Chapter 16 Ratios

Question 1

What are the Liquidity Ratios?

Answer 1

1) Working Capital
2) Current Ratio
3) Acid-Test Ratio

Question 2

What is the formula for Working Capital?

Answer 2

Current Assets- Current Liabilities

Question 3

What is the significance of the working capital ratio?

Answer 3

Measures the company’s ability to repay current liabilities using only current assets.

Question 4

What is the formula for current ratio?

Answer 4

Current Assets/Current Liabilities

Question 5

What is the significance of current ratio?

Answer 5

Test of short-term debt-paying ability.

Question 6

What is the formula for the acid-test ratio?

Answer 6

(Cash + Market Securities + Accounts Receivable)/Current Liabilities

Question 7

What is the significance of the acid-test ratio?

Answer 7

Test of short-term debt-paying ability without having to rely on inventory.

Question 8

What are the Asset Management Ratios?

Answer 8

1) Accounts Receivable Turnover
2) Average Collection Period
3) Inventory Turnover
4) Average Sale Period
5) Operating Cycle
6) Total Asset Turnover

Question 9

What is the formula for the accounts receivable turnover?

Answer 9

Sales on Account/Average Accounts Receivable Balance

Question 10

What is the significance of the accounts receivable turnover?

Answer 10

Measures how many times a company’s accounts receivable have been turned into cash during the year.

Question 11

What is the formula for the average collection period?

Answer 11

365 Days/Accounts Receivable Turnover

Question 12

What is the significance of the average collection period?

Answer 12

Measures the average number of days taken to collect an accounts receivable.

Question 13

What is the formula for inventory turnover?

Answer 13

Cost of Goods Sold/Average Inventory Balance

Question 14

What is the significance of inventory turnover?

Answer 14

Measures how many times a company’s inventory has been sold during the year.

Question 15

What is the formula for the average sale period?

Answer 15

365 Days/Inventory Turnover

Question 16

What is the significance of inventory turnover?

Answer 16

Measures the average number of days taken to sell the inventory one time.

Question 17

What is the operating cycle formula?

Answer 17

Average Sale Period + Average Collection Period

Question 18

What is the significance of the operating cycle?

Answer 18

Measures the elapsed time from when inventory is received from suppliers to when cash is received from customers.

Question 19

What is the formula for total asset turnover?

Answer 19

Sales/Average Total Assets

Question 20

What is the significance of the total assets turnover?

Answer 20

Measures how efficiently assets are being used to generate sales.

Question 21

What are the Debt Management Ratios?

Answer 21

1) Times Interest Earned Ratio
2) Debt-to-Equity Ratio
3) Equity Multiplier

Question 22

What is the formula for the times interest earned ratio?

Answer 22

Earnings before interest expense and income taxes/Interest expense

Question 23

What is the significance of the times interest earned ratio?

Answer 23

Measures the company’s ability to make interest payments.

Question 24

What is the formula for the debt-to-equity ratio?

Answer 24

Total Liabilities/Stockholder’s Equity

Question 25

What is the significance of the debt-to-equity ratio?

Answer 25

Measures the amount of assets being provided by creditors for each dollar of assets being provided by the stockholders.

Question 26

What is the formula for the equity multiplier?

Answer 26

Average Total Assets/Average Stockholder's Equity

Question 27

What is the significance of the equity multiplier?

Answer 27

Measures the portion of a company's assets funded by equity.

Question 28

What are the Profitability Ratios?

Answer 28

1) Gross Margin Percentage 2) Net Profit Margin Percentage 3) Return on Total Assets 4) Return on Equity

Question 29

What is the formula for the gross margin percentage?

Answer 29

Gross Margin/Sales

Question 30

What is the significance of the gross margin percentage?

Answer 30

Measuers profitablity before selling and administrative expenses.

Question 31

What is the formula for the net profit margin percentage?

Answer 31

Net Income/Sales

Question 32

What is the significance of the net profit margin percentage?

Answer 32

A broad measure of profitability.

Question 33

What is the formula for return on total assets?

Answer 33

(Net Income + [Interest Expense x (1- Tax Rate)])/Average Total Assets

Question 34

What is the significance on the return on total assets?

Answer 34

Measures how well assets have been employed by management.

Question 35

What is the formula for return on equity?

Answer 35

Net Income/Average Stockholders' Equity

Question 36

What is the significance of the return on equity?

Answer 36

When compared to the return on total assets, measures the extent to which financial leverage is working for or against common stockholders.

Question 37

What are the Market Performance Ratios?

Answer 37

1) Earnings per Share 2) Price-Earnings Ratio 3) Dividend Payout Ratio 4) Dividend Yield Ratio 5) Book Value Per Share

Question 38

What is the formula for Earnings Per Share?

Answer 38

Net Income/Average Number of Common Shares Outstanding

Question 39

What is the significance of the earnings per share?

Answer 39

Affects the market price per share, as reflected int he price-earnings ratio.

Question 40

What is the formula for the price-earnings ratio?

Answer 40

Market price per share/Earnings per share.

Question 41

What is the significance of the price-earnings ratio?

Answer 41

An index of whether a stock is relatively cheap or relatively expensive in relation to current earnings.

Question 42

What is the formula for the dividend payout ratio?

Answer 42

Dividends per share/Earnings per share.

Question 43

What is the significance of the dividend payout ratio?

Answer 43

An index showing whether a company pays out most of its earnings in dividends or reinvests the earnings internally.

Question 44

What is the formula for the dividend yield ratio?

Answer 44

Dividends per share/Market Price per Share

Question 45

What is the significance of the dividend yield ratio?

Answer 45

Shows the return in terms of cash dividends being provided by a stock.

Question 46

What is the formula for Book Value per Share

Answer 46

Total Stockholders' Equity/Number of Common Shares Outstanding

Question 47

What is the significance of the book value per share?

Answer 47

Measures the amount that would be distributed to common stockholders if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.