BUS 212 Exam 3
What is vertical analysis?
Comparison of a company's percentage of sales dollars from one year to the next for each line item
What ratio is a liquidity ratio?
Current ratio
What is a way to determine the ability of a company to collect receivables?
Days' sales in receivables
What ratio is a leverage ratio?
Debt to equity
What is not a way to accurately determine the financial performance of a company?
Examining one year's financial results
T/F: A high current ratio indicates current liabilities are higher than current assets.
False
T/F: Days' sales in inventory measures how quickly a company can collect its receivables.
False
T/F: Declining sales, gross margin, operating and/or net income is normal for a company.
False
What is investor confidence that earnings will rise?
Higher price/earnings ratio leads to higher confidence
What does a leverage ratio tell you?
If the company can pay its long term liabilities and if it has too much debt
What does a liquidity ratio tell you?
If the company has cash available and if the company can pay its current liabilities
What does a valuation ratio tell you?
Is the company a good investment?
What type of ratio would tell if a company has too much debt?
Leverage
What type of ratio would tell if a company has issues selling its inventory?
Operational
What types of transactions do unearned revenue include?
Payments to a business before work is done
Out of four companies, which debt to equity ratio would be most favorable?
The company with the lowest ratio
How do you calculate gross profit?
net sales - cost of goods sold
What are the limitations of ratio analysis?
1. no single ratio tells the whole picture 2. industry average ratios may not be desirable targets
What is a good current ratio?
1.5 or higher is ideal
What types of transactions do prepaid assets include?
Anything you prepay: such as rent for 6 months, car insurance for 6 months, etc
What is the accounting equation?
Assets = Liabilities + Equity
T/F: In a vertical analysis of the income statement, each line item is shown as a percentage of net sales.
True
T/F: Inconsistent movement between sales, inventory, and receivables is a red flag.
True
T/F: Sales, inventory, and A/R should move in the same direction
True
What ratios are operational ratios?
Turnover and profitability ratios
What methods could you use to compare financial results from different operating periods?
Vertical, horizontal, and trend analysises
In a vertical analysis statement, what does the "percent of total" column tell you?
What percent the item is of net sales revenue
