Rich Wants to Measure the Profitability of His Business

question 153

Multiple Choice

Rich wants to measure the profitability of his business.Which of the following pairs of ratios would you recommend for this?

• A) return on owners' equity and debt-to-equity
• B) current ratio and acid-test ratio
• C) return on sales and sales turnover
• D) inventory turnover and earnings per share
• E) earnings per share and return on sales

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Definitions:

Statement of Cash Flows

A financial report that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period.

Indirect Method

A way of calculating cash flows for operating activities in the cash flow statement by adjusting net income for changes in non-cash items.

Operating Activities

Operating activities involve the day-to-day functions of a business directly related to its provision of goods and services.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from total revenue.