Chapter 13, Problem 6QS

To determine

Profit Margin Ratio:

Profit margin ratio represents the profitability of the given product. The formula to calculate profit margin ratio is,

$\text{Profit margin }=\frac{\text{Net revenue }}{\text{Net sales}}\times 100$

Debt Ratio:

Debt ratio represents the capability of the company to pay its liabilities utilizing its assets. The formula to calculate debt ratio is,

$\text{Debt ratio}=\frac{\text{Total debt}}{\text{Total assets}}\times 100$

Gross Margin Ratio:

Gross margin ratio measures the degree of profit earned by company by selling its inventory. The formula to calculate gross margin ratio is,

$\text{Gross margin ratio}=\frac{\text{Gross margin}}{\text{Net sales}}\times 100$

Acid Test Ratio:

Acid test ratio represents the capability of the company to pay its current liabilities by utilizing its quick assets, that is assets which be turned into cash within 90 days. The formula to calculate quick acid ratio is,

$\begin{array}{l}\text{Quick acid ratio}=\frac{\text{Quick assets}}{\text{Current liabilities}}\\ \end{array}$

The formula to calculate quick assets is,

$\text{Quick assets}=\text{Current assets }-\text{Inventory}-\text{Prepaid expenses}$

Accounts Receivable Turnover:

Accounts receivable turnover measures how frequently company recovers its receivables. The formula to calculate accounts receivable turnover is,

$\begin{array}{l}\text{Accounts receivable turnover}=\frac{\text{Net credit sales}}{\text{Average accounts receivable}}\\ \end{array}$

Basic Earnings per Share:

Basic earnings per share are a share of profit allocated to every outstanding share of stock. The formula to calculate basic earnings per share is,

$\begin{array}{l}\text{Basic earning per share}=\frac{\text{Net income-any preferred dividends}}{\begin{array}{l}\text{Weighted average number of common}\\ \text{ shares outstanding}\end{array}}\\ \end{array}$

Inventory Turnover Ratio:

Inventory turnover ratio is a tool to evaluate the number of times a company sells and change its inventory and how effectively company satisfies its orders. The formula to calculate inventory turnover is,

$\begin{array}{l}\text{Inventory turnover ratio}=\frac{\text{Sales}}{\text{Average inventory}}\\ \end{array}$

Dividend Yield:

Dividend yield is the dividend paid on share in comparison to its price. The formula to calculate dividend yield is,

$\begin{array}{l}\text{Dividend yield}=\frac{\text{Cash dividend per share}}{\text{Market price per share}}\times 100\\ \end{array}$

To identify: Change in ratio to be classified under favorable and unfavorable.