ACC221 MIAMI UNIVERSITY PRACTICE PAPER
2026 COMPLETE SOLUTIONS
◉ Solvency Risk. Answer: Risk that the company cannot survive
long-term or manage its debt obligations.
◉ Debt to Assets Ratio. Answer: Measures what percentage of assets
is financed by debt. Formula: Total Liabilities ÷ Total Assets.
◉ Debt to Equity Ratio. Answer: Measures the amount of debt
relative to equity. Formula: Total Liabilities ÷ Total Equity.
◉ Times Interest Earned (TIE). Answer: Measures ability to pay
interest. Formula: EBIT ÷ Interest Expense.
◉ Free Cash Flow. Answer: Cash available after essential spending.
Formula: Operating Cash Flow - Capital Expenditures - Dividends.
◉ Leverage. Answer: Using debt to finance assets; increases both
potential returns and potential losses.
, ◉ High Debt to Equity Meaning. Answer: Company is highly
leveraged, creating bigger swings in ROE (higher reward, higher
risk).
◉ Positive Financial Leverage. Answer: Occurs when return on
assets is higher than the cost of debt, boosting ROE.
◉ Negative Financial Leverage. Answer: Occurs when return on
assets is lower than the cost of debt, reducing ROE.
◉ Why Low ACP Is Good. Answer: Customers pay quickly, improving
cash flow and lowering risk.
◉ Why High ACP Is Bad. Answer: Customers pay slowly, creating
cash shortages and increasing risk of nonpayment.
◉ Why High Inventory Turnover Is Good. Answer: Inventory sells
quickly, reducing storage costs and risk of obsolescence.
◉ Why Low Inventory Turnover Is Bad. Answer: Inventory sits too
long, tying up cash and signaling weak demand.
◉ Why High AR Turnover Is Good. Answer: Customers pay often and
on time.
2026 COMPLETE SOLUTIONS
◉ Solvency Risk. Answer: Risk that the company cannot survive
long-term or manage its debt obligations.
◉ Debt to Assets Ratio. Answer: Measures what percentage of assets
is financed by debt. Formula: Total Liabilities ÷ Total Assets.
◉ Debt to Equity Ratio. Answer: Measures the amount of debt
relative to equity. Formula: Total Liabilities ÷ Total Equity.
◉ Times Interest Earned (TIE). Answer: Measures ability to pay
interest. Formula: EBIT ÷ Interest Expense.
◉ Free Cash Flow. Answer: Cash available after essential spending.
Formula: Operating Cash Flow - Capital Expenditures - Dividends.
◉ Leverage. Answer: Using debt to finance assets; increases both
potential returns and potential losses.
, ◉ High Debt to Equity Meaning. Answer: Company is highly
leveraged, creating bigger swings in ROE (higher reward, higher
risk).
◉ Positive Financial Leverage. Answer: Occurs when return on
assets is higher than the cost of debt, boosting ROE.
◉ Negative Financial Leverage. Answer: Occurs when return on
assets is lower than the cost of debt, reducing ROE.
◉ Why Low ACP Is Good. Answer: Customers pay quickly, improving
cash flow and lowering risk.
◉ Why High ACP Is Bad. Answer: Customers pay slowly, creating
cash shortages and increasing risk of nonpayment.
◉ Why High Inventory Turnover Is Good. Answer: Inventory sells
quickly, reducing storage costs and risk of obsolescence.
◉ Why Low Inventory Turnover Is Bad. Answer: Inventory sits too
long, tying up cash and signaling weak demand.
◉ Why High AR Turnover Is Good. Answer: Customers pay often and
on time.
