FAR 2

Question 1

Liquidity Ratios (also known as Solvency Ratios)-

Answer 1

Measure the ability of the firm to pay its obligations as they become due.

Question 2

Debt to Equity Ratio-

Answer 2

Total Debit (Liabilities) / Owner’s Equity

Question 3

Working Capital=

Answer 3

Current Assets - Current Liability

Question 4

Working Capital Ratio=

Answer 4

Current Assets / Current Liabilities
An increase in current assets alone increases the WCR
A decrease in current assets alone decreases the WCR
An increase in current liabilities alone decreases the WCR
A decrease in current liabilities alone increases the WCR

Question 5

Acid-Test Ratio (Quick Ratio)-

Answer 5

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

Question 6

Securities Defensive-Interval Ratios=

Answer 6

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

Question 7

Times Interest Earned Ratios=

Answer 7

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

Question 8

Times Preferred Dividend Earned Ratio=

Answer 8

Net Income / Annual Preferred Dividend Obligation

Question 9

Operational Activity Ratios-

Answer 9

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

Question 10

Accounts Receivable Turnover-

Answer 10

(Net) Credit Sales / Average (Net) Accounts Receivable (i.e. Beginning + Ending/2)

Question 11

of days’ sales in Average Receivables=

Answer 11

(300 or 360 or 365 (or other measure of business days in a year)) / Accounts Receivable Turnover

Question 12

Inventory Turnover=

Answer 12

Cost of Goods Sold / Average Inventory

Question 13

of days’ Supply in Inventory-

Answer 13

(300 or 360 or 365) / Inventory Turnover

Question 14

Operating Number of Cycle-

Answer 14

Days in Operating= # of days’ Sale in A/R + Length Cycle Number of Days’ Supply in Inventory

Question 15

Financial Statement Ratio Analysis-

Answer 15

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

Question 16

Profitability Ratios-

Answer 16

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

Question 17

Profit Margin (on Sales)=

Answer 17

Net Income / (Net) Sales

Question 18

Return on Total Assets=

Answer 18

(Net Income + (add back) Interest Expense (net of tax effect)) / Average Total Assets

Question 19

Return on Common Stockholders’ Equity =

Answer 19

(Net Income - Preferred Dividend (obligation for period only)) / Average Common Stockholders’ Equity

Question 20

Return on Owners’ (all stockholders’) Equity=

Answer 20

Net Income / Average Stockholders’ Equity

Question 21

Earning Per Share (EPS) basic formula=

Answer 21

(Net Income - Preferred Dividends (obligation for the period only)) / Weighted Average # of shares outstanding

Question 22

Price-Earnings Ratio (P/E Ratio)=

Answer 22

Market Price for a Common Share / Earnings Per Share

Question 23

Total Basis=

Answer 23

Cash Dividends to Common Shareholders / Net Income to Common Shareholder

Question 24

Per Share Basis=

Answer 24

Cash Dividends per Common Share / Earnings per Common Share

Question 25

Common Stock Yield=

Answer 25

Dividend per Common Share / Market Price per Common Share

Question 26

Debit to Equity Ratio=

Answer 26

Total Liabilities / Total Shareholders’ Equity

Question 27

Owners’ Equity Ratio=

Answer 27

Shareholders’ Equity / Total Assets

Question 28

Debt Ratio=

Answer 28

Total Liabilities / Total Assets

Question 29

Book Value per Common Stock=

Answer 29

Common Shareholders’ Equity / # of outstanding common shares

Question 30

Book Value per Preferred Share=

Answer 30

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