What are the most common ratios split into four catagories?
1)liquidity
2) asset use efficiency
3) financing
4)profitability
The ratios used in
... [Show More] financial analysis are defined by GAAP.
FALSE-There are no rules for ratios. You can make your own to meet your needs.
Which of the following statements is NOT correct with respect to using ratios to analyze a firm or firms?
A change in a ratios reveals the economic character of the firm.-Using ratios to assess cost structure and creating new ratios to assess cost structure are examples of "Focus" and "flexibility" in ratio analysis. Using ratios to assess three companies is an example of "standardization". The incorrect statement is that ratios (and even change in ratios) reveal economic character. Ratios do NOT answer questions; rather, they indicate where the analyst should dig deeper to understand differences or changes
Which one of the following is NOT part of the common ratio categories?
Operating
Ratios help identify the areas of a firm that need investigation.
TRUE-Ratios tell you what questions to ask about the company.
What is a liquitity ratio?
Firms ability to meet short term obligations
Ratios you need to know: Liquidity
Current ratio = current assets / current liabilities
Quick ratio = (current assets - inventory) / current liabilities
AR turnover = credit sales / AR
Average collection period = 365 / AR turnover
Inventory turnover = COGS / inventory
Days on hand = 365 / inventory turnover
Accounts receivable turnover for the industry is 4.50. Assume a 365 day year and all sales were made on credit. This tells you that:
In this industry, the companies take about 81.1 days to collect their accounts receivable.-Average collection period for the industry is 81.1 days (365/4.5 = 81.1), accounts receivable turnover for Eastern Family is 3.33 (10000/3000 = 3.33), and average collection period for Eastern Family is 109.6 days (365/3.33 = 109.6). Based on these calculations we find that the industry has higher accounts receivable turnover so the industry's AR are more liquid than Eastern Family's and the industry collects accounts receivable more quickly than Eastern Family. Lastly, accounts receivable turnover tells how many times a year a company turns accounts receivable over NOT how many days it takes to collect. (The average collection period tells us on average how many days it takes to collect a firm's receivables)
If the current ratio of a company is higher than the industry, then:
You cannot tell without looking at other liquidity ratios.-You cannot tell a company's liquidity compared to the industry by just looking at one ratio.
Suppose the inventory turnover of a company is higher than the industry. Based on this one ratio, which of the following is most likely to be correct?
The firm has too little inventory resulting in lost sales or stock-out-While we can't say for sure the firm has too little inventory (lost sales/stock-outs) based on a single ratio, all the other choices would run counter to the "most likely" interpretation requested by the question. A high inventory turnover implies a relatively smaller inventory; the other available answers imply the firm has larger inventory.
"Ratios You Need to Know: Efficiency
Total Asset turnover = sales / total assets
Fixed Asset turnover = sales / fixed assets
OIROI = operating income / total assets
What is the fixed asset turnover of Eastern Family?"
1.53-FAT = Sales / Fixed Assets = 10000 / 6500 = 1.53
If a competitor of Eastern Family has a Total Asset Turnover (TAT) of 1.10, then:
Eastern Family's asset utilization success cannot be assessed by the TAT alone.-Looking only at TAT for Eastern and a competitor will not allow us to judge whether Eastern is doing good or bad. We have to consider issues such as technology investment and cost structure.
Consider two companies, Hoogle and Mapple. They are economically identical. However, for reporting purposes Hoogle uses the managerial discretion that is required with accrual accounting to increase net income relative to Mapple (assume any balance sheet effects are inconsequential). Which of the following is correct:
Hoogle's OIROI is higher than Mapple's but Hoogle is NOT more efficient.-Using the accrual accounting system to increase net income is known as earnings management. Since the firms are economically identical, Hoogle's use of accruals to increase net income and OIROI is just a ruse.
Suppose that Macrosoft decides to increase the estimated life over which fixed assets are depreciated. Which of the following is most likely?
Macrosoft's OIROI will increase.-Macrosoft's depreciation expense will be lower as a result of extending the estimated life of its assets (recall depreciation expense = (cost-salvage value)/estimated life). Lower depreciation expense leads to higher EBIT. Higher EBIT results in higher OIROI. (Note: the change in depreciation expense will increase EBIT and increase total assets; however, the change in EBIT will likely dominate).
What is the Times Interest Earned for Eastern Family?
2.41x-TIE = 1350 / 560 = 2.41x
If the industry average debt ratio is 60%, then:
Eastern Family is more aggressively financed by debt than the industry.-Eastern Family's debt ratio is 67.28% (= total liabilities/total assets = 10,900 / 16200; remember, total liabilities equals current liabilities [$3,900] + long-term liabilities [$7,000]). Since the industry average is only 60%, Eastern Family finances a higher portion of its assets with debt than the industry norm. Thus, Eastern is more aggressivelyfinanced than the industry. Having a higher debt ratio does not necessarily mean that the company's debt is lower quality.
Suppose a firm has a financial leverage ratio of 2.50. What percentage of the firm's assets are financed by equity?
0.4
The correct answer is 40%. We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So Financial leverage ratio = 2.5 = 100% / Y% = Assets/Equity; thus Y = 100 / 2.5 = 40%
If a firm's financial leverage ratio is 2.50, what percentage of assets are financed by debt?
0.6-We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So, Financial leverage ratio = 2.5 = 100%/Y% = Assets/Equity; thus Y = 40%, so X = 60% = percent financed by debt.
Ratios You Need to Know: Financing
Debt ratio = total liabilities/total assets
Interest-bearing debt to total capital (IBDTC) = interest-bearing debt/total capital
Times interest earned (TIE) = EBIT / Interest expense
Financial leverage ratio (FLR) = total assets/equity
Ratios You Need to Know: Profitability
Investment Based:
ROA = NI / assets
ROE = NI / equity
Sales Based:
Gross margin = (sales - COGS) / sales
Operating margin = EBIT / sales
Net margin = NI / sales
Two categories of Profitability Ratios
those based on salesand those based on investment (i.e.,assets or equity)-
Assume that the industry average ROE is 12%. For Eastern Family, which of the following best describes their ROE:
Eastern Family is generating lower return to owners than the industry.-ROE for Eastern Family is 8.94% (474/5300 = 8.9%) which is less than the industry average.
If the industry average ROE is 4.12% and ROA is 2.09%, the most plausible conclusion about Macrosoft's profitability is:
Macrosoft is more profitable than the industry.-For Macrosoft: ROE = NI/Equity = 462/8300 = 5.56%; ROA = 462/20900 = .0221 = 2.21%. Hence, Macrosoft is generating higher ROA and ROE than the industry.
Which one of the following is NOT included in the DuPont calculation?
Net Profit Margin
Kyoto Restaurant has total asset turnover of 1.50, ROE of 18.00%, and net profit margin of 6.00%. What is Kyoto's financial leverage ratio?
2-ROE = Net Margin x TAT x FLR, so FLR = ROE / (Net Margin x TAT) = 0.18 / (0.06 x 1.50) = 2.00.
What is the range of trend analisis
Look back 5 years and forward 3
Which one of the following is NOT an example of the use of meaningful comparison standards for ratio analysis?
Reporting ratios in annual financial statements.-There are no required ratios for financial reporting. Simply including ratios for the year in an annual report does not provide a comparison or standard for the calculated ratios. The other answers are examples of internal goal monitoring, trend analysis, and cross-sectional analysis.
The timing of a firm's fiscal year end would be most relevant to which of the following firms:
----> A snowboard shop.
A hospital.
A supermarket.
A restaurant.-When analyzing seasonal firms, an analyst must be careful to understand the relationship between fiscal year end and the sales cycle.
Which of the following best describes the problem associated with GAAP accounting standards when performing ratio analysis?
GAAP accounting standards allow for significant managerial discretion in reported financial statements.
Within the confines of GAAP, managers still have significant discretion over reported results.
What is the an example of ''recasting'' the financial statements?
To evaluate Cisco,we begin by "scrubbing the data." This means that we have to makesure Cisco's financial statements arecomparable to the peer group [Show Less]