Accounting 201Chapter 12 Key Words

Question 1

Acid-test ratio

Answer 1

Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.

Question 2

Aggressive accounting practices

Answer 2

Practices that result in reporting higher income, higher assets, and lower liabilities.

Question 3

Asset turnover

Answer 3

Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets.

Question 4

Average collection period

Answer 4

Approximate number of days the average accounts receivable balance is outstanding. It equals 365 divided by the receivables turnover ratio.

Question 5

Average days in inventory

Answer 5

Approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.

Question 6

Conservative accounting practices

Answer 6

Practices that result in reporting lower income, lower assets, and higher liabilities.

Question 7

Current ratio

Answer 7

Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.

Question 8

Debt to equity ratio

Answer 8

Total liabilities divided by total stockholders’ equity; measures a company’s risk. Total liabilities divided by stockholders’ equity; measures a company’s solvency risk.

Question 9

Discontinued operation

Answer 9

The sale or disposal of a significant component of a company’s operations.

Question 10

Extraordinary item

Answer 10

An event that is (1) unusual in nature and (2) infrequent in occurrence.

Question 11

Gross profit ratio

Answer 11

Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of sales.

Question 12

Horizontal analysis

Answer 12

Analyzes trends in financial statement data for a single company over time.

Question 13

Inventory turnover ratio

Answer 13

Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance during a reporting period.

Question 14

Liquidity

Answer 14

Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts. Refers to a company’s ability to pay its current liabilities.

Question 15

Price-earnings (PE) ratio

Answer 15

Compares a company’s share price with its earnings per share.The stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis.

Question 16

Profit margin

Answer 16

Net income divided by net sales; indicates the earnings per dollar of sales.

Question 17

Profitability ratios

Answer 17

Measure the earnings or operating effectiveness of a company.

Question 18

Quality of earnings

Answer 18

Refers to the ability of reported earnings to reflect the company’s true earnings, as well as the usefulness of reported earnings to predict future earnings.

Question 19

Receivables turnover ratio

Answer 19

Net credit sales divided by average accounts receivable; the number of times during a year that the average accounts receivable balance is collected (“turns over”).

Question 20

Return on assets

Answer 20

Net income divided by average total assets; measures the income generated per dollar of assets.

Question 21

Return on equity

Answer 21

Net income divided by average stockholders’ equity; measures the income generated per dollar of equity.

Question 22

Solvency

Answer 22

Refers to a company’s ability to pay its long-term liabilities.

Question 23

Times interest earned ratio

Answer 23

Ratio that compares interest expense with income available to pay those charges.

Question 24

Value stocks

Answer 24

Stocks that tend to have lower price earnings ratios and are priced low in relation to current earnings. Stocks that have lower share prices in relationship to their fundamental ratios and therefore trade at lower (bargain) PE ratios.

Question 25

Vertical analysis

Answer 25

Expresses each item in a financial statement as a percentage of the same base amount.