FIN 340 EXAM 1 RECENTLY UPDATED QUESTIONS
& ANSWERS
quick ratio - ANSWER (Current Assets - Inventory) / Current Liabilities
Liquidity
measures the firms ability to pay off short term obligations with the most liquid
assets
GREATER THAN 1
Current Ratio - ANSWER current assets/current liabilities (liquidity)
indicates to the extent to which current liabilities are covered by those assets
expected to be converted to cash in the near future, rule of thumb 2:1
HIGH IS BETTER
Total Asset Turnover - ANSWER Sales/Total Assets
(Asset management ratio)
Measures how effectively a firm uses its total assets to generate revenue
HIGH IS BETTER
Fixed Asset Turnover - ANSWER Sales/Net Fixed Assets
net fixed assets=net plant and equipment (asset management ratio)
measures how effectively the firm uses its PPE to generate revenue
HIGHER IS BETTER
Days Sales Outstanding - ANSWER Receivables/(Annual Sales/365)
(asset management ratio)
Indicates the length of time the firm must wait after making a sales before
receiving cash
LOWER IS BETTER
, Inventory Turnover - ANSWER (COGS+Depr.)/Inventory
(asset management ratio)
Measures the speed at which inventory moves through a company; how many
times inventory is replaced
HIGH IS BETTER
debt to assets ratio - ANSWER Total Debt/Total Assets
(debt management ratio)
indicates how much debt a company is using to finance assets
Creditors want low
investors want high
Debt to Equity Ratio - ANSWER Total Debt/Total Common Equity
(debt management ratio)
measures how much the company depends on debt to finance the business
LOW IS BETTER
you dont want more debt than equity
Market Debt Ratio - ANSWER Total Debt / (Total Debt + Market Value of
Equity)
(debt management ratio)
measures a source of risk not captured by the debt ratio and measures the debt
component of a companies capital structure
LOWER IS BETTER
Liability to Assets Ratio - ANSWER total liabilities/total assets
(debt management ratio)
times interest earned ratio - ANSWER EBIT/ interest expense
(debt management ratio)
& ANSWERS
quick ratio - ANSWER (Current Assets - Inventory) / Current Liabilities
Liquidity
measures the firms ability to pay off short term obligations with the most liquid
assets
GREATER THAN 1
Current Ratio - ANSWER current assets/current liabilities (liquidity)
indicates to the extent to which current liabilities are covered by those assets
expected to be converted to cash in the near future, rule of thumb 2:1
HIGH IS BETTER
Total Asset Turnover - ANSWER Sales/Total Assets
(Asset management ratio)
Measures how effectively a firm uses its total assets to generate revenue
HIGH IS BETTER
Fixed Asset Turnover - ANSWER Sales/Net Fixed Assets
net fixed assets=net plant and equipment (asset management ratio)
measures how effectively the firm uses its PPE to generate revenue
HIGHER IS BETTER
Days Sales Outstanding - ANSWER Receivables/(Annual Sales/365)
(asset management ratio)
Indicates the length of time the firm must wait after making a sales before
receiving cash
LOWER IS BETTER
, Inventory Turnover - ANSWER (COGS+Depr.)/Inventory
(asset management ratio)
Measures the speed at which inventory moves through a company; how many
times inventory is replaced
HIGH IS BETTER
debt to assets ratio - ANSWER Total Debt/Total Assets
(debt management ratio)
indicates how much debt a company is using to finance assets
Creditors want low
investors want high
Debt to Equity Ratio - ANSWER Total Debt/Total Common Equity
(debt management ratio)
measures how much the company depends on debt to finance the business
LOW IS BETTER
you dont want more debt than equity
Market Debt Ratio - ANSWER Total Debt / (Total Debt + Market Value of
Equity)
(debt management ratio)
measures a source of risk not captured by the debt ratio and measures the debt
component of a companies capital structure
LOWER IS BETTER
Liability to Assets Ratio - ANSWER total liabilities/total assets
(debt management ratio)
times interest earned ratio - ANSWER EBIT/ interest expense
(debt management ratio)
