Statement Analysis Tools and Accounting Ratios Test

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Statement Analysis Tools and Accounting Ratios Test - 42

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Weekly Quiz Competition

Question 1
1 / -0

Operating leverage helps in the analysis of __________.

A
Business Risk

B

Financing Risk

C
Production Risk

D
Credit Risk

Solution

A higher proportion of higher fixed cost in the production process means that the operating leverage is higher and the company has more business risk.
Question 2
1 / -0

Benefit of 'Trading on Equity' is available only if .

A
Rate of interest < Rate of return

B
Rate of interest > Rate of return

C
Both A and B

D
None of A and B

Solution

In Trading on Equity, also known as financial leverage what happens is that the company uses its own equity capital as well as borrowed funds or only borrowed funds to increase its operational capacity. The management is certain that the increase in returns from the expansion would be more than the increase in interest cost.
For Example: A Ltd purchases an asset for Rs.1,00,000 using amount raised from issue of debentures on which interest has to paid @ 10% and the return from the asset is 15%.
Question 3
1 / -0

Dividend Payout Ratio is equal to ________.

A
PAT Capital

B
DPS $$\div$$ EPS

C
Preferred dividend $$\div$$ PAT

D
Preferred dividend $$\div$$ Equity Dividend

Solution

Dividend payout ratio is a proportion of dividend per share and earning per share. It signifies that how much is the dividend paid to the shareholders against the earning per share.
Question 4
1 / -0

Working capital turnover measures the relationship of working capital with ________.

A
Fixed assets

B
Sales

C
Purchases

D
Stock

Solution

Working capital turnover is also known as net sales to working capital. It indicates company's effectiveness in using its working capital in generating sales for the business.
Question 5
1 / -0

What does net profit ratio signify?

A
Operational profitability

B
Liquidity position

C
Solvency

D
Profit

Solution

The net profit ratio signifies remaining profit after all costs of production, administration & financing have been deducted from sales,and income taxes recognized.
Question 6
1 / -0

Trading on Equity .

A
is always beneficial

B
can be beneficial

C
is never beneficial

D
None of the Above

Solution

In Trading on Equity, also known as financial leverage what happens is that the company uses its own equity capital as well as borrowed funds or only borrowed funds to increase its operational capacity. The management is certain that the increase in returns from the expansion would be more than the increase in cost.

For Example: A Ltd purchases an asset for $$Rs.100000$$ using amount raised from issue of debentures on which interest has to paid @ $$10$$% and the return from the asset is $$15$$% so the additional $$5$$% earned is due to Trading on equity hence the same is beneficial. But there might be cases where the asset is not able to make returns which is more than the interest payable and in such cases trading on equity would not be beneficial. Hence we can say that trading on equity is beneficial but it cannot be said that it would always be beneficial or it would never be beneficial.
Question 7
1 / -0

Inventory turnover ratio $$=$$ Cost of __________ during the period $$\div$$ Cost of average inventory held during the period.

A
Inventory consumed

B
Minimum inventory

C
Maximum inventory

D
None of these

Solution

Inventory turnover ratio determines the number of times stock is turned into sales during the accounting period under consideration. It expresses the relationship between the cost of goods sold and stock of goods. The formula for its calculation is as follows:

Stock Turnover Ratio = Cost of Goods Sold/Average Stock

Where average stock refers to arithmetic average of opening and closing stock, and the cost of goods sold means sales less gross profit
It studies the frequency of conversion of stock of finished goods into sales. It is also a measure of liquidity. It determines how many times stock is purchased and replaced during a year. Low turnover of stock may be due to bad buying, obsolete stock, etc. and is a danger signal. High turnover is goods but is must be carefully interpreted as it may be due to buying into small lots or selling quickly at low margin to realize cash. Thus, it throws light on utilization of stock of goods.
Question 8
1 / -0

There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?

A
That the capital employed has reduced

B
That the profitability has gone up

C
That debtors collection period has increased

D
That sales has decreased

Solution

Debtor collection period is the time that it takes to convert balances from account receivables back into cash flow. This can apply to an individual transaction or to the business's overall transaction history for a period of time. The lower the debtor collection period the more efficient is the company in collecting payment from its customers.
Question 9
1 / -0

In response to market expectations, the credit period has been increased from 45 days to 60 days. This would result in a _____________.

A
Decrease in sales

B
Decrease in debtors

C
Increase in bad debts

D
Increase in average collection period

Solution

Credit policy of an organization consists of various elements like cash discount, collection period etc. Collection period means the period of credit allowed to the customer by the organization against the credit sales.

If the credit period is increased from 45 days to 60 days, this will result more blockage of funds and will increase in average collection period.
Question 10
1 / -0

'Constant Dividend Per Share' Policy is considered as .

A
Increasing Dividend Policy

B
Decreasing Dividend Policy

C
Stable Dividend Policy

D
None of the Above
Solution
Stability of dividend means paying out an amount of dividend every year even though the amount may differ/fluctuate every year and it mean not be in relation to the earnings.
Stable Dividend policy includes the following:
Constant pay out rate
Constant dividend per share
Constant dividend per share plus extra dividend or interim dividend .
So, Constant Dividend Per Share is considered as Stable Dividend Policy.

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Re-Attempt Weekly Quiz Competition

Statement Analysis Tools and Accounting Ratios Test - 42

Result

Statement Analysis Tools and Accounting Ratios Test - 42

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SHARING IS CARING

Question 1

Business Risk

Financing Risk

Production Risk

Credit Risk

Solution

Question 2

Rate of interest < Rate of return

Rate of interest > Rate of return

Both A and B

None of A and B

Solution

Question 3

PAT Capital

DPS $$\div$$ EPS

Preferred dividend $$\div$$ PAT

Preferred dividend $$\div$$ Equity Dividend

Solution

Question 4

Fixed assets

Sales

Purchases

Stock

Solution

Question 5

Operational profitability

Liquidity position

Solvency

Profit

Solution

Question 6

is always beneficial

can be beneficial

is never beneficial

None of the Above

Solution

Question 7

Inventory consumed

Minimum inventory

Maximum inventory

None of these

Solution

Question 8

That the capital employed has reduced

That the profitability has gone up

That debtors collection period has increased

That sales has decreased

Solution

Question 9

Decrease in sales

Decrease in debtors

Increase in bad debts

Increase in average collection period

Solution

Question 10

Increasing Dividend Policy

Decreasing Dividend Policy

Stable Dividend Policy

None of the Above

Solution

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