Chapter 12 Example Questions - Trone

Example Questions                           Common size analysis is another term used for a vertical analysis Trend analysis and time series analysis refer to horizontal analysis Common types of analysis that help assess a specific company's performance include comparisons between companies, overtime, and to the same industry A company's ability to pay its long-term debt is referred to as solvency Current ratio, average collection., and receivables turnover are liquidity ratios The formula to compute the receivables turnover ratio is net credit sales divided by average accounts receivable Risk ratios and probability ratios represent common ratios used for analysis o risk and probability ratios are common categories into which ratios are classified The average collection. Is calculated as 365 divided by the receivable turnover ratio Liquidity refers to a company having enough cash or convertible assets to pay its current liabilities Formula for the inventory turnover ratio is cost of goods sold divided by average inventory Average days in inventory is calculated as 365 days divided by the inventory turnover ratio Current ratio and acid test ratio are liquidity ratios Formula for the current ratio is current assets divided by current liabilities Formula for the receivables turnover ratio is net credit sales divided by average accounts receivable (net) Prepaid expenses and inventory are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid test ratio The formula for average collection. Is 365 divided by the receivables turnover ratio The acid test ratio provides the most conservative measure of a firm's ability to pay its current liabilities Formula for the inventory turnover ratio is cost of goods sold divided by average inventory Debt equity is a ratio used to evaluate a company's solvency Formula to compute the average days in inventory is 365 days divided by inventory turnover ratio The debt-to-equity ratio is calculated as total liabilities divided by total stockholders’ equity Mathematically, the current ratio is expressed as current assets divided by current liabilities The times interest earned formula is calculated as earnings before interest and taxes divided by interest expense The sum of cash, Curry investments, and accounts receivable divided by current liabilities equals the acid test ratio Many investors view profitability as the number one measure of a company's success Return on assets, price earnings ratio, and gross profit ratio our profitability ratios            Debt to equity ratio and times interest earned ratio are used to evaluate a company's ability to pay long term debts The gross profit ratio indicates the portion of each sales dollar above its cost of goods sold The debt-to-equity ratio is total liabilities divided by total owners’ equity An item that requires separate disclosure on the income statement after income from continuing operations is discontinued operations The times interest earned formula is calculated as earnings before interest and taxes divided by interest expense The ability of reported earnings to reflect the company's true earnings is referred to as quality of earnings profitability ratios are used by investors and creditors most frequently in making final decisions Profit margin and return on equity are profitability ratios The gross profit ratio indicates the portion of each dollar of sales above the cost of goods sold Discontinued operations require separate disclosure after income from continuing operations 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.