Download Financial Ratios for Liquidity and Solvency Analysis - Prof. James A. Yardley and more Study notes Financial Accounting in PDF only on Docsity! 1. What describes the ability to generate sufficient short term cash flows to pay obligations as they come due? What ratio is primarily used to evaluate this? 2. What is the ability to repay liabilities in the long run, and what is one type of ratio used to measure it? 3. Deer company has current assets of $250 and current liabilities of $100. What is the current ratio. What does this mean? 4. What does a low current ratio suggest? 5. What does a high current ratio suggest? 6. Bad Debts Expense and record-keeping-costs 7. What is the accounts receivable turn over ratio? 8. A company obtains 100,000 to start. During its first year of operation it earned 60,000 in revenue and 40,000 of expenses other than interest expense. Consider two different forms of financing. First assume the first 100,000 is obtained by issuing common stock (equity) and pays an 8% dividend. Second, assume the company issues 100,000 in bonds with an interest rate of 8%. Assuming a 30% income tax rate, which form of financing produces the larger increase in retained earnings? 9. Refer to question above. What is the after tax interest rate that the company is paying? 10. Refer to question above. Which type of financing method would produce a higher return on assets (Net Income / Total Assets) 11. Refer to question above. Which type of financing method would produce higher return on assets using the EBIT method? 12. What two methods help assess the risk of bankruptcy? 13. What is a company’s times interest earned ratio if its net income before taxes and interest is 20,000 and has incurred 12,000 of interest expense? 14. Which of the following companies would be more likely to be able to make its interest payment? Shaver Falls EBIT 750,720 2,970,680 Interest Expense 234,600 645,800 1. Liquidity, Current Ratio 2. Solvency, Debts to Assets 3. Current ratio is 2.5. It means that the company has $2.50 for every $1 in current liabilities 4. Company may have difficulty paying its short-term obligations 5. Company is not maximizing earnings potential 6. What two costs are associated with extending credit to costumers? 7. Sales / Acct. rec. Tells you how many times acct rec. is converted into cash “turned over” each year. Higher turnover, shorter collection period 8. Debt financing will produce 2400 more retained earnings than equity financing. 9. 8% * (1.0 – 3.0) = 5.6%
