Chapter 12

Liquidity Ratios:

- current ratio - average collection period - recievable turnover - average days in inventory - inventory turnover ratio - acid - test ratio

What is the formula to compute the average days in inventory?

365 days/inventory turnover ratio

The formula for average collection period is

365 divided by the receivables turnover ratio.

What is the formula for the inventory turnover ratio?

Cost of goods sold divided by average inventory.

Which ratios are used to evaluate a company's ability to pay long-term debts?

Debt to equity ratio Times interest earned ratio

What is the formula for the receivables turnover ratio?

Net credit sales divided by average accounts receivable (net).

True or False: Risk ratios and profitability ratios represent common ratios used for analysis.

True

Solvency

a company's ability to pay its long-term liabilities

The formula to compute the receivables turnover ratio is net credit sales divided by

average accounts receivable

The formula for the inventory turnover ratio is

cost of goods sold divided by average inventory

A ratio used to measure liquidity is the

current ratio

An item that requires separate disclosure on the income statement after income from continuing operations is

discontinued operations

Average days in inventory is calculated as 365 days divided by the

inventory turnover ratio

Mark wants to determine whether a specific company has become more profitable over time. Mark should compare the company's performance to:

its prior years' performance

Which term best describes a company having a suitable amount of cash or easily convertible assets to pay incurred current liabilities?

liquidity

______ refers to a company having enough cash or convertible assets to pay its current liabilities.

liquidity

Which items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio?

pre-paid expenses inventory

Many investors view this type of indicator as the number one measure of a company's success.

profitability

Which ratios do investors and creditors use most frequently in making financial decisions?

profitability ratios

When comparing the financial statements of two different companies, a financial analyst would use which two categories of ratios?

profitability ratios risk ratios

The ability of reported earnings to reflect the company's true earnings is referred to as

quality of earnings

The average collection period equals 365 days divided by

receivables turnover

Which ratios provides the most conservative measure of a firms ability to pay its current liabilities.

the acid-test ratio

Common types of analysis that help assess a specific company's performance include comparisons:

to the same industry between companies over time

trend analysis (time series analysis)

used to evaluate a firm's performance over time - the same as horizontal analysis

Common-size analysis is another term used for a ______ analysis

vertical