PT2 SU1

Question 1

What is the purpose of common-size financial statements?

Answer 1

Common-size financial statements restate financial statement line items in terms of percentages of a given amount so that the financial statements of steadily growing firms and firms of different sizes can be analyzed and compared.

Question 2

How are items on common-size financial statements expressed?

Answer 2

Items on a common-size income statement are expressed as percentages of sales.

Items on a common-size balance sheet are expressed as percentages of assets, liabilities, or stockholders’ equity.

Question 3

Define liquidity

Answer 3

Liquidity is a firm’s ability to pay its current obligations as they come due and thus remain in business in the short run.

Question 4

Current assets include

Answer 4

• Cash and equivalents
• Marketable securities
• Net receivables
• Inventories
• Prepaid items

Question 5

Current liabilities include

Answer 5

• Accounts payable
• Notes payable
• Current maturities of long-term debt
• Unearned revenues
• Taxes payable
• Wages payable
• Other accruals

Question 6

How is net working capital calculated?

Answer 6

Net working capital =
Current assets – Current liabilities

Question 7

How is the current ratio calculated?

Answer 7

Current Ratio =
Current assets / Current liabilities

Question 8

What is the formula to calculate the quick (acid-test) ratio?

Answer 8

=
(Cash + Marketable securities + Net receivables) / Current liabilities

Question 9

How is the cash flow ratio calculated?

Answer 9

=
Cash flow from operations / Current liabilities

Question 10

Define solvency

Answer 10

Solvency refers to the ability of a business to meet its long-term obligations. This ability is related to the extent to which the business uses debt versus equity financing.