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BU227 - All Ratios - Final Exam.docx

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Wilfrid Laurier University
David Scallen

TESTS OF PROFITABILITY Ability to generate earnings as compared to expenses/costs CHAPTER 3: RETURN ONASSETS (ROA) - Measures how much the company earned from the use of assets - High = effective resource management Profit+Interest Expense(Net of Tax) Returnon Assets= AverageTotal Assets Average Total Assets = (Beginning total assets + ending total assets) ÷ 2 - Profit = revenue – expenses + gains – losses a) Revenues: increase in assets/ settlements of liabilities from ongoing operations b) Expenses: decrease in assets/ increases of liabilities from ongoing operations c) Gains: increase in assets/ settlements of liabilities from peripheral activities d) Losses: decrease in assets/ increases of liabilities from peripheral activities - Ongoing operations: common, expected to run into the future (i.e. bookstore selling books) - Peripheral activities: activities that outside of the normal course of business (i.e. bookstore selling off old bookshelves) CHAPTER 4: RETURN ON EQUITY - How much the firm earned for each dollar of shareholders’investment Profit ReturnonEquity= ' AverageShareholder s Equity CHAPTER 4: NET PROFIT MARGIN - Measures how much profit each sales dollar generated during the period - High/rising = efficient management of sales and expenses NetProfit Margin= Profit Net Sales CHAPTER 5: QUALITY OF EARNINGS RATIO - What portion of profit was generated in cash Cash Flow ¿ Qualityof EarningsRatio=¿Operating Activities Profit CHAPTER 9: FIXEDASSET TURNOVER RATIO - How efficiently a company utilizes its investment in property, plant and equipment over time. Used to compare against competitors. AverageNet ¿Asset Turnover= NetSales(¿operatingrevenues) Assets¿ ¿ Average Fixed Assets = [Beginning + Ending Balances of Property, Plant and Equipment (net of accumulated depreciation)] ÷ 2 CHAPTER 12: EARNINGS PER SHARE RATIO - Measure of the return on investment that is based on the number of shares outstanding instead of the dollar amounts reported on the statement of financial position o Shares outstanding: a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Profit Available Earnings perShare=¿CommonShareholders ¿ Average Numberof CommonSharesOutstanding TESTS OF LIQUIDITY Ability to pay off short-terms debt obligations CHAPTER 7: RECEIVABLES TURNOVER RATIO - Measures the effectiveness of credit granting and collection activities ReceivablesTurnoverRatio= Net Sales AverageNetTradeReceivables CHAPTER 8: INVENTORY TURNOVER RATIO - Measure the efficiency of inventory management – how many times the average inventory was produced and sold during the period InventoryTurnover= Cost of Sales AverageInventory Average Inventory = (Beginning inventory + ending inventory) ÷ 2 CHAPTER 10: CURRENT RATIO - Measures the ability of a company to pay its current obligations Current Assets Current Ratio= Current Liabilities CHAPTER 10: TRADE PAYABLES TURNOVER &AVERAGEAGE OF PAYABLES - Measures how efficient management is in meeting its obligations to suppliers - High = company is paying supp
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