Financial Ratios

Question 1

Financial Ratios:

Answer 1

Provide us with a perspective of relationships between two entities

Provide an index of performance much like the free throw percentage

Question 2

Liquidity ratios measure:

Answer 2

a company’s current assets against current liabilities

Question 3

Current ratios measure:

Answer 3

ability to pay short-term debt-insurance, vendor invoices, payroll, leases-with cash from savings and checking accounts, securities, inventory and accounts receivable

Question 4

Quick ratios:

Answer 4

Only includes cash and accounts receivable as assets

Sometimes is referred to as “acid test ratio”

Question 5

Cash to Current Liability ratios:

Answer 5

Measures a company’s ability to meet it’s financial obligations with actual cash in bank accounts

A general guideline for this ratio is .40 of cash for every $1 in liabilities

Question 6

Debt ratios:

Answer 6

Debt to equity=Total Liabilities/Owner’s Equity

The lower the number the better for the company’s financial status

Measure the amount of a company’s debt relative to the owner’s equity

Question 7

Inventory Turnover ratios:

Answer 7

Indicate the frequency with which inventory is converted into cash via sales to jobs

Inventory turnover ratio= Material costs/average inventory

The higher the number the better

Question 8

Average Collection Period:

Answer 8

The lower the number the better

Average collection period=365/(Sales/Accounts Receivable)

The period of time, in days, that it takes a company to collect its accounts receivable

Question 9

Accounts Payable Payout Period:

Answer 9

Indicates the time a company takes to pay its vendors (suppliers)

Accounts payable payout period= accounts payable/(cost of goods sold/365)

The lower the number the better

Question 10

Productivity ratios:

Answer 10

relate to fixed assets

relate to employees

for both types of productivity ratios the higher number the better

are indicators of the efficient use of human resources and fixed assetss