RATIOS

Question 1

List the formula for working capital

Answer 1

Current assets — Current liabilities

Question 2

What are the general types of ratios?

Answer 2

• Liquidity/Solvency
• Operational activity
• Profitability
• Equity/Investment leverage

Question 3

What do liquidity (or solvency) ratios measure?

Answer 3

They, easure the ability of the firm to pay its debts as they come due.

Question 4

List the formula for times interest earned.

Answer 4

(Net income + Interest expense + Income tax expense) / Interest expense

Question 5

List the formula for times preferred dividend.

Answer 5

Net income / Annual preferred dividend obligation

Question 6

List the formula for determining operating cycle length.

Answer 6

Days’ sales in accounts receivable + Days’ supply in inventory

Question 7

What is financial statement ratio analysis?

Answer 7

The development of quantitative relationships between various elements of a firm’s financial statements

Question 8

List the formula for the acid test or quick ratio.

Answer 8

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

Question 9

List the accounts receivable turnover ratio formula.

Answer 9

Net credit sales / Average net accounts receivable

Question 10

List the cash availability or interval ratio formula.

Answer 10

(Cash + Net receivables + Marketable securities) / Average daily cash expenditures

Question 11

List the formula for number of days’ sales in accounts receivable (AR).

Answer 11

365/ AR turnover.

Question 12

List the formula for number of days’ supply in inventory.

Answer 12

365/ Inventory turnover

Question 13

List the working capital ratio formula

Answer 13

Current assets / Current liabilities

Question 14

List the formula for inventory turnover.

Answer 14

Cost of goods sold (COGS) / Average inventory