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Questions and Answers

What are the components of cash flows from operations according to the direct method?

Cash receipts from customers, Cash disbursements to suppliers, Cash disbursements on operating expenses (correct)

Cash receipts from customers, Sales of current period, Cash disbursements to tax authority

Accounts receivable, Accounts payable, Prepaid expenses

Net income, Depreciation, Changes in working capital

How is the direct cash collection from customers calculated using the direct method?

Sales of current period + beginning period Accounts Receivable - end of period Accounts Receivable (correct)

Purchases + beginning period Accounts Payable - end of period Accounts Payable

General expenses - beginning period Prepaid Expenses + beginning period Expenses Payable - ending Prepaid Expenses

Net income - Depreciation - Changes in working capital

What is included in the cash disbursements to suppliers using the direct method?

Net income - Depreciation - Changes in working capital

Property Taxes + beginning period Property Taxes Payable - end of period Property Taxes Payable

General expenses - beginning period Prepaid Expenses + beginning period Expenses Payable - ending Prepaid Expenses

Purchases + beginning period Accounts Payable - end of period Accounts Payable (correct)

What is the formula for cash disbursements on operating expenses using the direct method?

General expenses - beginning period Prepaid Expenses + beginning period Expenses Payable - ending Prepaid Expenses Signup and view all the answers

What is the correct formula for calculating cash disbursements to the tax authority using the direct method?

Property Taxes + beginning period Property Taxes Payable - end of period Property Taxes Payable Signup and view all the answers

What are the components of cash receipts from customers using the direct method?

Sales of current period + beginning period Accounts Receivable - end of period Accounts Receivable Signup and view all the answers

What is the correct formula for cash disbursements on operating expenses using the direct method?

General expenses - beginning period Prepaid Expenses + beginning period Expenses Payable - ending Prepaid Expenses Signup and view all the answers

What do common-size financial statements report?

Only percentages Signup and view all the answers

What does benchmarking involve?

Comparing a company to a standard set by others for improvement Signup and view all the answers

What do efficiency ratios, such as inventory turnover, measure?

Ability to collect cash and sell inventory Signup and view all the answers

What does the accounts payable turnover measure?

How quickly a business pays its suppliers Signup and view all the answers

What does the asset turnover ratio assess?

The amount of resources used to generate sales or revenue Signup and view all the answers

What does the cash conversion cycle combine?

Inventory resident period, receivable collection period, and payable collection period Signup and view all the answers

What does the inventory turnover measure?

Number of times a company sells its average level of inventory during a year Signup and view all the answers

What does horizontal analysis involve?

Studying percentage changes from year to year in financial statements Signup and view all the answers

What is the purpose of horizontal analysis for investors?

Assess potential future impacts on operations Signup and view all the answers

How are trend percentages computed in trend analysis?

By selecting a base year with amounts set at 100% Signup and view all the answers

What does vertical analysis show the relationship of financial-statement items relative to?

A total, which is the 100% figure Signup and view all the answers

What do changes in Balance Sheet accounts enhance understanding of?

An entity's financial position Signup and view all the answers

What is the purpose of trend analysis using Income Statement data?

Predicting the future Signup and view all the answers

What is trend analysis a form of?

Horizontal analysis Signup and view all the answers

What does the current ratio measure?

Ability to pay current liabilities with current assets Signup and view all the answers

What does the quick ratio assess?

Business's ability to pay all its current liabilities if they were due immediately Signup and view all the answers

What does the debt ratio indicate?

Proportion of assets financed with debt Signup and view all the answers

What does the times-interest-earned ratio measure?

Number of times operating income can cover interest expense Signup and view all the answers

What does return on total assets (ROA) measure?

Company's success in using assets to earn a profit Signup and view all the answers

What does return on equity (ROE) show?

Relationship between net income and ordinary shareholders' investment Signup and view all the answers

What does earnings per ordinary share (EPS) show?

Amount of net income earned for each outstanding ordinary share Signup and view all the answers

What does price/earnings ratio (P/E) indicate?

How much an investor is willing to pay for each unit of earnings Signup and view all the answers

What does dividend yield measure?

Percentage of a share's market value returned annually to shareholders as dividends Signup and view all the answers

Study Notes

Financial Statement Analysis and Managerial Accounting

Financial strength ratios assess an entity's ability to meet financial obligations, including liquidity ratios for short-term obligations and solvency ratios for long-term obligations.
The current ratio measures the ability to pay current liabilities with current assets and a higher ratio indicates a stronger financial position.
The quick ratio, or acid-test ratio, assesses a business's ability to pay all its current liabilities if they were due immediately, with a ratio of 0.90 to 1.00 generally considered acceptable in most industries.
The debt ratio indicates the proportion of assets financed with debt, with higher ratios leading to greater pressure to pay interest and principal.
The times-interest-earned ratio, or interest coverage ratio, measures the number of times operating income can cover interest expense, with a high ratio indicating ease in paying interest.
Profitability ratios, such as gross profit margin, operating profit margin, and net profit margin, show the percentage of each sales dollar earned as gross, operating, and net profit.
Return on total assets (ROA) measures a company's success in using assets to earn a profit, with the numerator being the net profit and the denominator being the average total assets.
Return on equity (ROE) shows the relationship between net income and ordinary shareholders' investment in the company, indicating how much income is earned for every $1 invested by the ordinary equity shareholders.
Earnings per ordinary share (EPS) shows the amount of net income earned for each outstanding ordinary share and is computed by dividing net income available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the year.
Price/earnings ratio (P/E) indicates how much an investor is willing to pay for each unit of earnings and is widely quoted in financial sections of newspapers and online financial databases.
Dividend yield measures the percentage of a share's market value returned annually to shareholders as dividends.
Book value per ordinary share indicates the recorded accounting amount for each share of ordinary shares, calculated as ordinary shareholders’ equity divided by the number of ordinary shares outstanding.

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Description

Test your knowledge of financial statement analysis and managerial accounting with this quiz. Explore key ratios and metrics used to assess a company's financial strength, profitability, and investor appeal. Gain a deeper understanding of liquidity ratios, solvency ratios, profitability ratios, and stock valuation metrics.