Unit 4

Question 1

Comparing a firm’s ratios across time

Answer 1

Trend Analysis

Question 2

Comparing a firm’s financial ratios to other firms’ ratios or industry averages.

Answer 2

Cross-sectional Analysis

Question 3

Firms whose performance varies according to the season

Answer 3

Seasonal Firms

Question 4

A category of ratios that measure a firm’s ability to meet short-term obligations

Answer 4

Liquidity Ratios

Question 5

A category of ratios that measure how well a company uses its assets to generate sales or cash, showing the firm’s operational efficiency and profitability.

Answer 5

Activity Ratios

Question 6

A category of ratios that consider how a firm is financed.

Answer 6

Leverage Ratios

Question 7

A category of ratios that are commonly used to directly judge how well management is doing as they strive to maximize owner wealth

Answer 7

Profitability Ratios

Question 8

A category of ratios that are used to evaluate the current share price of a public firm’s stock

Answer 8

Market Ratios

Question 9

A liquidity ratios found by current assets less inventory, divided by current liabilities; also called the acid-test ratio

Answer 9

Quick Ratio

Question 10

The percentage of sales remaining after all costs have been deducted from a company’s total sales; indicates the profit earned by the firm

Answer 10

Net Margin

Question 11

An expanded formula of the return of equity, net margin times total asset turnover times leverage multiplier, which represent the components of profitability, activity (efficiency), and financing.

Answer 11

DuPont Framework

Question 12

Another name for debt or liability

Answer 12

Leverage

Question 13

Increased volatility in earnings as a result of using debt

Answer 13

Financial Risk

Question 14

The process of completing a financial analysis to compare a firm’s financial performance to that of other similar firms.

Answer 14

Benchmarking

Question 15

A feature of preferred stock specifying that if a company skips payment of a preferred stock dividend one year, it is still required to pay that dividend sometime in the future before paying any common dividends.

Answer 15

Cumulative

Question 16

The percent of net income distributed to the shareholders.

Answer 16

Payout Ratio

Question 17

The percent of net income retained in the firm; also called the retention ratio.

Answer 17

Plowback Ratio

Question 18

The percent of net income retained in the firm; also called the plowback ratio

Answer 18

Retention Ratio

Question 19

measures how many times accounts receivable are “rolled over” during a year.

Answer 19

Accounts Receivable Turnover

Question 20

measures the number of days it takes the firm to collect its receivables.

Answer 20

Average Collection Period

Question 21

measures how many times the company turns over its inventory during the year.

Answer 21

Inventory Turnover

Question 22

represents the total sales generated per dollar invested in the firm’s assets.

Answer 22

Total Asset Turnover

Question 23

measures firm’s efficiency in utilizing its fixed assets (such as property, plant, and equipment).

Answer 23

Fixed Asset Turnover

Question 24

is the summary measure of operating efficiency, which considers both the management’s success in controlling expenses, contributing to profit margins, and its efficient use of assets to generate sales.

Answer 24

Operating Income Return on Investment

Question 25

measures the proportion of the firm’s assets that are financed by borrowing or debt financing.

Answer 25

Debt ratio

Question 26

shows the proportion of debt financing relative to equity financing.

Answer 26

Debt-to-Equity ratio

Question 27

measures the ability of the firm to service its debt or repay the interest on debt.

Answer 27

Times Interest Earned Ratio

Question 28

represents bottom-line earnings as a percentage of all assets utilized in the firm.

Answer 28

Return on Assets

Question 29

shows how much the firm earned as a percentage of each dollar of equity invested in the business.

Answer 29

Return on Equity

Question 30

shows how well the firm’s management controls its direct expenses to generate profits.

Answer 30

Gross Margin

Question 31

measures how much profit is generated from each dollar of sales after accounting for both costs of goods sold and operating expenses.

Answer 31

Operating Margin

Question 32

measures how much income is generated from each dollar of sales after adjusting for all expenses (including income taxes).

Answer 32

Net (Profit) Margin

Question 33

shows the relation between the market value of a share to its book value

Answer 33

Market-to-Book Ratio

Question 34

measures how attractive or reasonable a firm’s current price is, relative to its earnings.

Answer 34

Price-to-Earnings Ratio