Accounting Exam

Question 1

Liquidity 💧 current ratio

Answer 1

Current A/current L measures short-term debt paying ability

Question 2

Acid test ratio

Answer 2

Cash+short-T Investments+A/R ÷ Curr L measures IMMEDIATE short-term debt paying ability

Question 3

Receivables turnover ratio

Answer 3

Net Credit Sales ÷ Average A/R Measures liquidity of receivables
(some companies don’t disclose net credit sales so just use sales!)
-Measures the number of times that receivables are collected in a period
-Higher the number, the more liquid are receivables
-Co’s rarely report the amount of net sales made on credit, therefore it will include both cash & credit sales

Question 4

Receivables collection period

Answer 4

days in year/ Receivables turnover measures number of days receivables R outstanding. -General rule: the collection period should not exceed the credit term period (don’t want it to exceed the net 30 days or whatever is specified…..offor mo incentives 2 pay back)

Question 5

Inventory turnover

Answer 5

COGS ÷ Avg Inventory (prev+curr inventory)/2
Measures Liquidity of inventory. The number of times inventory “turns over” during a given period
The more times inventory turns over, the 𝗺𝗼𝗿𝗲 𝗲𝗳𝗳𝗶𝗰𝗶𝗲𝗻𝘁𝗹𝘆sales are being made
Average inventory is usually average of beginning and ending inventories
(getting rid of inventory.how fast am i selling goods? discounts can help?.. the word turnover is changes..so employee turnover would be bad)
Excessive levels of inventory leads to high carrying costs
Too little inventory may result in lost sales

Question 6

Days sales in Inventory (Inventory collection period)

Answer 6

Days in year/Inventory Turnover measures number of days inventory is on hand

Question 7

Operating cycle

Answer 7

Days sales in inventory + Collection Inventory . measures number of days to purchase inventory, sell, collect cash

Question 8

Solvency 🌊💶 debt to total assets

Answer 8

Total L / Total A measures % of total assets provided by creditors.
1.The higher the percentage of total debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations

2.The lower the debt to total assets ratio, the more net assets there are to repay creditors if the company becomes insolvent
3.From a lender’s point of view, a low ratio of debt to total assets is desirable

Question 9

Solvency–> Interest Coverage PIII

Answer 9

Profit+ Interest Expense+ Income tax expense (EBIT) ÷ Interest Expense measures ability to meet interest payments. 1. EBIT represents the amount that is considered to be available to cover interest
2. This ratio is used in relation to the Debt to Total Assets ratio.
-Some businesses may have a high D to TA but it is able to cover its interest payments.
-Some businesses may have a low D to TA but has a low interest coverage

Question 10

Profitability 💰🤑 gross profit ratio

Answer 10

Gross profit/Net Sales Measures margin btwn selling price and COGS

Question 11

Profit ratio

Answer 11

Profit/Net Sales Measures amount of profit generated by each dollar of sales

Question 12

explain each ratio classification

Answer 12

Liquidity ratios:
measure short-term ability to meet obligations and unexpected cash needs
Solvency ratios: measure ability to survive over long periods of time
Profitability ratios: measure operating success for a specific time period

Question 13

Asset turnover ratio🔄

Answer 13

Net Sales/ Average total Assets Measures how efficiently assets R used to generate sales. Indicates how efficiently a company uses its assets
How many dollars of sales are generated by each dollar that it invested in assets.

Question 14

Return on Assets

Answer 14

Profit/Average total Assets (beginning & end of the year)

Measures overall profitability of assets
Indicates the amount of profit that is generated by each dollar invested in assets

A high return on assets indicates a profitable company, but should be compared with previous years and other companies in the same industry to determine how well it has actually performed

Question 15

read this doc and links :))

Answer 15

https://docs.google.com/document/d/1w_6dUZztm5cjQ8diJ6F53cgyCMW9sD-SMUIzELA05CQ/edit?pli=1

Question 16

more on gross profit

Answer 16

-Gross profit expressed as a percentage
-Measures the effectiveness of a company’s purchasing and
pricing policies
-COGS is a company’s largest expense of overall profitability (operating expenses haven’t been deducted yet)
-Measures how much of every dollar of revenues is left over afterpaying cost of goods sold
= Gross Profit ÷ Net Sales
(Net Sales - COGS) ÷ Net Sales

Question 17

what does this tell us?
Company ABC makes pens. If ABC reported $5 million in total revenue for
the year and cost of goods sold (cost of materials and direct labor) of $2
million. Calculate the Gross Profit Margin
Gross Profit Margin = ($5,000,000 - $2,000,000) / $5,000,000 = 60%

Answer 17

The gross profit margin percentage tells us that Company ABC has 60% of its revenues left over after it pays the direct costs associated with making its shoes (its cost of goods sold (COGS)). Company ABC can use this money to
for operating expenses, taxes, etc.

Question 18

more on profit margin

Answer 18

-The percentage of sales that results in profit
percentage of each dollar of sales that results in profit
-Measures the ability of a company to cover all
expenses and provide a return to owners
-how effectively a company can convert sales into net
income
= Profit ÷ Net Sales

why it’s important: Investors want to make sure profits are high enough to
distribute dividends
-Creditors want to make sure the company has enough profits to
pay back its loans.
-In other words, outside users want to know that the company
is running efficiently. An extremely low profit margin formula
would indicate the expenses are too high and the management
needs to budget and cut expenses