FINANCIAL RATIOS

Answer explanation

ANSWER:

Formula: Current Assets ($78,000) divided by current liabilities ($98,000)

=0.796

The bank(s) will require a ratio between 1 and 2 to approve the loan.

 

REF: https://www.myaccountingcourse.com/financial-ratios/current-ratio

Answer explanation

ANSWER:

Formula: Cash ($18,500) + Accounts Receivable ($6,000) + Stock Investments ($2,500) divided by Current Liabilities ($25,600)

=1.05

 

This means that Claude can pay off all of his current liabilities with quick assets and still have some quick assets left over. The bank mostlikley will approve his loan application

 

REF: https://www.myaccountingcourse.com/financial-ratios/quick-ratio

Answer explanation

ANSWER:

COGS ($2,850,000) divided by the average of beginning ($2,500,000) and ending inventory ($3,000,000)

=1.036

 

This means Dominic sold roughly the whole of its inventory during the year. It also implies that he completed one turn (selling his entire inventory). In other words, Dominic’s Hotel  has very good inventory control.

 

REF: https://www.myaccountingcourse.com/financial-ratios/inventory-turnover-ratio,555 + $3,000,000

Answer explanation

ANSWER:

Liabilities ($95,000) divide by Assets ($165,000)

=0.58 (58%)

 

Kim’s DTA is 0.58 (58%) because she has almost twice as many assets as liabilities. Kim’s bank would consider this during his loan application process. This ratio/calculation must always be measured/compared against industry standards (average).

REF: https://www.myaccountingcourse.com/financial-ratios/debt-to-asset-ratio

NOTE: There is no standard or universally accepted benchmark for Debt to Asset Ratio (DTA) in the hospitality or restaurant industry in Australia or any other country. The optimal DTA can vary depending on several factors such as the nature of the business, its size, the stage of its growth, and the economic conditions prevailing in the industry.

That said, a DTA ratio of around 0.5 to 0.6 is generally considered reasonable in the hospitality industry. However, it's important to note that DTA ratios can differ depending on the specific sub-sector of the hospitality industry, such as hotels or restaurants.

It's also essential to consider that debt financing can come from various sources, including bank loans, trade credit, and vendor financing, which can affect the DTA ratio. Thus, it's best to consult with a financial advisor or an accountant familiar with the hospitality industry to determine a suitable DTA ratio for your specific circumstances.

Answer explanation

ANSWER:

Line of credit ($120,000) + Mortgage ($400,000) divided by Investment ($1,500,000)

=0.346

A debt-to-equity ratio of 1 would mean that investors and creditors have an equal stake in the business assets.

In this example, a lower debt to equity ratio (0.346) usually implies a more financially stable business. Companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio.

REF: https://www.myaccountingcourse.com/financial-ratios/debt-to-equity-ratio

 

Answer explanation

ANSWER:

Net Income ($170,000) - (Dividends ($8,000)) divided by Common Shares (outstanding) – the sum of 20,000 * $5

=1.62

 

After preferred dividends are removed from net income, Hugos’s ROE is 1.62. This means every dollar of common shareholder’s equity earned about $1.62 this year. In other words, shareholders saw a 178 percent return on their investment. Hugo’s ratio is most likely considered high for his industry. This could indicate that Hugo’s is a growing company.

REF: https://www.myaccountingcourse.com/financial-ratios/return-on-equity

 

Answer explanation

ANSWER:

Net Income ($15,400,000) divided by the Sum of (beginning $1,250,000 and end of assets $1,900,000 divided by 2)* 100

=977.77%

Sam’s ratio is 977.77 percent. In other words, every dollar Sam invested in assets during the year produced $9.78 of net income. Depending on the economy, this can be a healthy return rate regardless of the investment.

REF: https://www.myaccountingcourse.com/financial-ratios/return-on-assets

Answer explanation

ANSWER:

 Sum of Account receivable ($42,000) divided by Net Credit Sales ($215,000) -  multiply by 365 days

=71 days (71.3)

It takes Matt approximately 71 days to collect cash from his customers on average. This is not a good ratio since Matt is aiming for a 30 day collection period.

 

REF: https://www.myaccountingcourse.com/financial-ratios/days-sales-outstanding

Answer explanation

ANSWER:

(Actual Sales (Sales of $624,000 minus Refund $70,000 =$554,000) minus Inventory spent ($135,000)) divided by (Sum of Sales ($624000) minus Refund ($70000))

=0.756 (75%)

Jane has a ratio of 75% This is a high ratio in the lobster tank industry. This means that after Jane pays off her inventory costs, she still has 75% of her sales revenue to cover her operating costs.

 

REF: https://www.myaccountingcourse.com/financial-ratios/gross-margin-ratio

Answer explanation

ANSWER:

Net Income ($89,000) divided by Sales ($1,150,000) multiplied by 100

=7.74%

Tim converted 7.74 per cent of his sales into profits.

 

REF: https://www.myaccountingcourse.com/financial-ratios/profit-margin-ratio