Chapter 3

Question 1

acid- test ratio

Answer 1

a financial ratio used as a measure of short term liquidity also known as the quick ratio

cash+securities+receivables/ current liabilities

Question 2

liquidity

Answer 2

the ability of a firm to pay its short term obligations

Question 3

current ratio

Answer 3

indicator of the overall liquidity of a company.

current assets/current liabilities

Question 4

additional paid in capital

Answer 4

the investment of stockholders in excess of the amounts assignable to capital stock as stated or par value. As well as other invested capital such as the sale of treasury stock.

Question 5

debt ratio

Answer 5

an indicator of a company’s ability to repay its debt

total liabilities/total assets
(the higher the debt ratio the higher the likelihood that some of the debt might not be repaid

Question 6

asset mix

Answer 6

the proportion of total assets in each asset category

asset category/total assets

Question 7

asset turnover

Answer 7

an overall measure of a company’s efficiency. (is the company using its assets efficiently to convert them into revenue.

sales/total assets

Question 8

return on assets

Answer 8

used to calculate revenue the assets are generating

net income/ total assets

Question 9

return on equity

Answer 9

measures the % return on the actual investment made

net income/stock holders equity

Question 10

Notes added to the financial statement

Answer 10

• summary of accounting policies
• additional information to support summary totals
• Info. about items that do not meet the recognition criteria but is still useful for decision makers
• Supplementary schedules required by FASB or SEC (inventory valuation method, depreciation methods, accounting changes, special revenue recognition practices)

Question 11

book to market ratio

Answer 11

reflects the difference between the balance sheet value and actual market value of a company

book equity/ market equity

Question 12

callable obligation

Answer 12

a debt instrument that is 1) payable or demand and 2) has a specific due date but can be payable on demand

Question 13

capital stock

Answer 13

the portion of the amount invested by stockholders that is designated as par or stated value

Question 14

common stock

Answer 14

class of stock that represents the basic ownership of a company. Allows shareholders the right to vote and to dividends if declared (dividends are secondary to preferred)

Question 15

working capital

Answer 15

current assets- current liabilities; measures liquidity

Question 16

Treasury Stock

Answer 16

Stock that is issued and then bought back

Question 17

trading securities

Answer 17

debt and equity securities that are bought with the intent of selling them in the near future to generate profits from short term changes in the market prices

Question 18

subjective acceleration clause

Answer 18

a clause in a debt agreement that identifies general conditions that can make a debt payable on demand BUT violations of the agreement can not be determined objectively

Question 19

Stock Holders Equity

Answer 19

total owners equity

Question 20

sinking fund

Answer 20

assets that have been accumulated in order to repay a loan… savings account

Question 21

Retained Earnings

Answer 21

Amount of earnings made restricted by board members (for dividend payments)

Question 22

Other Comprehensive Income

Answer 22

Part of SHE.

Showing changes in owners equity exclusive of net income and contributions by and distribution to owners

Question 23

objective acceleration clause

Answer 23

a clause in a debt agreement that identifies specific conditions that will cause the debt to be callable immediatly

Question 24

loan covenant

Answer 24

provisions in a loan agreement restricting the borrower or allowing for some monitoring of the borrowers actions

Question 25

liquidity

Answer 25

a company’s ability to pay its short term obligations

How quickly a company can convert its assets into cash