Accounting Online Program Accounting Financial Ratios 2

Question 1

A company has net income of $150,000 and average shareholders' equity of $750,000. What is the Return on Equity (ROE)?

Accepted Answer

20%

Answer

ROE = Net Income / Average Shareholders' Equity = $150,000 / $750,000 = 20%.

Question 2

Which ratio measures how efficiently a company collects its accounts receivable?

Accepted Answer

Accounts receivable turnover ratio

Answer

The accounts receivable turnover ratio measures how many times per period a company collects its average accounts receivable balance.

Question 3

If a firm's debt-to-equity ratio is 2.0, what does this indicate?

Accepted Answer

The company has twice as much debt as equity

Answer

A debt-to-equity ratio of 2.0 means the company has $2 of debt for every $1 of equity.

Question 4

A company reports EBIT of $200,000 and interest expense of $40,000. What is its interest coverage ratio?

Accepted Answer

5.0

Answer

Interest coverage ratio = EBIT / Interest Expense = $200,000 / $40,000 = 5.0.

Question 5

Which profitability ratio is calculated as (Gross Profit / Net Sales) × 100?

Accepted Answer

Gross profit margin

Answer

The gross profit margin measures the percentage of sales revenue remaining after deducting the cost of goods sold.

Accounting Online Program Practice Test