FINN 3120 Ch.3

Which of the following statements concerning net income is MOST Correct?

Net Income represents income that may be reinvested in the firm or distributed to its owners.

PDQ Corp. has sales of $4,000,000: the firm's COGS is $2,500,000, and the tax rate is 40%. What is PDQ's net income?


Based on table 3-1, calcuolate the amount of dividends paid by Jones Company in 2010 (No assets were disposed of during the year, and there was no change in interest payable or taxes payable).


Based on the information in table 3-1, calculate the after tax cash flow from operations for 2008 (no assets were disposed of during the year, and there was no change in interest payable or taxes payable).


Cost of goods sold (COGS) Pg.52

The cost of producing or acquiring a product or service to be sold in the ordinary course of business.

Gross Profit Pg. 52

Sale or revenue minus the COGS

Operating Expenses Pg. 52

Marketing and selling expenses, general and administrative expenses, and depreciation expense.

Operating Income (EBIT)

Earnings Before Interest and Taxes. SALE-COGS-OPERATING EXPENSES.

Earnings before taxes Pg. 53

Operating Income - Interest Expense

Net Income

Net Profit, or earning available to common stockholders

Earnings Per Share (EPS) Pg. 54

Net Income on a per share basis.

Dividends Per Share Pg. 54

The amount of dividends a firm pays for each share outstanding.

Common-sized Income Statement Pg.55

An income statement in which a firm's expenses and profits are expressed as a percentage of its sales.

Profit Margins Pg.55

Financial Ratios that reflect the level of the firm's profits relative to its sales.

Gross Profit Margin Pg. 55

Gross Profit divided by net sales. It is a ratio denoting the gross profit earned by the firm as a percentage of its net sales.

Operating Profit Margin Pg. 55

Operating Income Divided by Sales. Serves as a measure of the company's operating effectiveness.

Net Profit Margin Pg. 55

Net Income Divided by Sales. A ratio that measures the net income of the firm as a percentage of sales.

Fixed Costs Pg. 55

Costs that remain constant, regardless of any change in a firm's activity.

Variable Costs Pg.55

Costs that change in the proportion to changes in the firm's activity.

Semi-variable Costs Pg.55

Costs composed of a mixture of fixed and variable components.

Balance Sheet Pg. 56

A statement that shows a firm's assets, liabilities, and shareholder equity at a given point in time. It is a snapshot of the firm's financial position on a particular date.

Accounting Book Value Pg.57

The value of an asset as shown on a balance sheet.

Liquidity Pg. 57

The ability to convert an asset into cash quickly without a significant loss of value.

Current Assets (gross working capital)

Current assets consist primarily of cash, marketable securities, accounts receivable, inventories and prepaid expenses.


Cash on hand, demand deposits, and short-term marketable securities that can quickly be converted into cash.

Accounts receivable

Money owed by customers who purchased goods or services by the firm on credit.


Raw materials, W-I-P, and finished goods held for by the firm for eventual sale.

Fixed Assets

Equipment, buildings, and land.

Depreciation Expense

A non-cash expense to allocate the cost of depreciable assets, such as plant and equipment over the life of the asset.

Gross Fixed Assets

The original cost of a firm's assets.


Stockholders' investment in the firm and cumulative profits retained in the business up to the date of the balance sheet.


Debt to be paid within 12 months.

Par Value

The arbitrary value a firm puts on each share of stock prior to it being offered for sale.

Paid-in capital

The amount a company receives above par value from selling stock to investors.

Retained Earnings

Cumulative profits retained in a business up to the date of the balance sheet.

Debt Ratio

A firm's total liabilities divided by its total assets. Measure how much of the firm that has been financed by debt.

Net Working Capital Pg.62

The difference between current assets of the firm and the current liabilities. Net Working Capital

Total Assets=

Total Liabilities(Debt) + total shareholder's equity

Ending retained earnings=

Begin Retained Earnings + Net income for the Year - Dividends Paid for the Year

Net Working Capital=

Current Assets - Current Liabilities

Taxable Income

Income from all sources, except for allowable exclusions, less any tax-deductible expenses.