AFM101 Chapter Notes - Chapter 10: Current Liability, Financial Statement, Remittance

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tanscorpion990

13 Sep 2015

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Donna Psutka

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AFM101 Full Course Notes

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Liabilities: debts or obligations arising from past transactions that will be paid with assets or services. When liabilities first recorded, measured in terms of current cash equivalent. Current liabilities: short-term obligations that will be paid within the normal operating cycle or year, whichever is longer. Ratio and comparisons: analysts use the current ratio as an indicator of the amount of current assets available to satisfy current liabilities. Current ratio = current assets / current liabilities. But to high means inefficient use of resources. If significant funds tied in assets may be misleading. With high current ratio may still have liquidity problems; can be manipulated by say paying creditors just before period end. Important because both managers and financial analysts assess health and profitability of company with this. Too little; unable to meet obligations with creditors. Too much; tie up in unproductive assets and incur additional costs (ie inventory) Credit purchases of goods and services to meet basic operation needs.

Related Questions

Here is your first question:

Explain what current assets and fixed assets are and give as many examples as you can for each. What is the difference between tangible and intangible assets?

Liabilities and owner's equity are listed on the right-hand side respectively. Liabilities are also classified as current liabilities and long-term liabilities.

Here is your second question:

Explain what current liabilities differ from long-term liabilities and give as many examples as you can for each.

Owner's equity (also known as shareholders' equity, common equity) is the difference between total value of assets and total value of liabilities. That is, if you were to use your assets to pay off the debts, whatever is left over (the residual) would belong to shareholders. That is why they are known as residual claimants. Hence we have the identity;

Assets = Liabilities + Shareholders' equity

Net working capital is simply equal to current assets minus current liabilities. When net working capital is positive, it means cash that will be available over the next 12 months exceeds what must be paid. It is important for a healthy firm to have positive net working capital.

Here is your third question:

A firm has current assets of $100, net fixed assets of $500, short-term debt of $70 and long-term debt of $200. What is shareholders' equity. Construct a balance sheet

for this company. Is net working capital positive or negative? If so by how much? (Hint: You may utilize Example 2.1 on page 24 of the textbook).

QUESTION 1

Determine the cost of sales for a firm with the following financial ratios and data:

Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times

	a.	$6,000,000
	b.	$3,000,000
	c.	$2,000,000
	d.	$1,000,000

8.3 points

QUESTION 2

What would be the times interest earned of a company, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.

	a.	2.65
	b.	2.1
	c.	1.1
	d.	1.2

8.3 points

QUESTION 3

A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?

	a.	$20,000
	b.	$ 5,000
	c.	$10,000
	d.	$15,000

8.3 points

QUESTION 4

If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must

	a.	increase its equity multiplier
	b.	increase sales and increase assets
	c.	decrease its equity multiplier
	d.	reduce sales and increase assets

8.3 points

QUESTION 5

The sales-to-inventory ratio:

	a.	is technically inferior to other commonly used ratios.
	b.	is superior to the inventory turnover ratio.
	c.	as a determination of financial performance, is good comparison tool.
	d.	was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole.

8.5 points

QUESTION 6

Primary sources of comparative financial data include

	a.	Dun and Bradstreet
	b.	Richard Moore, Inc.
	c.	Framingham Financial Library
	d.	New York Times

8.3 points

QUESTION 7

____ indicate the ability of the firm to meet its short-term financial obligations

	a.	Leverage ratios
	b.	Profitability ratios
	c.	Activity ratios
	d.	Liquidity ratios

8.3 points

QUESTION 8

If a firmâs common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:

	a.	on total assets as a percentage of long-term liabilities.
	b.	on cost of goods sold as a percentage of sales.
	c.	on taxes paid as a percentage of stockholdersâ equity.
	d.	on expenses as a percentage of current assets.

8.3 points

QUESTION 9

The ____ ratio indicates the percentage of a firm's earnings that are distributed as dividends.

	a.	payout
	b.	earnings
	c.	return on earnings
	d.	dividend yield

8.3 points

QUESTION 10

The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:

	a.	based on the company's accounting information system (AIS)
	b.	constructed in conformity with generally accepted accounting principles
	c.	developed using management's choice of accounting enhancement techniques
	d.	an accurate picture of the company's market position

8.3 points

QUESTION 11

The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.

	a.	liquidity
	b.	profitability
	c.	size
	d.	risk

8.3 points

QUESTION 12

The type of ratio that indicates the firmâs ability to provide adequate returns in the form of dividends and share price appreciation is:

	a.	Profitability ratios
	b.	Asset management ratios
	c.	Financial leverage management ratios
	d.	Liquidity ratios

8.5 points

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redant965

I am having a problem getting my memo right for this math done already class, I have the math done. Heres the directions and Ill post the memo outline they gave us and the math I have doneI have to tell them yes on the loan as you will see in my answer to Part 3

Precision company wishes to expand but needs a $300,000 loan. The bank requests that Precision prepare a balance sheet and key financial ratios. Precision has kept formal records and is able to provide financial statements as of December 31, 2017. The industry debt ratio averages 45.00%. The industry return on assets is 2.0%.

You represent Ideal Bank and will present your findings in a memo to report the ratios for Precision, and identify the conclusion of your opinion reached from your analysis of the companyâs financials. The memo is to be copied and distributed to the VP of Ideal Bank, so a well-written and detailed memo is crucial. Your memo will be crucial to bank leadersâ decision to lend Precision the $300,000.

Make sure you use complete sentences. Check your work for proper spelling, grammar and punctuation.

Part 1(a) - Return on Total assets

Return on Total Assets = (Earning Before Income And Taxes)/Total Assets*100

Total Assets = $1684000

Earning before Interest and Taxes = $185000

Return on Total Assets = ($185000/$1684000)*100 = 10.99%

Part 1(b) - Its Building Block is Profitability. Profitability ratios measure the how effectively company uses its assets in generating revenue. The ratio explain the relationship between income and Resources.

Company is generating more return on total assets than the industry average. Industry average is 2% and company's return on total assets is 10.99%

Also company is having the very high profit Margin, High Return on Equity. Hence overall Position regarding Profitability is Higher than Industry's average

Part 2(a) - Debt Ratio = Total Debts/Shareholders Equity

Total Debts = $400000

Shareholders Equity = $1019000

Debt Ratio = ($400000/$1019000)*100 = 39.25%

Part 2(b) - Its Building Block is Solvency. Solvency ratio determines the ability of company to meet the liabilities of long term debts. It analyses that whether company has sufficient cash flows to repay the long term debts.

Company debt ratio is 39% which is lesser than Industry Average ratio. It says that company better manages its long term debt financing. Lower debt equity ratio is better. And debt equity ratio of more than 50% is considered unhealthy. Hence company is very much performing better than its Industries sector.

Part 3- Yes, Company is highly able to get the loan of $300000. Company is performing better than Industry averages in terms of profitability and Solvency. Also Company has current ratio of more than 2.0 which says that company has high liquidity. Hence company is Growing in business and has strong financials better than industry average. Hence Company can get the loan of $300000 for expansion

Precision Company

Memorandum

To: Recipient Name

From: Your Name

CC: CC Name

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AFM101 Chapter Notes - Chapter 10: Current Liability, Financial Statement, Remittance

AFM101 Full Course Notes

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