Chapter 6: Financial Statement AnalysisJust click on the button next to each answer and you'll get immediate feedback.Note: Your browser must support JavaScript in order to use this quiz. Show
1.Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total assets are $8 million, and ROI is 8 percent.1.60 2.05 2.50 4.00 2.Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net profit margin of 5 percent. What are its sales?$3,750,000 $480,000 $300,000 $1,500,000 3.Which of the following would NOT improve the current ratio?Borrow short term to finance additional fixed assets. Issue long-term debt to buy inventory. Sell common stock to reduce current liabilities. Sell fixed assets to reduce accounts payable. 4. The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened ifcost of goods sold increased relative to sales. sales increased relative to expenses. the U.S. Congress increased the tax rate. dividends were decreased. 5.Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the companywill not experience any difficulty with its creditors. has less liquidity than other firms in the industry. will be viewed as having high creditworthiness. has greater than average financial risk when compared to other firms in its industry. 6.Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to . (Assume a 365-day year.)$26.1 million $23.7 million $7.4 million $18.7 million 7.A company can improve (lower) its debt-to-total assets ratio by doing which of the following?Borrow more. Shift short-term to long-term debt. Shift long-term to short-term debt. Sell common stock. 8.Which of the following statements (in general) is correct?A low receivables turnover is desirable. The lower the total debt-to-equity ratio, the lower the financial risk for a firm. An increase in net profit margin with no change in sales or assets means a poor ROI. The higher the tax rate for a firm, the lower the interest coverage ratio. 9.Retained earnings for the "base year" equals 100.0 percent. You must be looking ata common-size balance sheet. a common-size income statement. an indexed balance sheet. an indexed income statement. 10.Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio?.2 .6 .667 .333 11.A firm's operating cycle is equal to its inventory turnover in days (ITD)plus its receivable turnover in days (RTD). minus its RTD. plus its RTD minus its payable turnover in days (PTD). minus its RTD minus its PTD. 12.When doing an "index analysis," we should expect that changes in a number of the firm's current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable) would move roughly together with for a normal, well-run company.net sales cost of goods sold earnings before interest and taxes (EBIT) earnings before taxes (EBT) The following item is NEW to the 13th edition. 13.The process of convergence of accounting standards around the world aims to .narrow or remove national accounting differencesmove non-US accounting standards towards US Generally Accepted Accounting Principles (US GAAP) create one set of rules-based accounting standards for all countries Retake Quiz Multiple-Choice Quiz questions are Copyright © by Pearson Education Limited. Used by permission. All rights reserved. Previous Quiz | Back to Main Index | Next QuizLiquidity ratios provide information about the liquid situation and stability of a company. We show you here which different ratios there are, how to calculate them and what the ideal values are. Liquidity ratio: MeaningLiquidity ratios measure the liquidity of a company. They provide insight into a company's ability to repay its debts and other liabilities out of its liquid assets. Liquidity includes all assets that can be converted into cash quickly and cheaply. In addition to cash and account balances, this also includes securities that can be sold quickly, such as shares, and investments with short maturities, such as treasury bills. Accounts receivable and inventories are also included in liquidity under certain circumstances. Liquidity ratio: FormulaThere are different liquidity ratios, so there are also different formulas. Each ratio looks at liquidity from a slightly different angle. So, depending on what you are interested in, you can choose the appropriate formula. Current ratioThe current ratio compares current assets with current liabilities. Current assets include cash, marketable securities, accounts receivable and inventories. Current liabilities include all short-term liabilities, i.e. those that have to be paid within one year or less. Current ratio = Current assets / current liabilities x 100 Multiplying by 100 gives the current ratio as a percentage. It indicates how well a company is able to repay its current liabilities with its current assets. The higher the current ratio, the more funds the company has available and the better its liquid situation. If the current ratio is greater than 100%, it means that the company has more current assets available than it has current liabilities. This is the standard case for a healthy company. If the current ratio is below 100%, this means that the company cannot repay its current liabilities with its current assets. However, this need not be a cause for concern, as long as this situation does not become the norm. Quick ratioWith the quick ratio, the same variables are considered as with the current ratio, only inventories are left out of the calculation. The formula for the quick ratio then looks like this: Quick ratio = (Cash + marketable securities + accounts receivables) / current liabilities x 100 Marketable securities include, for example, securities or bonds that can be sold quickly. The quick ratio indicates the company's ability to service its short-term liabilities from the majority of its liquid assets. Absolute liquidity ratio or cash ratioIn the absolute liquidity ratio or cash ratio, accounts receivable and inventories are not included in the calculation: Cash ratio = (Cash + marketable securities) / current liabilities x 100 This takes an even closer look at the liquidity situation, as only the most liquid funds are compared to the current liabilities. These are the liquid funds that are available to the company very quickly, which is an advantage if an unexpected higher sum has to be paid at short notice. Liquidity ratio: ExampleA company has the following values in its balance sheet:
We can now calculate the different liquidity ratios using the formulas from the previous section: Current ratio = (£50,000 + £20,000 + £100,000 + £30,000) / £80,000 x 100 = 250% Quick ratio = (£50,000 + £20,000 + £100,000) / £80,000 x 100 = 213% Cash ratio = = (£50,000 + £20,000) / £80,000 x 100 = 88%. Liquidity ratio analysis & interpretationBy calculating the various liquidity ratios as in the example above, the cash situation of the company can be analysed. The current ratio in the example is 250%. This means that the company has more current assets available than it has short-term liabilities to service - a positive sign. However, if liquidity is interpreted more narrowly and the quick ratio is considered, the ratio is lower, but in the example it is still sufficient at 213%. The company can pay its liabilities in full within a short time without having to liquidate assets from inventories. The cash ratio is even narrower and only includes the absolute most liquid funds. The company could still service 88% of its liabilities, but would have to liquidate part of its inventories or wait for a longer period of time until income from accounts receivable arrives. What is a good liquidity ratio?One might think that a company should aim for the highest possible liquidity ratios. However, this is not the case. For the current ratio, a benchmark of 200% is considered solid. This means that the company always has sufficient current assets available to meet its short-term liabilities. If the current ratio were only 100%, this would mean that the company can just about service its liabilities with its current assets. An unexpectedly high bill could then quickly bring the company into payment difficulties. A value of 100% is targeted for the quick ratio. This is to ensure that the company can cover all its liabilities without having to liquidate assets from inventories. For the cash ratio, 20% is a good benchmark. Although this means that you could only cover a small part of your liabilities with the most liquid funds, companies accept this risk for growth reasons. If the cash ratio is very high, it means that a lot of cash is lying around unused and cannot be used for investments and growth. We summarise the benchmarks for liquidity ratios:
Which of the following ratios measure short term liquidity?The Quick Ratio, also known as the Acid-test or Liquidity ratio, measures the ability of a business to pay its short-term liabilities by having assets that are readily convertible into cash.
Which one of the following is not a short term liquidity ratio?1) Which of the following ratios is not a liquidity ratio? ROE (Return on Equity) is a profitability ratio, whereas all others are liquidity ratios.
What are the 4 liquidity ratios?Types of Liquidity Ratio. Current Ratio.. Quick Ratio or Acid test Ratio.. Cash Ratio or Absolute Liquidity Ratio.. Net Working Capital Ratio.. What are the 3 liquidity ratios?The three main liquidity ratios are the current ratio, quick ratio, and cash ratio. When analyzing a company, investors and creditors want to see a company with liquidity ratios above 1.0. A company with healthy liquidity ratios is more likely to be approved for credit.
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