Mostly Asked Business Ratios Interview Preparation Guide

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These are the amounts that are due to vendors who have supplied goods or services. The accounts payable are supported by the vendor invoices that have been approved and processed, but have not yet been paid.

This reports the amounts that a customer has prepaid and will be earned by the company within one year of the balance sheet date. An example is a retailer's unredeemed gift cards.

Included in this are payroll related items such as the amounts due to employees and the amounts to be remitted for payroll taxes.

This reports the amounts that the company owes for items not recorded in accounts payable or accrued compensation. Examples include the interest expense that the company has incurred (but has not yet paid) and repairs that took place but the vendor's invoice has not been fully processed.

The tax advantage of issuing bonds (or other debt) instead of stock results from the interest paid by the company being a deductible expense on its federal and state income tax returns. Dividends paid to stockholders are not a deductible expense, since dividends are a distribution of profits to the owners of the corporation.

Liabilities are obligations and are usually defined as a claim on assets. However, liabilities and stockholders' equity are also the sources of assets. Generally, liabilities are considered to have a lower cost than stockholders' equity. On the other hand, too many liabilities result in additional risk.

Some liabilities have low interest rates and some have no interest associated with them. For example, some of a company's accounts payable may allow payment in 30 days. With those payables it is better to have the liability and to keep your cash in the bank until they become due.

In our personal lives, our first house was probably purchased with a down payment and mortgage loan. That mortgage loan was a big liability, but it allowed us to upgrade our living space. I viewed my mortgage loan liability as a good thing because it allowed me to own a nice home in a beautiful neighborhood.

So some liabilities are good-especially the ones that have a very low interest rate. Too many liabilities could cause financial hardships.

The debt to total assets ratio is an indicator of financial leverage. It tells you the percentage of total assets that were financed by creditors, liabilities, debt.

NOI is the acronym for net operating income. Net operating income is also referred to as income from operations.
NOI excludes discontinued operations, extraordinary items, and nonoperating (or other) items such as interest expense, interest revenues, gains, and losses.

Turnover is used in some countries to mean sales.
Turnover is also used in certain financial ratios. For example, the inventory turnover ratio is calculated by dividing the cost of goods sold during a year by the average inventory during the same year. The accounts receivable turnover ratio is computed by dividing the credit sales during a year by the average balance in Accounts Receivable during the same year.

Financial leverage refers to the use of debt to acquire additional assets. Financial leverage is also known as trading on equity. Below are two examples to illustrate the use of financial leverage, or simply leverage.

Voided checks may require some adjustments when reconciling the bank statement. For example, if a check is written in December but is voided in January, the Cash account in the company's general ledger will need to be increased when the check is voided. (Another account will need to be credited because of double entry bookkeeping.)

A voided check is a check written or partially written but then canceled or deleted by the maker of the check.
The notation of "void" is used because checks are prenumbered for control purposes and every check needs to be accounted for.

Liquidity refers to a company's ability to pay its bills from cash or from assets that can be turned into cash very quickly.

I use the term solvency to mean:
1) that a company is able to pay its obligations when they come due
2) that a company is able to continue in business.

A customer deposit could be an amount paid by a customer to a company prior to the company providing it with goods or services. In other words, the company receives the money prior to earning it. The company receiving the money has an obligation to provide the goods or services to the customer or to return the money.

Working capital can be improved by
1) earning profits
2) issuing common stock or preferred stock for cash
3) replacing short-term debt with long-term debt
4) selling long-term assets for cash
5) settling short-term debts for less than the stated amounts
6) collecting more of the accounts receivables than was anticipated and then reducing the balance required in the current asset account Allowance for Doubtful Accounts.

If the registration fee refers to an amount you are refunding because someone had originally registered for one of your programs, I would:
1) credit Cash for the amount you are paying out as the refund,
2) debit a contra-revenue account such as Refunds of Registration Fee Revenues. This will allow you to easily track the total amounts of refunds that you make during a year. On the other hand, if it is rare for your organization to refund registration fees, you could simply:
1) debit the amount you are refunding to the normal revenue account such as Registration Fee Revenues
2) credit Cash.

An expense will decrease the amount of assets or increase the amount of liabilities, and will reduce the amount of owner's or stockholders' equity.
For example an expense might:
1) reduce a company's assets such as Cash, Prepaid Expenses, or Inventory,
2) increase the credit balance in a contra-asset account such as Allowance for Doubtful Accounts or Accumulated Depreciation,
3) increase the balance in the liability account Accounts Payable, or increase the amount of accrued expenses payable such as Wages Payable, Interest Payable, and so on.

The liability account Accounts Payable for suppliers' invoices that have been received and must be paid. As a result, the balance in Accounts Payable is likely to be a precise amount that agrees with supporting documents such as invoices, agreements, etc.

I would use the liability account Accrued Expenses Payable for the accrual type adjusting entries made at the end of the accounting period for items such as utilities, interest, wages, and so on. The balance in the Accrued Expenses Payable should be the total of the expenses that were incurred as of the date of the balance sheet, but were not entered into the accounts because an invoice has not been received or the payroll for the hourly wages has not yet been processed, etc. The amounts recorded in Accrued Expenses Payable will often be estimated amounts supported by logical calculations.

The separation of duties is one of several steps to improve the internal control of an organization's assets. For example, the internal control of cash is improved if the money handling duties are separated from the record keeping duties. By separating these duties the likelihood of theft is reduced because it will now require two dishonest people working together to admit to each other that they are dishonest, plan the theft, and to then carry out the theft. One person will have to remove the cash and the other person will have to falsify the records.

Without the separation of duties, the theft of cash is easier. One dishonest person can steal the money and enter a fictitious amount into the records-thereby concealing the theft.
Another step in improving internal control over cash is to use a cash register, issue receipts, and have two people present when cash is handled.

The days sales in inventory is high when the inventory turnover is low.
Since inventory turnover is associated with sales and average inventory, changes in either sales or inventory can cause a high amount of inventory days.

For example, if a company has maintained its inventory quantities, but economic factors cause a significant drop in its sales, the company's inventory days will increase dramatically.
If a retailer increases its inventory in order to generate additional sales, but sales do not increase, there will also be an increase in the number of inventory days.

Liquidity is often evaluated by comparing a company's current assets to its current liabilities. Working capital, the current ratio, and the quick ratio are referred to as liquidity ratios or short-term solvency ratios , since their calculations use some or all of the current assets and the current liabilities. Sometimes a company's accounts receivable turnover ratio, inventory turnover ratio, and free cash flow are also used to assess a company's liquidity.
Liquidation is a term commonly used when a company sells parts of its business for cash, or when it sells assets in order to pay debts. Liquidation may also involve the winding down or the closing of a business.

Liquidation is a term commonly used when a company sells parts of its business for cash, or when it sells assets in order to pay debts. Liquidation may also involve the winding down or the closing of a business.

Liquidity usually refers to a company's ability to pay its bills when they become due. Liquidity is often evaluated by comparing a company's current assets to its current liabilities.

A change in the total amount of current assets without a change of the same amount in current liabilities will result in a change in the amount of working capital. Similarly, a change in the total amount of current liabilities without an identical change in the total amount of current assets will cause a change in working capital.