F2 M8 Ratio and Variance Analysis

Question 1

What’s the formula for inventory turnover?

Answer 1

COGS / Average Inventory

COGS = Beginning Inventory + Purchases - Ending Inventory
Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Question 2

What’s the formula for the debt-to-equity ratio?

Answer 2

Total Liabilities / Equity

Question 3

What’s the formula for the debt ratio?

Answer 3

Total Liabilities / Total Assets

Question 4

What’s the formula for working capital turnover?

Answer 4

Sales / Average Working Capital

Average Working Capital = ((Beginning Current Assets - Beginning Current Liabilities) + (Ending Current Assets - Ending Current Liabilities)) / 2

Question 5

What’s the formula for return on assets?

Answer 5

Net Income / Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

Question 6

What’s the formula for return on equity?

Answer 6

(Net Income – Preferred Dividends) / Average Total Equity

Average Total Equity = (Beginning Total Equity + Ending Total Equity) / 2

Question 7

What’s the formula for total asset turnover?

Answer 7

Net Sales / Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

Question 8

What’s the formula for DuPont return on assets?

Answer 8

Net Profit Margin x Total Asset Turnover

Net Profit Margin = Net Income / Net Sales
Total Asset Turnover = Net Sales / Average Total Assets

Note that the formula simplifies to Net Income / Average Total Assets

Question 9

What’s the formula for the current ratio?

Answer 9

Current Assets / Current Liabilities

Question 10

What’s the formula for the quick ratio?

Answer 10

(Cash and Equivalents + Short-Term Marketable Securities + Receivables (net of allowance)) / Current Liabilities

Question 11

What’s the formula for days sales outstanding (a.k.a. days sales in accounts receivable)?

Answer 11

Ending Accounts Receivable (Net) / (Net Sales / 365)

Question 12

What’s the formula for the accounts receivable turnover ratio?

Answer 12

Sales (net) / Average Accounts Receivable (net)

Average Accounts Receivable (net) = (Beginning AR (net) + Ending AR (net)) / 2

Question 13

What’s the formula for days in inventory?

Answer 13

Ending Inventory / (COGS / 365)

Question 14

What’s the formula for inventory turnover?

Answer 14

COGS / Average Inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Question 15

What’s the formula for times interest earned?

Answer 15

Earnings Before Interest and Taxes / Interest Expense