CH 3 Notes

If sales = $500,000, turnover = 1.5, and net income = $75,000, then:

ROI = 22.5% and margin is 15% Margin = $75,000 / $500,000 = 15% ROI = 15% x 1.5 = 22.5%

In the DuPont model for ROI, margin is calculated as: net ________divided by__________

income, sales

A firm's liquidity refers to:

its ability to meet its current obligations as they become due.

the numerator of the acid-test ratio includes most current assets but specifically excludes

merchandise inventory

interest =

principal x rate x time interest -is the income or expense from investing or borrowing money principal -is the amount invested or borrowed rate - is the interest rate per year expressed as a percentage time - is the length of time the funds are invested or borrowed expressed in years

Acid Test Ratio

quick ratio more conservative short term measure of liquidity because merchandise inventories are excluded front he compution

current ratio

ratio of current assets to current liabilities. Primary measure of a firms liquidity

In the DuPont model for analyzing ROI, turnover is calculated as: ________divided by average total ________

sales , average total assets

rate of return =

amount of return/amount invested

If the rate of return on an investment was 10 percent:

and $500 was invested for one year, then the return on the investment would have been $50 500/50 = 10%

The annual rate of return on a two-year investment of $1,000 that earns a total return of $100 is:

(100/1000) / 2 = 5%

Working capital:

- is the excess of a firm's current assets over its current liabilities. - is expressed as a dollar amount, rather than as a financial ratio.

Which of the following statements is true regarding the current ratio?

-Cash is included in the numerator. -Accounts payable are included in the denominator. -The current ratio is calculated as current assets divided by current liabilities. -Merchandise inventory is included in the numerator. -Rent payable is included in the denominator.

Which of the following statements are true regarding the acid-test ratio?

-The acid-test ratio can be calculated as (Cash (including temporary cash investments) + accounts receivable) divided by current liabilities. -The acid-test ratio is sometimes called the quick ratio. -Temporary cash investments are included in the numerator of the acid-test ratio.

return on investment (ROI)(ROA)

-label usually assigned to the rate of return calculation made using data from financial statements -

Calculate the acid-test ratio, assuming that cash + accounts receivable = $50,000, merchandise inventory = $10,000, noncurrent assets = $40,000, current liabilities = $20,000, noncurrent liabilities = $50,000, and stockholders' equity = $30,000. (Round your answer to one decimal place, if necessary.)

50,000/20000 = 2.5

If turnover is 1.5 times per year and ROI is 9 percent, then margin is

6%

Semilogarithmic Graph

A graph format in which the vertical axis is a logarithmic scale. and the horizontal scale is arithmetic

Rate of return

A percentage calculated by dividing the amount of return on an investment for a period of time by the average amount invested for the period. A primary measure of profitability.

If stockholders' equity at the beginning of the year = $480,000, stockholders' equity at the end of the year = $520,000, and net income = $80,000, then:

Average stockholders' equity = $500,000, and ROE = 16% ROE = net income / average stockholders equity

The amount of interest earned on an investment is calculated as

Principal ($) x Rate (%) x Time (in years)

working capital

The excess of the current assets of a business over its current liabilities.

risk

a concept that describes the range of possible outcomes from an action. The greater the range of possible outcomes the greater the risk.

liquidity

a firms ability to meet its current obligations and is measured by relating its current assets

Trend Analysis

for a company over several years generally leads to a more meaningful analysis than does the observation of a single year's ratio result.