Part 3 Ch 11

Part 3 Ch 11 - CHAPTER 11 ANSWERS 11-1 The four financial...

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Unformatted text preview: CHAPTER 11 ANSWERS 11-1 The four financial statements contained in most annual reports are the balance sheet, income statement, statement of retained earnings, and statement of cash flows. 11-2 No, because the $20 million of retained earnings probably would not be held as cash. The retained earnings figure represents the reinvestment of earnings by the firm. Consequently, the $20 million would be an investment in all of the assets of the firm. 11-3 Liquidating assets, borrowing more funds, and issuing stock would constitute sources of funds. Purchasing assets, paying off debt, and stock repurchases would constitute uses of funds. Thus, the following general rules can be used to determine what changes in balance sheet accounts represent sources and uses if funds: Sources of cash: Uses of Cash: ↑ in a liability or equity account ↓ in a liability of equity account ↓ in an asset account ↑ in an asset account 11-4 The emphasis of the various types of analysts is by no means uniform, nor should it be. Management is interested in all types of ratios for two reasons. First, the ratios point out weaknesses that should be strengthened; second, management recognizes that the other parties are interested in all the ratios and that financial appearances must be kept up if the firm is to be regarded highly by creditors and equity investors. Equity investors are interested primarily in profitability, but they examine the other ratios to get information on the riskiness of equity commitments. Long-term creditors are more interested in the debt ratio, TIE, and fixed charge coverage ratios, as well as the profitability ratios. Short-term creditors emphasize liquidity and look most carefully at the liquidity ratios. 11-5 The most important aspect of ratio analysis is the judgment used when interpreting the results to reach an overall conclusion concerning a firm’s financial position. The analyst should be aware of, and include in the interpretation, the fact that: (1) large firms with many different divisions are difficult to categorize in a single industry; (2) financial statements are reported at historical costs; (3) seasonal factors can distort the ratios; (4) some firms try to “window dress” their financial statements to look good; (5) firms use different accounting procedures to compute inventory values, depreciation, and so on; (6) there might not exist a single value that can be used for comparing firms’ ratios (e.g., a current ratio of 2.0 might not be good); and (7) conclusions concerning the overall financial position of a firm should a representative number of ratios, not a single ratio. 11-6 Differences in the amounts of assets necessary to generate a dollar of sales cause asset turnover ratios to vary among industries. For example, a steel company needs a greater number of dollars in assets to produce a dollar in sales than does a grocery store chain such as Safeway. Also, profit margins and turnover ratios might vary due to differences in the as Safeway....
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This note was uploaded on 03/31/2012 for the course BUS 200 taught by Professor Bens during the Spring '12 term at FIU.

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Part 3 Ch 11 - CHAPTER 11 ANSWERS 11-1 The four financial...

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