Evaluating Financial Statements

Question 1

List the formula for times interest earned.

Answer 1

(Net Income + Interest Expense + Income Tax Expense) / Interest Expense.

Question 2

List the formula for number of days’ supply in inventory.

Answer 2

365/ Inventory Turnover.

Question 3

What are the general types of ratios?

Answer 3

Liquidity/Solvency; Operational Activity; Profitability; Equity/Investment Leverage.

Question 4

What do operational activity ratios measure?

Answer 4

They measure the efficiency with which a firm carries out its operating activities.

Question 5

List the formula for working capital.

Answer 5

Current Assets - Current Liabilities.

Question 6

List the formula for determining Operating Cycle Length.

Answer 6

Days’ Sales in Accounts Receivable + Days’ Supply in Inventory.

Question 7

List the formula for the Acid Test or Quick Ratio.

Answer 7

(Cash + Net Receivables + Marketable Securities) / Current Liabilities.

Question 8

List the Accounts Receivable Turnover ratio formula.

Answer 8

Net Credit Sales / Average Net Accounts Receivable.

Question 9

List the working capital ratio formula.

Answer 9

Current Assets / Current Liabilities.

Question 10

What do liquidity (or solvency) ratios measure?

Answer 10

Measure the ability of the firm to pay its debts as they come due.

Question 11

List the formula for Number of Days’ Sales in Accounts Receivable (AR).

Answer 11

365/ AR Turnover.

Question 12

List the cash availability or interval ratio formula.

Answer 12

(Cash + Net Receivables + Marketable Securities) / Average Daily Cash Expenditures.

Question 13

List the formula for times preferred dividend.

Answer 13

Net Income / Annual Preferred Dividend Obligation.

Question 14

List the formula for inventory turnover.

Answer 14

Cost of Goods Sold (COGS) / Average Inventory.

Question 15

What is financial statement ratio analysis?

Answer 15

The development of quantitative relationships between various elements of a firm’s financial statements.

Question 16

List the total common stock dividend payout rate formula.

Answer 16

Cash Dividends to Common Shareholders / Net Income to Common Shareholders.

Question 17

List the book value per preferred share ratio formula.

Answer 17

Preferred Shareholders’ Equity (including dividends in arrears) / Number of Outstanding Preferred Stocks.

Question 18

What do equity/investment leverage ratios measure?

Answer 18

Measure relative sources of equity and equity value.

Question 19

List the debt to equity ratio formula.

Answer 19

Total Liabilities / Total Shareholders’ Equity.

Question 20

List the price to earnings ratio formula.

Answer 20

Market Price for a Common Share / Earnings Per Share (EPS).

Question 21

List the profit margin formula.

Answer 21

Net Income/Net Sales.

Question 22

List the common stock yield formula.

Answer 22

Dividend per Common Share / Market Price per Common Share.

Question 23

List the return on common stockholders’ equity formula.

Answer 23

(Net Income-Current Period Preferred Dividend Obligation) / Average Common Stockholders’ Equity.

Question 24

List the debt ratio formula.

Answer 24

Total Liabilities / Total Assets.

Question 25

List the per share common stock dividend pay out rate formula.

Answer 25

Cash Dividends per Common Share / Earnings Per Share (EPS).

Question 26

List the book value per common stock ratio formula.

Answer 26

Common Shareholders’ Equity / Number of Outstanding Common Shares.

Question 27

List the return on total assets formula.

Answer 27

(Net Income + Interest Expense (net of tax)) / Average Total Assets.

Question 28

What do profitability ratios measure?

Answer 28

Aspects of a firm’s operating (income/loss) results on a relative basis.

Question 29

List the return on owner’s equity formula.

Answer 29

Net Income / Average Stockholders’ Equity.

Question 30

List the owner’s equity ratio formula.

Answer 30

Shareholders’ Equity / Total Assets.