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Statement Analysis Tools and Accounting Ratios Test - 23

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Statement Analysis Tools and Accounting Ratios Test - 23
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Weekly Quiz Competition
  • Question 1
    1 / -0
    ______ ratios are a measure of the speed with which various accounts are converted into sales or cash.
    Solution
    Activity ratios are primarily measures of returns. Activity ratios are financial analysis tools used to gauge the ability of a business to convert various assets, liability and capital accounts into cash or sales. The faster a business is able to convert its assets into cash or sales, the more efficient it runs.
  • Question 2
    1 / -0
    Which of the following are solvency ratios?
    a. Debt equity ratio
    b. Total fixed assets to debt ratio
    c. Debt ratio
    d. Interest coverage ratio
    Solution
    Solvency ratio is one of the various ratios used to measure the ability of a company to meet its long term debts. Moreover, the solvency ratio qualifies the size of a company's after tax income, not counting non-cash depreciation expenses,  as contrasted to the total debt obligations of the firm. examples of solvency ratios are -  Debt-to-equity ratio, Total-debt-to-total assets ratio, Interest coverage ratio etc.
  • Question 3
    1 / -0
    The _____ ratio may indicate the firm is experiencing stock outs and lost sales. 
    Solution
    The average payment period (APP) is defined as the number of days a company takes to pay off credit purchases. It is calculated as accounts payable/ (total annual purchases/360).  As the average payment period increases, cash should increases as well, but working capital remains the same. APP ratio may indicate the firm is experiencing stock outs and lost sales.
  • Question 4
    1 / -0
    The _________ is useful in evaluating credit and collection policies.
    Solution
    The average collection period is calculated as: 365 days in a year divided by the accounts receivable turnover ratio. The average collection period is the average number of days between the date that a credit sale is made, and the date that the money is received from the customer. The average collection period is also referred to as the days' sales in accounts receivable.
  • Question 5
    1 / -0
    The ______ of business firms is measured by its ability to satisfy its short-term obligations as they come due.
    Solution
    The liquidity of business firms is measured by its ability to satisfy its short-term obligations as they come due. Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price.
  • Question 6
    1 / -0
    ABC co. extends credit term of 45 days to its customers. Its credit collection would be considered poor if its average collection period was ____________.
    Solution
    By monitoring average collection policy, the firm can see if its term are generally being met. ABC company's credit collection would be considered poor if collection period is more than 45 days i.e. Customers on average are significantly slower in paying than company policies allow.
  • Question 7
    1 / -0
    Calculate debtor turnover ratio from the following information:
    Total sales = Rs. 4,00,000
    Cash sales = 20% of total sales
    Debtor beginning of the year = Rs. 40,000
    Debtors end of the year =  Rs. 1,20,000
    Solution
    Average debtors = (Rs. 40,000 + Rs. 1,20,000)/2 = Rs. 80,000
    Cash sales = 20% of total sales
                       = Rs. 4,00,000 x 20%
                       = Rs. 80,000
    Net credit sales = Total sales - Cash sales
                               = Rs. 4,00,000 -  Rs. 80,000
                               = Rs. 3,20,000
    Debtors turnover ratio = Net credit sales/Average debtors
                                          = Rs. 3,20,000/Rs. 80,000
                                          = 4 Times
  • Question 8
    1 / -0
    The ___________ ratios provide the information critical to the long-run operation of the firm.
    Solution
    Solvency ratio is one of the various ratios used to measure the ability of a company to meet its long term debts. Solvency ratio qualifies the size of a company's after tax income, not counting non-cash depreciation expenses, as contrasted to the total debt obligations of the firm. These ratios provide the information critical to the long-term operation of the firm.
  • Question 9
    1 / -0
    The debt ratio refers to the ratio of long-term debt to total external and _________.
    Solution
    Debt ratio refers to the ratio of long-term debt to the total of external and internal funds. It compares total debts to its total assets.  
    It is a financial ratio that measures the extent of the company's  leverage.
    Low ratio provides security to creditors and high ratio helps management in trading on equity.
  • Question 10
    1 / -0
    When the operating ratio is $$81.5$$ the ratio of operating profit to sales will be ______________.
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