5 Accounting principles: The Assumption of Arm’s Length Transaction:Two parties involved in an economic transaction arrive at a decision independently and

rationally.The
Cost Principle: Transactions are recorded at the cost at which they occurred. The Realization Principle: Revenue is recognized when transaction is completed, while cash may
not be collected until a later time. The Matching Principle: Revenues are matched with the expenses used to generate the revenue. The Going Concern Assumption: It is
assumed that a company will continue to operate for the predictable future

EQUATIONS
Net working capital example - Diaz Manufacturing Common Equity: Common equity represents the true ownership of the firm
Total current assets = $1,039.8 million Preferred Equity: Has features that make it a combination of a fixed income security and an equity security
Total current liabilities = $377.8 million
Net working capital = Total current assets - Total current liabilities
= $1,039.8 million - $377.8 million
= $ 662.0 million

Net Income example

Revenues = $1,563.7 million
Expenses = $1,445.2 million
Net Income = Revenues – Expenses
= $1,563.7 million - $1,445.2 million
= $ 118.5 million

NCFOA example – Diaz Manufacturing

Net Income = $118.5 million
Depreciation and Amortization = $83.1 million
NCFOA = Net Income + Depreciation and Amortization
= $118.5 million + $83.1 million
= $201.6 million

Ellicott Testing Company produced revenues of $745,000 in 2008. It has expenses (excluding depreciation) of $312,640, depreciation of $65,000, and interest expense of $41,823.
It pays a marginal tax rate of 34 percent. What is the firm’s net income after taxes?
Revenues 745,000
Costs 312,640
EBITDA 432,360
Deprec. 65,000
EBIT 367,360
Inter. 41,823
EBT 325,537
Tax(35%) 110,682.58
NI 214,854.42

Tejada Enterprises reported an EBITDA of $7,300,125 and $3,328,950 of net income for the fiscal year ended September 30, 2008. The company has $1,155,378 interest expense, and
the corporate tax rate is 35 percent. What was the company’s depreciation and amortization expense?
\EBITDA 7,300,125
Deprec. 1,023,285 (EBITA - EBIT)
EBIT $6,276,840 (I+EBT)
Inter. 1,155,378
EBT $5,121,462 (3328950/.65)
Tax(35%) 1,792,512 (EBT-NI
NI 3,328,950

In the year ended June 30, 2008, Tri King Company increased its investment in marketable securities by $234,375, funded fixed assets acquisition by $1,324,766, and sold $77,215
of long-term debt. In addition, the firm had a net inflow of $365,778 from selling certain assets. What is the net cash used in investing activities?
Net prop, equi, & other assests $(1,324,766) (long term investing activities)
Net acquisisiiton and dispositions365,778
Investemenst in marketable securities (311,590)
Net cash used in investing activities $(1,270,578)

Triumph Soccer Club has the following cash flows during this year. It repaid existing debt of $875,430, while raising additional debt capital of $1,213,455. It also repurchased
stock in the open markets for a total of $71,112. What is the net cash provided by financing activities?
Loan payment $(875,403) (Financing activities)
Inc. in long term debt 1,213,455
Purchase of treasury stock 71,112
Net cash provided by financing activities $409,137

Current Ratio= Current Ass/Cur liabi Quick Ratio= current ass-inv/current liabi Int. Turnover ratio= Cost of goods sold/inv Days’ sales inv=365 days/inv. Turnover

A/R turnover= net sales/A. R Days Sales outs (DSO)= 365/A.R. turnover Total Ass Turnover=Net sales/Total assets Fixed Ass Turnov=net sales/net fixed ass Tot. Dbt
Ratio=total debt/total ass

Debt-to-equity ratio=total debt/total equity Equity multiplier =total ass/total equity Times int. earned=EBIT/int. exp Cash coverage= EBITDA/INT. EXP Gross pro
mar=net sales- cgs/ net sales

Operating p. marg= EBIT/net sales Net profit margin = net income/net sales EROA=EBIT/TOTAL ASS OR net income/total ass ROE= NI/total equity Earnings
p/share=NI/shares outstanding

Price earnings ratio= price p. share/ earnings p. share

Morgan Sports Equipment Company has accounts payable of $1,221,669, cash of $677,423, inventory of $2,312,478, accounts receivable of $845,113, and net working capital of
$2,297,945. What are the company’s current ratio and quick ratio?

Current assets = $677,423 + $2,312,478 + $845,113 = $3,835,014 Current ratio = C.A/C.L =3835014/1537069= 2.5
Net working capital= Current assets – Current liabilities
Current liabilities = Current assets – Net working capital Quick Ratio= C.A – Inventory/C.L = 3835014-2312478/1537069=0.99
= $3,835,014 – $2,297,945 = $1,537,069

Southwest Airlines, Inc., has total operating revenues of $6.53 million on total assets of $11.337 million. Their property, plant, and equipment, including their ground equipment

and other assets, are listed at a historical cost of $11.921 million, while the accumulated depreciation and amortization amount to $3.198 million. What are the airline’s total asset

turnover and fixed asset turnover ratios?

Total assets = $11,337,000 Total ass turnover ratio = sales/ total ass = 6,530,000/11,337,000 = 0.58
Fixed assets = $11,921,000
Accumulated depreciation = $3,198,000
Net fixed assets = $11,921,000 – $3,198,000 = $8,723,000 Fixed assets turnover ratio= sales/ fixed assets= 6,530,000/8,723,000 = 0.75 times
Sales or operating revenues = $6,530,000

Haugen Enterprises has an equity multiplier of 2.5. What is the firm’s debt ratio?

Total assets 1
Equity Multiplier = =
Equity Equity / Total assets
1
2.5 =
1 − Debt/Total assets
1
1 − Debt ratio = = 0.4
2 .5
Debt ratio = 1 - 0.4 = 0.60 = 60%

Centennial Chemical Corp. has a gross profit margin of 31.4 percent on revenues of $13,144,680 and EBIT of $2,586,150. What are the company’s cost of goods sold and

operating profit margin?

Revenues = $13,144,680 GPM= Operating P. Margin= 2586150/13144680= 19.7%

EBIT = $2,586,150 0.314=13,144,680-CGS/13144680 = 9,017,250.48
Gross profit margin = 31.4%

National City Bank has 646,749,650 shares of common stock outstanding, and they are currently priced at $37.55. If its net income is $2,780,955,000, what are its earnings per
share and price-earnings ratio?
Net income
Earnings per share =
Shares outstandin g
$2,780 ,955 ,000
= = $4.30
646 ,749 ,650

Share price
Price - earnings ratio =
EPS
$37 .55
= = 8.73 times
$4.30

What is the future value of an investment of $3,000 for three years compounded at the following rates and frequencies? 8.5% compounded continuously.
FV 3 = PV ×e in =$3,000 ×e 0.085 ×3
=$3,000 ×1.29046 =$3,871.38
Twenty-five years ago, Amanda Cortez invested $10,000 in an account paying an annual interest rate of 5.75 percent. What is the value of the investment today? What is the
interest-on-interest earned on this investment?

Compound interest on investment = $40,458.46 - $10,000 = $30,458.46

Simple interest on investment = $10,000 x 0.0575 x 25 = $14,375.00
Interest-on-interest = $30,458.46 – $14,375.00 = $16, 083.46

5.5 You just bought a corporate bond at $863.75 today. In five years the bond will mature and you

will receive $1,000. What is the rate of return on this bond?

Solution:

0 5 years

├────────────────────┤

PV = $863.75 FV = $1,000

Amount to be borrowed = PV = $863.75

Amount to be paid back after 5 years = FV5 = $1,000

Years to maturity = n = 5 years.

Interest rate on investment = i

Present value of investment = PV

FVn
PV =
(1 + i ) n
$1,000
$863.75 =
(1 + i ) 5
$1,000
(1 + i ) 5 = = 1.1577
$863.75
i = (1.1577)1 5 − 1
i = 2.97%

The rate of return on this bond is 2.97 percent