FREE Certified Management Accountant Question and Answers
Which financial ratio reveals the extent to which a company's net assets can pay down its debt?
Asset Coverage Ratio: Once all liabilities have been paid off, a company's capacity to pay its debt commitments with its assets is determined by its asset coverage ratio. It's employed to estimate the magnitude of probable damages in the event that a company is liquidated. The ability to cover fixed financing costs out of profits is gauged by the Earning To Fixed Charges ratio, also known as the Fixed-Charge Coverage ratio. By displaying the percentage of a company's assets that have been financed with debt, the debt-to-total assets ratio assesses financial risk. The ability of a company to repay its debt is gauged by the Time Interest Earned ratio. It demonstrates how frequently a company can pay its interest on a pretax basis.
What doesn't a balance sheet include?
Taxes paid: The balance sheet is a summary of the assets, liabilities, and shareholders' equity of a corporation. The extent of an organization's resources is frequently decided at this time by decisions made by the investing and financial communities. its reliance on outside funding as well as its flexibility in responding to changing business conditions. Three types of account categories can be found on a balance sheet:
> Assets - include financial resources including cash, receivables from customers, deposits, stock, real estate, patents, and machinery. Assets are divided into two categories: current and fixed.
*Current - assets are those that can be quickly converted into cash.
*Fixed - expected to be retained long-term
> Accounts payable, accumulated expenses, taxes due, short-term loans, mortgages, and long-term loans are all examples of liabilities. Liabilities are divided into the following categories:
* Current - due in a year or less from the balance sheet preparation date
*Long-term - obligations include loans and leases, which take more than a year to pay off.
Shareholders' equity, or the difference between assets and liabilities, is the company's net worth. equal to retained earnings plus stock contributions from shareholders.
Which item appears in the cash flow statement?
Payments for goods and services received: A cash flow statement lists the company's cash inflows and outflows, broken down into categories like:
> Operating activities: cash from sales of goods and services, as well as payments for goods and services used in the course of doing business.
> Investing activities: buying real estate, machinery, and other assets required to run and expand the business.
> Financing activities: cash invested by shareholders or borrowed money.
The account of changes in shareholders' equity includes investments made by shareholders. The income statement lists net income, whereas the balance sheet lists accrued income.
The Acid-Test Ratio is calculated in what way?
Divided by current obligations, cash accounts receivable, and short-term investments: The Acid-Test or Quick ratio assesses a company's capacity to meet its short-term obligations. It is computed by combining cash, receivables, and short-term investments; the total is then divided by current liabilities. Other crucial measurements that shed light on a company's position with regard to current liabilities include:
> The current, or cash, ratio, which assesses the company's capacity to create cash rapidly enough to cover short-term obligations using short-term assets. calculated by subtracting current liabilities from current assets.
> Inventory turnover measures how frequently stock was replaced over a certain period of time.
> Days payable outstanding, which is calculated by dividing sales by inventory, gauges how long it takes a company to pay its creditors. Calculated by multiplying the results by the number of days in the accounting period after dividing accounts payable by cost of sales.
A company's return on investment analysis may or may not be helpful in measuring...
Efficiency in operations: Return on investment (ROI) is typically used to calculate the earning potential of a product or asset. ROI is a tool used by financial professionals to assess the financial health and resource efficiency of a firm. Additionally, it can be used to assess operational profitability, which in turn serves as a barometer for the efficiency of management. Additionally, ROI would show how successfully a company achieves its objectives and how it stacks up against the competition. The profit margin on sales, which shows how much money is made for every dollar of sales, is used to gauge how efficiently a business is run. The profit margin on sales can also be used to evaluate the company against rivals or peers in the market.
Which part of a company's financial statements include information about its liquidity?
Management Discussion and Analysis (MD&A): The Management Discussion and Analysis (MD&A) section of a financial statement includes managerial observations on the operation of the company throughout the reporting period. The MD&A discusses, among other things, the company's financial status, cash flow, liquidity, and capital resources. The majority of MD&A sections will discuss short- and long-term objectives, new opportunities or changes being considered, and feature specifics regarding business management and management style.
What financial ratio is employed to assess the risk of an organization?
Debt-to-Equity ratio: Since businesses rely on their capital structures to finance operations, assessing the health of the capital structure is essential to determining the level of risk in a company. To calculate the risk level of an organization, the debt-to-equity ratio divides all liabilities by shareholder equity. A company that borrows more money will be riskier. The current ratio and acid test ratio show how successfully a company can pay its current liabilities and how quickly it can convert sales into cash. When the Acid-Test ratio is lower than the Current ratio, it typically means that the company has a large amount of inventory. The average time it takes for a company to collect its accounts receivable is measured in days of sales outstanding in receivables. A large number indicates poor sales or inefficient receivables collection.