Chapter 6

Question 1

Asset Turnover

Answer 1

sales divided by assets and is interpreted as the number of dollars in sales generated by each dollar of assets

Question 2

Assets-to-equity

Answer 2

assets divided by equity and is interpreted as the number of dollars of assets acquired for each dollar invested by stockholders

Question 3

Average Collection Period

Answer 3

Shows the average number of days that elapse between sale and cash collection

Question 4

Cash Flow Adequacy Ratio

Answer 4

cash from operations divided by expenditure for fixed asset additions and acquisitions of new businesses

Question 5

Cash Times Interest Earned Ratio

Answer 5

a financial analysis tool that indicates the interest payment ability of an entity

Question 6

Common-size Financial Statements

Answer 6

all amounts for a given year being shown as a percentage of that denominator for the year

Question 7

Current Ratio

Answer 7

a comparison of current assets (cash, receivable, and inventory) with current liabilities. It is computed by dividing total current assets by total current liabilities

Question 8

Debt Ratio

Answer 8

a frequently used measure of leverage, computed as total liabilities divided by total assets

Question 9

Debt-to-equity Ratio

Answer 9

total liabilities divided by total equity and is interpreted as the number of dollars of borrowing for each dollar equity investment

Question 10

DuPont Framework

Answer 10

a systemic approach to identifying general factors causing ROE to deviate from normal

Question 11

Financial Statement Analysis

Answer 11

areas in which additional data must be gathered, including details of significant transaction, market share information, competitors plans and customer demand forecasts

Question 12

Fixed Asset Turnover

Answer 12

sales divided by average fixed assets and is interpreted as the number of dollars in sales generated by each dollar of fixed assets

Question 13

Leverage

Answer 13

borrowing that allows a company to purchase more assets than its stockholders are able to pay through their own investment

Question 14

Liquidity

Answer 14

a company’s ability to pay its debt in the short run

Question 15

Margin

Answer 15

the profitability of each dollar in sales

Question 16

Number of Day’s Sales in Inventories `

Answer 16

calculated by dividing average inventory by average daily cost of goods sold and is interpreted as the average number of days of sales that can be made using only the supply of inventory on hand

Question 17

Price-earnings Ratio

Answer 17

an equity valuation multiple. it is defined as market price per share divided by annual earnings per share

Question 18

Return on Assets

Answer 18

net income divided by total assets and is the number of pennies of net income generated by each dollar of assets

Question 19

Return on Equity

Answer 19

the overall measure of the performance of a company

Question 20

Return on Sales

Answer 20

net income divided by sales and is interpreted as the number of pennies in profit generated from each dollar of sales

Question 21

Turnover

Answer 21

the degree to which assets are used to generate sales