Ratios

Question 1

Return of Assets (ROA)

Answer 1

Measures operating performances free from financing

Question 2

Return of Equity (ROE)

Answer 2

Includes the amount and cost of financing

Question 3

Liquidity Ratios

Answer 3

Measures the ability of the firm to pay obligations as they become due

Question 4

Working Capital Ratio (LR) - current ratio

Answer 4

Measures the extent of current assets exceeding current liabilities

=Current asset/current liabilities

Question 5

Acid- Test Ratio (LR) - quick ratio

Answer 5

Measures how quickly highly liquid assets can be converted into cash to cover current liabilities

=Cash + net account receivables + Market securities/ current liabilities

Question 6

Times interest earned ratio (LR)

Answer 6

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

=Net income + interest expense + income tax/ interest expense

=income before interest expense+income tax/interest expense

Question 7

Times preferred dividends earned ratio (LR)

Answer 7

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

=Net income/ Annual preferred dividends obligation

Question 8

Operational activity ratio

Answer 8

Measures the efficiency for which a firm carries out its operating activities

Question 9

Account Receivable Turnover Ratio

Answer 9

Measures how efficiently a firm uses its assets

=Credit sales/Average of account receivable (beg+end/2)

Question 10

Number of days in average receivable

Answer 10

Measures the average number of days required to collect receivables

=365/ Account Receivable Turnover ^

Question 11

Inventory Turnover Ratio

Answer 11

Measures the number of times that inventory turnover (acquired and sold) during a period

=Cost of good sold/ Average Inventory (beg+end/2)

Question 12

Number of days supply in inventory

Answer 12

Measures the number of days inventory is sold or used

=365/Inventory Turnover^

Question 13

Operating number of cycle

Answer 13

Measures the average length of time invest cash into inventory, convert the inventory to receivables, and collect the receivables. Measures the time to from cash back to cash

=Days in operating= Number of days in AR+ length cycle of days supply in inventory

Question 14

Cost Of Goods Sold

Answer 14

Beg inventory + Purchases - Ending Inventory = COGS

Question 15

Net Account Receivables

Answer 15

Gross Account Receivables - allowance of uncollectible accounts

Question 16

Profitability Ratios

Answer 16

Measures aspects of the firms operating results on s relative basis

Question 17

Profit Margin

Answer 17

Measures the net profitability on net sales

= Net income/ Net sales

Question 18

Earnings per share

Answer 18

Measures the income earned per (average) share of common stock. Indicates ability to pay dividends to common shareholders.
=(Net Income—Preferred Dividends (obligation for the period only)) / Weighted Average Number of Shares Outstanding

Question 19

Equity/Investment Leverage Ratios

Answer 19

Measures of relative sources of equity and equity value

Question 20

Debt to equity ratio

Answer 20

Measures relative amounts of assets provided by creditors and shareholders
=Total Liabilities/ Total Shareholder’s Equity

Question 21

Book Value per common stock

Answer 21

measures the per share amount of common shareholders claim to assets
= Common Shareholder Equity /#of outstanding Common Shares

Question 22

Book Value Per Preferred Stock

Answer 22

measures the per share amount of Preferred shareholders claim to assets
= Preferred Shareholders Equity (dividends included)/ # of outstanding preferred stock

Question 23

Return on Total Assets

Answer 23

Measures the rate of ROTA and indicates the efficiency with which invested assets are used
= (Net income + (add back) interest expense(net of tax effect))/Average total assets

Question 24

Current Ratio Decreases/Increases

Answer 24

Decreases in asset decreases C/R

Question 25

Ending Inventory

Answer 25

= Beginning Inventory + Purchases - COGS

Question 26

Net Credit Sales

Answer 26

= Sales - Sales returns - sales allowances