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Homework answers / question archive / Read each statement given below carefully and determine the correct choice for the statements below
Read each statement given below carefully and determine the correct choice for the statements below. Please fill in the answers in the table given below by writing "a", "b", "c" OR "d" in the space provided (Rubrics: I mark each for a correct answer, for 6 statements - Total 6 marks) Question 123456 Answer 1. Four areas that financial ratios concentrate on are: a) liquidity, profitability, debt, and efficiency b) profitability, strategy, liquidity, auditing, share prices c) liquidity, current ratio, quick ratio, interest cover, dividend cover d) none of the above. 2. Ratios that evaluate the capability of the business to meet its short-term liabilities are called: a) debt ratios b) cover ratios c) profitability ratios d) liquidity ratios 3. The quick ratio is defined as: a) current assets divided by current liabilities b) current assets divided by total liabilities c) current assets less inventory, divided by current liabilities d) current assets less inventory, divided by non-current liabilities 4. Earnings per share is affected by: a) dividends b) number of shares outstanding c) net income d) c&b 5. Saud has current assets that comprises of cash: OMR 20.000, account receivables: OMR 70,000 and inventory OMR 90,000. Current liabilities are OMR 75,000. The quick ratio is: a) 1.7 b) 1.2 c) 1.0 d) 0.8 6. Which of the following changes is the least favorable? a) An increase in inventory turnover b) A decrease in operating expenses c) An increase in the price-earnings ratio d) A decrease in the asset tumover
1.) (a) Liquidity, profitability, debt and efficiency
Financial ratios are evaluated to know about financial health of the company. It is used by all stakeholders in areas of their concern. Generally there are five areas on which Financial ratios concentrate and that are liquidity, profitability, debt, efficiency and market related areas.
2.) (d) Liquidity ratios
Liquidity ratios are the ratios that evaluate the capability of the business to meet its short term liabilities. In simple terms liquidity ratios tell about the ability of company to payoff its short term liabilities when they become due, by using its current assets or quick assets.
3.) (c) Current assets less inventory, divided by current liabilities
Quick ratio is a liquidity ratio and it is also called acid-test ratio. As the name says quick ratio measures the ability of company to retire its current liabilities by using its quick assets.
Quick assets are the assets which can be converted into cash within a short period of time. Inventory is not considered as quick assets because its conversion into cash depends on its sale and which can not be predicted.
4.) (d) c & b i.e. net income and number of shares
Earning per share means the amount that a single share of a company earned for that accounting period. It is defined as company's net income, divided by total number of shares of the company
EPS = Net income / Total number of outstanding shares
5.) (b) 1.2
Quick Ratio = Current Assets (Excluding inventory) / Current Liabilities
= (Cash + Accounts Receivable) / Current liabilities
= (OMR 20000 + OMR 70000) / OMR 75000
= OMR 90000 / OMR 75000
= 1.2
As a general rule, quick ratio greater than 1 indicates that the company is able to meet its short term obligations.
6.) (d) A decrease in asset turnover
An increase in company's inventory turnover shows that it's stock is moving fast means goods are sold quickly and there is a good demand for its products.
A decrease in operating expenses can happen for different reasons. If expenses are reduced by conforming to quality, it is good but if decrease in operating expenses also decreases the quality of the product then it is not good.
An increase in price earning ratio indicates an increase in market value of shares which means investors are willing to pay more for its shares.
An asset turnover shows the efficiency of company's assets in generating revenue. An increase shows how efficiently company's assets are working whereas a decrease shows that assets are not orking efficiently.
