ACT3014 - Topic 4 - Financial Accounting Analysis (Part 1)

Quick ratio or acid-test ratio =

• current assets - current liabilities
• current assets ÷ quick liabilities
• quick assets ÷ current liabilities

Price earning ratio also known as P/E ratio

• earnings per share - market price per share
• market price per share ÷ earnings per share
• market price per share - dividends per share

Current ratio =

• Current assets - current liabilities
• current assets ÷ current liabilities
• quick assets ÷ quick liabilities

Earnings per share or EPS=

• net income after tax - number of shares outstanding
• net income after tax ÷ number of shares outstanding
• net income after tax - market price per share

Liquidity ratios measure

• the ability of a business to meet its financial obligations
• the view or opinion of the financial markets about the company

Market ratios 

• measure the ability of the company to meet its daily financial needs.
• measure a company's financial performance in relative to the market value of the stock

What is the main objective of accounting ratios?

• To calculate profit

• To evaluate financial position and performance

• To determine market share

• To analyze customer satisfaction

Which ratio measures the firm's ability to meet current obligations?

• Liquidity ratios

• Profitability ratios

• Activity ratios

• Leverage ratios

Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.

• True

• False

Ratio analysis enhances our understanding of three basic attributes of performance: liquidity, profitability, and the ability to create shareholder value.

• True

• False