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What does a high current ratio indicate about a company's ability to meet obligations?
What does a high current ratio indicate about a company's ability to meet obligations?
What components are used to calculate the quick ratio?
What components are used to calculate the quick ratio?
What is the Return on Assets (ROA) if the net income is P116,030 and the average total assets are P1,014,082 and P966,290?
What is the Return on Assets (ROA) if the net income is P116,030 and the average total assets are P1,014,082 and P966,290?
Which of the following is NOT an efficiency ratio?
Which of the following is NOT an efficiency ratio?
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How does the DuPont Model help in analyzing a company's performance?
How does the DuPont Model help in analyzing a company's performance?
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How is accounts receivable turnover calculated?
How is accounts receivable turnover calculated?
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If a company has an equity multiplier of 2, what does that indicate about its use of financial leverage?
If a company has an equity multiplier of 2, what does that indicate about its use of financial leverage?
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Which of the following is NOT a component of the DuPont analysis?
Which of the following is NOT a component of the DuPont analysis?
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What is the formula for calculating the average collection period?
What is the formula for calculating the average collection period?
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What does a higher net profit margin indicate in the context of operating efficiency?
What does a higher net profit margin indicate in the context of operating efficiency?
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Which of the following ratios measures how effectively a company uses inventory?
Which of the following ratios measures how effectively a company uses inventory?
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What is the correct formula for the equity multiplier in the DuPont analysis?
What is the correct formula for the equity multiplier in the DuPont analysis?
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What does the inventory turnover ratio rely on for its calculation?
What does the inventory turnover ratio rely on for its calculation?
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What does the number of times interest earned ratio indicate?
What does the number of times interest earned ratio indicate?
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Which profitability ratio measures the profit relative to net sales?
Which profitability ratio measures the profit relative to net sales?
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Which measure is considered a slow-moving asset and affects the current ratio?
Which measure is considered a slow-moving asset and affects the current ratio?
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For every P1 of stockholder's equity, what does a Return on Equity (ROE) of 29% indicate?
For every P1 of stockholder's equity, what does a Return on Equity (ROE) of 29% indicate?
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Which metric is calculated as net income divided by total sales or revenue?
Which metric is calculated as net income divided by total sales or revenue?
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If a company has a gross profit of P799,367 and net sales of P3,007,887, what is the gross profit ratio?
If a company has a gross profit of P799,367 and net sales of P3,007,887, what is the gross profit ratio?
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What does a net profit margin of 3.9% signify?
What does a net profit margin of 3.9% signify?
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What does the return on assets (ROA) ratio measure?
What does the return on assets (ROA) ratio measure?
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When calculating gross profit ratio, which of the following is used in the denominator?
When calculating gross profit ratio, which of the following is used in the denominator?
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If a firm shows a negative profitability ratio, what might that suggest?
If a firm shows a negative profitability ratio, what might that suggest?
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In the context of profitability ratios, what does the Du Pont system analyze?
In the context of profitability ratios, what does the Du Pont system analyze?
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What does the inventory turnover ratio measure?
What does the inventory turnover ratio measure?
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How is the average sale period calculated in relation to inventory turnover?
How is the average sale period calculated in relation to inventory turnover?
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What does the total asset turnover ratio indicate?
What does the total asset turnover ratio indicate?
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Which calculation reflects the debt-to-equity ratio?
Which calculation reflects the debt-to-equity ratio?
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What does a debt ratio of 0.59 indicate?
What does a debt ratio of 0.59 indicate?
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The number of times interest earned indicates what?
The number of times interest earned indicates what?
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If the average net fixed assets is calculated as $P135,754 + P166,481/2$, what does it equal?
If the average net fixed assets is calculated as $P135,754 + P166,481/2$, what does it equal?
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What does a fixed assets turnover ratio of 19.90 indicate?
What does a fixed assets turnover ratio of 19.90 indicate?
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What does the working capital ratio measure?
What does the working capital ratio measure?
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Which of the following is NOT considered a liquidity ratio?
Which of the following is NOT considered a liquidity ratio?
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What are standard ratios typically based on?
What are standard ratios typically based on?
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How do liquidity ratios help a business?
How do liquidity ratios help a business?
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What is the formula for the current ratio?
What is the formula for the current ratio?
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What might be a limitation of financial ratio analysis?
What might be a limitation of financial ratio analysis?
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Which financial statement item is included in both the working capital ratio and liquidity ratios?
Which financial statement item is included in both the working capital ratio and liquidity ratios?
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Which event would likely improve a company's working capital ratio?
Which event would likely improve a company's working capital ratio?
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If a company's current ratio is calculated to be 1.96:1, what does this indicate?
If a company's current ratio is calculated to be 1.96:1, what does this indicate?
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Which item is typically included in current liabilities?
Which item is typically included in current liabilities?
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Why might analysts use financial ratio analysis?
Why might analysts use financial ratio analysis?
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Which of the following ratios indicates the short-term liquidity position of a firm?
Which of the following ratios indicates the short-term liquidity position of a firm?
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What factor can significantly impact the interpretation of financial ratios?
What factor can significantly impact the interpretation of financial ratios?
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Study Notes
Financial Statement Analysis 2
- Financial ratio analysis is a technique used to evaluate a company's performance by comparing its financial data to other companies or industry benchmarks.
- The primary goal of financial ratio analysis is to assess a company's financial health and performance.
- Financial ratios can be categorized as liquidity ratios, efficiency ratios, debt utilization ratios, and profitability ratios.
Learning Objectives
- Students are expected to understand and discuss financial ratio analysis and its purpose.
- Students will be able to explain and differentiate the limitations of financial ratio analysis.
- Students will be able to conduct financial ratio analysis by performing the steps in the process, interpret the results, draw conclusions, and identify implications based on these results.
Ratio
- A ratio presents the relationship between two variables.
Financial Ratio
- A financial ratio is the relationship between financial statement items, expressed mathematically.
Basis Of Standard Ratios
- Company budget for the same period
- Industry benchmarks for the company's sector
- Ratios used by successful competitors
- Ratios used by the company in the past period
- Ratios calculated by analysts.
Liquidity Ratios
- Liquidity ratios evaluate a company's ability to meet its short-term obligations with its current assets.
- Working capital ratio (current ratio) measures a company's capacity to meet short-term debt obligations with current assets.
- Current Ratio = current assets / current liabilities
- Quick ratio (acid-test ratio) assesses a company's ability to pay short-term obligations without selling inventory.
- Quick ratio or acid test ratio = (current assets - inventory) / current liabilities
Efficiency Ratios
- Efficiency ratios measure a company's effectiveness in using its resources to generate revenue.
- Accounts receivable turnover measures how efficiently a company collects its receivables.
- Accounts Receivable Turnover = Net Sales / Average Accounts Receivable
- Average collection period calculates the average number of days it takes to collect payments from customers.
- Average collection period = 365 days / Accounts Receivable Turnover
- Inventory turnover ratio assesses how efficiently a company manages its inventory.
- Merchandise inventory turnover = Cost of goods sold / Average merchandise inventory
- Average sale period = 365/ Inventory turnover ratio
- Fixed assets turnover measures how efficiently a company uses its fixed assets.
- Fixed assets turnover = Net Sales / Average net fixed assets
- Total assets turnover measures how efficiently a company uses all its assets.
- Total asset turnover = Net Sales / Average total assets
Debt Utilization (Leverage) Ratio
- Debt utilization ratios measure how efficiently a company manages its financial obligations, including the use of borrowed funds.
- Debt-to-equity ratio quantifies the risk associated with a company's capital structure, evaluating the relationship between funds from creditors and owners.
- Debt-to-equity ratio = Total liabilities / Total Stockholders' equity
- Debt ratio measures the proportion of assets financed by debt.
- Debt Ratio = Total Liabilities / Total Assets
- Number of times interest earned quantifies a company's ability to cover its interest obligations with its operating income.
- Number of times interest earned = Net income before interest and income tax or operating income / annual interest expense
Profitability Ratios
- Profitability ratios assess a company's ability generate income relative to revenue, assets, operating costs, and shareholder equity over a given period of time.
- Gross profit ratio assesses the gross margin to cover operating expenses and desired income
- Gross profit ratio = Gross profit / Net sales
- Net profit ratio (profit margin) assesses the company's profitability after considering all revenues and costs.
- Net profit ratio = Net profit / Net sales
- Return on Assets (ROA) measures a company's profitability relative to its total assets over a period.
- Return on assets (ROA) = Net income / Average total assets
- Return on Equity (ROE) measures a company's profitability concerning the shareholder's equity.
- Return on equity (ROE) = Net income / Average stockholders' equity
- Dupont system of analysis offers a multi-step financial equation to better understand their fundamental performance, especially the Return on Equity (ROE). Its formula is in place to measure a business's operating efficiency, asset utilization, and financial leverage.
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Description
This quiz focuses on financial ratio analysis, a method for evaluating a company's performance through financial data comparison. Students will learn about various categories of financial ratios and their applications in assessing financial health and performance. Additionally, students will explore the limitations of financial ratios and gain practical skills in conducting and interpreting these analyses.
