Ratios

Question 1

Ratios - Liquidity

Answer 1

Ability to Pay short term obligations when due

Question 2

Ratio - current Ratio aka Working Capital
A measure of liquidity

Answer 2

How much do current assets exceed current liabilities

Current assets / current liabilities
Current assets=cash,A/R, inventory
This may be used to see if you meet your debt covenants

Question 3

Ratio analysis allows for comparing two companies using different currency

Answer 3

True

Question 4

Ratios - Liquidity
Quick ratio aka Acid Test ratio
Quick ratio will normally be lower than the current ratio because the current ratio includes more assets-excludes inventory

Answer 4

Uses ONLY most (Highly) liquid assets

Cash and cash equivalents
Plus short term marketable securities
Plus receivables (net)

Divided by current liabilities

Question 5

Operation and Efficiency ratios measure

Answer 5

Inventory turnover
Receivables turnover

Question 6

Profitability ratios measuring

Answer 6

Always have net income in the numerator… denominators have balance sheet account

Question 7

Ratios numerator goes up then the ratio goes

Answer 7

UP
and Vice versa is true- numerator goes down and ratio goes down

Current and quick- you want to have a higher numerator

Question 8

Common size balance sheet or income statement

Answer 8

Used to compare two companies of very different sizes
Example: putting 2 company balance sheets side by side
Divide cash by total assets to get the percentage cash for each company

Question 9

Current and quick rations:
If a denominator goes down

Answer 9

Then the ratio gets better
(Liabilities are lowering)

Question 10

Ratio Liquidity
Times Interest Earned Ratio

Answer 10

Ability to meet current interest expense
Net income (before taxes) plus Interest Expense / Interest Expense
***the numerator is EBIT

*if net income is given after tax then add tax expense back and then add interest expenses we back to get the numerator

Question 11

EBIT

Answer 11

Income from operations
…. Before interest and Taxes

Question 12

Inventory turnover

Answer 12

1. Calculate average inventory
   Beginning plus ending / 2
2. Inventory turnover ratio
   Cost of goods sold / avg inventory

Higher number is better

Question 13

Inventory Conversion (days in inventory)

Answer 13

Ending inventory/ cost of goods sold/ 365 (days)
1. Divide cost of goods by 365 first
2. Divide ending inventory by 365

Lower number is better because inventory is converted quickly

Question 14

Accounts Receivable Turnover

Answer 14

Net credit sales / average receivables

To get avg receivables- take beginning plus ending (subtract and allowance for doubtful accounts from each) and divide by 2

Higher number is better! You will collect quickly

Question 15

Days Sales in Receivables … average collection period

Answer 15

Ending AR /. Sales / 365

Lower is better because receivables are converted quickly to cash

Question 16

Operating cycle

Answer 16

The operating cycle is the period it takes to convert inventory to sales (receivables) and those same receivables into cash

Take receivables collection period (lower is better) and add inventory conversion period (lower is better)

Number of days to sell plus number of days to collect

Question 17

Cash conversion cycle aka
Net Operating Cycle

Answer 17

How many days does it take to pay the vendor (higher is better)

Days sales in AR plus Days in Inventory minus Days of payables outstanding

Question 18

Accounts payable turnover

Answer 18

Cost of goods sold / average accounts payable

Lower is better

Question 19

Accounts payable deferral period

Answer 19

Ending A/P. / COGS/365
(Higher is better)

Question 20

Transaction affect on ratios
If the numerator and denominator increase equally will the ratio stay the same

Answer 20

It depends:
If the starting ratio is above 1 (example 2:1) then the final ratio in this situation would be a decrease

If the start is less than 1 then it will be an increase

Question 21

Transaction effects on ratios
How to calculate

Answer 21

Adjust the ratios by simply adding one to the numerator or denominator accordingly or an amount less than that is the starting numerator is less than 1 (example adjusting top and bottom by .2)

Question 22

Total asset turnover

Answer 22

Net sales / average total assets

Question 23

Working capital turnover

Answer 23

1. Calculate avg working capital
   Working capital (assets minus liabilities) for each year added together and divide by 2
2. Net sales / Average working capital

Question 24

Special note: Inventory ratios use

Answer 24

Cost of goods sold, not sales

Question 25

Net profit margin

Answer 25

Net income after income taxes /
Sales

Question 26

Return on Assets ratio

Answer 26

Net income / average total assets

Question 27

Basic earnings per share

Answer 27

Income available to common shareholders divided by
Weighted average of common shares outstanding

Question 28

Price earnings ratio

Answer 28

Price per share divided by
Basic earnings per share

Question 29

Dividend payout

Answer 29

Cash dividends divided by
Net income

Question 30

Debt to equity

Answer 30

Total liabilities divided by
Total equity

Question 31

Total debt ratio

Answer 31

Total liabilities divided by
Total assets