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Accounting ratios questions with correct answers.
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Accounting ratios questions with correctanswers.
Gross profit margin ANS - Gross profit/sales
Assesses a firm's financial health by revealing the proportion of money left over from revenues after
accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional
expenses and future savings.
net profit margin ANS - after tax net income/sales
Profit margin is very useful when comparing companies in similar industries. A higher profit margin
indicates a more profitable company that has better control over its costs compared to its competitors
Return on equity ANS - after tax net income/ equity
The amount of net income returned as a percentage of shareholder's equity. Measures a corporation's
profitability by revealing how much profit a compay generates with the money shareholders have
invested.
return on assets ANS - after tax net income/ assets
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how
efficient management is at using its assets to generate earnings. AKA return on investment.
EBIT ANS - earnings before income and taxes
It is equal to net income with interest and taxes added back to it (measures profitability of a company
without taking into account its costs of capital or tax implications)
EBITDA ANS - earnings before interest, taxes, depreciation & Amortization
It is equal to net income with interest, taxes, depreciation, and amortization added back to it (used to
analyze and compare profitability between companies because it eliminates the effects of financing and
accounting decisions)
Times interest earned ANS - EBIT/ Interest expense
, A metric used to measure a company's ability to meet its debt obligations. It is usually quoted as a ratio
and indicates how many times a company can cover its interest charges on a pretax basis. Failing to
meet this could cause bankruptcy.
Current Ratio ANS - current assets/ current liabilities
This ratio tells us how likely it is that a company can pay off its current liabilities with just its current
assets.
Quick Ratio ANS - (Current Assets-Inventories)/Current liabilities
This is a more conservative ratio than the current ratio. It removes the inventory from current assets
which shows a more realistic ability for a company to pay off its liabilities.
Cash Ratio ANS - Cash & cash equivalents/ current liabilities
This is the most conservative ratio of the solvency ratios. It tells us what are the chances a company pays
off its liabilities just using cash or cash equivalents.
Working Capital ANS - current assets-current liabilities
Working Capital tells us if the company actually has enough money to currently pay off all of its
liabilities.
Accounts receivable turnover ANS - Credit sales/ accounts receivable
Average collection period ANS - 360/AR turnover
Accounts Payable Turnover ANS - purchases/accounts payable
A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers,
calculated by taking total suplier purchases and dividing it accounts payable. The ratio shows how many
times per year a company pays its accounts payable amount
Days to pay suppliers ANS - 360/AP turnover
Inventory turnover ANS - COGS/ Inventory
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