Ratios

Question 1

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

Answer 1

365/ AR turnover

Question 2

List the formula for determining operating cycle length.

Answer 2

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

Question 3

List the formula for times preferred dividend.

Answer 3

Net income / Annual preferred dividend obligation

Question 4

List the cash availability or interval ratio formula.

Answer 4

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

Question 5

List the formula for times interest earned.

Answer 5

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

Question 6

What are the general types of ratios?

Answer 6

Liquidity/Solvency
Operational activity
Profitability
Equity/Investment leverage

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 working capital.

Answer 8

Current assets ‐ Current liabilities

Question 9

List the formula for the acid test or quick ratio.

Answer 9

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

Question 10

What do operational activity ratios measure?

Answer 10

They measure the efficiency with which a firm carries out its operating activities.

Question 11

List the working capital ratio formula.

Answer 11

Current assets / Current liabilities

Question 12

List the formula for inventory turnover.

Answer 12

Cost of goods sold (COGS) / Average inventory

Question 13

List the accounts receivable turnover ratio formula.

Answer 13

Net credit sales / Average net accounts receivable

Question 14

What do liquidity (or solvency) ratios measure?

Answer 14

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

Question 15

List the formula for number of days’ supply in inventory

Answer 15

365/ Inventory turnover

Question 16

What do equity/investment leverage ratios measure?

Answer 16

Measure relative sources of equity and equity value.

Question 17

List the common stock yield formula.

Answer 17

Dividend per common share / Market price per common share

Question 18

List the return on common stockholders’ equity formula.

Answer 18

(Net income ‐ Current‐period preferred dividend obligation) / Average common stockholders’ equity

Question 19

List the return on owner’s equity formula.

Answer 19

Net income / Average stockholders’ equity

Question 20

List the price to earnings ratio formula.

Answer 20

Market price for a common share / Earnings per share (EPS)

Question 21

List the profit margin formula.

Answer 21

Net income/Net sales

Question 22

List the per share common stock dividend pay out rate formula.

Answer 22

Cash dividends per common share / Earnings per share (EPS)

Question 23

What do profitability ratios measure?

Answer 23

Aspects of a firm’s operating (income/loss) results on a relative basis

Question 24

List the debt ratio formula.

Answer 24

Total liabilities / Total assets

Question 25

List the book value per common stock ratio formula.

Answer 25

Common shareholders’ equity / Number of outstanding common shares

Question 26

List the total common stock dividend payout rate formula.

Answer 26

Cash dividends to common shareholders / Net income to common shareholders

Question 27

List the return on total assets formula.

Answer 27

(Net income + Interest expense (net of tax)) / Average total assets

Question 28

List the debt to equity ratio formula.

Answer 28

Total liabilities / Total shareholders’ equity

Question 29

List the book value per preferred share ratio formula.

Answer 29

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

Question 30

List the owner’s equity ratio formula.

Answer 30

Shareholders’ equity / Total assets