The Price/earnings Ratio

question 40

Multiple Choice

The price/earnings ratio:

• A) measures the past earning ability of the firm
• B) is a gauge of future earning power as seen by investors
• C) relates price to dividends
• D) relates price to total net income
• E) all of the answers are correct

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Definitions:

Income Summary

The income summary is a temporary account used during the closing process that contains the sums of all revenues and expenses for the period to calculate the net income or loss.

Net Income

The final financial gain of a firm once it has subtracted expenses and taxes from its revenue.

Net Loss

The amount by which total expenses exceed total revenues, indicating that a business spent more than it earned during a given period.

Net Loss

This occurs when a company's expenses exceed its revenues during a specific period of time, leading to a negative net income.