Financial Ratios and Accounting Measurements Quiz

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20 Questions

Which ratio measures the firm's ability to repay long-term debt?

Debt ratios

Which ratio measures the firm's use of its assets and control of its expenses to generate an acceptable rate of return?

Profitability ratios

Which ratio measures investor response to owning a company's stock and also the cost of issuing stock?

Market ratios

Which financial statement summarizes the net sales, cost of goods sold, and gross profit of a company?

Income statement

What does EBIT stand for?

Earnings before interest and taxes

What does COGS stand for?

Cost of goods sold

Which ratio measures the availability of cash to pay debt?

Current ratio

Which ratio measures the effectiveness of the firm's use of resources?

Inventory conversion ratio

Which ratio quantifies the firm's ability to repay long-term debt?

Debt to equity ratio

Which ratio measures investor response to owning a company's stock?

Dividend yield

Which ratio calculates the return on investment for shareholders?

Earnings per share

Which ratio measures the firm's use of debt to finance its operations?

Debt ratio

Which ratio is used to assess the value of an investment in a company's shares?

Price to book value ratio

Which ratio measures the firm's ability to generate cash flow from its operations?

Operating cash flow ratio

Which of the following statements is true about financial ratios?

Financial ratios are used to evaluate the overall financial condition of a corporation or organization.

What are some of the sources of data used in calculating financial ratios?

Balance sheet, income statement, statement of cash flows, and statement of changes in equity.

Who uses financial ratios to compare the strengths and weaknesses in various companies?

Financial analysts

How are ratios usually quoted when they are usually or always less than 1?

Percentages

What does the reciprocal of a ratio express?

The same information as the original ratio

What does a P/E ratio of 20 correspond to in terms of earnings yield?

An earnings yield of 5%

Study Notes

Financial Ratios

  • The Debt-to-Equity Ratio measures a firm's ability to repay long-term debt.
  • The Return on Investment (ROI) measures a firm's use of its assets and control of its expenses to generate an acceptable rate of return.
  • The Price-to-Earnings (P/E) Ratio measures investor response to owning a company's stock and also the cost of issuing stock.

Financial Statements

  • The Income Statement summarizes the net sales, cost of goods sold, and gross profit of a company.

Financial Terms

  • EBIT stands for Earnings Before Interest and Taxes.
  • COGS stands for Cost of Goods Sold.

Financial Ratios (continued)

  • The Current Ratio measures the availability of cash to pay debt.
  • The Asset Utilization Ratio measures the effectiveness of the firm's use of resources.
  • The Long-Term Debt-to-Equity Ratio quantifies the firm's ability to repay long-term debt.
  • The Price-to-Earnings (P/E) Ratio measures investor response to owning a company's stock.
  • The Return on Equity (ROE) calculates the return on investment for shareholders.
  • The Debt Ratio measures the firm's use of debt to finance its operations.
  • The Price-to-Book (P/B) Ratio is used to assess the value of an investment in a company's shares.
  • The Operating Cash Flow Ratio measures the firm's ability to generate cash flow from its operations.

Financial Ratio Analysis

  • Financial ratios are used to compare the strengths and weaknesses of various companies.
  • Ratios can be calculated using data from financial statements, industry averages, and market data.
  • Financial ratios are often expressed as a decimal value, but can be quoted as a percentage when always or usually less than 1.
  • The reciprocal of a ratio expresses the inverse of the original ratio.
  • A P/E ratio of 20 corresponds to an earnings yield of 5%.

Test your knowledge of financial ratios and accounting measurements with this quiz. Learn about the significance of these ratios in evaluating and understanding an organization's financial health.

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