Test 3

Question 1

Times interest earned

Answer 1

Higher better
Long term debt paying ability
Income statement

Question 2

Cash coverage

Answer 2

Higher better

Short run interest payments

Question 3

Debt ratio

Answer 3

Higher means more debt used to finance assets/ more leverage

Question 4

Debt/equity

Answer 4

Higher means more leverage

Question 5

Debt/ ebitda

Answer 5

5x means if earnings remain the same, we can pay off debt in 5 years

Question 6

Net debt

Answer 6

St debt + lt debt - cash and equivalents

Question 7

Net debt/ ebitda

Answer 7

Time for company to pay back debt

Can be negative

Question 8

Current ratio

Answer 8

Short term Debt-paying ability

Question 9

Acid test ratio

Answer 9

Immediate liquidity

Question 10

Operating cycle

Answer 10

Inv turnover in days + A/R turnover in days

Question 11

Comparisons

Answer 11

Trend analysis
SIC- classified business industry/ economy
NAICS- similar production processes
Industry averages

Question 12

Capital leases

Answer 12

Lease to buy

Balance sheet
Asset- purchase price
Liability- PV future payments

Expenses on income statement

Question 13

Operating lease

Answer 13

Give back

Expenses on income statement

Nothing on balance sheet

Question 14

Caution to industry averages

Answer 14

Differing data
Different fiscal year-ends
Varying financial policies
Inconsistent basis
Accounting treatment 
Inconsistent formula construction