Financial Ratios Analysis

Question 1

accounting

Answer 1

a service activity,
whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions

Question 2

What is ratio analysis used for?

Answer 2

to assess a company’s performance

Question 3

What is a financial ratio?

Answer 3

dividing one financial statement item by another

Question 4

What is the purpose of financial ratios?

Answer 4

Allows users to evaluate company performance by focusing on specific relationships between items on the balance sheet and income statement

Question 5

What are the types of comparative analysis?

Answer 5

• Intra-company basis
• Inter-company basis
• Industry averages
• Horizontal analysis
• Vertical analysis

Question 6

Intra-company basis

Answer 6

Compare current cash balance to prior year’s cash balance

Question 7

Inter-company basis

Answer 7

Compare Rx sales between your pharmacy and your classmates pharmacy

Question 8

Industry averages

Answer 8

Compare your pharmacy sales to all competitors sales (NCPA Digest)

Question 9

Horizontal analysis

Answer 9

• Also known as trend analysis

- Evaluation of company over time

Question 10

Vertical analysis

Answer 10

• Also known as common-size analysis

- Percent of a base amount

Question 11

What does Liquidity Ratios measure?

Answer 11

short-term ability of entity to pay its maturing obligations and meet unexpected needs for cash

Question 12

What are types of Liquidity Ratios?

Answer 12

• Working capital
• Current ratio
• Quick ratio
• Inventory turnover ratio
• Days in inventory
• Receivables turnover ratio
• Average collection period

Question 13

What does Solvency Ratios measure?

Answer 13

ability of the entity to survive over a long period of time

Question 14

What are types of Solvency Ratios?

Answer 14

• Debt to total assets ratio

- Cash debt coverage ratio

Question 15

What does Profitability Ratios measure?

Answer 15

income or operating success of an enterprise for a given period of time

Question 16

What are types of Profitability Ratios?

Answer 16

• Earnings per share
• Price-earnings ratio (P/E ratio)
• Gross profit rate
• Profit margin ratio
• Return on assets ratio
• Asset turnover ratio
• Return on equity ratio

Question 17

Working capital

Answer 17

• Liquidity Ratio
• Current assets – current liabilities
• Positive means greater likelihood of paying liabilities

Question 18

Current ratio

Answer 18

• Liquidity Ratio
• Current assets ÷ current liabilities
• Greater than 1:1 is desired (depending on industry and some banks look at 2:1)

Question 19

Quick ratio

Answer 19

• Liquidity Ratio
• (Current assets – inventories – pre-paid expenses) ÷ current liabilities
• Better indicator as to how fast you can pay your creditors

Question 20

Inventory turnover ratio

Answer 20

• Liquidity Ratio
• Cost of goods sold ÷ average inventory
• How quickly a company sells its goods or how many times the inventory “turns over” during the year

Question 21

average inventory

Answer 21

(beginning inventory + ending inventory) / 2

Question 22

Days in inventory

Answer 22

• Liquidity Ratio
• 365 ÷ (inventory turnover ratio)
• Average age of the inventory

Question 23

Debt to total assets ratio

Answer 23

• Solvency Ratio
• Total liabilities ÷ total assets
• Measures the percentage of assets financed by creditors rather than stockholders
• Higher the percentage, risker the company

Question 24

Gross profit rate

Answer 24

• Profitability Ratio
• Gross profit ÷ net sales
• Evaluates nature of costs of goods sold

Question 25

Profit margin ratio

Answer 25

• Profitability Ratio
• Net income ÷ net sales
• Also referred to as net profit margin
• Measures the percentage of each dollar of sales that results in net income
• Evaluates operating costs