Ch 13

Question 0

Vertical Analysis

Answer 0

Comparison of various financial statement items within a single period with use of common size statements

Ex. Percentage of inventory relative to total assets for the year

Question 1

Horizontal Analysis

Answer 1

Comparison of financial statement over series of years

Percentage change btw years

Question 2

Gross profit ratio

Answer 2

Gross profit ratio = gross profit/net sales

Question 3

Profit margin ratio, what does it measure?

Answer 3

Profit margin ratio = net income/net sales

Measures management’s ability to control expenses

Question 4

Liquidity

Answer 4

Nearness to cash of assets and liabilities,

Ability to pay debts as they come due

Question 5

Acid test AKA Quick ratio? quick assets?

Answer 5

Stricter test of liquidity than current ratio, excludes
Inventory and prepayments from numerator

Quick ratio = quick assets/current liabilities

Quick assets = cash + marketable securities + current receivables

Question 6

Whats a good number for quick ratio?

Answer 6

1 or higher

Question 7

Cash flow from operations to current liabilities ratio

Answer 7

Cash flow from operations to current liabilities ratio
= net cash from operating activities/avg. current liabilities

Measures ability to pay current debts from operating cash flows

Question 8

Accounts receivable turnover ratio

Answer 8

Measure of number of times accounts receivable
collected in period

A/R turnover ratio = net credit sales/avg A/R

Question 9

Number of days sales in receivables

Answer 9

Measure of avg. age of A/R

days sales in receivables = # days period/A/R turnover

Question 10

Inventory turnover ratio

Answer 10

Measure of # of times inventory is sold during period

Question 11

Number of days sales in inventory

Answer 11

Measure of how long it takes to sell inventory

Question 12

Cash to Cash operating cycle

Answer 12

Length of time from purchase of inventory

To collection on receivable from sale

Question 13

Name 5 ratios that asses liquidity?

Answer 13

Current
Quick
Cash from operations and liabilities
A/R turnover
Inventory turnover

Question 14

Solvency

Answer 14

Ability of company to remain in business over Longterm

Asses if company can handle Longterm and short term
Obligations

Question 15

Times interest earned ratio

Answer 15

Income statement measure of ability of company

To meet its interest payments

Question 16

Debt service coverage ratio

Answer 16

Statement of cash flows measure of ability of company

To meet interest and principal payments

Question 17

Cash flow from operations and capital expenditures ratio

Answer 17

Measure of ability of company to finance Longterm asset acquisitions with cash from operations

Question 18

Name 4 ratios that measure a company’s solvency?

Answer 18

Debt to equity, times interest earned, debt service coverage, cash flow from operations to capital expenditures

Question 19

Profitability

Answer 19

How well management is using company resources

To earn a return on funds invested by various groups

Question 20

Return on assets ratio

Answer 20

Measure of company’s success in earning a return for

All providers of capital

Question 21

Return on sales ratio

Answer 21

Variation of profit margin ratio

Measures earnings before payments to creditors

Question 22

Asset turnover ratio

Answer 22

Relationship btw net. Sales and average total assets

Question 23

Return on common stockholders equity

Answer 23

Measure of company’s success on earning a return for common stockholders

Question 24

Leverage

Answer 24

Use of borrowed funds and amounts contributed by
Preferred stockholders to earn an overall return
Higher than the cost of these funds

Question 25

Earnings per share (EPS)

Answer 25

Company’s bottom line stated on per share basis

Question 26

P/E ratio

Answer 26

Relationship btw company’s performance according to its income statement and performance in the stock market

Question 27

Dividend payout ratio

Answer 27

Percentage of earnings paid out as dividends

Question 28

Dividend yield ratio

Answer 28

Relationship between dividends and market price of stock

Question 29

The multiplication of which 2 ratios yields the return on assets ratio?

Answer 29

Return on sales and asset turnover

Question 30

Which of the following is an indication that a company successfully employed leverage?

Answer 30

Return on common stockholders equity exceeds return on assets

Question 31

Discontinued operations

Answer 31

Line item on income statement to reflect gains or losses
From disposal of segment of business as well as any
Net income or loss from operating that segment

Question 32

Extraordinary item

Answer 32

Line item on income statement to reflect any gains
Or losses that arise from event that’s unusual in nature
And infrequent in occurrence