ratio formulas

Question 1

3 types of ratios?

Answer 1

liquidity (can pay when due?)
solvency (can pay after 12 months?)
profitability

Question 2

liquidity ratios include:

Answer 2

current ratio 
quick ratio 
receivables turnover 
average collection period 
inventory turnover 
average days in inventory

Question 3

solvency ratios include:

Answer 3

debt to total assets ratio

time interest earned

Question 4

profitability ratios include:

Answer 4

return on ordinary shareholder's equity 
return on assets 
profit margin 
asset turnover 
gross profit ratio 
operative expense to sales ratio

Question 5

liquidity ratios measure?

Answer 5

the short-term ability of an entity to pay its debts and

meet unexpected needs for cash.

Question 6

liquidity: curent ratio?

Answer 6

current assets / current liabilities

Question 7

liquidity: quick ratio?

Answer 7

cash + marketable securities + net receivables / current liabilities

Question 8

liquidity: current ratio indicate?

Answer 8

short term debt-paying ability

Question 9

liquidity: quick ratio indicate

Answer 9

immediate short term liquidity

excludes inventory and prepaid assets which are least liquid current assets

Question 10

liquidity: receivables turnover?

Answer 10

net credit sales / average net trade receivables

Question 11

liquidity: receivables turnover indicate?

Answer 11

• Indicates the effectiveness of credit collection policies.

* Measures the number of times trade receivables are converted into cash during the period.

Question 12

liquidity: average collection period?

Answer 12

365 days / receivables turnover

Question 13

liquidity: average collection period indicates?

Answer 13

converts receivables turnover figure into a measure of days for receivables collection.
liquidity of receivables and collection success

Question 14

liquidity: inventory turn over?

Answer 14

cost of sales / average inventory

Question 15

liquidity: inventory turn over indicate?

Answer 15

effectiveness of inventory management

liquidity of inventory

Question 16

liquidity: average days in inventory?

Answer 16

365 days / inventory turnover

Question 17

liquidity: average days in inventory indicate?

Answer 17

Converts inventory turnover into a measure of days for inventory to be sold
liquidity of inventory and inventory management

Question 18

solvency: ratios measure?

Answer 18

ability of entity to survive over long period of time (beyond 12 months)

Question 19

solvency: debt to total asset?

Answer 19

total liabilities / total assets

Question 20

solvency: debt to total assets ratio indicate

Answer 20

degree of leverage (percentage of total assets provided by creditors)

Question 21

solvency: times interest earned?

Answer 21

earning before tax and interest / interest expense

Question 22

solvency: times interest earned indicates?

Answer 22

entity’s ability to sustain debt by measuring its ability meet interest payments from operating profit.

Question 23

profitability ratios measures?

Answer 23

the profit or operating success of an entity for a given period of time.

Question 24

Size of entity’s profit affects its:

Answer 24

• Ability to obtain debt and equity financing.
• Liquidity position.
• Ability to grow.

Question 25

Profitability is often regarded as

Answer 25

the ultimate test of management’s operating effectiveness.

Question 26

Profitability: return on ordinary shareholders’ equity ratio?

Answer 26

profit avail to ordinary shareholders / average ordinary shareholders’ equity

Question 27

Profitability: return on ord shareholders equity indicate?

Answer 27

Indicates earnings per dollar invested by the owners.

Question 28

Profitability: return on assets?

Answer 28

profit after tax / average total assets

Question 29

Profitability: return on asset indicate ?

Answer 29

overall profitability with respect to investment in assets.

Question 30

Profitability: profit margin?

Answer 30

profit after tax / net sales

Question 31

Profitability: profit margin indicates?

Answer 31

Measures percentage of each dollar of sales that results in profit:
• High volume firms (e.g. supermarkets) generally experience low profit margins.
• Low volume firms (e.g. white goods) have high profit margins.

Question 32

Profitability: asset turnover?

Answer 32

net sales / average total assets

Question 33

Profitability: asset turn over indicate?

Answer 33

how efficiently assets are used to generate sales - vary between industries

Question 34

Profitability: return on assets using other formulas?

Answer 34

profit margin x asset turnover
OR
profit after tax x average total assets

Question 35

Profitability: gross profit rate?

Answer 35

gross profit / net sales

Question 36

Profitability: gross profit rate indicate?

Answer 36

entity’s ability to maintain an adequate selling price above its costs. Ratio declines as industry becomes more competitive.

Question 37

Profitability: operating expense to sales ratio?

Answer 37

operating expenses / net sales

Question 38

Profitability: operating expense to sales ratio measures?

Answer 38

costs incurred to support each dollar of sales.