SU7: Ratio Analysis

Question 1

Net Working Capital

Answer 1

Current Assets - Current Liabilities

Question 2

Current Ratio

Answer 2

Current Assets / Current Liabilities

Question 3

Quick (Acid Test) Ratio

Answer 3

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

Question 4

Cash Ratio

Answer 4

(Cash + Marketable Securities) / Current Liabilities

Question 5

Cash Flow Ratio

Answer 5

Cash flow from operations / Current Liabilities

Question 6

Net Working Capital Ratio

Answer 6

(Current Assets - Current Liabilities) / Total Assets

Question 7

Gross Profit Margin

Answer 7

(Net Sales - COGS) / Net Sales

Question 8

Operating Profit Margin

Answer 8

Operating Income / Net Sales

Question 9

Net Profit Margin Ratio

Answer 9

Net Income / Net Sales

Question 10

EBITDA Margin

Answer 10

EBITDA / Average Total Assets

Question 11

Return on Assets (ROA)

Answer 11

Net Income / Average Total Assets

Question 12

Return on Equity (ROE)

Answer 12

Net Income / Average Total Equity

Question 13

Relationship between ROA and ROE

Answer 13

ROA = ROE x (1 - Debt Ratio)

Question 14

Dupont Model Equity- components

Answer 14

Net Profit Margin x Assets Turnover x Equity Multiplier

Question 15

Assets Turnover

Answer 15

Net Sales / Average Total Assets

Question 16

Equity Multiplier

Answer 16

Average Total Assets / Average Total Equity

Question 17

Dupont Model Assets

Answer 17

ROA = Net Proft Margin x Total Asset Turnover

Question 18

A change in accounting principle occurs when an entity

Answer 18

(1) adopts a generally accepted principle different from the one previously used, (2) changes the method of applying a generally accepted principle, or (3) changes to a generally accepted principle when the principle previously used is no longer generally accepted

Question 19

A change in accounting estimate is applied retrospectively or prospectively?

Answer 19

Prospectively only

Question 20

A change in accounting principal is applied retrospectively or prospectively?

Answer 20

Retrospectively if practicable.

Question 21

An error correction is applied retrospectively or prospectively?

Answer 21

Retrospectively - restating prior periods

Question 22

Total Debt to Total Capital Ratio

Answer 22

Total Debt / Total Capital

Question 23

Debt to Equity Ratio

Answer 23

Total Debt / Stockholders Equity

Question 24

Long Term Debt to Equity Ratio

Answer 24

Long Term Debt / Stockholders Equity

Question 25

Debt to Total Assets Ratio

Answer 25

Total Liabilities / Total Assets

Question 26

Times Interest Earned Ratio

Answer 26

EBIT / Interest Expense

Question 27

Earnings to Fixed Charges Ratio

Answer 27

Earnings before fixed charges and taxes / fixed charges

Question 28

Cash Flow to Fixed Charges Ratio

Answer 28

(Cash From Operations + Fixed Charges + Tax Payments) / Fixed Charges note that cash from operations is after tax

Question 29

Operating Leverage

Answer 29

use of a high level of plant and machinery in the production process, revealed through charges for depreciation, property taxes, etc.

Question 30

Financial leverage

Answer 30

use of a high level of debt in the firm’s financing structure, revealed through amounts paid out for interest.

Question 31

Degree of Leverage

Answer 31

Pre-fixed-cost income amount / Post-fixed-cost income amount | EBIT / Earnings before Tax (tax not included anywhere)

Question 32

DOL - single period version

Answer 32

Contribution Margin / Operating income or EBIT

Question 33

DOL - percentage change version

Answer 33

Percent Change in operating income or EBIT / Percent Change in Sales

Question 34

DFL - single period version

Answer 34

Earnings before interest and taxes (EBIT) / earnings before taxes

Question 35

DFL - percentage change version

Answer 35

Percent Change in Net Income / Percent Change in EBIT

Question 36

List forms of off-balance sheet financing.

Answer 36

Investment in unconsolidated (less than 50% int) entities Joint Ventures Special Purpose Entity (although, VIEs must be consolidated) Factoring accounts receivables with recourse

Question 37

How should a change in an assets useful life be reflected?

Answer 37

Current and prospective years only

Question 38

Are deferred taxes included as current liability?

Answer 38

No!

Question 39

A change in the estimate for bad debts should be

Answer 39

Treated as affecting only the period of the change and then all future periods.

Question 40

Prepaids are/are not included in Acid Test?

Answer 40

are NOT

Question 41

Sustainable Growth Rate

Answer 41

ROE x (1 - Dividend Payout Ratio)

Question 42

For a given level of sales and holding all other financial statement items constant, a company’s return on equity (ROE) will <> as total assets <>

Answer 42

Decrease as total assets increase

Question 43

All else being equal, a company with a higher dividend-payout ratio will have a <> debt-to-assets ratio and a <> current ratio.

Answer 43

Higher, Lower

Question 44

In comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current ratio is the better company?

Answer 44

A high current ratio may indicate inefficient use of various assets and liabilities

Question 45

Where to classify "reserve for bond retirement"

Answer 45

Equity section