Ratios - Liquidity/Solvency and Operational

Question 1

What is Financial Statement Ratio Analysis?

Answer 1

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

Question 2

What does ratio analysis of financial statements allow user to do?

Answer 2

Enables comparisons across firms, especially within the same industry, and facilitates identifying operating and financial strengths and weaknesses of a firm

Question 3

What does a liquidity/solvency ratio measure?

Answer 3

The ability of a firm to pay its obligations as they become due

Question 4

What does the Working Capital ratio analyze?

Answer 4

Measures the extent to which current assets exceed current liabilities and, thus are uncommitted in the short term. Type of Liquidity Ratio

Question 5

What is included in Working Capital (Formula)?

Answer 5

Current Assets-Current Liability

Question 6

What is the working capital ratio (Current Ratio)?

Answer 6

Current Assets/Current Liabilities

Question 7

What is the effect on the WCR (Working Capital Ratio) if there is an increase in assets?

Answer 7

Increases the WCR

Question 8

What is the effect on the WCR (Working Capital Ratio) if there is a decrease in current assets?

Answer 8

Decreases the WCR

Question 9

What is the effect on the WCR (Working Capital Ratio) if there is an increase in current liabilities?

Answer 9

Decreases the WCR

Question 10

What is the effect on the WCR (Working Capital Ratio) if there is a decrease in current liabilities?

Answer 10

Increases the WCR

Question 11

If the WCR (Working Capital Ratio) exceeds 1 and there are equal increases in current assets and liabilities, what is the effect on the WCR?

Answer 11

The WCR will decrease

Question 12

If the WCR (Working Capital Ratio) exceeds 1 and there are equal decreases in current assets and liabilities, what is the effect on the WCR?

Answer 12

The WCR will increase

Question 13

If the WCR (Working Capital Ratio) is less than 1 and there are equal increases in current assets and liabilities, what is the effect on the WCR?

Answer 13

The WCR would increase

Question 14

If the WCR (Working Capital Ratio) is less than 1 and there are equal decreases in current assets and liabilities, what is the effect on the WCR?

Answer 14

The WCR would decrease

Question 15

What does the Acid Test (Quick Ratio) measure?

Answer 15

The quantitative relationship between highly liquid assets and current liabilities in terms of the “number of times” that cash and assets that can be converted quickly to cash cover current liabilities

Question 16

What is the formula for the Acid Test (Quick Ratio)?

Answer 16

(Cash +(net) Receivables + Marketable Securities)/Current Liabilities

Question 17

What is the securities Defensive-Interval Ratio?

Answer 17

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

Question 18

What is the formula for the Securities Defensive-Interval Ratio?

Answer 18

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

Question 19

What is the times interest earned ratio?

Answer 19

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

Question 20

What is the formula for the times interest earned ratio?

Answer 20

(Net Income + Interest Expense + Income Tax)/Interest Expense

Question 21

What is the Times Preferred Dividend Earned Ratio?

Answer 21

Measures the ability of current earnings to cover preferred dividends for a period

Question 22

What is the formula for the Times Preferred Dividend Earned Ratio?

Answer 22

Net Income/Annual Preferred Dividend Obligation

Question 23

What is the Accounts Receivable Turnover?

Answer 23

Measures the number of times that accounts receivable turnover (Are incurred and collected) during a period. Indicates the quality of credit policies (and the resulting receivables) and the efficiency of the collection procedures

Question 24

What is the formula for the Accounts Receivable Turnover?

Answer 24

(Net Credit Sales/Average(Net) Accounts Receivable (e.g.(Beginning + Ending)/2)

Question 25

What is the “Number of Days’ Sales in Average Receivables” ratio used for?

Answer 25

Measures the average number of days required to collect receivables; it is a measure of the average age or receivables

Question 26

What is the formula for the “Number of Days’ Sales in Average Receivables” ratio?

Answer 26

(300 or 360 or 365 (or other measure of business days in a year))/Accounts Receivable Turnover

Question 27

What is the “Inventory Turnover” ratio used for?

Answer 27

Measures the number of times that inventory turns over (is acquired and sold or used) during a period. Indicates over or under stocking of inventory or obsolete inventory

Question 28

What is the formula for the “Inventory Turnover” Ratio?

Answer 28

COGS/Average Inventory (e.g. (Beginning + Ending/2)

Question 29

What is the “Number of Days’ Supply in Inventory” ratio used for?

Answer 29

Measures the number of days inventory is held before it is sold or used. Indicates the efficiency of general inventory management

Question 30

What is the Formula “Number of Days’ Supply in Inventory” ratio?

Answer 30

(300 or 360 or 365 (or other measure of business days in a year))/Inventory Turnover

Question 31

What is the operating cycle?

Answer 31

Measures the average length of time to invest cash in inventory, convert the inventory to receivables, and collect the receivables; it measures the time to go from cash back to cash

Question 32

What is the formula for the operating cycle?

Answer 32

Number of days’ sale in A/R + Length Cycle Number of Days’ Supply in Inventory