Finance 338 Time spent : 2 hours

Jonathan Wiley Name: Daniel Gabriel - Emmanuel

[email protected] Date : 09/07/2020

Homework project A-2

Pre-question: in the space below, write down the third and fourth commandments given in the Ten
Commandments (Ex.20:2-17; Deut. 5:6-21). The short versions are fine.

a. You shall not take the name of the Lord thy God in vain
b. Remember the Sabbath day and keep it holy.

Questions (worth 5 raw points per numerical question, and show your work):

1.

A. list the four major financial statements

Statements of retained earnings

Income statements

Balance sheet

Statement of cash flows

B. Explain the relationship of the balance sheet and income statement with respect to time

The income statement tells us what happened over a certain time period and it is subject to change at

the end of accounting period. However, the balance sheet is practically a snapshot of a company and the

balance sheet is not subject to change.

C. Are the income statement and the cash flow statement related?

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Yes, the income statement and cash flow statement are related. The revenues and expenditures the

corporation incurs are normally paid in off cash, except in the cases of credit sales or purchases and as a

result this affects cash flow.

D. Should net income and cash flow be correlated?

Yes, they should be correlated

E. What might an absence of correlation between net income and cash flow?

An absence of correlation might indicate that cash from unearned revenue has yet to be received. It may

indicate that a corporation is struggling to collect debts and therefore the net income may show that the

figures different to what they essentially have in cash flows.

F. Is there anything that could make net income and cash flow different?

Expenses that may not involve cash such as: non-cash revenues and expenses, the depreciation on

amortization may lead to a difference in net income and cash flow

G. What is a simple formula for approximating cash flow starting with net income?

Cash flows = net income + depreciation + amortization

H. Is net income the same as cash flow?

No, it is not the same

2.

A. What is EBIT?

It is Earnings Before Interest and Taxes

B. What is it intended to represent?

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It is intended to represent a company’s sustainability from the income that is made from their everyday

operations and activities and their ability to make profit. It is compared it with their competitors

C. What is another name for it?

Another name is operating income

3.

A. What does NOPAT (net operating profit after tax) represent?

NOPAT is a precise insight into a company’s operating efficiency. It is also used to make a calculation of a

corporation’s earnings without debt.

B. What is it used to accomplish? In other words, how is it helpful?

NOPAT is used to make comparisons between companies

C. How may it be calculated using EBIT?

NOPAT = EBIT * (1-Tax Rate)

4.

A. What are the four main types.

Liquidity Ratio

Debt Management Ratio

Asset Management Ratio

Profitability Ratio

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B. Describe the importance of each the four main types

Liquidity Ratio – It allows a company to assess the true value of all its assets and to discover how quickly

it can be liquidated.

Debt management ratio – this allows a company to know if they are financing their assets with realistic

debt. It is also used to show the company’s ability to pay off their liabilities and debts

Asset management ratio – this shows how effective a company is with collecting their receivables and

the speed with which the inventory is turned over. It shows whether the company is using their assets

effectively to generate sales

Profitability ratio – determines the precise percentage of net income that was produced from total

assets, sales and equity. This calculates the ability to produce and generate earnings that are relative to

expenses

C. Give the formulas for two ratios from each of the four main types of ratios.

Liquidity Ratio:

Current ratio = Current Assets/Current Liabilities

Quick ratio = (Current Assets – Inventories)/ Current Liabilities

Debt Management Ratio:

debt ratio = total debt/total assets

debt to equity ratio = total debt/total equity

Asset Management Ratio:

Inventory turnover ratio = COGS/inventory

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Day Sales Outstanding = Receivables/Average Sales per day

Profitability Ratio:

Profit Margin on Sales = Net Income/Sales

Return on Total Assets (ROA) = Net Income/Total Assets

D. How do investors use financial ratios?

Investors do use financial ratios in order to find out the financial health of the company and to decide if

it will be a good decision to invest or to not invest.

E. How do managers use financial ratios?

Managers use financial ratios to indicate whether or not the company is progressing well or not and to

use the information to ensure that the necessary adjustments are made for the company.

F. What is the common factor in the asset management ratios emphasized in class?

Sales

G. What is the common factor in the major profitability ratios emphasized in class?

Net Income

5. What is an authoritative and reputable source for financial data filed with the U.S Government?

The Securities and Exchange Commission (SEC)

6.

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A. What is book value (as commonly used in finance)?

Total Common Equity/Number of Common Shares Outstanding

B. Is it the same as market value? If yes, why? If no, why not?

No, it is not the same as market value due to market value being the amount of money which something

can be sold for on a market. Also, market value is its last reported sale price, asking price and its current

bid

C. What is the DuPont equation for ROA? Include equations for the underlying ratios.

ROA = (profit margin) * (total asset turnover)

D. What is the DuPont equation for ROE? Include equations for the underlying ratios

ROE = (profit margin) * (total asset turnover) *(equity multiplier)

= ROA * (equity multiplier)

= ROA * (1/[1-Debt Ratio)

F. What is the reason for breaking ROA and ROE into their component parts?

This helps to identify the specific variables that cause the ratios to fluctuate often, breaking ROA and

ROE companies can analyze the profit margin, use of debt to determine ratios and the total asset

turnover.

G. Why do mangers and investors conduct trend analyses?

This shows the company’s financial ratios and their stability over a period and it is used to estimate the

probability of the financial condition of the firm improving or weakening and to decide what

investments are good for the company’s future.

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1. I hereby certify that all work contained in this homework assignment is exclusively my own. I have

abided by all aspects of the Honor Code during the preparation of this assignment, and I pledge to

uphold the Honor Code by continuing to personally abide by it and by reporting all violations that I

observe. I recognize that copying that copying another student’s work is plagiarism and an Honor

Code violation. Furthermore, I realize that although consulting other students as I complete this

assignment is permissible, ultimately the work that I submit must be exclusively my own.

Signature: Daniel Gabriel-Emmanuel

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