USCPA (FAR) – (11) Ratio and Variance Analysis

I would like to record about the key points of the US CPA exam content.

<Create and note the points based on mainly Becker’s workbook>

Net profit margin

  • Net income / Net sales

Accounts receivable turnover

  • Net sales / average net accounts receivable

Days sales in accounts receivable

  • Ending net accounts receivable / net sales

Inventory turnover

  • Inventory turnover = Cost of goods sold / Average inventory
  • If inventory is sold at cost, net income does not change but sales increases. Therefore, the numerator does not change but the denominator increases, causing net profit margin to decrease.
  • Net purchase is not Cost of good sold.

Days in inventory

  • Ending inventory / (cost of goods sold / 365 days)

Debt-to-equity ratios

  • total all liabilities/ total equity

The quick ratio

  • The quick ratio is calculated by dividing [cash+ cash equivalents + net account receivables marketable securities] by current liabilities.

Times interest earned

  • Income before interest expense and taxes / Interest expense.
  • Earnings before interest and taxes / Interest expense
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