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CPA - FAR > Ratios > Flashcards

Ratios Flashcards

0
Q

What is working capital?

A

Working capital = Current Assets - Current Liabilities

The ratio which helps with working capital is: Current ratio

Working capital ratio = current assets/current liabilities

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1
Q

What do liquidity/solvency ratios measure?

A

They measure the ability of the firm to pay its obligations as they become due.

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2
Q

Would equal increases in current assets and current liabilities keep the ratio unchanged?

A

NOPE! Do the math. Don’t fall for this trick in the CPA exam.

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3
Q

Acid test ratio or quick ratio looks like what?

A

Cash + net receivables + marketable securities / current liabilities

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8
Q

A/R turnover ratio

A

(Net) credit sales / average (net) a/r

Average A/R= (Beg. Bal. + End. Bal.)/2

And then

300 or 360 or 365 / a/r turnover

To see how many days it takes the firm to receive its receivables

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9
Q

Inventory turnover ratio

A

COGS/Avg. Inventory

And then

300 or 360 or 365 / inventory turnover

To find out how many days it takes the firm to sell the inventory

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10
Q

Securities Defensive-Interval Ratio: what is it and what’s it look like?

A

(Cash + Net Receivables + Marketable Securities)/Average Daily Cash Expenditures

It measures the quantitative relationship between highly liquid assets and the average daily use of cash in terms of number of days that cash and assets can be quickly converted to support operating costs.

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11
Q

Times interest earned ratio

A

(Net income + interest expense + income tax)/interest expense

Measures the ability of current earnings to cover interest payments for a period.

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12
Q

Times Preferred Dividend Earned Ratio

A

Net Income / Annual Preferred Dividend Obligation

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13
Q

What do operational activity ratios measure?

A

They measure the efficiency with which a firm carries out it’s operating activities.

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14
Q

Operating number of cycle = Days in Operating.

A

Number of days’ Sales in A/R + Length Cycle number of days’ Supply in inventory

It measures the time to go from cash back to cash.

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15
Q

Working Capital Ratio or WCR or Current Ratio Relationships

A

If WCR exceeds 1.00:

Equal increases in CAs and CLs decrease the WCR.
Equal decrease in CAs and CLs increase the WCR.

If WCR is less than 1.00:

Equal increases in CAs and CLs increase the WCR.
Equal decrease in CAs and CLs decrease the WCR.

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16
Q

What do profitability ratios measure?

A

They measure aspects of a firm’s operating (income / loss) results in a relative basis.

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17
Q

Profit Margin (on sales) ratio

A

Net income / net sales

Measures the bet profitability on sales (revenue)

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18
Q

Return on total assets ratio

A

(Net Income + (add back) Interest Expense (net of tax effect)) / Average total assets

Measures the rate of return on total assets and indicates the efficiency with which invested resources (assets) are used.

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19
Q

Return on common stockholders’ equity ratio

A

(Net Income - Preferred Dividend (obligation for the period only)) / Avg. Common Stockholders’ Equity

Measures the rate of return on (earnings) on common stockholders’ investment

20
Q

Return on Owners’ (all stockholders’) equity ratio

A

Net Income / Avg. Stockholders’ Equity

Measures the rate of return on all stockholders’ investments

21
Q

Price-Earnings Ratio

A

Mkt. price for common share / EPS

22
Q

Total Basis Ratio

A

Cash Dividends to Common Shareholders / Net Income to Common Shareholders

23
Q

Per Share Basis Ratio

A

Cash Dividend Per Share / Earnings per Common Share

24
Q

Common Stock Yield Ratio

A

Dividend per Common Share / Mkt. Price per Common Share

25
Q

What do Equity/Investment Ratios measure?

A

They measure relative sources of equity and equity value

26
Q

Debt to Equity Ratio

A

Total Liabilities / Total Shareholders’ Equity

Measures relative amounts of assets provided by creditors and shareholders

27
Q

Owners’ Equity Ratio

A

Shareholders’ Equity / Total Assets

Measures the proportion is assets provided by shareholders

28
Q

Debt to asset ratio

A

Total liabilities / Total assets

29
Q

Book value per common stock ratio

A

Common shareholders’ equity / number of outstanding common shares

Measures the per share amount of common shareholders’ claim to assets.

30
Q

Book value per preferred share ratio

A

Preferred shareholders’ equity (including dividends in arrears) / number of outstanding preferred stocks

Measures the per share amount if preferred shareholders’ claim to assets

31
Q

Successful use of leverage is evidenced by a?

A

Rate of return on investment greater than the cost of debt.

32
Q

Dividend Payout Ratio

A

Common Dividend / Net Income

CPA - FAR (14 decks)

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