Chapter 12 homework solution

Chapter 12 homework solution - Solutions to Questions and...

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Solutions to Questions and Multiple Choice Questions 1. 2. 3. Items shown net of taxes have had the income taxes related to the item subtracted from the value. 4. 5. 6. Liquidity refers to the company's ability to meet its short-term obligations. Liquidity ratios include: 1) current ratio - measures a company's ability to pay current liabilities with current assets 2) quick ratio - measures a company's ability to meet its current obligations with very liquid current assets 3) working capital - measures a company's ability to meet its short-term obligations 4) inventory turnover ratio - measures how quickly a company is selling its inventory 7 Solvency refers to the company's ability to meet its long-term obligations. Solvency ratios include: 8. 2) asset turnover ratio - measures how efficiently a company uses its assets 4) gross profit ratio - measures a company's profitability 5) profit margin ratio - measures the percentage of each sales dollar that results in net income 6) earnings per share - calculates the net income per share of common stock The FASB requires that two items be reported separately: discontinued operations and extraordinary items. These items are separated because they are not expected to be repeated in the future and are therefore not part of ongoing operations. An item is classified as extraordinary if it is unusual in nature and infrequent in occurrence. Examples are eruptions of a volcano, a takeover of foreign operations by a foreign government, and effects of new laws or regulations that result in a one-time cost to comply. Horizontal analysis evaluates financial statement items over time. It expresses the change in financial statement amounts in percentages rather than dollars. The purpose of the analysis is to identify trends. Vertical analysis focuses on a single year's financial statements. Each item on the financial statement is expressed as a percentage of a selected base amount. The purpose of the analysis is to identify problem areas and for comparison with other companies. 5) accounts receivable turnover ratio - measures a company's ability to collect the cash from its credit card customers 6) current cash debt coverage ratio - measures the company's ability to generate the cash it needs to pay current liabilities from operations 1) debt to equity ratio - compares the amount of debt a company has with the amount the owners have invested in the company 2) times interest earned - compares the amount of income that has been earned in an accounting period to the interest obligation for the same period 3) cash flow adequacy ratio - measures a firm's ability to generate the cash it needs for investing from its operations Profitability ratios evaluate the operating or income performance of a company. Profitability ratios include: 1) return on assets - measures a company's success in using its assets to earn income for owners and creditors 3) return on equity - measures how much income is earned with the common shareholders' investment in the company
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9. 1) price-earnings ratio - the market price for $1 of earnings
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Chapter 12 homework solution - Solutions to Questions and...

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