Financial Accounting - Ratio Analysis

Question 1

What do Leverage (Gearing or Solvency) ratios show?

Answer 1

how heavily the company is in debt, ability to meet long−term liability obligations

Question 2

What are the names of the four leverage ratios?

Answer 2

1. long-term debt ratio
2. debt-equity ratio
3. total debt ratio
4. time interest earned

Question 3

What is the long-term debt ratio eqn?

Answer 3

long-term debt + equity

Question 4

What is the debt-equity ratio eqn?

Answer 4

long-term debt
___________
equity

Question 5

What is the total debt ratio eqn?

Answer 5

total liabilities
___________
total assets

Question 6

What is the time interest earned eqn?

Answer 6

EBIT
___________
interest payments

Question 7

What do the liquidity ratios mesure?

Answer 7

how easily the firm can lay its hands on cash and meet short‐term liability obligations

Question 8

What are the names of the three liquidity ratios?

Answer 8

1. quick (acid test) ratio
2. current (working capital) ratio
3. cash ratio

Question 9

What is the eqn for quick (acid test) ratio?

Answer 9

current liabilities

=
current assets - inventory
__________________
current liabilities

Question 10

What is the current (working capital) ratio eqn?

Answer 10

current assets
___________
current liabilities

Question 11

What is the cash ratio eqn?

Answer 11

cash + marketable securities
_________________
current liabilities

Question 12

What are the efficiency (or turnover) ratios a measure of?

Answer 12

how productively the firm is using its assets

Question 13

What are the names of the two efficiency ratios

Answer 13

1. asset turnover

2. inventory turnover

Question 14

What is the assert turnover eqn?

Answer 14

sales
_____
total assets

Question 15

What sit the inventory turnover eqn?

Answer 15

cost of goods sold
_______________
inventory

Question 16

What are the profitability (earning power) ratios used to measure?

Answer 16

firm’s return on its investments

Question 17

What are the names of the four profitability ratios?

Answer 17

1. gross profit margin
2. net profit margin
3. return on assets
4. return on equity

Question 18

What is the return of assets eqn?

Answer 18

EBIT
____
total assets

Question 19

What is the gross profit margin eqn?

Answer 19

net sales - cost of sales
__________________
net sales

Question 20

What is the net profit margin eqn?

Answer 20

net profit after tax
_____________
net sales

Question 21

What is the return on equity enq?

Answer 21

net profit after tax
______________
total equity