Accounting Ratios

Submitted By Aayushipandey
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CHAPTER 3 – ANALYZING FINANCIAL STATEMENTS

Questions

LG1-LG5 1. Classify each of the following ratios according to a ratio category (liquidity ratio, asset management ratio, debt management ratio, profitability ratio, or market value ratio).

a. Current ratio – liquidity ratio
b. Inventory turnover ratio – asset management ratio
c. Return on assets – profitability ratio
d. Accounts payable period – asset management ratio
e. Times interest earned – debt management ratio
f. Capital intensity ratio – asset management ratio
g. Equity multiplier – debt management ratio
h. Basic earnings power ratio – profitability ratio

LG1 2. For each of the actions listed below, determine what would happen to the current ratio. Assume nothing else on the balance sheet changes and that net working capital is positive.

a. Accounts receivable are paid in cash – Current ratio does not change
b. Notes payable are paid off with cash – Current ratio increases
c. Inventory is sold on account – Current ratio does not change
d. Inventory is purchased on account– Current ratio decreases
e. Accrued wages and taxes increase – Current ratio decrease
f. Long-term debt is paid with cash – Current ratio decreases
g. Cash from a short-term bank loan is received – Current ratio decreases

LG1-LG5 3. Explain the meaning and significance of the following ratios

a. Quick ratio - Inventories are generally the least liquid of a firm’s current assets. Further, inventory is the current asset for which book values are the least reliable measures of market value. In practical terms, what this means is that if the firm must sell inventory to pay upcoming bills, the firm is most likely to have to discount inventory items in order to liquidate them, and so therefore they are the assets on which losses are most likely to occur. Therefore, the quick (or acid-test) ratio measures a…...

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