72 financial ratios are relationships between two

72. Financial ratios are relationships between two financial statement numbers and are
often used in analyzing and describing a company's performance.
Financial ratios are often used in a business context to describe various
characteristics of companies. Six of the most commonly used ratios are:
1. Debt ratio: percentage of company funding that is borrowed
2. Current ratio: indication of a company's ability to pay its short-term debts
3. Return on sales: pennies in profit on each dollar of sales
4. Asset turnover: measure of efficiency; number of sales dollars generated
by each dollar of assets

5. Return on equity: pennies in profit for each dollar invested by stockholders
6. Price-earnings ratio: number of dollars an investor must pay to "buy" the
future rights to each dollar of current earnings
73. Financial statement analysis is used
• to predict a company's future profitability and cash flows from its past
performance and
• to evaluate the performance of a company with an eye toward identifying
problem areas.
• The informativeness of financial ratios is greatly enhanced when they are
compared with past values and with values for other firms in the same industry.
74. The 5 steps in implementing and using an ABC system are:
1. Identify overhead cost activities.
2. Analyze individual overhead costs in terms of those cost activities.
3. Identify measurable cost drivers.
4. Assign overhead.
5. Use the ABC data to make decisions.
75. Disagreements in judgment Differences in opinion about what numbers should be
reported in the financial statements based on different estimates
76. Fraud Intentional misrepresentations in the financial statements
77. The 5 types of control procedures are

1. Segregation of duties
2. Procedures for authorizations
3. Documents and records
4. Physical safeguards
5. Independent checks
78. A shoe manufacturer incurred the following costs during the first quarter of the year:
The company produced 40,000 pairs of shoes and sold 35,000 pairs.
• Direct labor 780,000
• Direct Materials 500,000
• Manufacturing Overhead 900,000
• Step 1: Total Product Costs 2,180,000
What was the cost of sales for the first quarter of the year?
• Step 1: Total the product costs
• Step 2: Divide the total product costs by the number of shoes produced
2,180,000 / 40,000 = 54.50 per pair of shoes
• Step 3: Multiply the cost per pair of shoes * the number of shoes sold
• 54.50 * 35,000 = 1,907,500
If the sales were $5,000,000. How much was the gross profit?
• 5,000,000 - 1,907,500 = 3,092,500
If fixed costs were $1,592,500, How much operating income (loss) did the company
have for the first quarter?
• 3,092,500 - 1,592,500 = 1,500,000
79. The income statement of Santa's Toy Manufacturing Company had the following
income statement for the month of November.
• Production = 1,000,000 units
• Sales $850,000
• Direct Material 270,000
• Direct Labor 380,000
• Mfg Overhead 247,000
• COS 897,000
• Gross profit (47,000)

Overhead was applied at 65% of direct labor.