Chapter 4 - Ratio Analysis Flashcards

1
Q

Accounts Receivable turnover

A

Credit sales (or revenue) / average Accounts Receivable

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2
Q

Inventory turnover ratio

A

Cost of sales / Average inventory

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3
Q

Inventory holding period

A

operating days / inventory turnover ratio

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4
Q

Fixed asset turnover

A

revenue / average fixed assets

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5
Q

working capital turnover

A

revenue / average working capital

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6
Q

What does AR turnover tell you?

A

The average number of times the company is paid

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7
Q

What does inventory turnover ratio tell you?

A

How many times the inventory has to be restocked. If ratio is 10, you have to restock 10 times per year

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8
Q

What does fixed asset turnover tell you?

A

the revenue generated by every $1 of fixed assets

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9
Q

What does working capital turnover tell you?

A

High W.C.: ineffective use of funds; low W.C.: liquidity problem if sales decline

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10
Q

Current ratio

A

current assets/current liabilities

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11
Q

Quick ratio

A

Quick assets/current liabilities

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12
Q

what are quick assets?

A

the sum of the assets BEFORE inventory

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13
Q

What is ratio analysis?

A

Comparing the ratios against benchmarks

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14
Q

How do you define a ratio?

A

The comparison and relationship of two figures

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15
Q

Explain the four basis of comparison

A

Industry average: easy access, quick idea, less valuable if it covers a large geographical area
Competitors: similar, difficult to obtain/explain difference
Past performance: except in a rapidly changing environment
Predetermined standards: consider external and internal factors

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16
Q

Ratio analysis benefits

A

Compare firms of different sizes

Evaluate balance sheets in conjunction with income statements

17
Q

What are the five ratio categories? Explain each.

A

Liquidity - current obligations
Solvency - long-term obligations
Profitability - mgmt effectiveness in producing profits
Activity - mgmt effectiveness in managing assets
Operating - F&B, Lodging - operating efficiency

18
Q

Working capital equation

A

Current assets - Current liability

19
Q

Solvency ratios

A

Total liabilities to total assets
Total liabilities to total equity
Number of times interest earned = EBIT / interest expense (no EBIT: use operating income)

20
Q

What are the profitability ratios

A

Profit margin = net income / sales revenue [not gross margin]
ROA = net income / average total assets
ROE = net income / average equity