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# Financial Ratios

### Questions about some of the basic financial ratios

Question | Answer |
---|---|

Name one liquidity ratio. | Current ratio |

What is generally accepted as a healthy current ratio? | 2:1 |

How do you calculate the current ratio? | Current Assets/Current Liabilities |

How do you calculate the rate of return? | Net Profit/Owner's Equity |

Would taking out a long term loan improve your liquidity? | Yes |

What is another name for the Current Ratio? | Working Capital Ratio |

Does a highly geared business have more equity than debt? | No |

What ratio can be used to measure solvency | Debt to Equity |

What is the formula of the Debt to Equity ratio? | Debt/Equity |

Name the two efficiency ratios. | The Accounts Receivable Turnover Rato The Expense Ratio |

What unit of measure does the ART Ratio use? | Days |

To calculate the ART Ratio, Accounts Receivable must be divided by what? | Average Credit Sales |

If your terms of credit are 30 days and your ART Ratio is 49 days, name two possible solutions. | Factoring Discounts for early payments |

What does COGS stand for? | Cost of Goods Sold |

How do you calculate COGS | Opening Stock plus Purchases Minus Closing Stock |

A high gross profit coupled with a low net profit would indicate a problem in which area? | Operating Expenses |

How do you calculate working capital? | Current Assets - Current Liabilities |

Name 3 current assets. | Cash, Inventory, Accounts Receivable, Prepayments |

Name 2 current liabilities | Overdraft, Accounts Payable |

What do the Expense Ratio, the Gross Profit Ratio and the Net Profit Ratio all have in common? | They are all calculated by dividing their name by sales. |

How do you calculate Net Profit? | Gross Profit - Expenses |

If the Expense Ratio is 40% and Sales are $100,000 - what is the value of expenses. | $40,000 |

If the Expense Ratio is written as 0.4, what does this mean? | For every one dollar of sales, 40c is lost to expenses |

Created by:
sshea
on 2011-03-26