Analytical Procedures Flashcards
What do liquidity ratios measure?
Liquidity ratios measure an entity’s short-term ability to meet its obligations.
What is the definition of working capital?
Working Capital = Current Assets - Current Liabilities
What is the current ratio?
Current Assets / Current Liabilities
What is the quick or acid-test ratio?
Current Assets (Cash + Marketable Securities + AR) / Current Liabilities
What is the current cash to debt ratio?
Net cash from operations / Average current liabilities
What do activity or efficiency ratios measure?
These ratios measure an entity’s effectiveness in putting their assets to use.
What is the asset turnover ratio?
Net sales / Average total assets
What is the receivable turnover ratio?
Net (credit) sales / Average (net) trade receivables
What is the number of days sales in receivables?
365 days / Receivable turnover
What is the inventory turnover ratio?
Cost of goods sold / Average inventory
What is number of days sales in inventory?
365 days / Inventory turnover ratio
What do profitability ratios measure?
Profitability ratios measure an entity’s operating success or failure for a period of time.
How is profit margin on sales calculated?
Net income / Net sales
How is the gross profit percentage calculated?
(Sales - Cost of goods sold) / Sales
How is the rate of return on assets (ROA) calculated?
Net income / Average total assets
How is the rate of return on common stockholders’ equity (ROE) calculated?
(Net income - Dividends to preferred shareholders) / Average common stockholders’ equity
How is earnings per share (EPS) calculated?
(Net income - preferred dividends) / average number of common shares outstanding
How is the price - earnings (P-E ratio) calculated?
Market price of stock / Earnings per share
What do coverage or leverage ratios measure?
These ratios measure an entity’s ability to meet its obligations over time. In other words, they are measures of long-term risk to creditors and the extent to which the entity has borrowed up to its available capacity.
What is the debt to total assets ratio?
Total liabilities / Total assets
What is the debt to equity ratio?
Total liabilities / Total stockholders’ equity
What is the times interest earned ratio?
Income before interest expense and income taxes / interest expense
What is the cash to debt coverage ratio?
Net cash from operations / Average total liabilities
How is earnings per share increased?
Journal entries with a net effect of increasing earnings or decreasing outstanding shares increases the ratio.
How is days sales in accounts receivable decreased?
An increase in sales increases the accounts receivable turnover, but decreases the days sales in accounts receivable. An increase in accounts receivable decreases the accounts receivable turnover, but increases the days sales in accounts receivable. Equal changes in sales and accounts receivable decrease the accounts receivable turnover and increase the days sales in accounts receivable.
When does gross profit increase?
Gross profit increases when the net change in sales minus cost of goods sold is positive.
