FAR 2.7 - Ratio Analysis

Question 1

What are the 4 key financial ratio classifications?

Answer 1

Liquidity ratios
Activity ratios
Profitability ratios
Coverage ratios

Question 2

Measures of a firm’s short term ability to pay maturing obligations

Answer 2

Liquidity ratios

Question 3

Current ratio calculation:

Answer 3

Current assets / current liabilities

Question 4

Quick ratio calculation:

Answer 4

Current assets - inventory / current liabilities

Question 5

Should liquidity ratios be higher or lower?

Answer 5

Higher the ratio, Lower the risk

Question 6

Measures how effectively an enterprise is using its assets:

Answer 6

Activity ratio

Question 7

Should turnover ratios be higher or lower?

Answer 7

Higher the better

Question 8

Accounts receivables turnover calculation:

Answer 8

Sales / Average AR

Question 9

Days sales in AR calculation:

Answer 9

Ending AR / (sales / 365)

Question 10

Inventory turnover calculation:

Answer 10

COGS / Average Inventory

Question 11

Days in inventory calculation:

Answer 11

Ending inventory / (COGS / 365)

Question 12

Accounts payable turnover calculation:

Answer 12

COGS / average AP

Question 13

Days of payables outstanding calculation:

Answer 13

Ending AP / (COGS / 365)

Question 14

Cash conversion cycle calculation:

Answer 14

Days sales in AR + Days in inventory - Days of payables outstanding

Question 15

Asset turnover calculation:

Answer 15

Sales / average total assets

Question 16

Measures of the success or failure of an enterprise for aa given time period:

Answer 16

Profitability ratios

Question 17

Should profitability ratios be higher or lower?

Answer 17

Higher than the standard

Question 18

Profit margin calculation:

Answer 18

Net income / sales

Question 19

Return on assets:

Answer 19

Net income / average total assets

Question 20

Return on equity calculation:

Answer 20

Net income / average total equity

Question 21

Return on sales calculation:

Answer 21

Income before interest income, interest expense, and taxes / sales

Question 22

Gross profit margin:

Answer 22

Sales - COGS / sales

Question 23

Operating cash flow ratio calculation:

Answer 23

Cash flow from operations / current liabilities

Question 24

Measure of security or protection for long-term creditors/investors:

Answer 24

Coverage ratios

Question 25

Debt to equity ratio calculation:

Answer 25

Total liabilities / total equity

Question 26

Total debt ratio calculation:

Answer 26

Total liabilities / total assets

Question 27

Equity multiplier calculation:

Answer 27

Total assets / total equity

Question 28

Times interest earned calculation:

Answer 28

Income before interest expense and taxes / interest expene

Question 29

Earnings per share calculation:

Answer 29

Income available to shareholders / WACO

Question 30

Price earnings ratio calculation:

Answer 30

Price per share / basic earnings per share

Question 31

Dividend payout calculation:

Answer 31

Cash dividend / net income