Ratios

Question 1

Current ratio =

Answer 1

Current Assets / Current Liabilities

Question 2

Acid-test ratio =

Answer 2

(cash + accounts receivable) / current liabilities

Question 3

Days in receivables =

Answer 3

accounts receivable /

annual credit sales / 365

Question 4

Accounts receivable turnover =

Answer 4

annual credit sales /

accounts receivable

Question 5

Days in inventory =

Answer 5

inventory /

annual cost of goods sold / 365

Question 6

Inventory turnover =

Answer 6

cost of goods sold /

inventory

Question 7

Liquidity

Answer 7

a firm’s ability to pay its bills on time. Liquidity is related to the ease and speed with which a firm can convert its noncash assets into cash, as well as to the size of the firm’s investment in noncash assets relative to its short-term liabilities.

Question 8

Current ratio

Answer 8

a firm’s current assets divided by its current liabilities. This ratio indicates the firm’s degree of liquidity by comparing its current assets to its current liabilities.

Question 9

Acid-test (quick) ratio

Answer 9

the sum of a firm’s cash and accounts receivable divided by its current liabilities. This ratio is a more stringent measure of liquidity than the current ratio because it excludes inventories and other current assets (those that are least liquid) from the numerator.

Question 10

Days in receivables (average collection period)

Answer 10

a firm’s accounts receivable divided by the company’s average daily credit sales (annual credit sales ÷ 365). This ratio expresses how rapidly the firm is collecting its credit accounts.

Question 11

Accounts receivable turnover ratio

Answer 11

a firm’s credit sales divided by its accounts receivable. This ratio expresses how often accounts receivable are “rolled over” during a year.

Question 12

days in inventory

Answer 12

inventory divided by daily cost of goods sold. This ratio measures the number of days a firm’s inventories are held on average before being sold; it also indicates the quality of the inventory.

Question 13

Inventory turnover

Answer 13

a firm’s cost of goods sold divided by its inventory. This ratio measures the number of times a firm’s inventories are sold and replaced during the year (that is, the relative liquidity of the inventories).

Question 14

Operating return on assets (OROA)

Answer 14

the ratio of a firm’s operating profits divided by its total assets. This ratio indicates the rate of return being earned on the firm’s assets.

Question 15

Operating profit margin

Answer 15

a firm’s operating profits divided by sales. This ratio serves as an overall measure of operating effectiveness.

Question 16

Total asset turnover

Answer 16

a firm’s sales divided by its total assets. This ratio is an overall measure of asset efficiency based on the relation between a firm’s sales and the total assets.

Question 17

Asset efficiency

Answer 17

how well a firm is managing its assets.

Question 18

Fixed asset turnover

Answer 18

a firm’s sales divided by its net fixed assets. This ratio indicates how efficiently the firm is using its fixed assets.

Question 19

Debt ratio

Answer 19

a firm’s total liabilities divided by its total assets. This ratio measures the extent to which a firm has been financed with debt.

Question 20

Times interest earned

Answer 20

a firm’s operating profits divided by interest expense. This ratio measures a firm’s ability to meet its interest payments from its annual operating earnings.

Question 21

Return on equity

Answer 21

a firm’s net income divided by its total common book equity. This ratio is the accounting rate of return earned on the common stockholders’ investment.

Question 22

Price/earnings ratio

Answer 22

the price the market places on $1 of a firm’s earnings.

Question 23

Price/book ratio

Answer 23

the market value of a share of the firm’s stock divided by the book value per share of the firm’s reported equity in the balance sheet.

Question 24

Economic Value Added

Answer 24

a company’s economic profits, as opposed to its accounting profits, which includes not only interest expense as a cost but also the shareholders’ required rate of return on their investment.