Accounting Financial Ratios Flashcards
7 cards from real Accounting Online Program practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Accounting Financial Ratios flashcards as text
The cash ratio is considered the most conservative liquidity measure because it:
Answer: Only uses cash and cash equivalents in the numerator
The cash ratio = (Cash + Cash Equivalents) / Current Liabilities, using only the most liquid assets.
A company has 50,000 shares outstanding, net income of $200,000, and pays $50,000 in dividends. What is the earnings per share (EPS)?
Answer: $4.00
EPS = Net Income / Shares Outstanding = $200,000 / 50,000 = $4.00 per share.
Which of the following correctly describes the relationship between the times interest earned ratio and financial risk?
Answer: A higher ratio indicates the company can more easily service its debt
A higher times interest earned ratio means EBIT covers interest expense more comfortably, signaling lower default risk.
A company's accounts payable turnover ratio is 6. What is the average days payable outstanding (DPO)?
Answer: 61 days
DPO = 365 / Accounts Payable Turnover = 365 / 6 ≈ 60.8 days.
Which ratio best captures how effectively management uses all available resources to generate profit?
Answer: Return on assets (ROA)
ROA = Net Income / Average Total Assets, measuring how efficiently the entire asset base is used to generate earnings.
A firm has a P/E ratio of 20 and earnings per share of $3. What is the market price per share?
Answer: $60
Market Price = P/E × EPS = 20 × $3 = $60.
When comparing two companies, Company A has a higher net profit margin but lower asset turnover than Company B. Which conclusion is most accurate?
Answer: Their ROA could still be equal depending on the magnitude of each component
ROA = Net Profit Margin × Asset Turnover, so a higher margin can offset lower turnover and vice versa, potentially yielding the same ROA.