Summary Chapter 12 Determining the Financial Mix

Also another risk factor that will increase the company’s inherent audit risk is the situation of its cash flow. If a retail company has a negative cash flow which means it not generating enough cash to maintain its operations, the risk of misstatement will accordingly increase. As stated in Q1, auditors should spend more efforts on examine the cash accounts if the cash flow of the company shows some abnormal signals.

Financial Management: “The process for and the analysis of making financial decisions in the business context.” (Cornett, Adair, & Nofsinger, 2016, p. 5).

Classify each of the items as an asset, liability; revenue; or expense from the company's viewpoint. Also indicate the normal account balance of each item.

* A balance sheet is snapshot of the financials for that organization (with assets on the left and liabilities on the right side) for that particular date that was requested

| |financial statements related to cash and cash equivalents, receivables, and inventories. | | |

Managers use the degree of operating leverage to gauge the risk associated with their cost function and to explicitly calculate the sensitivity of profits to changes in sales. Managers need to consider the degree of operating leverage when they decide whether to incur additional fixed

However, two known authors in this field of study believe that companies with low business risk obtains factors of production at a lower cost which may also pave to the ability of the firm to operate more efficiently (Amit & Wernerfet, 1990). Therefore, many stockholders faced a high of uncertainty; this is because some companies do not have the financial strengths to cover its debts that even may result to bankruptcy.

b. The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The quantitative approach described in the definitions of the terms expected losses, expected residual returns, and expected variability is not required and shall not be the sole determinant as to whether a reporting entity has these obligations or rights.”

Financial flexibility (Solvency and leverage) is a company’s ability to adapt to unforeseen events and opportunities. Leverage means using debt (or other third party funds) to increase earnings for the owners. Table 3 presents some financial flexibility and leverage ratios of Amazon.com from 2005 to 2009 and for Ebay from 2008 to 2009. Amazon.com is a fast growing company and in the fiscal year ended 2004, they had a negative total equity, which could skew the ratios. Therefore, we did not present the ratios in 2004.

A combination of business risk and financial risk shows the risk of an organization’s future return on equity. Business risk is related to make a firm’s operation without any debt whereas financial risk requires that the firm’s common stockholders make a decision to finance it with debt. Business risk can be evaluated volatility in earnings and profits (coefficient of variation of returns on assets and of operating profits). A measure of business risk is also asset beta or unlevered beta. In case of AHP, it is 1.2 (βa) which is very low signifying low business risk for the firm.

1. The cause to the conflict in the rankings is that while the IRR ranking shows a percentage so that you can see what percentage you are making on certain amount, it does not show the size of the project.

The last one is the Balance Sheet which tells a person the lists of assets he has, the list of

Also, the stock market tends to react negatively to announcements of new common stock offerings, whereas debt security announcement tend to have little impact on stock prices. As a additional external financing is needed, the firm will work down the pecking order – from safe to more risky debt, then possibly to convertible debt, and finally to common equity as a last resort.

In above case there might be companies that are healthy and many go through period of financial distress. In particular is the threat of not being able to meet debt obligations.

West Company's cost structure will include a larger proportion of variable costs than East Company's cost structure. A firm's operating leverage factor, at a particular sales volume, is defined as its total contribution margin divided by its net income. Since East Company has proportionately higher fixed costs, it will have a proportionately higher total contribution margin. Therefore, East Company's operating leverage factor will be higher.