Chap 6

Question 1

Express the relationship among specific financial statement data.

Answer 1

Financial Ratios

Question 2

Measure the ability of the company to generate income from the use of its assets and
invested capital.

Answer 2

Profitability Ratio

Question 3

measured based on the company’s ability to generate sales from the utilization of its
assets, as a whole or individually.

Answer 3

Operational Efficiency Ratio

Question 4

● To evaluate the financial health of a business, Solvency and Liquidity Ratios must be
considered
● Solvency refers to the company’s capacity to pay its long-term liabilities.
● Liquidity refers to the company’s capacity to pay its short-term liabilities.

Answer 4

Financial Health Ratio

Question 5

3 financial ratios

Answer 5

1. Profitability Ratio
2. Operational Efficiency ratio
3. Financial health ratio

Question 6

Profitability ratios

Answer 6

1. Gross Profit Margin or Gross Profit Rate
2. Operating Profit Margin
3. Net Profit Margin
4. Return on Assets (ROA)
5. Return on Equity (ROE)

Question 7

It can be interpreted as the peso value of the gross profit earned for every peso of
sales

Answer 7

1. Gross Profit Margin or Gross Profit Rate

Question 8

expresses operating income as a percentage of net sales.

Answer 8

2. Operating Profit Margin

Question 9

It can be interpreted as the peso value of the net income earned for every peso of net
sales.

Answer 9

Net profit margin

Question 10

measure of the profitability of the company’s assets.

Answer 10

Return on assets

Question 11

measures the return generated by the capital invested by the owner in the business.

Answer 11

Return on equity

Question 12

OPERATIONAL EFFICIENCY RATIOS

Answer 12

1. Asset Turnover
2. Fixed Asset Turnover
3. Inventory Turnover
4. Days in Inventory
5. Accounts Receivable Turnover
6. Days in Receivable

Question 13

is an indicator of the efficiency with which the company is utilizing all its assets

Answer 13

Asset turnover

Question 14

● This ratio is similar to asset turnover, except that it is focused on fixed assets only.

Answer 14

Fixed Asset Turnover

Question 15

This ratio is an indicator of how fast the company can sell its inventory.

Answer 15

Inventory turnover

Question 16

This ratio computes the average number of days that inventories are held until sold.

Answer 16

Days in inventory

Question 17

measures the number of times the company can convert accounts receivable to cash
during the year

Answer 17

Accounts receivable turnover

Question 18

● It computes the average number of days from the date of sale to the date of collection.

Answer 18

Days in receivable

Question 19

indicates the company’s reliance on debt or liability as a source
of financing relative to equity.

Answer 19

debt-to-equity ratio

Question 20

Also known as Debt to Assets Ratio. It indicates the percentage of the company’s
liabilities as a percentage of total assets or a percentage of the company’s assets that
are financed by debt.

Answer 20

Debt ratio

Question 21

This ratio measures the company’s ability to cover the interest expense on its liability with its operating income.

Answer 21

interest coverage ratio

Question 22

FINANCIAL HEALTH RATIOS - SOLVENCY RATIOS

Answer 22

1. Debt-to-equity ratio
   2.debt ratio
   3.interest coverage ratio

Question 23

measures the sufficiency of current assets to cover current liabilities

Answer 23

current ratio

Question 24

measures the sufficiency of quick assets to cover current liabilities.

Answer 24

quick ratio