FAR - Framework, Overview & Statements - Notes to Financial Statements - Ratios - Liquidity / Solvency & Operational

Question 1

What are the general types of ratios?

Answer 1

Liquidity/Solvency; Operational Activity; Profitability; Equity/Investment Leverage.

Question 2

List the formula for working capital.

Answer 2

Current Assets less Current Liabilities

Question 3

List the formula for the Acid Test or Quick Ratio.

Answer 3

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

Question 4

List the formula for times interest earned.

Answer 4

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

Question 5

List the formula for times preferred dividend.

Answer 5

Net Income / Annual Preferred Dividend Obligation

Question 6

What do liquidity (or solvency) ratios measure?

Answer 6

Measures the ability of the firm to pay its debts as they come due.

Question 7

What is financial statement ratio analysis?

Answer 7

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

Question 8

List the formula for Number of Days’ Sales in Accounts Receivable.

Answer 8

365 / AR Turnover

Question 9

List the formula for inventory turnover.

Answer 9

COGS / Average Inventory

Question 10

List the formula for number of days’ supply in inventory.

Answer 10

365 / Inventory Turnover

Question 11

What do operational activity ratios measure?

Answer 11

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

Question 12

List the formula for determining Operating Cycle Length.

Answer 12

Days’ Sales in AR plus Days’ Supply in Inventory

Question 13

List the working capital ratio formula.

Answer 13

Current Assets / Current Liabilities

Question 14

List the AR Turnover ratio formula.

Answer 14

Net Credit Sales / Average Net AR

Question 15

List the cash availability or interval ratio formula.

Answer 15

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