Deck 4

Question 1

Method of converting from accrual to cash

Answer 1

Change in assets - Inverse relationship

Change in liabilities - proportional relationship

Question 2

Method of converting from cash to accrual

Answer 2

Change in assets - Proportional relationship

Change in liabilities - Inverse relationship

Question 3

Receivables turnover ratio

Answer 3

AR Turnover = Net credit sales/Average net receivables

Average net receivables = (Beginning net A/R + Ending net A/R)/2

Question 4

Total asset turnover

Answer 4

Total asset turnover = Net sales/Average total assets

Average total assets = Net sales/Total asset turnover

Question 5

Debt to equity ratio

Answer 5

Debt-to-equity ratio = Total liabilities/Equity

Question 6

Accounts receivable turnover

Answer 6

Accounts receivable turnover = Net credit sales/Average accounts receivable

Question 7

Average collection period

Answer 7

Average collection period = 365/Accounts receivable turnover

Question 8

Current ratio

Answer 8

Current ratio = Current assets/Current liabilities

Question 9

Inventory turnover

Answer 9

Inventory turnover = Cost of goods sold/Average inventory

Question 10

Quick ratio

Answer 10

Quick ratio= (Cash+Net receivables+Marketable securities)/Current liabilities

Question 11

Working capital

Answer 11

Working capital = Current assets - Current liabilities

Question 12

Cash ratio

Answer 12

Cash ratio = (Cash + Cash equivalents + Marketable securities)/Current liabilities

Question 13

Inventory turnover in days

Answer 13

Inventory turnover in days = 365/Inventory turnover

Inventory turnover = COGS/Average inventory

Question 14

Operating cycle

Answer 14

Operating cycle = Accounts receivable turnover in days + Inventory turnover in days

Question 15

Working capital turnover

Answer 15

Working capital turnover = Sales/Average working capital

Average working capital = (Working capital Year 1 + Working capital Year 2)/2

Question 16

Total asset turnover

Answer 16

Total asset turnover = Net sales/Average total assets

Question 17

Net profit margin

Answer 17

Net profit margin = Net income/Net sales

Question 18

Return on total assets

Answer 18

Return on total assets = Net income/Average total assets

Question 19

DuPont return on assets

Answer 19

DuPont return on assets = (Net income/Net sales) • (Net sales/Average total assets)

Question 20

Return on common equity

Answer 20

Return on common equity = (Net income - Preferred dividends)/Average common equity

Average common equity = (Common equity year 1 + Common equity year 2)/2

Question 21

Debt-to-asset ratio

Answer 21

Debt-to-asset ratio = Total liabilities/Total assets

Question 22

Times interest earned

Answer 22

Times interest earned = EBIT or EBITDA/Interest charged

Question 23

Assets contributed to a partnership are valued at

Answer 23

Fair market value of the assets net of any liabilities

Question 24

Formula for “exact method” partnership interest

Answer 24

Old equity/(1-new equity %)

Question 25

Bonus method steps

Answer 25

1. Determine total capital and interest to new partner 2. If interest less than amount contributed, bonus to old partners 3. If interest more than amount contributed, bonus to new partner

Question 26

Goodwill method steps

Answer 26

1. Compute new “Net assets before goodwill” after admitting new (or paying old) partner 2. Memo: compute new “capitalized” net assets (=total net worth) and compare “Capitalized net assets” with “Net assets before goodwill;” and 3. The difference is goodwill to be allocated to the old partners according to their OLD partnership PROFIT ratios