F2 - Ratios!

Question 1

What is the AR Turnover Ratio?

Answer 1

Net Sales / Average NET A/R (factor in a.d.a)

Question 2

What is the Asset Turnover Ratio?

Answer 2

Net Sales / Average Total Assets

Question 3

What are the two (general) components used to sum up to Equity?

Answer 3

Capital Stock + Retained Earnings = Equity

Question 4

What is the Debt / Equity Ratio?

Answer 4

Total Liabilities / Equity

Question 5

What is the Current Ratio?

Answer 5

Current Assets / Current Liabilities

Question 6

What is the Inventory Turnover Ratio?

Answer 6

Cost of Goods Sold / Average Inventory.

Careful: Inventory Turnover uses average inventory for the year… while Days in Inventory uses ending inventory.

Question 7

What is the Quick Ratio?

Answer 7

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

-One thing to note: Quick ratio excludes inventory and prepaids in its tallying of current assets. Basically all the money-related current assets are used, no prepaids or inv.

Question 8

What is the Working Capital Calculation?

Answer 8

Current Assets - Current Liabiltiies.

Question 9

What is the Days In Inventory Calculation (Ratio)?

Answer 9

Ending Inventory / (COGS/365),
Or…
365 / (Ending inventory/COGS)

Careful: Inventory Turnover Ratio uses average inventory for the year. Days in Inventory uses ending inventory.

Question 10

What is the Working Capital Turnover Ratio?

Answer 10

Net Sales / Average Working Capital
Or…
Net Sales / (CA - CL Year 1 + CA - CL Year 2, averaged)

Question 11

What is the Net Profit Margin Calculation?

Answer 11

Net Income / Net Sales

Question 12

What is the ROA (Return on Assets) Calculation?

Answer 12

Net Income / Average Total Assets

Question 13

What is the DuPont Return on Assets Calculation?

Answer 13

Net Profit Margin * Total Asset Turnover = DuPont ROA
-Aka-
Net Income / Net Sales * Net Sales / Average Total Assets

Question 14

What is DuPont?

Answer 14

Net Profit Margin (how much can u profit)
TIMES
TAT.

Say it after me: Net Profit Margin (what’s the margin on thoseee) * TAT

Question 15

What is the (ROE) Return on Equity Calculation?

Answer 15

(Net income MINUS Preferred Dividends) / Average COMMON Equity.

This is important, so I’m going to repeat it. Remember it.

Return on equity = (NI - preferred dividends) / Average common equity

• Preferred privilege goes on the top (of course.)
• Common jibroni equity goes on the bottom

Question 16

SNEAKY Trick: If company sells inventory at cost ($100 sold for $100), which ratios will decrease / be affected?

Answer 16

• Net profit margin will decrease (net sales in the denominator).
• -> Net Sales will increase (up $100), but Net Income will remain the same (COGS = Net Sales)

Question 17

What is the Total Debt Ratio?

Answer 17

Total Liabilities / Total Assets
OR…
Total Liabilities / (Total Liabilities + Total Equity)

Question 18

What is the Times Interest Earned Ratio?

Answer 18

EBIT / Interest Expense
Important…
EBIT = Earnings before any interest and tax payments are made… higher than your net income.

Question 19

What is the Operating Cash Flow Ratio?

Answer 19

Operating Cash Flow / Ending Current Liabilities
Important…
SIMILAR to Current Ratio, or Quick Ratio. Divide OCF by current liabilities