ACP Business Chapter 14
Ratio Analysis - ANS-Calculations that measure an organization's financial health
The usefulness of Ratio - ANS-Overall they are not very useful unless a relationship is formed to
compare past examples
Profitability ratios - ANS-Ratios that measure the amount of operating income or net income an
organization is able to generate relative to its assets, owners' equity, and sales
Profit Margin - ANS-Net income divided by sales
Return on Assets - ANS-Net income divided by assets
Return on equity - ANS-Net income divided by owners' equity; also called return on investment
(ROI)
Asset utilization ratios - ANS-Ratios that measure how well a firm uses its assets to generate
each $1 of sales
Receivables turnover - ANS-Sales divided by accounts receivable
Inventory turnover - ANS-Sales divided by total inventory
Total asset turnover - ANS-Sales divided by total assets
Liquidity ratios - ANS-Ratios that measure the speed with which a company can turn its assets
into cash to meet short-term debt
Current ratio - ANS-Current assets divided by current liabilities
Quick ratio (acid test) - ANS-a stringent measure of liquidity that eliminates inventory (Current
assets minus Inventory divided by Current Liabilities)
Debt utilization ratios - ANS-Ratios that measure how much debt an organization is using
relative to other sources of capital, such as owners' equity
Debt to total assets ratio - ANS-A ratio of how much of the firm is financed by debt and how
much is owners' equity
Times interest earned ratio - ANS-Operating income divided by interest expense
Ratio Analysis - ANS-Calculations that measure an organization's financial health
The usefulness of Ratio - ANS-Overall they are not very useful unless a relationship is formed to
compare past examples
Profitability ratios - ANS-Ratios that measure the amount of operating income or net income an
organization is able to generate relative to its assets, owners' equity, and sales
Profit Margin - ANS-Net income divided by sales
Return on Assets - ANS-Net income divided by assets
Return on equity - ANS-Net income divided by owners' equity; also called return on investment
(ROI)
Asset utilization ratios - ANS-Ratios that measure how well a firm uses its assets to generate
each $1 of sales
Receivables turnover - ANS-Sales divided by accounts receivable
Inventory turnover - ANS-Sales divided by total inventory
Total asset turnover - ANS-Sales divided by total assets
Liquidity ratios - ANS-Ratios that measure the speed with which a company can turn its assets
into cash to meet short-term debt
Current ratio - ANS-Current assets divided by current liabilities
Quick ratio (acid test) - ANS-a stringent measure of liquidity that eliminates inventory (Current
assets minus Inventory divided by Current Liabilities)
Debt utilization ratios - ANS-Ratios that measure how much debt an organization is using
relative to other sources of capital, such as owners' equity
Debt to total assets ratio - ANS-A ratio of how much of the firm is financed by debt and how
much is owners' equity
Times interest earned ratio - ANS-Operating income divided by interest expense
