Accounting Test 2

Return on Total Assets

Adding interest expense back to net income enables the return on assets to be compared for companies with different amounts of debt or over time for a single company that has changed its mix of debt and equity.

Financial Leverage

Financial leverage results from the difference between the rate of return the company earns on investments in its own assets and the rate of return that the company must pay its creditors.

EBIT

earnings before interest and taxes

EBITDA

earnings before interest and taxes, Depreciation and amortization

Working capital-

excess of current assets over current liabilities is known as working capital.

Price-Earning Ratio

higher price-earnings ratio means that investors are willing to pay a premium for a company's stock because of optimistic future growth prospects.

Net Profit Margin

how selling and administrative expenses, interest expense, and income tax expense influence performance.

Quick assets

include Cash, Marketable Securities, Accounts Receivable, and current Notes Receivable.

Gross Margin Percentage

indicates how much of each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit

Equity Multiplier

indicates the portion of a company's assets that are funded by equity. It focuses on average amounts maintained throughout the year rather than amounts at one point in time.

Debt-to-equity

indicates the relative proportions of debt to equity on a company's balance sheet.

Return on Equity-

measure indicates how well the company used the owners' investments to earn income.

Acid -Test (Quick) Ratio

measures a company's ability to meet obligations without having to liquidate inventory.

Current Ratio

measures a company's short-term debt paying ability.

Total Asset Turnover

measures how efficiently a company's assets are being used to generate sales. This ratio expands beyond current assets to include noncurrent assets.

Average Sale Period

measures how many days, on average, it takes to sell the entire inventory.

Accounts Receivable Turnover

measures how many times a company converts its receivables into cash each year.

Operating Cycle

measures the elapsed time from when inventory is received from suppliers to when cash is received from customers.

Average Collection period

measures, on average, how many days it takes to collect an account receivable.

Times Interest Earned

most common measure of a company's ability to provide protection for its long-term creditors. A ratio of less than 1.0 is inadequate

Dividend Yield Ratio

rate of return earned by the shareholders on their investment

Dividend Payout Ratio

ratio gauges the portion of current earnings being paid out in dividends. Investors seeking dividends (market price growth) would like this ratio to be large (small).

Inventory Turnover

ratio measures how many times a company's inventory has been sold and replaced during the year.

Book Value Per Share-

ratio measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts after all creditors were paid off.

Investing Activities

§ Changes in investments § Long-term assets □ Ex. Building, land, selling □ As long as cash is involved Stock in another company

Financing Activities

§ Changes in long-term liabilities § stockholder's equity Dividends paid

Operating Activities

§ Current assets, current liabilities □ Income statement items □ Net income from cash basis □ Dividends received - income INTEREST

Preparation of Statement of Cash Flows

• Primary purpose: To provide information about a company's cash receipts and cash payments during a period • Secondary objective: To provide cash-basis information about the company's operating, investing, and financing activities