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34 terms

Fundamentals of Accounting: Slide Notes

flashcard deck on calculating ratios
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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