chapter 12

gross profit ratio

(Net Sales - Cost of Goods Sold) / Net Sales indicates the portion of each sales dollar above its cost of goods sold

Which of the following are common synonyms of the gross profit ratio?

-Gross profit margin -Gross margin

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

-Inventory -Prepaid expenses

Which statements about the inventory turnover ratio are correct?

-It shows the number of times the average inventory balance is sold during a reporting period. -It indicates how quickly inventory is sold.

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

-between companies -over time -to the same industry

Solvency ratios include:

-debt to equity ratio -times interest earned ratio

Which of the following are profitability ratios?

-profit margin -return on equity

Liquidity ratios include:

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

Acid Test Ratio

Cash, current investments, and accounts receivable / by current liabilities; measures the availability of liquid current assets to pay current liabilities provides the most conservative measure of a firms ability to pay its current liabilities.

Company A has an accounts receivable turnover of 8.0. Company B has an accounts receivable turnover of 10.0. Which of the following is true?

Company B collects its receivables faster than Company A.

Compute the inventory turnover ratio using the following information: Net sales is $100,000 for the year, costs of goods sold are $40,000, last year's assets in place were $900,000, and this year's assets in place are $1,100,000. Receivables for both years are $50,000. Inventory changed from $30,000 last year to $10,000 this year.

Cost of goods sold/average inventory = $40,000/[($30,000 + 10,000)/2] = 2

Which of the following is a solvency ratio?

Debt-to-equity

Solvency

The ability of a company to pay all its liabilities, which includes long-term liabilities as well.

Liquidity

having sufficient cash to pay its current liabilities

receivables turnover ratio

measures how many times a company collects its receivables during the year. A low receivables turnover ratio may indicate that the company is having trouble collecting its accounts receivable Net Credit Sales / Average Accounts Receivable

Profit Margin Ratio

net income / net sales (measures extent by which selling price covers all expenses)

Return on Assets

net income/average total assets

Asset Turnover Ratio

net sales/average total assets

Receipts, Inc.'s Sales were $200,000 while its Accounts receivable was $23,000 at the beginning of the year and $27,000 at the end. All sales were credit sales. Receipts' receivables turnover equals:

receivables turnover=$200,000/(($23,000+$27,000)/2)=8.0

Quality of earnings

refers to the ability of reported earnings to reflect a company's true earnings, as well as the usefulness of reported earnings to predict future earnings.

P/E Ratio

stock price divided by earnings per share

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

Debt to Equity Ratio

total liabilities/total stockholders' equity

GPS, Inc.'s sales were $200,000, cost of goods sold was $150,000 and net income was $20,000. Its average inventory was $25,000. The gross profit ratio equals ______.

25% Gross profit ratio=($200,000-$150,000)/$200,000=0.25, or 25%

The average collection period equals

365 days/receivables turnover ratio

Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?

365/receivable turnover = 40.6 days

Compute the average days in inventory ratio using the following information: Net sales is $200,000 for the year, cost of goods sold are $80,000, last year's total assets were $900,000, and this year's total assets are $1,100,000. Receivables for both years are $40,000. Inventory changed from $30,000 last year to $10,000 this year.

91.25 days Average days in inventory is 365/inventory turnover ratio = 365/4. Inventory turnover is calculated as cost of goods sold/average inventory = $80,000/[($30,000 + 10,000)/2] = 4.

Return on Shareholder's Equity

Net Income / Average Shareholder's Equity

Which is typically preferable for a company?

a short average collection period

horizontal analysis (trend analysis)

analyzes trends in financial data for a single company over time.

Inventory turnover ratio

cost of goods sold/average inventory

current ratio is expressed as

current assets / current liabilities

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

times interest earned ratio

earnings before interest and taxes divided by interest expense

vertical analysis (common-size analysis)

expresses each item in a financial statement as a percentage of the same base amount.