Financial Ratio Analysis

Question 1

What four things does ratio analysis measure?

Answer 1

Ratio analysis measures liquidity, profitability, reliance on debt financing, and effectiveness of management’s resource utilization

Question 2

What are the four types of financial ratios?

Answer 2

Liquidity ratios, activity ratios, profitability ratios, leverage ratios

Question 3

What can financial ratios be used for?

Answer 3

Financial ratios can be used to compare a company’s past to other companies, pinpoint problems, highlight excellence, and spot trends

Question 4

Liquidity ratios measure a company’s ability to

Answer 4

Meet it’s short term obligations when they must be paid

Question 5

Increasing liquidity reduces

Answer 5

The likelihood that a company will face emergencies caused by a need to raise funds to repay loans

Question 6

Current ratio is

Answer 6

Current assets / current liabiltiea

Question 7

Current ratio measures the

Answer 7

Ability to pay debts as they mature

Question 8

Acid-test / quick ratio measures

Answer 8

The ability to pay debts on short notice

Question 9

Acid-test/quick ratio

Answer 9

(Current assets - inventory) l current liabilities

Question 10

What is a satisfactory current ratio?

Answer 10

2:1

Question 11

What is a satisfactory acid-test ratio?

Answer 11

1:1

Question 12

Activity ratios measure

Answer 12

Management’s effective use of company resources

Question 13

What are the three activity ratios?

Answer 13

Inventory turnover ratio, receivables turnover ratio, total asset turnover ratio

Question 14

Inventory turnover ratio

Answer 14

Cost of goods sold / avg inventory

Question 15

Receivables turnover

Answer 15

Crédit sales / avg accounts receivable

Question 16

Total asset turnover

Answer 16

Sales / avg total assets (aka invested dollars)

Question 17

Profitability ratios measure

Answer 17

An organization’s overall financial performance by evaluating its ability to generate revenues in excess -aka profit - of operating costs and other expenaea

Question 18

The three profitablity ratios are

Answer 18

Gross profit margin, net profit margin, return on equity

Question 19

Gross profit margin

Answer 19

Gross profit / sales

Question 20

Net profit margin

Answer 20

Net income/ sales

Question 21

Return on equity

Answer 21

Net income / avg equity

Question 22

Leverage ratios measure

Answer 22

The extent to which a company relies on debt financing

Question 23

Leverage ratios are good info to provide to

Answer 23

Potential investors and lenders as too much debt means future problems meeting future interest payments

Question 24

What are the two leverage ratios?

Answer 24

Debt ratio and long-term debt to equity

Question 25

Debt ratio

Answer 25

Total liabilities/total assets

Question 26

Long-term debt to equity ratio

Answer 26

Long-term debt / owners equity

Question 27

A debt ratio of more than 50% means

Answer 27

A company relies more in borrowed money 🤑 (liabilities) than owner’s equity (assets)

Question 28

What do financial ratios do for managerial accounting?

Answer 28

Relate balance sheet and income statement data to each other
Help management know a company’s strengths and weaknesses
Indicate areas in need of more investigation