Fundamentals of Accounting: Slide Notes

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34 terms · flashcard deck on calculating ratios

Liquidity Ratios

measure firms ability to meet its short-term obligations to creditors as they come due

Liquidity

refers to how quickly an asset can be converted to cash

True

True or False: the quicker an asset can be converted to cash, the more liquid

Current Ratio

how many times can current liabilities be met with current assets is called _____

current assets/current liabilities

The calculation for current ratio is_____

Low

Net profit margin ratio of 1 or less is considered (high / low).

2

Current ratio of much more than (#) may be indicative of excessive liquidity.

1.2

Liquidity ratio standard for chiropractic is _____ according to Chiropractic Economics, May 22, 2007

Quick ratio

measures the firm's ability to meet current obligations with the most liquid of current assets

1

A quick ratio minimum of (#) is desirable

cash + accounts receivable/ current liabilities

Quick ratio calculation is _____

1.0

Standard quick ratio for the idustry of chiroopractic is (#) , according to Chiropractic Economics, May 22, 2007

Activity Ratios

measure the speed at which various accounts are converted to cash

Average collection period

measures how long it takes an office to convert a credit sale (sale on account) into cash

Accounts receivable / average sales per day

what is the calculation for average collection period

Total revenue / 365

Average sales per day calculation _____

False (lower)

True or False: the higher the number, the shorter the collection period (...the better)

Accounts Receivable Turnover Ratio

measures how many times accounts receivable are rolled over during a year

Annual Revenue / Accounts Receivable

Accounts Receivable Turnover calculation is ____

True

True or False: The greater the number for current ratio the more the turnover (...the better, generally)

15.5

accounts receivable turnover ratio Industry ratio is (#) for chiropractic, according to Chiropractic Economics

Leverage ratios

measure the extent to which firms use debt to source financing and ability to service debt

Leverage

_____ refers to the ability to use other people's money to generate profits

Debt Ratio

measures the proportion of a firm's total assets that is acquired with the borrowed funds

Total debt / Total assets

Debt Ratio calculation is _____

True

True or False: A higher percentage of leverage ratio can be considered okay if borrowed at a good interest rate and used to generate revenue

Lower

From credit standpoint want number to be (higher/ lower)

4 (all of the above)

Profitability Ratios - measure ability to...1) turn sales into profits 2) earn profits on committed assets 3) management efficiency 4) all of the above

Net profit margin

measures the percentage of each sales dollar that remains as profit after all expenses including taxes have been paid

Net profit = net income / sales

Net profit margin calculation _____

True

True or False: If net profit is too low indicates that expenses are too high relative to sales

Return on Investment

indicates a firm's effectiveness in generating profits from its available assets

net profit after tax / total assets

Return on investment calculation

Higher

For liquidity ratios, the (higher/lower) the ratio the better

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