Week 6: Ratios and etc.

Question 1

Why are ratios important?

Answer 1

Comparisons are easier

Question 2

When comparing company’s ratios, the firms should be:

Answer 2

The same size and in the same accounting system (IFRS or USG)

Question 3

Gross profit margin

Answer 3

(Revenue - COGS) / Revenue

Question 4

Debt to Equity Ratio

Answer 4

= Total liabilities / shareholder equity

Question 5

Price to earning ratio

Answer 5

share price / earnings per share

Question 6

Return On Assets ratio

Answer 6

= Net Income / Total Assets

Question 7

Debt Ratio

Answer 7

Total Liabilities / Total Assets

Question 8

Inventory Turnover

Answer 8

Cost of Goods sold / average inventory

Question 9

Working Capital

Answer 9

Current assets - Current liabilities

Question 10

Day’s sales in inventory

Answer 10

Average inventory / (COGS / 365)

Question 11

Gross Profit Ratio*

Answer 11

Gross profit / Net Sales *100

Question 12

Working Capital Ratio

Answer 12

Current Assets / Current Liabilities

Question 13

ROA

Answer 13

Net Income / Total Assets

Question 14

Non-financials examples

Answer 14

Airlines: Capacity

Hotels: Occupancy

Question 15

Gross profit

Answer 15

Revenue - COGS

Question 16

Dividend Ratio

Answer 16

Dividends / Net Income

Question 17

Types of Ratios

Answer 17

Profitability, liquidity, and debt ratios

Question 18

P/E ratio

Answer 18

Price per share / Earnings per share

Question 19

What is a high leverage ratio?

Answer 19

a 3/1 D/E ratio is very high

Question 20

Provisions

Answer 20

Will happen and you will know the amount

Bad debt or warrenties

Question 21

Contingent liability

Answer 21

You are not sure if it is going to happen or how much

Question 22

Lease

Answer 22

Temporary rights to PPE

All deferred taxes are long term

Question 23

Development in IFRS lasts:

Answer 23

20 years

Amortized over 20 years

Question 24

Component depreciation

Answer 24

Used in IFRS not USG

Depreciating the individual parts of PPE.

The engine may be depreciated over 15 years while the chassis may only be 5

Question 25

Impairment in the different accounting systems

Answer 25

USG: Only lets you go down IFRS: Impairment can be reversed (The value of an asset can go down and then back up)

Question 26

Leases in the different accounting system

Answer 26

IFRS: "no bright lines"

Question 27

Purpose of working capital ratio

Answer 27

Tells you how liquid a firm is

Question 28

Purpose of D/E ratio

Answer 28

Tells you how leveraged a firm is

Question 29

A/R turnover in days

Answer 29

Accounts receivable / (Revenue/365)

Question 30

Kevin Enters into a contract on 10/1/19 with AT&T for 2 years for 2400 and he receives a free Apple phone. The fair value of the same Apple phone in an Apple store is $600. How and when would AT&T recognize revenue

Answer 30

10/1/19 Dr. Cash 2400 Cr. Def Rev 1800 Cr. Rev 600 Every month Dr. Def Rev 75 Cr. Rev 75