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67 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What is Liquidity ?
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Company’s ability to convert noncash assets into cash or to obtain cash in order to meet current liabilities; Short-term (1 yr or less); Essential to carrying out of business acitivity
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What is the Quick (Acid-Test) Ratio?
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(Cash + Securities + Accounts Receivable) – Inventory / Current Liabilities
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shows how quick you can generate cash; 1 or more is good
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What is the Accounts Receivable Turnover?
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Net Credit Sales (or Total Sales) / Average Accounts Receivable
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number of sales/collection cycles completed during the year
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Average Collection period
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Avg Accts Receivable/Avg Daily Sales
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Avg # of days that elapse between sale and cash collection
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What do you do with the collection period?
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This indicates the length of time needed to buy
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sell
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What is the operating cycle?
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the number of days it takes to convert inventory into cash
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What is solvency?
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the entity’s ability to meet its long-term obligations as they become due
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Can you cover your debt? (long term)
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Debt to Equity
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Liabilities / Equity
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If # < 1- owned more by owners (equity) ; If # > 1- owned more by banks (creditors)
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Debt to Assets
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Liabilities / Total Assets
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If # < 1, I OWN more than I owe and If # > 1, I OWE more than I owe
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Equity
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Assets – Liabilities
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What ratio is the significant measure of solvency?
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Stockholders’ Equity / Total Liabilities
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How do you figure the stockholders’ equity?
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In the balance sheet - take the number of shares and multiply them by the par value price + Retained earnings
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What is the formula for the operating cycle?
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Number of days inventory is held + Number of days receivables are held
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Why is the Stockholders’ equity compared to total liabilities important?
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this is a significant measure of solvency since a high degree of debt in the capital structure may make it difficult for the company to meet interest charges and principal at maturity.
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What do you get if you have a high debt position?
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there is a high degree of debt in the capital structure may make it difficult for the company to meet interest charges and principal at maturity – AND the risk of running out of cash – AND – Less financial flexibility in the sense that it will be difficult to get loans in a crunch.
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Return on Assets (ROA)
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Net Income + Interest Expense (L-T) / Average Assets
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doesn’t mean anything except when compared to a benchmark- is a Profitability ratio
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Profit Margin on Assets
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Net Income + Interest Expense (L-T) / Sales
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Profitability Ratio; for every dollar sold
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Asset Turnover
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Sales / Assets
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Profitability
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Return on Assets (ROA)
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Asset Turnover x Profit Margin
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DuPont Framework
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Return on Equity (ROE)
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Net Income/Sales x Sales/Assets x Assets/Equity
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Return on Equity (ROE)
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Net Income / Average Stockholders' Equity
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According to stockholders, this measures the overall performance of a company.// It is the number of pennies earned during the year on each dollar invested
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Financial Leverage
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Avg Assets / Avg Equity
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how much of common equity is used to purchase assets – is bad if less than 1; on avg
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Common Earning Leverage
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Net Income – Pref Div / Net Income + Interest Expense (L-T)
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How do you convert from a yearly number to a daily number?
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365 / yearly number
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How do you get an average number?
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(Beginning of year # + End of year #) / 2
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Fixed Assets .Sales/Avg Fixed Assets (L-T)
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how many times per year that long-term assets are turned over
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how often in days there is a turnover in long-term assets
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365 / Fixed Assets
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Earnings Coverage Ratio
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Earnings before Interest Expense / Interest Expense
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Return on Sales
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Net Income/Sales
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number of pennies earned during the year on each dollar of sales
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Asset Turnover
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Sales/Total Assets
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number of dollars of sales during the year generated by each dollar of assets
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Assets-to-equity ratio
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Total Assets / Stockholders’ equity
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number of dollars of assets acquired for each dollar of funds invested by stockholders
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What is the purpose of the Form 20-F?
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a form that explains in detail the differences between a company’s net income computed applying its home country’s accounting principles and net income computed applying U.S. GAAP.
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Rauh Corp had a current ratio of 2.0 at the end of 2007. Current assets and current liabilities increased by equal amounts during 2008. The effects on net working capital and on the current ratio respectively were:
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No Effect
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No Effect - Increase – Decrease
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From the standpoint of the stockholders of a company the ratio that measures the overall performance of a company would be calculated using what?
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Average stockholders’ equity and Net Income
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Which of the following is NOT a component of the DuPont Framework?
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Assets to Debt
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Return on Sales;
Asset turnover; Assets to debt; Assets to equity |
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What is assigned 100% in vertical analysis for the balance sheet
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Total assets
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What is assigned 100% in vertical analysis for the income statement
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Net Sales
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What is the Working Capital formula?
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Current Assets – Current Liabilities
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What is Working capital used for?
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Safety cushion to creditors; a greater balance is required when the entity has difficulty borrowing on short notice
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What is the Current Ratio?
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Current Assets / Current Liabilities
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What Current Ratio used for?
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Used to measure the ability of an enterprise to meet its current liabilities out of current assets
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What does the Quick Ratio do?
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A stringent test of liquidity; Does not include Inventory
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What is this ratio for? 365 days / Turnover rate
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Collection period: The number of days inventory is held
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What do you do with the collection period?
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This indicates the length of time needed to buy
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sell
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What is the operating cycle?
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the number of days it takes to convert inventory into cash
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What is solvency?
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the entity’s ability to meet its long-term obligations as they become due
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Can you cover your debt? (long term)
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Debt to Assets
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Liabilities / Total Assets
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If # < 1
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Equity
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Assets – Liabilities
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What ratio is the significant measure of solvency?
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Stockholders’ Equity / Total Liabilities
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What is the formula for the operating cycle?
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Number of days inventory is held + Number of days receivables are held
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Why is the Stockholders’ equity compared to total liabilities important?
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this is a significant measure of solvency since a high degree of debt in the capital structure may make it difficult for the company to meet interest charges and principal at maturity.
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What do you get if you have a high debt position?
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there is a high degree of debt in the capital structure may make it difficult for the company to meet interest charges and principal at maturity – AND the risk of running out of cash – AND – Less financial flexibility in the sense that it will be difficult to get loans in a crunch.
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Return on Assets (ROA)
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Net Income + Interest Expense (L-T) / Average Assets
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doesn’t mean anything except when compared to a benchmark- is a Profitability ratio
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Profit Margin on Assets
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Net Income + Interest Expense (L-T) / Sales
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Profitability Ratio; for every dollar sold
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Asset Turnover
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Sales / Assets
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Profitability
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Return on Assets (ROA)
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Asset Turnover x Profit Margin
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DuPont Framework
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Financial Leverage
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Avg Assets / Avg Equity
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how much of common equity is used to purchase assets – is bad if less than 1; on avg
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Common Earning Leverage
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Net Income – Preferred Dividends / Net Income + Interest Expense (L-T)
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How do you convert from a yearly number to a daily number?
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365 / yearly number
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Inventory Turnover Ratio
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Cost of Goods Sold / Avg Inventory
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The inventory turnover ratio measures the number of times a company sells its inventory during the year.//
A high inventory turnover ratio indicated that the product is selling well.// The inventory turnover ratio should be done by inventory categories or by individual product. |
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How do you get an average number?
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(Beginning of year # + End of year #) / 2
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Fixed Assets .Sales/Avg Fixed Assets (L-T)
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how many times per year that long-term assets are turned over
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how often in days there is a turnover in long-term assets
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365 / Fixed Assets
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Earnings Coverage Ratio
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Earnings before Interest Expense / Interest Expense
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Return on Sales
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Net Income/Sales
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number of pennies earned during the year on each dollar of sales
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Return on Equity (ROE)
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Profitability x Efficiency x Leverage
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Return on Equity (ROE)
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Return on Sales x Asset Turnover x Assets-to-Equity Ratio
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