Unit 2: Ratio Analysis Flashcards

1
Q

Define:

Liquidity

A

A firm’s ability to pay its current obligations as they come due

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Define:

Net Working Capital = ?

A

Net Working Capital =

Current Assets – Current Liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Define:

Current Ratio = ?

A

Current Ratio =

Current Assets

————————————

Current Liabilities

*The use of LIFO lowers the current ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Define:

Quick (Acid Test) Ratio = ?

A

Quick (Acid Test Ratio) =

(Cash + Marketable Securities + Net Receivables)

——————————————————————————

Current Liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Define:

Cash Ratio = ?

A

Cash Ratio =

(Cash + Marketable Securities)

—————————————————————

Current Liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Define:

Cash Flow Ratio = ?

A

Cash Flow Ratio =

(Cash flow from operations)

——————————————————

Current Liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Define:

Net Working Capital Ratio = ?

A

Net Working Capital Ratio =

(Current Assets - Current Liabilities)

—————————————————————————

Total Assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are ‘Activity Ratios’ used for?

A

To measure how quickly two noncash items are converted into cash.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Define:

A/R Turnover = ?

A

A/R Turnover =

(Net Credit Sales)

———————————————

Average A/R

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Define:

Days’ Sales Outstanding in Receivables

A

Days’ Sales Oustanding in Receivables =

(Days in year)

————————————————————

A/R Turnover Ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Define:

Inventory Turnover = ?

A

Inventory Turnover =

(COGS)

———————————————————

Avg. Inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Define:

Days’ Sales in Inventory = ?

A

Days’ Sales in Inventory =

(Days in year)

————————————————————

Inventory Turnover Ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Define:

A/P Turnover = ?

A

A/P Turnover =

(Purchases)

————————————————————

Average A/P

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Define:

Days’ Purchases in A/P = ?

A

Days’ Purchases in A/P =

(Days in year)

————————————————————

A/P Turnover Ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Define:

Operating Cycle = ?

A

Operating Cycle =

(Days’ Sales in Receivables) + (Days’ Sales in Inventory)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Define:

Cash Cycle = ?

A

Cash Cycle =

(Operating Cycle) - (Days’ Purchases in Payables)

17
Q

Define:

F.A. Turnover Ratio = ?

A

F.A. Turnover =

(Net Sales)

————————————————————

Avg Net PPE

* Measures efficiency at using F.A. to generate sales

18
Q

Define:

Total Assets Turnover Ratio = ?

A

Total Assets Turnover =

(Net Sales)

————————————————————

Avg Total Assets

* Measures efficiency at using F.A. to generate sales

19
Q

For Turnover Ratios, why is a higher ratio preferable?

A

It implies effective use of assets to generate sales

20
Q

Define:

Solvency

A

A firm’s ability to pay its noncurrent obligations as they come due.

21
Q

Define:

Total Debt to Total Capital Ratio = ?

A

Total Debt to Total Capital =

(Total Debt)

———————————————————

Total Capital

22
Q

Define:

Debt to Equity Ratio = ?

A

Debt to Equity Ratio =

(Total Debt)

————————————————

Stockholder’s Equity

23
Q

Define:

Long-term Debt to Equity Ratio = ?

A

Long-term Debt to Equity Ratio =

(Long-term Debt)

———————————————

Stockholder’s Equity

24
Q

Define:

Debt Ratio = ?

A

Debt Ratio =

(Total Liabilities)

———————————————

Total Assets

25
# Define: Times Interest Earned Ratio = ? [Interest Coverage]
Interest Coverage = (EBIT) ——————————————— Interest Expense \*Measures the ability to pay interest \*Denominator should include capitalized interest
26
# Define: Earnings to Fixed Charge Ratio = ? [Fixed Charge Coverage]
Earnings to Fixed Charge Ratio = (EBIT + Interest portion of operating leases) ——————————————— (Int Expense + Int portion of operating leases + dividends on preferred stock)
27
# Define: Cash Flow to Fixed Charges Ratio = ?
Cash Flow to Fixed Charges Ratio = (Pre-tax operating cash flow) ——————————————— (Int Expense + Int portion of operating leases + dividends on preferred stock)
28
Define Operating Leverage:
Operating Leverage: Arises from use of a high level of plant & machinery, revealed through charges for depreciation, property taxes, etc.
29
Define Financial Leverage:
Financial Leverage: Arises from use of a high level of debt in financial structure, revealed through amounts paid out for interest.
30
# Define: Degree of Leverage = ?
Degree of Leverage = (Pre-fixed cost income amount) ——————————————— Post-fixed cost income amount
31
Define Leverage
* The relative amount of fixed costs in the overall cost structure * Creates risk because fixed costs must be covered
32
Degree of Operating Leverage = ? [Single period version]
Degree of Operating Leverage = (Contribution Margin) ——————————————— Operating Income or EBIT
33
Degree of Operating Leverage = ? [Percentage-change version]
Degree of Operating Leverage = (% change in operating income or EBIT) ——————————————— % change in sales \*A firm with high operating leverage necessarily carries a greater degree of risk because fixed costs must be covered regardless of the level of sales \*Such a firm is also able to expand production rapidly in times of higher product demand \*The more leveraged a firm is in its operations, the more sensitive operating income is to changes in sales volume
34
Degree of Financial Leverage = ? [Single period version]
Degree of Financial Leverage = (EBIT) ——————————————— EBT
35
Degree of Financial Leverage = ? [Percentage-change version]
Degree of Financial Leverage = (% change in net income) ——————————————— % change in EBIT \*High Degree of financial leverage = greater risk, more residual profit for shareholders after debt service (interest on debt is tax deductible)