Module 22.7: Shareholder's Equity and Ratios

Question 1

What are the components of Owner’s Equity?

Answer 1

Contributed capital + Preferred Stock + Treasury Stock + Retained Earnings + Non-Controlling Interest, and Accumulated Other Comprehensive Income

Question 2

What is the difference between Authorized Shares, Issued Shares, and Outstanding Shares?

Answer 2

authorized - the number of shares that may be sold under the firm’s articles of incorporation

issued - number of shares that have actually been sold to shareholders

outstanding shares - equal to the issued shares less shares that have been repurchased (treasury stock)

Question 3

Common sized balance sheets are all a % of what?

Answer 3

percentage of total assets.

Question 4

What are liquidity ratios?

Answer 4

measure the firm’s ability to satisfy short term obligations

Question 5

What is the current ratio formula?

Answer 5

current assets / current liabilities

Question 6

What is the quick ratio

Answer 6

cash + marketable securities + receivables / current liabilities

Question 7

What is the cash ratio

Answer 7

cash + marketable securities / current liabilities

Question 8

What do solvency ratios help measure?

Answer 8

a firms ability to satisfy long term commitments

Question 9

what is the formula for long term debt to equity?

Answer 9

long term debt / total equity

Question 10

what is the formula for total debt to equity?

Answer 10

total debt / total equity

Question 11

what is the debt ratio?

Answer 11

total debt / total assets

Question 12

what is financial leverage?

Answer 12

total assets / total equity

Question 13

What are some of the limitations of balance sheet analysis?

Answer 13

1) difference in accounting standards and estimates
2) lack of homogeneity as many firms operate in different industries
3) Interpretation of ratios required significant judgement
4) Balance sheet data is only measures at 1 point in time.