC/CMmix

Question 62

step 4 multiproduct

Answer 62

multiply breakeven by Q of individual products to get breakeven unit for each product

Question 63

margin of safety definition

Answer 63

shows how much sales can fall before you start making a loss

Question 64

margin of safety equation units

Answer 64

expected sales - breakeven sales

Question 65

margin of safety percentage

Answer 65

expected sales - breakeven sales / expected sales

Question 66

Income Statement

Answer 66

SALES COGS (manufacturing costs) GROSS MARGIN NON-MANUFACTURING COSTS NET INCOME

Question 67

Discuss the difference between book value and market value.

Answer 67

Book value: The value of an asset according to the company’s accounting records. Book value ignores internally generated intangibles (brand, customer loyalty, patents, data). Market value: The value of an asset according to the current market price.