The ratio of __________ to __________ is an example of a __________ ratio.
A. quick assets; current liabilities; leverage
B. cost of goods sold; total assets; asset utilization
C. net credit sales; average owner's equity; leverage
D. net income after taxes; net sales; profit
D
To determine the correct answer, we need to first understand the definitions of the given terms and then match them to the options provided.
Ratio: A ratio is the quantitative relationship between two numbers, typically expressed as a quotient or fraction.
Quick assets: Quick assets, often referred to as liquidity ratios, are assets that can be easily converted into cash or used to pay off current liabilities. Examples include cash, accounts receivable, and short-term investments.
Current liabilities: Current liabilities are obligations that are expected to be settled within a year. Examples include accounts payable, accrued expenses, and short-term debt.
Leverage: Leverage is the use of borrowed funds to finance investments or business operations, with the goal of increasing potential returns.
Cost of goods sold: Cost of goods sold (COGS) represents the direct costs incurred in producing or acquiring products or services that are sold by a company. It includes costs such as raw materials, labor, and manufacturing overhead.
Total assets: Total assets are the sum of all the assets owned by a company. These can include both current and long-term assets.
Asset utilization: Asset utilization measures how efficiently a company uses its assets to generate revenue. It measures the relationship between revenue and the assets employed to generate that revenue.
Net credit sales: Net credit sales represent the total sales made on credit during a specific period, minus any returns or allowances.
Average owner's equity: Average owner's equity is the average amount of equity (i.e., the residual interest in the assets of the entity after deducting liabilities) over a specific period of time.
Net income after taxes: Net income after taxes is the measure of a company's profitability after all taxes have been deducted from its revenues. It represents the company's bottom line.
Net sales: Net sales are the total sales generated by a company after deducting any returns, allowances, or discounts.
Profit: Profit is the financial gain or benefit obtained from a business operation, typically calculated as the difference between revenue and expenses.
Now, let's match these terms to the options:
A. quick assets; current liabilities; leverage: This option matches the definitions of quick assets, current liabilities, and leverage.
B. cost of goods sold; total assets; asset utilization: This option matches the definitions of cost of goods sold and total assets but not asset utilization.
C. net credit sales; average owner's equity; leverage: This option matches the definitions of net credit sales and average owner's equity but not leverage.
D. net income after taxes; net sales; profit: This option matches the definitions of net income after taxes, net sales, and profit.
Based on the definitions, the correct answer is option D. The ratio of net income after taxes to net sales is an example of a profit ratio.