EXAM

Question 1

These ratios measure the returns on investors and the operating performance of a company during a given accounting period. The following ratios are used to measure the profitability of a company:

Answer 1

PROFITABILITY RATIOS

Question 2

is a profitability measure that should be of interest to the owners of the company, whether they are single proprietors, partners, or shareholders.

Answer 2

Return on equity (ROE)

Question 3

measures the amount of net income earned in relation to equity.

Answer 3

Return on equity (ROE)

Question 4

ROE FORMULA

Answer 4

Net income ÷ Equity × 100%

Question 5

measures the ability of a company to generate income out of its resources.

Answer 5

Return on assets (ROA)

Question 6

ROA FORMULA

Answer 6

(Operating income + Total assets) × 100%

Question 7

provides information regarding the ability of a company to cover its cost of goods sold from its sales.

Answer 7

Gross profit margin

Question 8

Gross profit margin

Answer 8

(Gross profit = Net sales) × 100%

Question 9

Margin measures the amount of income generated from the core business of a company.

Answer 9

Operating profit margin

Question 10

Operating profit margin formula

Answer 10

= (Operating income ÷ Net sales) × 100%

Question 11

measures how much net profit a company generates for every peso of net sales or revenues that it generates.

Answer 11

Net Profit Margin

Question 12

is the amount left after all expenses have been deducted from net sales, including interest expense and income taxes.

Answer 12

Net income

Question 13

measure how much of the total assets of a company are financed by liabilities and equity, otherwise known as capital structure.

Answer 13

STABILITY OR LEVERAGE RATIOS

Question 14

ratio measures how much of the total assets are financed by liabilities

Answer 14

Debt ratio

Question 15

Debt ratio formula

Answer 15

Total liabilities ÷ Total assets

Question 16

________ ratio is a variation of the debt ratio. _______ ratio of more than one means that a company has more liabilities as compared to stockholders’ equity.

Answer 16

Debt-to-equity ratio

Question 17

Debt-to-equity ratio formula

Answer 17

= Total liabilities ÷ Equity

Question 18

provides information if a company has enough operating income to cover interest expense.

Answer 18

Interest Coverage Ratio

Question 18

Interest coverage ratio formula

Answer 18

= Operating income ÷ Interest expense

Question 19

refers to the current assets used in the operations of a business. This includes cash, accounts receivable, inventories, and prepaid expenses.

Answer 19

Working capital