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Becker Auditing > Auditing Financial Ratios > Flashcards

Auditing Financial Ratios Flashcards

1
Q

Liquidity Ratios

A

Liquidity ratios are measures of a firm’s S-T ability to pay maturing obiligations

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2
Q

Activity ratios

A

Activity ratios are measures of how effectively an enterprise is using its assets.

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3
Q

Profitability Ratios

A

Profitability ratios measure the financial performance of an enterprise for a given period of time period.

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4
Q

Investor Ratios

A

Investor ratios are measures that are of interest to investors.

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5
Q

Long-Term Debt-Paying Ability Ratio

A

(Coverage ratios) Coverage ratios are measuring of securities for L-T creditors/investors

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6
Q

7 Limitations of Ratios

A
  1. There are few industry benchmarks for comparison
  2. Dissimilar business units may make analysis difficult
  3. Inflation can reduce comparability of balance sheet items
  4. Manipulation of ratios by management can occur
  5. The choice of different GAAP can affect ratios and reduce comparability.
  6. Generalizations are difficult to make
  7. Ratios may use accounting data (e.g. fixed assets) that do not reflect FV
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7
Q

Work capital ratio

A

Current Assets - Current Liabilities

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8
Q

Current Ratio (Working Capital Ratio)

A

Current Assets / Current Liabilities

The higher the ratio indicates company ability to meet is short-term obligations, has improved.

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9
Q

Acid-Test Ratio

A

Cash Equivalents + Marketable Securities + AR

/

Current Liabilities

The higher the ratio the better because this indicates that company is meeting ST needs.

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10
Q

Cash Ratio

A

Cash equivalents + Marketable Securities

/

Current Liabilities

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11
Q

Account Receivable Turnover

A

Net Credit Sales

/

Average net receivables

This ratio indicates the receivables’ quality and indicates the success of the firm in collecting outstanding receivables. Faster turnover gives creditability to the current and acid-test ratios.

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12
Q

AR Turnover in days

A

Average net receivable / Net Credit sales 365

= 365 days / Receivable Turnover

This ratio indicates the average number of days required to collect AR.

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13
Q

Inventory Turnover

A

COGS / Average Inventory

This measures of how quickly inventory is sold is an indicator of enterprise performance. The higher the turnover, in general, the better the performance.

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14
Q

Inventory Turnover in Days

A

= Average Inventory / (COGS / 365)

= 365 days / Inventory T/O

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15
Q

Operating Cycle

A

= AR Turnover in days + Inventory turnover in days

The operating cycle indicates the number of days between the acquisition of inventory and realization of cash from selling the inventory.

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16
Q

Working Capital Turnover

A

Sales / Average Working Capital

This Ratio indicates how effectively working capital is used.

17
Q

Total Asset Turnover

A

Net Sales / Average total Assets

This ratio is in indicator of how company makes use of its assets. A high ratio indicates effective asset use to generate saels.

18
Q

AP Turnover

A

COGS / Average AP

This ratio indicates the number of times trade payables turn over during the year. A low turnover may indicate a delay in payment, such as from shortage of cash.

19
Q

Days in AP

A

Average AP / (COGS / 365)

This ratio indicates the average length of time trade payables are outstanding before they are paid.

20
Q

Net Profit Margin

A

Net Income / Net Sales

This ratio indicates profit rates and when used with the asset turnover ratio, indicates rate of return on assets.

21
Q

Return on Total Assets

A

Net Income / Average Total Assets

22
Q

Return on Assets

A

Net Profit Margin x Total Asset Turnover

23
Q

Return on Investments

A

((Net Income + Interest Expense) (1-Tax Rate))

/

Average (Long-Term Liabilities + Equity)

ROI measures the performance of the firm without regard to the method of financing.

24
Q

Return on Common Equity

A

Net Income - Preferred Dividends

/

Average Common Equity

This ratio uses net income less preferred dividends in the numerator to better measure returns accruing to common shareholders.

25
Q

Net Operating Margin Percentage

A

Net Operating Income

/

Net Sales

26
Q

Gross (Profit) Margin Percentage

A

Gross (Profit) Margin

/

Net Sales

27
Q

Operating Cash Flow Per Share

A

Operating Cash Flow

/

Common Shares Outstanding

28
Q

Degree of Financial Leverage

A

Earnings before interest and taxes / Earnings before taxes

The degree of financial leverage is the factor by which net income will change with a change in earnings before interest and taxes. The degree of financial leverage indicates the leverage factor for recurring earnings.

29
Q

Earnings Per Share

A

Net Income - Preferred Dividends

/

Weighted Average Number of Common Shares Outstanding

30
Q

Price / Earning Ratio

A

Market Price per share

/

Diluted EPS

31
Q

Dividend Payout Ratio

A

Dividends per common share

/

Diluted EPS

32
Q

Dividend Yield

A

Dividends per Common Share

/

Market Price per common share

33
Q

Book Value per share

A

Total stockholder equity - preferred stock

/

Number of common shares outstanding

34
Q

Debt Ratio

A

Total Liabilities

/

Total Assets

This debt ratio indicates that more than half of the assets are financed by credits.

35
Q

Debt / Equity

A

Total Liabilities / Common Stockholders’ Equity

This ratio indicates the degree of protection to creditors in case of insolvency. The lower this ratio the better company’s position. If Ratio is very high, indicates that a majority of funds come from creditors.

36
Q

Times Interest earned

A

Earnings before taxes and interst

/

Interest

This ratio reflects the ability of a company to cover interest charges. It uses income before interest and taxes to reflect the amount of income available to cover interest expense.

37
Q

Operating Cash Flow / Total Debt

A

Operating Cash Flow / Total Debt

This ratio indicates the ability of the company to cover total debt with yearly cash flow.

Becker Auditing (17 decks)

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