Chapter 3- Accounting Analysis and Evaluation

Question 1

What are financial statement ratios used for?

Answer 1

as measures of the efficiency and productivity of a business.

Question 2

What are the basic ratios?

Answer 2

1. current ratio (working capital ratio).
2. quick ratio
3. earnings per share
4. debt-to-asset ratio
5. return on equity

Question 3

What does the current ratio tell us and how is it calculated?

Answer 3

measures the amount of current liabilities that a company has for every dollar of current assets.

divide current assets by current liabilities

Question 4

what does the quick ratio tell us and how is it calculated?

Answer 4

Measures the number of dollars in cash and accounts receivable that there are for every one dollar in liabilities.

adding cash and accounts receivable together and dividing that total by amount of current liabilities

Question 5

What does the earnings per share tell us and how is it calculated?

Answer 5

measures how much net income is earned per share of a company’s common stock.

dividing net income by the number of shares of common stock outstanding

Question 6

What does the debt-to-assets ratio tell us and how is it calculated?

Answer 6

how many assets a company has that are financed by debt

dividing total liabilities by total assets.

Question 7

What does return on equity tell us and how is it calculated?

Answer 7

measure of the return on each dollar invested by stockholders

dividing net income by the average stockholder’s equity.