Section 26 - Financial Statement Analysis

Question 1

What are the 2 ratios used to determine the ability of the company to cover its upcoming bills?

Answer 1

1) Current ratio

2) Quick (acid test) ratio

Question 2

How do you calculate Current Ratio?

Answer 2

Current assets / Current liabilities

-measure short-term debt paying ability

Question 3

How do you calculate Quick or Acid-test Ratio?

Answer 3

Quick assets / Current liabilities

• Quick asset is cash, marketable securities and receivables
• measure immediate short-term liquidity

Question 4

What are the two ratios used to determine the efficient use of inventory?

Answer 4

1) Inventory Turnover Ratio

2) Number of days’ sales in average inventory

Question 5

How do you calculate Inventory Turnover Ratio?

Answer 5

Cost of sales / Average of beginning and ending inventory

• measure the number of times the average inventory is sold
• may need the following formulas to compute ratio
  
  • Cost of sales = BI + Purchases - EI
  • Average Inventory = (BI + EI)/2

Question 6

How do you calculate Number of days’ sales in average inventory?

Answer 6

Average ending inventory / Average daily cost of goods sold

OR

360 / Inventory Turnover

-measures number of days required to sell inventory

Question 7

What are the two ratios used to determine the efficiency of receivables?

Answer 7

1) Receivable turnover ratio

2) Number of days’ sales in average receivable

Question 8

How do you calculate Receivable turnover ratio?

Answer 8

Sales on credit / Average of beginning and ending A/R

-measures liquidity of receivables

Question 9

How do you calculate Number of days’ sales in average receivable?

Answer 9

360 / Receivable Turnover

-measures number of days required to collect receivables