FAR - Framework/Overview, Ratios

Question 1

liquidity ratios
operational ratios
profitability ratios
equity ratios
financial statement ratio analysis

Answer 1

measure ability to pay obligations
measure operational activity efficiency

quantitative relationship between elements on a financial

Question 2

Number of Days’ Sales in Average receivables

Acid Test/Quick Ratio

A/R Turnover

Answer 2

365 / A/R Turnover (Net sales / average net A/R)
-> number of days to collect receivables

(Cash + Net A/R + Trading/market securities) / CL
-> # of times that quick assets can be converted to cover liab

Net Credit Sales / Average Net Accounts Receivable.
-> # of times A/R are incurred and collected

Question 3

Times Preferred Dividend

cash availability or interval ratio formula.

Answer 3

Net Income / Annual Preferred Dividend Obligation.

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

Question 4

Working Capital

Working Capital Ratio

Inventory Turnover

Number of Days’ supply in inventory

Answer 4

CA - CL -> firm’s ability to pay off CL

CA / CL -> # of times CA covers CL

COGS / Average Inventory -> measures # of times inventory is acquired/sold (over/under-stocking)

365/ Inventory Turnover -> # of days inv is held before sold/used

Question 5

Operating Cycle Length

Times Interest Earned

Answer 5

Days’ Sales A/R + Days’ Supply in Inventory (ADD)
-> invest in inventory, convert inv to cash, and collect receivables

(NI + Interest Expense + Income Tax Expense) / Interest Expense -> ability to cover interest payments

Question 6

True/False

Financial Statement ratios facilitate comparisons between firms.

The defensive-interval ratio is a measure of how long available cash and other highly liquid assets could support normal cash requirements.

If the cost of goods sold increases while average inventory remains constant, there has been a more efficient use of inventory.

Answer 6

True

Question 7

Determine Beginning Inventory

Answer 7

COGS + Ending Inventory = COGS for sale

COGS for sale - purchases = Beginning Inventory

Question 8

True/False

Number of times turning over and number of days to collect are DIFFERENT

Answer 8

True

Question 9

True/False

If WCR > 1
Equal Increase -> decrease WCR
Equal Decrease -> increase WCR

if WCR increase WCR
Equal Decrease -> decrease WCR

Answer 9

True

Question 10

common stock dividend pay out rate formula:

Per share basis?

total basis?

Answer 10

cash div/c. share / EPS

total cash div to c. sh / NI to c. sh

Question 11

BV per preferred share formula

Return on owners’ equity formula

Answer 11

P. Sh’s equity (include div in arrears) / # of outstanding p. shares

Net Income / Average Stockholders’ Equity.

Question 12

Common stock yield formula

Return on C. S/H Equity formula

Answer 12

Div per c. share / MKT price/c. share

(NI - p. div obligation for current period) / AVG C. SH Equity

Question 13

Debt ratio formula

BV per common stock

Answer 13

TL / TA

Total owner’s equity / # of outstanding C. Shares (issued shares - treasury stock)

Question 14

equity/investment leverage ratios measure?

Owner’s equity ratio formula?

Answer 14

measure relative sources of equity and equity value

S/Hs’ Equity / TA

Question 15

Price earnings ratio ?

debt to equity ratio?

Answer 15

MKT price/common share / EPS

TL / TE

Question 16

Return on total assets

Profit Margin on sales

Answer 16

(NI + Interest Exp net) / AVG TA

NI / Net Sales

Question 17

profitability ratios measure?

Answer 17

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

Question 18

true/false

A common stock split will decrease the book value per share of common stock.

The purchase of treasury stock by an entity will decrease its book value per share of common stock.

In computing return on common stock equity, all preferred dividends in arrears must be subtracted from net income in the numerator.

The earning per share ratio is computed only for common stock.

The rate of return earned by common shareholders is measured by the common stock yield.

Answer 18

true

false

false

true

true

Question 19

true/false

Successful leverage is practiced by a company when it can borrow at a particular rate of interest, and then use the proceeds to earn a higher rate of return on stockholder’s equity (contributed capital investment). As long as business opportunities present themselves under these conditions, prudent borrowing is recommended.

Answer 19

true

Question 20

if question asks for return on owner’s equity,

deduct dividends paid from net income and exclude preferred stock from owners’ equity

Answer 20

true