Accounting Online Program Accounting Financial Ratios 4

Question 1

A company's total debt is $400,000 and total assets are $1,000,000. What is the debt ratio?

Accepted Answer

0.40

Answer

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?

Accepted Answer

Debt-to-equity ratio

Answer

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?

Accepted Answer

1.50

Answer

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?

Accepted Answer

5%

Answer

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:

Accepted Answer

Excludes interest and taxes from the calculation

Answer

Operating profit margin uses EBIT (before interest and taxes), while net profit margin uses net income (after interest and taxes).

Accounting Online Program Practice Test