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