M8 - Ratio Analysis

Question 1

Inventory Turnover Ratio

Answer 1

COGS / (Beg - End Inv)/2

Question 2

Debt to Equity Ratio

Answer 2

Total Liabilities / Equity

Question 3

Net Profit Margin

Answer 3

NI (after tax) / Net Sales

Question 4

Return on assets

Answer 4

NI / [(Beg + End total assets)/2]

Question 5

What the equation for the Dupont return on assets?

Answer 5

same as regular return on assets equation

Question 6

Cash ratio

Answer 6

Cash + marketable securities / Current Liabilities

Question 7

Current ratio

Answer 7

Current assets / Current liabilities

Question 8

Quick Ratio

Answer 8

Quick assets (including cash) / current liabilities

Question 9

Cash balance is $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, Year 3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Answer 9

Current: Increased
Quick: Decreased

Why?
Current: Both numerator (assets) and denominator (liabilities) decrease by the same amount, but there is a greater % decrease to the denominator since its smaller, therefore the ratio will increase since its current assets are proportionately larger than the current liabilities
Quick: Opposite effect since the quick assets are smaller than the current liabilities