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Uses of Cash

Activities of a firm which require the spending of cash

Statement of Cash Flows

The sources and uses of cash over a stated period of time are reflected on the


Common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of

Common-base year statement

Standardizes items on the income statement and balance sheet relative to their values as of a common point in time

Financial ratios

Relationships determined from a firm's financial information and used for comparison purposes

Du Pont Identity

Formula which breaks down the return on equity into three component parts

Standard Industrial Classification

U.S. gov't coding system that classifies a firm by the nature of its business operations

Increase in accounts payable

Source of cash (Asset decreases, Liability increases)

Decrease in common stock

Use of cash (Asset increases, Liability decreases)

Acquisition of debt

Source of cash

Decrease in inventory

Source of cash

Source of cash

Increase in accounts payable, acquisition of debt, decrease in inventory

financing activities

Increase in long-term debt & dividends paid are _____ on the Statement of Cash Flows

operating activities

Cost of Good Sold, Decrease in accounts payable, Interest paid are _____ on the Statement of Cash Flows

Increase; Operating

According to the Statement of Cash Flows, a decrease in accounts receivable will ___ the cash flow from ___ activities

Decrease; Operating

According to the Statement of Cash Flows, an increase in interest expense will ___ the cash flow from ___ activities

Total assets for the current year

On a common-size balance sheet all accounts are expressed as a percentage of

base-year accounts receivable

On a common-base year financial statement, accounts receivable will be expressed relative to

Interval measure & quick ratio

Which ratios are measures of a firm's liquidity

Decrease in quick ratio

An increase in current liabilities will have which one of the following effects, all else held constant

Accounts receivable

An increase in which of the following will increase a firm's quick ratio without affecting its cash ratio


a supplier, who requires payment within ten days, should be most concerned with which ratio when granting credit?

cover operating costs for the next 48 days

Interval measure = 48. Firm has sufficient liquid assets to do which?

Inventory decreased

Over the past year, the quick ratio for a firm increased while the current ratio remained constant. Which must have occurred?

Long-Term Solvency

Ratios that measure a firm's financial leverage are known as ___ ratios


An increase in the depreciation expense will not affect the cash coverage ratio

payment of interest to a lender

The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its obligations?

Decrease in days' sales in inventory

Corner Hardware increased amt. of goods sold while maintaining inventory constant. Cost per unit & selling price per unit are constant. How is this reflected in financial ratios?


Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ____ ratios


If a firm produces a 12% return on assets and also a 12% return on equity, it has an equity multiplier of

Price-earnings ratio

Will decrease if a firm can decrease operating costs

today's cost to duplicate assets

Tobin's Q relates the market value of a firm's assets to which?

negative earnings

the price-sales ratio is especially useful when analyzing firms that have

return on equity and price earnings

Shareholders probably have the most interest in

equity multiplier, profit margin, total asset turnover

DuPont Identity

sales & net income

an increase in which will increase return on equity

return on equity

Return on assets x Equity multiplier and net income/total equity can be used to compute what?

DuPont Identity

How many sales dollars has the firm generated per each dollar of assets? How many dollars of assets has a firm acquired per each dollar in shareholder's equity? How much net profit is a firm generating per dollar of sales?

equity multiplier

$600 in debt for $1000 in equity. Uses cash to decrease debt while maintaining equity and net income. Which decreases?


Financial statements are frequently used as the basis for performance evaluations

uses the same accounting procedures as other firms in the industry

It is easier to evaluate a firm using financial statements when the firm

financial ratios to the firm's historical ratios

The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current

Problems when comparing separate financial statements

Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business. The operations of the two firms may vary geographically. The firms may use different accounting methods. The two firms may be seasonal in nature and have different fiscal year ends.

net present value

the difference between an investment's market value and its cost

discounted cash flow valuation

the process of valuing an investment by discounting its future cash flows

payback period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

discounted payback period

the length of time required for an investment's discounted cash flows to equal to its initial cost

average accounting return

an investment's average net income divided by its average book value

internal rate of return

the discount rate that makes the NPV of an investment zero

net present value profile

a graphical representation of the relationship between an investment's NPV and various discount rates

multiple rates of return

the possibility that more than one discount rate will make the NPV of an investment zero

mutually exclusive investment decision

a situation in which taking one investment prevents the taking of another

profitability index

the present value of an investment's future cash flows divided by its initial cost

profitability index

benefit-cost ratio


The NPV rule is to take a project if its NPV is ____


frequently estimated by calculating the present value of future cash flows (to estimate market value) and then subtracting the cost


has no serious flaws; preferred decision criterion


discounted cash flow return

required return

the IRR rule is to take a project when its IRR exceeds the ____

conventional, independent

IRR leads to exactly the same decisions as NPV for ___ projects


When project cash flows are not ___, there may be no IRR or there may be more than one

mutually exclusive

IRR cannot be used to rank ___ projects


The project with the highest IRR is not necessarily the ___ investment


Cash flows are modified by discounting the negative cash flows back to the present, compounding cash flows to the end of the project's life, or both


guaranteed to avoid the multiple rate of return problem

discounting or compounding

MIRRs are not truly "internal" because they depend on externally supplied __ rates


The PI rule is to take an investment if the index exceeds __


measures the present value of an investment per dollar invested


cannot be used to rank mutually exclusive projects


sometimes used to rank projects when a firm has more positive NPV investments than it can currently finance

internal rate of return

discount rate which causes the net present value of a project to equal zero

mutually exclusive

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery

increasing the project's initial cost at time zero

which will decrease the net present value of a project?

net present value

the best method of analyzing mutually exclusive projects

profitability index

provides the best information on the cost-benefit aspects

balance sheet

financial statement showing a firm's accounting value on a particular date

net working capital

current assets less current liabilities

generally accepted accounting principals

the common set of standards and procedures by which audited financial statements are prepared

income statement

financial statement summarizing a firm's performance over a period of time

noncash items

expenses charged against revenues that do not directly affect cash flow, such as depreciation

average tax rate

total taxes paid divided by total taxable income

marginal tax rate

amount of tax payable on the next dollar earned

cash flow from assets

the total of cash flow to creditors and cash flow to stockholders

cash flow from assets

consists of operating cash flow, capital spending, and change in net working capital

operating cash flow

cash generated from a firm's normal business activities

free cash flow

another name for cash flow from assets

cash flow to creditors

a firm's interest payments to creditors less net new borrowing

cash flow to stockholders

dividends paid out by a firm less net new equity raised

sources of cash

a firm's activities that generate cash

uses of cash

a firm's activities in which cash is spent

uses of cash

applications of cash

statement of cash flows

a firm's financial statement that summarizes its sources and uses of cash over a specified period

common-size statement

a standardized financial statement presenting all items in percentage terms

common-base year statement

a standardized financial statement presenting all items relative to a certain base year amount

financial ratios

relationships determined from a firm's financial information and used for comparison purposes

DuPont identity

popular expression breaking ROE into three parts : operating efficiency, asset use efficiency, and financial leverage

Standard Industrial Classification

A U.S. govt code used to classify a firm by its type of business operations

incremental cash flows

the difference between a firm's future cash flows with a project and those without the project

stand-alone principal

the assumption that evaluation of a project may be based on the project's incremental cash flows

sunk cost

a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision

opportunity cost

the most valuable alternative that is given up if a particular investment is undertaken


the cash flows of a new project that come at the expense of a firm's existing projects

pro forma financial statements

financial statements projecting future years' operations

accelerated cost recovery system

a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications

depreciation tax shield

the tax saving that results from the depreciation deduction

depreciation tax shield

depreciation multiplied by the corporate tax rate

equivalent annual cost

the present value of a project's costs calculated on an annual basis

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