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AUDIT - Only pass keys and problem areas > Appendix I - Financial Ratios > Flashcards

Appendix I - Financial Ratios Flashcards

1
Q

Ratios Question TIP:

A

In questions when both the numerator and denominator are affected by a given change, the final result (increase or decrease) is hard to determine. SO, to answer these, make up numbers and plug them into the ratio formula.

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2
Q

Which Financial Ratio Classification is this?

Financial measures of a firm’s short-terms ability to pay maturing obligations

A

Liquidity Ratios

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3
Q

Which Financial Ratio Classification is this?

Measures the financial performance of an enterprise for a given time period

A

Profitability Ratios

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4
Q

Which Financial Ratio Classification is this?

Measures of security for long-term creditors/investors

A

Long-term Deb-Paying Ability Ratios (coverage ratios)

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5
Q

Which Financial Ratio Classification is this?

Measures how effectively an enterprise is using its assets

A

Activity Ratios

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6
Q

Analysis used to compare a company’s performance with the performance of other small/larger companies or with its own performance over time?

A

Common size Financial Statements.

Both Horizontal and Vertical

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7
Q

How is the common size BS and IS drafted?

A

BS = Divide each balance by total assets

IS = Divide each IS amount by total revenue.

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8
Q

Ratios analysis is useful in comparing norms in an industry and can be used to analyze trends over time

A

Benchmarking can be done against competitors or industry averages

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9
Q

What is the formula for the current ratio and what is it also called?

A

Its also called the working capital ratio

CR = CA / CL

WC = CA - CL

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10
Q

The current ratio is a measure of ?

A

A company’s ability to meet its short-term obligations

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11
Q

What is the formula for the acid-test ratio?

A

ATR = (Cash Equiv. + Marketable Securities + AR) / CL

Also, calc’d as:
Liquid assets = (Total current assets) – (Inventories + Prepaid expenses) / CL

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12
Q

What is the formula for the cash ratio?

A

(Cash Equiv. + Marketable Securities) / CL

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13
Q

What is the formula for the AR turnover, and the AR turnover in Days?

A

AR TO = Net Credit Sales / Average Net Receivables

AR TO in Days = 365/ AR TO
AR TO in Days also = Avg. Net Receivables / (Net Credit Sales / 365)

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14
Q

What does the AR TO ratio indicate?

A

AR quality and the success of the firm in collecting outstanding AR. Faster TO gives credibility to the current/acid-test ratios.

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15
Q

What does the AR TO ratio indicate?

A

The average number of days required to collect AR

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16
Q

What is the inventory TO formula?

A

INV TO = COGS / AVG INVENTORY

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17
Q

What does the inventory TO measure?

A

How quickly inventory is sold and is an indicator of enterprise performance. Higher the TO the better

18
Q

What is the inventory TO in days formula?

What does this ratio indicate?

A

INV TO in Days = 365 / INV TO

INV TO in Days also = AVG INV / (COGS / 365)

The ratio indicates the average number of days required to sell inventory

19
Q

What is the formula for the operating cycle? And, what does it indicate?

A

AR TO in days + Inventory TO in days.

Indicates the number of days between acquisition of inventory and realization of cash from selling the inventory

20
Q

What is the formula for the working capital TO ratio and what does it indicate?

A

WC TO = Sales / Average WC

This ratio indicates how effectively working capital is used.

Note = Avg WC is Beg WC + End WB / 2

21
Q

What is the Total Asset TO formula and what does it indicate?

A

Net Sales / Average Total Assets

It indicates of how well a company makes use of its assets. Higher ratio indicates effective use to generate sales

22
Q

What is the formula for Accounts Payable TO and what does it indicate?

A

AP TO = COGS / Average AP

Indicates the number of times payables turn over during the year. Low TO may indicate delay in payment like a shortage of cash.

23
Q

What’s the formula for Days in Accounts Payable and what does it indicate?

A

Average AP / (COGS / 365)

Indicates the average length of time trade payable are outstanding before they are paid

24
Q

What’s the formula for Net Profit Margin Ratio

A

NI / Sales

25
Q

What is the ROA formula?

A

Net Income / Average Total Assets

26
Q

What is the alternate version of the ROA formula?

A

Net Profit Margin x Total Asset TO

Allows for increased analysis of changes in percentages.

27
Q

What is the ROI formula?

A

NI + Int Exp(1 - TR) / Average (LT liab + Equity)

ROI measures performance w/out regard to financing

28
Q

Whats the formula for Return on Equity?

A

( NI - Preferred Dividends ) / Average Common Equity

29
Q

Whats the formula for Net Operating Margin Percentage?

A

NOI / Net Sales

30
Q

Whats the formula for Gross Profit Margin Percentage?

A

Gross Profit Margin / Net Sales

31
Q

Operating Cash Flow Per Share formula?

A

Operating Cash Flow / Common Shares Outstanding

32
Q

Whats the Degree of Financial Leverage Formula?

A

EBIT / EBT

The DOL is the factor by which NI will change with a change in EBIT. The DOL indicates the leverage factor for recurring earnings.

33
Q

Whats the EPS formula?

A

NI - Preferred Dividends / Weighted Average number of shares oustanding

34
Q

Whats the Price/Earnings Ratio =

A

Market Price Per Share / Diluted Earnings Per Share

This indicates the investment potential of an enterprise. A rise in the ratio indicates that investors are pleased w/the firm’s opportunity for growth.

35
Q

Whats the D/E payout ratio and what does it indicate?

A

Dividends per common share / Diluted earnings per share

It indicates the portion of current earning beings paid out in dividends

36
Q

Whats the D/E yield ratio and what does it indicate?

A

D/E per common share / Market Price per common share

It indicates the relationship between d/e and market price

37
Q

Whats the formula for the BV per share and what does it indicate?

A

BV per share = Total SE - Pstock / # of shares of common stock outstanding

Indicates the amount of SE that relates to each share of common stock.

38
Q

Whats the formula for Debt to Equity and what does it indicate?

A

Total Liab / Common SE

Indicates the degree of protection to creditors in case of insolvency. The lower the rate the better the company’s position.

39
Q

Whats the debt ratio ?

A

Total Liabs / Total Assets

40
Q

Whats the formula for the Times Interest Earned ratio?

A

EBIT / Interest

It reflects the ability of a company to cover interest charges

AUDIT - Only pass keys and problem areas (20 decks)

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