Accounting Online Program Accounting Financial Ratios 4 — Questions and Answers
Question 1: A company's total debt is $400,000 and total assets are $1,000,000. What is the debt ratio?
- 0.25
- 0.40 (Correct answer)
- 0.60
- 2.50
Correct answer: 0.40
Debt ratio = Total Debt / Total Assets = $400,000 / $1,000,000 = 0.40 or 40%.
Question 2: Which financial ratio would a creditor most likely examine when assessing a company's long-term solvency?
- Quick ratio
- Debt-to-equity ratio (Correct answer)
- Gross profit margin
- Inventory turnover
Correct answer: Debt-to-equity ratio
Long-term creditors focus on the debt-to-equity ratio to gauge the degree of financial leverage and solvency risk.
Question 3: Net sales are $900,000 and average total assets are $600,000. What is the asset turnover ratio?
- 0.67
- 1.00
- 1.50 (Correct answer)
- 1.33
Correct answer: 1.50
Asset turnover = Net Sales / Average Total Assets = $900,000 / $600,000 = 1.50.
Question 4: A company pays $2 dividend per share and the stock trades at $40. What is the dividend yield?
- 2%
- 4%
- 5% (Correct answer)
- 8%
Correct answer: 5%
Dividend yield = Annual Dividend Per Share / Market Price Per Share = $2 / $40 = 5%.
Question 5: The operating profit margin differs from the net profit margin because it:
- Excludes depreciation from expenses
- Excludes interest and taxes from the calculation (Correct answer)
- Includes non-operating income
- Is calculated before deducting COGS
Correct answer: Excludes interest and taxes from the calculation
Operating profit margin uses EBIT (before interest and taxes), while net profit margin uses net income (after interest and taxes).
Question 6: If a company's book value per share is $25 and its market price per share is $75, the Price-to-Book (P/B) ratio is:
- 0.33
- 1.0
- 2.0
- 3.0 (Correct answer)
Correct answer: 3.0
P/B ratio = Market Price Per Share / Book Value Per Share = $75 / $25 = 3.0.
Question 7: Which of the following scenarios would INCREASE a company's current ratio?
- Purchasing inventory on credit
- Paying off a short-term loan with cash (Correct answer)
- Taking out a long-term loan to fund operations
- Declaring a cash dividend
Correct answer: Paying off a short-term loan with cash
Paying off a short-term loan reduces current liabilities, which increases the current ratio when current assets remain unchanged.
Accounting Online Program Accounting Financial Ratios 4
A company's total debt is $400,000 and total assets are $1,000,000.
What is the debt ratio?