# Fundamentals of Accounting: Slide Notes

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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

Example: