Flashcards in Ratios - Liquidity/Solvency and Operational Deck (32):

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## What is Financial Statement Ratio Analysis?

### The development of quantitative relationships between various elements of a firm's financial statements

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## What does ratio analysis of financial statements allow user to do?

### Enables comparisons across firms, especially within the same industry, and facilitates identifying operating and financial strengths and weaknesses of a firm

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## What does a liquidity/solvency ratio measure?

### The ability of a firm to pay its obligations as they become due

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## What does the Working Capital ratio analyze?

### Measures the extent to which current assets exceed current liabilities and, thus are uncommitted in the short term. Type of Liquidity Ratio

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## What is included in Working Capital (Formula)?

### Current Assets-Current Liability

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## What is the working capital ratio (Current Ratio)?

### Current Assets/Current Liabilities

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## What is the effect on the WCR (Working Capital Ratio) if there is an increase in assets?

### Increases the WCR

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## What is the effect on the WCR (Working Capital Ratio) if there is a decrease in current assets?

### Decreases the WCR

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## What is the effect on the WCR (Working Capital Ratio) if there is an increase in current liabilities?

### Decreases the WCR

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## What is the effect on the WCR (Working Capital Ratio) if there is a decrease in current liabilities?

### Increases the WCR

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## If the WCR (Working Capital Ratio) exceeds 1 and there are equal increases in current assets and liabilities, what is the effect on the WCR?

### The WCR will decrease

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## If the WCR (Working Capital Ratio) exceeds 1 and there are equal decreases in current assets and liabilities, what is the effect on the WCR?

### The WCR will increase

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## If the WCR (Working Capital Ratio) is less than 1 and there are equal increases in current assets and liabilities, what is the effect on the WCR?

### The WCR would increase

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## If the WCR (Working Capital Ratio) is less than 1 and there are equal decreases in current assets and liabilities, what is the effect on the WCR?

### The WCR would decrease

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## What does the Acid Test (Quick Ratio) measure?

### 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

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## What is the formula for the Acid Test (Quick Ratio)?

### (Cash +(net) Receivables + Marketable Securities)/Current Liabilities

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## What is the securities Defensive-Interval Ratio?

### 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

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## What is the formula for the Securities Defensive-Interval Ratio?

### (Cash + (Net) Receivables + Marketable Securities)/Average Daily Cash Expenditure

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## What is the times interest earned ratio?

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

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## What is the formula for the times interest earned ratio?

### (Net Income + Interest Expense + Income Tax)/Interest Expense

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## What is the Times Preferred Dividend Earned Ratio?

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

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## What is the formula for the Times Preferred Dividend Earned Ratio?

### Net Income/Annual Preferred Dividend Obligation

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## What is the Accounts 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 the collection procedures

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## What is the formula for the Accounts Receivable Turnover?

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

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## What is the "Number of Days' Sales in Average Receivables" ratio used for?

### Measures the average number of days required to collect receivables; it is a measure of the average age or receivables

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## What is the formula for the "Number of Days' Sales in Average Receivables" ratio?

### (300 or 360 or 365 (or other measure of business days in a year))/Accounts Receivable Turnover

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## What is the "Inventory Turnover" ratio used for?

### 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

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## What is the formula for the "Inventory Turnover" Ratio?

### COGS/Average Inventory (e.g. (Beginning + Ending/2)

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## What is the "Number of Days' Supply in Inventory" ratio used for?

### Measures the number of days inventory is held before it is sold or used. Indicates the efficiency of general inventory management

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## What is the Formula "Number of Days' Supply in Inventory" ratio?

### (300 or 360 or 365 (or other measure of business days in a year))/Inventory Turnover

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## What is the operating 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

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