Test 1

Question 1

Purpose of Ratio Analysis

Answer 1

• Identify a company’s strengths and weaknesses

- Forecast future performance

Question 2

4 Types of Financial Ratios

Answer 2

1. Liquidity
2. Capital Adequacy (Financial leverage)
3. Asset Quality (Asset Management)
4. Earnings (Profitability)

Question 3

Liquidity ratios…

Answer 3

help to analyze a company’s ability to meet its short term obligations

Question 4

Quick (acid-test) Ratio excludes…

Answer 4

Inventories (not easily convertible to cash)

Question 5

Companies want these ratios above 1

Answer 5

Current Ratio, Quick (acid-test) Ratio

Question 6

Capital Adequacy Ratios

Answer 6

Debt Ratio, Interest Coverage Ratio

Question 7

Companies like this ratio not close to 1 or close to 0

Answer 7

Debt Ratio

Question 8

Interest Coverage Ratio =

Answer 8

Earnings before interest and taxes/Interest Expense

Question 9

Companies want this ratio well above 1

Answer 9

Interest Coverage Ratio

Question 10

Asset Quality Ratios

Answer 10

Inventory Turnover Ratio, Asset Turnover Ratio

Question 11

Day’s Inventory =

Answer 11

365/Inventory Turnover

Question 12

Inventory Turnover Ratio shows…

Answer 12

How quickly the inventory is being turned over

Question 13

Companys want these ratios as high as possible…

Answer 13

Inventory Turnover Ratio, Asset Turnover Ratio, Profit Margin Ratio

Question 14

Asset Turnover Ratio shows

Answer 14

how efficiently the company’s assets are being used to generate sales

Question 15

Earnings Ratios

Answer 15

Profit Margin (Return on Sales) Ratio, Return on Assets Ratio

Question 16

This ratio allows to meaningfully compare companies of different sizes

Answer 16

Return on Assets Ratio

Question 17

This ratio doesn’t allow to meaningfully compare companies of different sizes

Answer 17

Profit Margin (Return on Sales) Ratio

Question 18

Long Term Assets

Answer 18

1. Property, Plant and Equipment
2. Land
3. Long-Term Investments
4. Goodwill
5. Other
   - 6. Accumulated Depreciation

Question 19

Current Assets

Answer 19

1. Cash
2. Marketable Securities
3. Accounts Receivable
4. Inventory
5. Prepaid Expenses
   - 6. Allowance for Bad Debts

Question 20

Long Term Debt

Answer 20

Notes Payable + Bonds Payable + Mortgage Payable - Discount on Bonds

Question 21

Gross Margin

Answer 21

Revenues - Cost of Goods Sold

Question 22

Net Income

Answer 22

Gross Margin - All Expenses - Income Tax

Question 23

Gross Margin %

Answer 23

(Total Rev + (Change in Inventory))/Gross Profit

Question 24

Operating Income

Answer 24

Gross Margin - Operating Expenses

Question 25

Operating Expenses (Account Names)

Answer 25

Selling, General, Administration Costs Depreciation Expense Research and Development

Question 26

Income Statement

Answer 26

``` Gross Margin Operating Expenses Operating Income Earning Before Taxes Net Income ```

Question 27

Weighted Average

Answer 27

Average cost of each unit

Question 28

Stockholders' Equity Calculation

Answer 28

(Common Stock + Paid-in Capital + Retained Earnings) - Treasury Stock

Question 29

Bad Debt Expense

Answer 29

(Amount Receivable * Estimated percent uncollectible) - Current Balance

Question 30

Goodwill Created =

Answer 30

Total amount paid - total fair value (assets - liabilities)

Question 31

Book Value

Answer 31

Amount worth on the balance sheet

Question 32

Retained Earnings

Answer 32

Beginning Balance + Net Income - Dividend paid

Question 33

A balance sheet shows...

Answer 33

Claims owners have against assets of the firm

Question 34

Is Depreciation on the balance sheet?

Answer 34

No

Question 35

Are Intangible assets current or non-current?

Answer 35

Non-current

Question 36

Is Dividend Expense included on the Income Statement?

Answer 36

No

Question 37

Does Net Income include Dividends paid?

Answer 37

No

Question 38

Does a Balance Sheet show a company's current market value?

Answer 38

No

Question 39

The Balance Sheet represents the financial position of the firm for what time period?

Answer 39

The day it is dated only.

Question 40

The accounting equation can be described as...

Answer 40

Resources of the firm equal the creditor's and owner's claim to those resources.

Question 41

In accrual basis accounting:

Answer 41

Revenues are recognized when earned rather than when the cash is collected

Question 42

The Income Statement represents the firm's financial position for what time period?

Answer 42

The previous Fiscal Year

Question 43

The assumption that a business has perpetual existence is recognized by:

Answer 43

Going concern

Question 44

Paying a liability will...

Answer 44

Decrease assets and decrease liabilities

Question 45

Prepaid Expenses are a...

Answer 45

Current Asset

Question 46

Bond Rate < Market =

Answer 46

Discount

Question 47

Bond Rate > Market =

Answer 47

Premium

Question 48

Short Term Debts

Answer 48

``` Salaries Payable Taxes Payable Dividends Payable Accounts Payable Interest Payable Current Mortgages Payable Current Bonds Payable Current Notes Payable ```

Question 49

Notes Payable is a...

Answer 49

Long term debt

Question 50

Depreciation Expense...

Answer 50

counts towards net income

Question 51

Bad Debt Calculation (re: current balance)

Answer 51

Subtract current balance at end