Exam 2: Analysis of Financial Statements

The annual report contains all of the following financial statements except

The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent.What is the firm's times-interest-earned ratio?

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

An increase in an asset account is a source of cash, whereas an increase in a liability account is a use of cash.

A firm has a profit margin of 15 percent on sales of $20,000,000.If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?

A firm's current ratio has steadily increased over the past 5 years, from 1.9 five years ago to 3.8 today.What would a financial analyst be most justified in concluding?

Aurillo Equipment Company (AEC) projected that its ROE for next year would be just 6%.However, the financial staff has determined that the firm can increase its ROE by refinancing some high interest bonds currently outstanding.The firm's total debt will remain at $200,000 and the debt ratio will hold constant at 80%, but the interest rate on the refinanced debt will be 10%.The rate on the old debt is 14%.Refinancing will not affect sales which are projected to be $300,000.EBIT will be 11% of sales, and the firm's tax rate is 40%.If AEC refinances its high interest bonds, what will be its projected new ROE?

Selling new stock is an equity transaction; it does not affect any asset or liability account and therefore, does not appear on the statement of cash flows.

If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will decrease.

Funds supplied by common stockholders mainly includes capital stock, paid-in capital, and retained earnings, while total equity is comprised of common equity plus preferred stock.

On the balance sheet, total assets must equal total liabilities plus stockholders equity.

The Charleston Company is a relatively small, privately owned firm.Last year the company had after-tax income of $15,000 and 10,000 shares were outstanding.The owners were trying to determine the market value for the stock, prior to taking the company public.A similar firm which is publicly traded had a price/earnings ratio of 5.0.Using only the information given, estimate the market value of one share of Charleston's stock.

Depreciation, as shown on the income statement, is regarded as a use of cash because it is an expense.

Which of the following statements shows the portion of the firm's earnings that has been saved rather than paid out as dividends?

One would calculate changes in balance sheet accounts for

Suppose two firms with the same amount of assets pay the same interest rate on their debt and earn the same rate of return on their assets, and that ROA is positive.However, one firm has a higher debt ratio.Under these conditions, the firm with the higher debt ratio will also have a higher rate of return on common equity.

Current cash flow from existing assets is highly relevant to the investor.However, the value of the firm depends primarily upon its growth opportunities.As a result, profit projections from those opportunities are the only relevant future flows with which investors are concerned.

One of the biggest noncash items on the income statement is depreciation which needs to be subtracted from net income to determine cash flows for the firm.

Which of the following groups probably would not be interested in the financial statement analysis of a firm?