VQ15, SB11a, SB11b

Debt/Equity Ratio

(Total Liabilities) / (Total Owner's Equity)

Current Ratio

(current assets) / (current liabilities)

Price/Earnings (P/E) Ratio

(market price per share) / (diluted earnings per share)

Return on Equity

(net income)/(average owner's equity)

Acid Test Ratio

(quick assets) / (current liabilities)

Asset Turnover

Sales/Average Total Assets

A company desiring to increase its total asset turnover could do so by using:

an accelerated depreciation method and the LIFO cost flow assumption.

With a semilogarithmic graph, the _______ scale is arithmetic.

horizontal

Firm C's common stock has a par value per share of $10, earnings per share of $6, dividends per share of $5, a book value per share of $69, and a market value per share of $84. Firm C's price/earnings ratio is:

$84 / $6 = $14 per share

Book Value Per Share

(common stockholders' equity) / (number of common shares outstanding)

Inventory Turnover

(cost of goods sold) / (average inventory)

Which of the following statements is true regarding the working capital calculation?

Accounts payable are included in current liabilities. Accounts receivable are included in current assets.

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% Reason: Average stockholders' equity = ($480,000 + $520,000) / 2 = $500,000 ROE = $80,000 / $500,000 = 16%

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

The acid-test ratio is a more conservative measure of liquidity than is the current ratio. The acid-test ratio excludes merchandise inventory from the numerator. The acid-test ratio uses the same denominator as does the current ratio. The acid-test ratio is sometimes called the quick ratio. Temporary cash investments are included in the numerator of the acid-test ratio. The acid-test ratio can be calculated as (Cash (including temporary cash investments) + accounts receivable) divided by current liabilities.

Select all that apply Financial leverage: is considered positive if the return on investment (ROI) earned on borrowed funds is less than the cost of borrowing. adds risk to the operation of the firm. is provided by debt and preferred stock because the interest cost (or dividend rate) is fixed. is considered positive if the interest rate paid on borrowed money is less than the rate of return (ROI) earned on that money. refers to the use of equity to finance the assets of the firm. magnifies the return to the owners (ROE) relative to the return on assets (ROI)

adds risk to the operation of the firm. is provided by debt and preferred stock because the interest cost (or dividend rate) is fixed. is considered positive if the interest rate paid on borrowed money is less than the rate of return (ROI) earned on that money. refers to the use of equity to finance the assets of the firm. magnifies the return to the owners (ROE) relative to the return on assets (ROI)

Working capital refers to the excess of a firm's:

current assets over its current liabilities.

In ________ (horizontal/vertical) common size analysis, the base year selected impacts how the trends of a company's financial results in recent years are portrayed.

horizontal

Trend analysis of ratios:

is a meaningful comparison despite the use of different financial accounting alternatives to develop the data used in the ratios for a company over several years generally leads to a more meaningful analysis than does the observation of a single year's ratio result.

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.

A firm's liquidity refers to:

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

The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into four (4) categories:

liquidity, activity, profitability, and debt

Liquidity:

refers to a firm's ability to meet its current obligations as they become due. is measured by relating current assets and current liabilities as reported on the balance sheet.

The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the LIFO __________ (backlog/reserve/stockpile).

reserve

Earnings multiple is another term used to describe the price/earnings ratio. This term merely reflects that:

the market price of stock is equal to the earnings per share multiplied by the P/E ratio.

Debt Ratio

total liabilities/total assets

With a semilogarithmic graph, the _______ scale is logarithmic.

vertical

Book value per share of common stock is usually calculated by dividing a company's ________ (average/year-end) total stockholders' equity by the __________ (average/year-end) number of shares of common stock _________ (authorized/issued/outstanding).

year-end, year-end, outstanding

Firm D had total stockholders equity of $1,000,000 at the end of Year 1 and $1,400,000 at the end of Year 2. Throughout Year 2, there were 100,000 shares of common stock authorized, 60,000 shares issued, and 50,000 shares outstanding. Firm D's book value per share at the end of Year 2 was:

$1,400,000 / 50,000 = $28 per share

DuPont Formula

Return on Investment = (Net Profit Margin) * (Asset Turnover) = Net Income / Average Total Assets

Select all that apply To calculate the amount of interest earned on an investment, you would need to know: the amount of the return on previous investments the length of time the funds are invested for the interest rate per year the principal amount invested

the length of time the funds are invested for the interest rate per year the principal amount invested

Select all that apply Examples of physical or combined physical/financial measures of activity that are sometimes disclosed in the notes to the financial statements include: sales dollars per employee cost of goods sold operating income per employee plant operating expenses per square foot gross profit per square foot of selling space number of employees sales in units accumulated depreciation

sales dollars per employee operating income per employee plant operating expenses per square foot gross profit per square foot of selling space number of employees sales in units

Select all that apply Operating income is frequently substituted for net income in the calculation of ROI and ROE because: operating income excludes service revenues and thus focuses on sales revenues, which are more directly comparable from firm to firm. operating income excludes interest expense, which varies from firm to firm based on their capital structure decisions. operating income is a more direct measure of the results of a firm's activities. operating income excludes depreciation and amortization expenses and thus provides a better measure of the firm's cash generating ability. operating income excludes income tax expense, which varies from firm to firm based on country-specific tax rates. operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability.

operating income excludes interest expense, which varies from firm to firm based on their capital structure decisions. operating income is a more direct measure of the results of a firm's activities. operating income excludes income tax expense, which varies from firm to firm based on country-specific tax rates. operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability.

Identify the correct statements about vertical common size financial statement analysis. Several years' financial data are stated in terms of a base year. Depreciation expense is expressed as a percentage of total expenses. Each financial statement is examined from top to bottom on an annual basis. Each stockholders' equity item is expressed as a percentage of total assets. Each asset is expressed as a percentage of total assets. With vertical common size financial statement analysis, each item on the income statement is expressed as a percentage of sales. With vertical common size financial statement analysis, total current assets are expressed as a percentage of total assets. With vertical common size financial statement analysis, each liability is expressed as a percentage of total liabilities.

Each financial statement is examined from top to bottom on an annual basis. Each stockholders' equity item is expressed as a percentage of total assets. Each asset is expressed as a percentage of total assets. With vertical common size financial statement analysis, each item on the income statement is expressed as a percentage of sales. With vertical common size financial statement analysis, total current assets are expressed as a percentage of total assets.

The LIFO reserve is the difference between the inventory valuation as reported under:

LIFO and the amount that would have been reported under FIFO.

Select all that apply Which of the following statements is true regarding the working capital calculation? Merchandise inventory is part of current assets. Cash is part of current assets. Cash is included in the numerator. Accounts payable is part of current assets.

Merchandise inventory is part of current assets. Cash is part of current assets.

Net Profit Margin

Net Income/Sales

The amount of interest earned on an investment is calculated as:

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

If margin = 5 percent, net income = $100,000, and turnover = 4.0, then:

ROI = 20%, average total assets = $500,000, and sales = $2,000,000 Reason: ROI = 5% x 4.0 = 20%, Sales = $100,000 / 5% = $2,000,000 Average total assets = $2,000,000 / 4 = $500,000

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

Reason: Margin = $75,000 / $500,000 = 15% ROI = 15% x 1.5 = 22.5%

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

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