FASB 2

Question 1

What is the purposes or types of measures being analyzed for the Ratios are:

Answer 1

1. Liquidity/solvency;
2. Operational Activity;
3. Profitability;
4. Equity/Investment leverage

Question 2

The formula of working Capital Ratio(WCR)?

Answer 2

Working Capital = Current Assets - Current Liability

Working Capital Ratio = Current Assets / Current Liabilities

Question 3

What is Securities Defensive-Interval Ratios?

Answer 3

it measures the quantitative relationship between highly liquid assets and the average daily use of cash in terms of the number of days that cash and assets can be quickly converted to support operating costs.

Securities Defensive-Interval Ratios = (Cash + (Net) Receivables + Marketable Securities) / Average Daily Cash Expenditures

Question 4

What is Account Receivable turnover?

Answer 4

Account Receivable turnover measures the number of times that accounts receivable turnover (are incurred and collected) during a period. Indicates the quality of credit policies (and the resulting receivables) and the efficiency of collection procedures.

Accounts Receivable Turnover = (Net) Credit Sales / Average (Net) Accounts Receivable (e.g. (Beginning + Ending)/2)

Question 5

What is inventory turnover?

Answer 5

Inventory turnover measures the number of times that inventory turns over (is acquired and sold or used) during a period. Indicates over or under stocking of inventory or obsolete inventory.

Inventory Turnover = Cost of Goods Sold / Average Inventory (e.g. (Beginning + Ending)/2)

Question 6

What is Operating Number of Cycle?

Answer 6

Operating Number of Cycle measures the average length of time to invest cash in inventory, convert the inventory to receivables, and collect the receivables; it measures the time to go from cash back to cash.

Number of Days’ Supply in Inventory = (300 or 360 or 365 (or other measure of business days in a year)) / Inventory Turnover (computed above)

Number of Days’ Sales in Average Receivables = (300 or 360 or 365 (or other measure of business days in a year)) / Accounts Receivable Turnover (computed above)

Operating Number of Cycle = Days in Operating = Number of Days’ Sale in A/R + Length Cycle Number of Days’ Supply in Inventory

Question 7

What is Acid-Test Ratio (aka Quick Ratio)?

Answer 7

Measures the quantitative relationship between highly liquid assets and current liabilities in terms of the “number of times” that cash and assets that can be converted quickly to cash cover current liabilities.

Acid-Test Ratio (also known as Quick Ratio) = (Cash + (Net) Receivables + Marketable Securities) / Current Liabilities

Question 8

What is interest earning ratio?

Answer 8

Measures the ability of current earnings to cover interest payments for a period.

Times Interest Earned Ratios = (Net Income + Interest Expense + Income Tax) / Interest Expense

Question 9

What is “Times Preferred Dividend Earned Ratio”?

Answer 9

Measures the ability of current earnings to cover preferred dividends for a period.

Times Preferred Dividend Earned Ratio = Net Income / Annual Preferred Dividend Obligation

Question 10

What is financial statement ratio analysis?

Answer 10

The development of quantitative relationships between various elements of a firm’s financial statements.

Question 11

List the cash availability or interval ratio formula.

Answer 11

(Cash + Net Receivables + Marketable Securities) / Average Daily Cash Expenditures.

Question 12

What do operational activity ratios measure?

Answer 12

They measure the efficiency with which a firm carries out its operating activities.

Question 13

What do liquidity (or solvency) ratios measure?

Answer 13

Measure the ability of the firm to pay its debts as they come due.

Question 14

What are the general types of ratios?

Answer 14

Liquidity/Solvency;
Operational Activity;
Profitability;
Equity/Investment Leverage.

Question 15

Debt to Equity ratio

Answer 15

Debt to Equity ratio = Total Debt (Liabilities) / Owner’s Equity

Question 16

Price-Earnings Ratio (P/E Ratio)

Answer 16

Measures the price of a share of common stock relative to its latest earnings per share. Indicates a measure of how the market values the stock, especially when compared with other stocks.

Price-Earnings Ratio (P/E Ratio) = Market Price for a Common Share / Earnings per (Common) Share (EPS)

Question 17

Return on Common Stockholders’ Equity

Answer 17

Measures the rate of return (earnings) on common stockholders’ investment.

Return on Common Stockholders’ Equity = (Net Income - Preferred Dividend (obligation for the period only)) / Average Common Stockholders’ Equity (e.g. Beginning + Ending/2)

Question 18

Return on Owners’ (all Stockholders’) Equity

Answer 18

Measures the rate of return (earnings) on all stockholders’ investment.

Return on Owners’ (all Stockholders’) Equity = Net Income / Average Stockholders’ Equity (e.g. Beginning + Ending/2)

Question 19

Earnings Per Share (EPS – Basic Formula)

Answer 19

Measures the income earned per (average) share of common stock. Indicates ability to pay dividends to common shareholders.

Earnings Per Share (EPS – Basic Formula) = (Net Income - Preferred Dividends (obligation for the period only)) / Weighted Average Number of Shares Outstanding

Question 20

Book Value per Preferred Share

Answer 20

Measures the per share amount of preferred shareholders’ claim to assets.

Book Value per Preferred Share = Preferred Shareholders’ Equity (including dividends in arrears) / Number of Outstanding Preferred Stocks

Question 21

Common Stock Dividends Pay Out Ratio

Answer 21

Measures the extent (percent) of earnings distributed to common shareholders.

Total Basis = Cash Dividends to Common Shareholders / Net Income to Common Shareholder

Per Share Basis = Cash Dividends per Common Share / Earnings per Common Share

Question 22

List the return on total assets formula.

Answer 22

(Net Income + Interest Expense (net of tax)) / Average Total Assets.

Question 23

What do equity/investment leverage ratios measure?

Answer 23

Measure relative sources of equity and equity value.

Question 24

List the price to earnings ratio formula.

Answer 24

Market Price for a Common Share / Earnings Per Share (EPS).

Question 25

List the total common stock dividend payout rate formula.

Answer 25

Cash Dividends to Common Shareholders / Net Income to Common Shareholders.

Question 26

List the debt ratio formula.

Answer 26

Total Liabilities / Total Assets.

Question 27

List the return on common stockholders’ equity formula.

Answer 27

(Net Income-Current Period Preferred Dividend Obligation) / Average Common Stockholders’ Equity.

Question 28

List the profit margin formula.

Answer 28

Net Income/Net Sales.

Question 29

List the per share common stock dividend pay out rate formula.

Answer 29

Cash Dividends per Common Share / Earnings Per Share (EPS).

Question 30

List the common stock yield formula.

Answer 30

Dividend per Common Share / Market Price per Common Share.

Question 31

List the book value per common stock ratio formula.

Answer 31

Common Shareholders’ Equity / Number of Outstanding Common Shares.

Question 32

List the owner’s equity ratio formula.

Answer 32

Shareholders’ Equity / Total Assets.

Question 33

List the book value per preferred share ratio formula.

Answer 33

Preferred Shareholders’ Equity (including dividends in arrears) / Number of Outstanding Preferred Stocks.

Question 34

List the return on owner’s equity formula.

Answer 34

Net Income / Average Stockholders’ Equity.

Question 35

List the debt to equity ratio formula.

Answer 35

Total Liabilities / Total Shareholders’ Equity.

Question 36

What do profitability ratios measure?

Answer 36

Aspects of a firm’s operating (income/loss) results on a relative basis.

Question 37

Times interest earned ratio

Answer 37

Times interest earned ratio = (net income + interest expense + income tax expense)/interest expense

Question 38

Profit margin on sales

Answer 38

Profit margin on sales = net income/sales

Question 39

Return on total assets

Answer 39

Return on total assets = (net income + after-tax interest expense)/average total assets

Question 40

Return on equity

Answer 40

Return on equity = net income/average OE

Question 41

Dividend payout ratio

Answer 41

Dividend payout ratio = common dividends/net income