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Finance Exam 2 > Ratios > Flashcards

Ratios Flashcards

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1
Q

In order to compute a meaningful ratio…?

A

There must be a significant relationship between the two

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2
Q

Define ratio analysis

A

Mathematical method using income statement and balance sheet data to detect trends
- Gives us a way to compare our business to another

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3
Q

Examples of ratio analysis

A

Inventory and credit management problems
Poor pricing policies
Declining sales and profitability

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4
Q

Does the business earn adequate profits?

A

Tests of Profitability

Ratio that help determine if the business is earning adequate profits

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5
Q

Are funds available to the business and its management being used wisely?

A

Debit and equity (money borrowed and money put in)

Ratio that helps determine if funds are being used wisely by the business: Test of Overall Performance

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6
Q

Can the firm pay its short term debts as they come due?

A

The ability to pay short term debts is liquidity

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7
Q

Can the firm pay its long term debts on a continuing basis?

A

Ability is known as solvency

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8
Q

A solvent company is one that?

A

Owns more than it owes

Positive net worth and manageable debt load

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9
Q

A company with adequate liquidity but not solvency, is one that?

A

Enough cash available to pay its bills but has a negative net work and debt load that is not manageable

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10
Q

How efficiently are the firm’s assets being managed?

A

Minimize assets (inventory receivable) to generate sales and income

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11
Q

Test of Profitability indicates?

A

The pharmacy’s ability to cover its expenses plus some excess to reward its owners

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12
Q

Test of Profitability includes?

A

GM %

Net Income %

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13
Q

Define Gross Margin Percent

A

Measure of profitability before expenses are considered

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14
Q

Gross Margin Percent Formula

A

(Sales-COGS)/Sales x100

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15
Q

GM% means

A

that much of each dollar of sales is available to cover expenses and profit

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16
Q

Low GM% might result from?

A

Low prices
Improper purchasing
Shoplifting or other theft
Owners or employees not ringing up sales right

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17
Q

Normal Pharmacy GM% is?

A

22-28%

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18
Q

Define Net Income Percentage

A

Measure of the profitability after expenses are consider

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19
Q

NI% Formula

A

Net income/sales x100

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20
Q

NI% tells you?

A

that amount of every dollar of sales is available to cover profit
Tells the owner how much you are making!

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21
Q

NI can increased by?

A

Raising prices without effecting sales
Purchase goods at lower cost
Decreasing expenses

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22
Q

Normal Net Income for pharmacies?

A

2-5%

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23
Q

Define Test of OVerall Performance

A

Indicates if funds (debt and equity) available to the business and its management are being used wisely

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24
Q

Debit consist of

A

funds borrowed by the business

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25
Q

Equity consist of

A

funds that the owners have invested in the business

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26
Q

Test of overall performance are

A

Return on equity

Return on assests

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27
Q

Return on Equity

A

How effectively are funds invested in the firm have been used
Making enough money to make the risk of being in business for owners

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28
Q

ROE =

A

Net income/OE x100

For every dollar they invest, they get X amount cents back

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29
Q

How can ROE be altered?

A

Increase NI
Decrease expenses
Decrease OE

30
Q

How can you decrease OE?

A

Borrow more funds and withdraw capital (financial leverage)
Decrease assets
Hold less inventory

31
Q

What is the normal ROE?

A

20%+

32
Q

ROA

A

Measures how effectively all funds available to the manager have been used to generate a return

33
Q

ROA =

A

NI/total assets x 100

For every dollar we invested, you receive X cents of income

34
Q

How can you alter Return on Assets?

A

Increase NI
Decrease assets
Manage accounts receivable and inventories

35
Q

Normal ROA?

A

Greater than 10% (13-15%)

36
Q

Define Test of Liquidity

A

Can the firm pay its short term debt as they come due

37
Q

Tests of liquidity are

A

Current Ratio
Quick Ratio
Accounts payable period

38
Q

Current Ratio

A

compares a pharmacy’s current assets (supply cash to pay current debt) with its current debt

39
Q

CR =

A

Current assets/current liabilities

Tells you how many dollars of current assets for every dollar of current liability

40
Q

Creditors prefer:

A

high CR (between 2-3.8)

41
Q

Quick Ratio

A

Acid Test
Measures the excess of very liquid current assets
Could the firm pay its current debt if it were not able to sell its inventory

42
Q

QR =

A

(current assets - inventory)/current liabilities

X dollars of very current assets for every dollar of current liabities

43
Q

QR should be

A

1.1-2

44
Q

Accounts Payable Period indicates

A

how long it takes the pharmacy to pay for its credit purchases
Avg # of days between when a pharmacy makes a purchase on credit and when it pays for the puchase

45
Q

APP =

A

Accounts Payable/Purchases per day

X days between when the pharmacy makes a purchase on credit and when it pays for the purchase

46
Q

APP average

A

21 days

47
Q

Debt to equity ratio measures

A

A business’ abiliity to meet its long term debt payments

Compare about the pharmacy has borrowed to the OE

48
Q

Debit vs Equity

A

Debit must be repaid according to a set schedule regardless of whether the firm is profitable
Equity is funds that have been invested in the business

49
Q

Debit to Equity Ratios are

A

Current liabilities to OE
Long term debit to OE
Total debit to OE
Financial leverage

50
Q

Financial leverage equation

A

(Total Debit + OE) /OE

51
Q

Lenders prefer that pharmacies have _____ debt to equity

A

low

52
Q

Low debit to equity ratios indicates

A

the owner has more invested in the business than the bank does, owner should have a strong incentive to do well

53
Q

Normal debit to equity ratios

A

50%-80%

54
Q

Tests of efficiency

A

How efficiently the pharmacy’s assets are being used

Given level of activity with the smallest possible investment in assets

55
Q

Test of efficiency are

A

Accounts Receivable Collection Period
Inventory turnover
Asset turnover

56
Q

Two test of efficiency for hospital

A

Hospital inventory turnover

Personnel expense per occupied bed

57
Q

Accounts Receivable Collection Period

A

An estimate of the average number of days it takes the pharmacy to collect an account receivable
Should be no greater than 1.5X the firms credit terms

58
Q

Longer periods of time indicate

A

poor credit management or customers are not paying on time

59
Q

ARCP =

A

Accounts receivable/net credit sales per day

60
Q

Inventory turnover

A

Measures the rate of movement of inventory

Indicates that the pharmacy is being run with a minimum investment in inventory

61
Q

If the ITO is too high

A

Pharmacy may frequently find itself out of stock

62
Q

How can you increase ITO

A

increasing sales without increasing inventory or decreasing inventory while maintaining sales

63
Q

ITO =

A

Cost of goods sold/average inventory at cost

64
Q

Asset turnover

A

Measures how efficiently the pharmacy’s total assets are used

65
Q

High ATO indicates that,

A

The pharmacy is being operated with minimum investment in assets

66
Q

How can you improve ATO

A

Increase sales while holding asset investment constant

Decreasing asset investment while increasing or maintaining sales

67
Q

ATO =

A

Sales/total assets

68
Q

Hospital inventory turnover (HITO) =

A

Annual purchases at costs/average inventory at cost

69
Q

Normal HITO

A

10.6

70
Q

Personnel Expense Per Occupied Bed

A

Total annual pharmacy payroll/occupied beds (= # of licensed beds X average occupancy rate)

71
Q

Normal PEPOB

A

$4,559

Finance Exam 2 (7 decks)

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