Solutions to Questions and Multiple Choice
Questions
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3.
Items shown net of taxes have had the income taxes related to the item subtracted from the value.
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Liquidity refers to the company's ability to meet its shortterm 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 shortterm obligations
4) inventory turnover ratio  measures how quickly a company is selling its inventory
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Solvency refers to the company's ability to meet its longterm obligations.
Solvency ratios include:
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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 onetime 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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1) priceearnings ratio  the market price for $1 of earnings
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 Fall '08
 MATTPOLZE
 Financial Accounting, Balance Sheet, Revenue, Financial Ratio, Generally Accepted Accounting Principles

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