ACC 313 Chapter 4 Quiz

Knight, Creighton University

the balance sheet is a ______ statement

point-in-time

the balance sheet provides the direct basis for assessing…

• liquidity

• financial flexibility

• long-term risk

• profitability

• operating efficiency

liquidity ratios

• current ratio

• quick ratio

• working capita

financial flexibility/long-term risk/leverage ratios

• total debt to total assets ratio

• total liabilities to equity ratio

• total liabilities to total assets ratio

current ratio

current assets / current liabilities

quick ratio

(cash + temporary investments + A/R) / current liabilities

working capital formula

current assets - current liabilities

total liabilities-to-equity ratio

total liabilities / total stockholders’ equity

total long-term debt-to-total assets ratio

(long-term debt + current portion of long-term debt) / total assets

total long-term liabilities-to-total assets ratio

total long-term liabilities / total assets

how does the balance sheet help in the evaluation of profitability?

a company’s total equity and its total assets may be used as the denominator in computing various rates of return

how does the balance sheet help in the evaluation of operating efficiency?

a company’s A/R, merchandise inventory, and current assets are used to determine various turnover ratios

merchandise inventory turnover ratio

COGS / [(beg. inventory + end. inventory) / 2] → average merchandise inventory

if a ratio involves a non-balance sheet number and a balance sheet number…

use the period “average” for the balance sheet number

ratios can be compared to…

• industry averages

• industry leaders

• the company’s own ratios from previous years

• expectations

*these are ordered from worst → best

what is the best base of comparison for ratios?

a company’s own expectations

what is the worst base of comparison for ratios?

industry averages

a company wants a ratio to “appear” to be…

high or low

a company wants a ratio to “really be”…

just right