Deck 7: Ratio Analysis 2: Liquidity, Working Capital and Long-Term Financial Stability

Question 1

Profitability is the key to survival for every entity.

Answer 1

False

Question 2

An entity's liquidity depends upon its cash flows.

Answer 2

True

Question 3

Liquidity refers to the ability of an entity to raise cash to pay off its liabilities as they become due for payment.

Answer 3

True

Question 4

Different types of businesses have different cash flow cycles. Which of the following statements describe the cash flow cycle of retailers and which describe the cash flow cycle of manufacturers?

A) Sell finished goods on credit to customers = Manufacturers
B) Turn raw materials into finished goods = Manufacturers
C) Sell bought in goods to customers for cash = Retailers
D) Goods for resale purchased on credit from suppliers = Retailers

Question 5

Which of the following are characteristics of the cash flow cycle of manufacturing companies only? Please select all that apply.

A) Sell bought in goods for cash.
B) Turn raw materials into finished goods.
C) Sell finished goods on credit to customers.
D) Use cash received from customers to pay suppliers and other claims upon the entity.

Question 6

Which of the following statements most accurately describes the quick (acid test) ratio?

A) An assessment of short-term liquidity that compares inventory, receivables and cash to current liabilities.
B) An assessment of long-term solvency and financial stability which compares total assets to total liabilities.
C) An assessment of short-term liquidity which compares receivables and cash to current liabilities.
D) An assessment of long-term solvency which compares short and long-term borrowings to total equity.

Question 7

Which one of the following would not form part of the calculation of the current ratio of an entity?

A) Borrowings due for repayment within 12 months of the statement of financial position date.
B) A bank overdraft
C) Inventory
D) A trade payable due for payment more than 12 months after the statement of financial position date.

Question 8

The current ratio is calculated to determine whether an organisation has sufficient short-term assets from which to meet short-term liabilities.

Question 9

Based on the below figures, what is the current ratio?
$\begin{array}{lr}\text { Inventory } & 6,000 \\\text { Payables } & 12,000 \\\text { Receivables } & 11,000 \\\text { Non-current liabilities } & 16,000 \\\text { Current portion of long-term borrowings } & 3,000 \\\text { Cash } & 1,000 \\\text { Taxation payable } & 5,000\end{array}$

A) 0.50:1
B) 0.60:1
C) 0.75:1
D) 0.90:1

Question 10

Based on the below figures, what is the current ratio?
$\begin{array}{lr} & £ \\\text { Trade payables } & 20,000 \\\text { Trade and other receivables } & 25,000 \\\text { Cash } & 9,000 \\\text { Taxation payable } & 10,000 \\\text { Current portion of long-term borrowings } & 6,000 \\\text { Inventory } & 18,000 \\\text { Non-current assets } & 60,000\end{array}$

A) 1.15:1
B) 1.44:1
C) 1.73:1
D) 3.11:1

Question 11

Based on the below figures, what is the current ratio?
$\begin{array}{lr}& £ \\\text { Trade payables } & 35,000 \\\text { Trade receivables } & 28,000 \\\text { Cash and cash equivalents } & 15,000 \\\text { Taxation payable } & 12,000 \\\text { Prepayments } & 4,000 \\\text { Inventory } & 14,000 \\\text { Accruals } & 6,000\end{array}$

A) 1.15:1
B) 1.21:1
C) 1.24:1
D) 1.30:1

Question 12

At 31 December 2019, Martha Limited has inventory of £48,000, trade payables of £68,000, cash at the bank of £22,000, trade receivables of £81,000, cash in hand of £1,000 and current tax payable of £15,000. Martha Limited also has a loan of £60,000 which is due for repayment by 5 annual instalments commencing on 30 June 2020. What is Martha Limited's current ratio?

A) 1.06:1
B) 1.59:1
C) 1.60:1
D) 1.83:1

Question 13

Based on the below figures, what is the quick ratio?
$\begin{array}{ll}& £ \\\text { Trade payables } & 40,000 \\ \text { Trade receivables } & 45,000 \\ \text { Cash and cash equivalents } & 15,000 \\ \text { Taxation payable } & 20,000\\\text { The portion of long-term borrowings repayable }&15,000\\\text { within } 12 \text { months of the year end date }\\\text { Inventory }&20,000\end{array}$

A) 0.80:1
B) 1:1
C) 1.07:1
D) 1.25:1

Question 14

Based on the below figures, what is the quick ratio?
$\begin{array}{lr}& £ \\\text { Trade payables } & 35,000 \\\text { Trade receivables } & 28,000 \\\text { Cash and cash equivalents } & 15,000 \\\text { Taxation repayable to the company } & 12,000 \\\text { Inventory } & 14,000 \\\text { Accruals } & 6,000\end{array}$

A) 0.81:1
B) 1.05:1
C) 1.34:1
D) 1.68:1

Question 15

At 31 October 2019, Tasha Limited has inventory of £60,000, trade payables of £80,000, cash at the bank of £24,500, trade receivables of £88,000, cash in hand of £2,500 and current tax payable of £20,000. Tasha Limited also has a loan of £125,000 which is due for repayment by 5 annual instalments commencing on 30 September 2020. What is Tasha Limited's quick ratio?

A) 0.51:1
B) 0.90:1
C) 0.92:1
D) 1.40:1

Question 16

Which one of the following statements is not a criticism of the current and quick ratios?

A) Current and quick ratios assume that all liabilities at the year end are payable on the day following the year end rather than being payable over the next twelve months.
B) Current and quick ratios ignore the future timing of cash inflows and outflows.
C) Current and quick ratios present a snapshot of short-term liquidity at one day in the year.
D) Current and quick ratios compare current assets with current liabilities to assess the ability of short-term assets to meet the commitments presented by short-term liabilities.

Question 17

Current and quick ratios are largely irrelevant when making an assessment of an entity's liquidity position.

Question 18

Working capital = current assets + current liabilities.

Question 19

Which of the following are components of working capital? Please select all that apply.

A) Inventories of raw materials for use in production.
B) Trade receivables which have been provided with a credit facility by the entity.
C) Trade payables of the business which require settlement on a daily basis.
D) The current portion of long-term borrowings included in current liabilities.

Question 20

Which one of the following would not form part of the working capital of an organization?

A) Cash receipts due from trade receivables.
B) Cash payments for tax due on past profits of the business.
C) Cash due to trade payables for goods supplied on credit.
D) Inventories of finished goods and goods for resale.

Question 21

Which of the following statements describes the function of the inventory days ratio?

A) Measures the number of days goods are held in stock before they are sold.
B) Evaluates the efficiency of an entity's credit control and the speed with which credit sales are turned into cash.
C) Measures the speed with which trade receivables are turned into cash.
D) Measures how quickly an entity is paying for its purchases of inventory.

Question 22

Based on the below figures, what are the inventory days?
$\begin{array}{lc} & £ \\\text { Inventory } & 5,400 \\\text { Trade payables } & 7,560 \\\text { Trade receivables } & 9,000 \\\text { Sales } & 65,700 \\\text { Cost of sales } & 43,800\end{array}$

A) 30 days
B) 45 days
C) 50 days
D) 63 days

Question 23

Based on the below figures, what are the inventory days?
$\begin{array}{lc} & £ \\\text { Inventory } & 5,400 \\\text { Trade payables } & 7,560 \\\text { Trade receivables } & 9,000 \\\text { Sales } & 65,700 \\\text { Cost of sales } & 43,800\end{array}$

A) 45.63 days
B) 58.40 days
C) 60.83 days
D) 76.04 days

Question 24

A high number of inventory days indicate that stock obsolescence is minimised.

Question 25

The working capital position of a business is improved if inventory is sold quickly.

Question 26

Based on the below figures, what are the receivables days?
$\begin{array}{lr} & £ \\\text { Inventory } & 63,700 \\\text { Trade payables } & 50,960 \\\text { Trade receivables } & 114,400 \\\text { Revenue } & 949,000 \\\text { Cost of sales } & 664,300\end{array}$

A) 19.60 days
B) 28.00 days
C) 35.00 days
D) 44.00 days

Question 27

Based on the below figures, what are the receivables days?
$\begin{array}{lr}& £ \\\text { Trade receivables } & 72,000 \\\text { Prepayments } & 30,000 \\\text { Cash sales } & 328,500 \\\text { Credit sales } & 547,500\end{array}$

A) 30.00 days
B) 42.50 days
C) 48.00 days
D) 68.00 days

Question 28

Paying trade payables before cash has been received from trade receivables has a positive impact upon working capital cash flow.

Question 29

Based on the below figures, what are the payables days?
$\begin{array}{lr} & £ 000 \\\text { Inventory } & 1,800 \\\text { Trade payables } & 3,780 \\\text { Trade receivables } & 4,050 \\\text { sales } & 49,275 \\\text { Cost of sales } & 32,850\end{array}$

A) 20 days
B) 28 days
C) 30 days
D) 42 days

Question 30

Based on the below figures, what are the payables days?
$\begin{array}{lr}& £ \\\text { Trade payables } & 15,000 \\\text { Taxation payable } & 10,000 \\\text { Cash purchases } & 28,750 \\\text { Credit purchases} & 121,250\end{array}$

A) 36.50 days
B) 45.15 days
C) 60.83 days
D) 75.26 days

Question 31

Which of the following is the correct way in which to calculate the cash conversion cycle?

A) Inventory days + receivables days + payables days
B) Receivables days - payables days + inventory days
C) Inventory days - receivables days + payables days
D) Receivables days + payables days - inventory days

Question 32

Chibble Limited has payables days of 30, inventory days of 28 and receivables days of 42. What is Chibble Limited's cash conversion cycle?

A) 16 days
B) 40 days
C) 44 days
D) 110 days

Question 33

Dibble Limited has inventory days of 20, receivables days of 5 and payables days of 40. What is Dibble Limited's cash conversion cycle?

A) - 15 days
B) + 15 days
C) - 25 days
D) + 65 days

Question 34

Fibble Limited has receivables days of 120, payables days of 60 and inventory days of 90. What is Fibble Limited's cash conversion cycle?

A) - 30 days
B) + 90 days
C) + 150 days
D) + 270 days

Question 35

The gearing ratio is based on the long term borrowings of an entity only.

Question 36

Based on the below figures, what is the gearing ratio?
$\begin{array}{ll}& £ 000 \\ \text {Current assets } &15,000 \\ \text {Non-current assets } &35,000 \\ \text {Non-current liability borrowings } &18,000 \\ \text {Equity } &20,000 \\ \text {Current portion of long-term borrowings } &2,000 \\ \text {Other non-current and current liabilities } &10,000\end{array}$

A) 40%
B) 90%
C) 100%
D) 150%

Question 37

Foggle Plc has the following balances in its statement of financial position at 31 August 2019:
$\begin{array}{lr} & £ 000 \\\text { 5\% Bonds } 2022 & 6,000 \\\text { Equity } & 8,000 \\\text { Non-current liability bank loan } & 2,000 \\\text { Current liability bank loan } & 640 \\\text { Bank overdraft } & 320\end{array}$ Based on the above figures, what is Foggle Plc's gearing ratio at 31 August 2019?

A) 75%
B) 100%
C) 108%
D) 112%

Question 38

It is not the gearing % that is important in assessing an organization's long term solvency and financial stability, but the ability of each organization to generate operating cash inflows with which to pay the interest on borrowed money.

Question 39

Which of the following ratios enables users to make an assessment of the affordability of borrowings?

A) Current ratio
B) Gearing ratio
C) Interest cover
D) Quick ratio

Question 40

Based on the below figures, what is the interest cover ratio?
$\begin{array}{lr} & £ 000 \\\text { Sales } & 15,000 \\\text { Gross Profit } & 5,000 \\\text { Operating Profit } & 3,000 \\\text { Finance Expense } & 500 \\\text { Profit Before Taxation } & 2,500\end{array}$

A) 3 times
B) 5 times
C) 6 times
D) 10 times

Question 41

Interest cover:

A) Measures the £s of liabilities per £1 of total assets
B) Measures how many times the ordinary dividend is covered by profit for the year.
C) Measures the £s of borrowings for each £1 of equity.
D) Measures how many times finance expense is covered by operating profits.

Question 42

Goggle Limited has the following figures in its statement of profit or loss for the year ended 31 October 2019:
$\begin{array}{ll}& £ \\ \text {Gross profit } &84,000 \\ \text {Administration expenses } &24,000 \\ \text {Bank overdraft interest } &600 \\ \text {Bank loan interest } &2,400 \\ \text {Selling and distribution costs } &21,000 \\ \text {Profit before taxation } &36,000 \\ \text {Taxation } &9,000\end{array}$

A) 9 times
B) 12 times
C) 13 times
D) 15 times

Question 43

Which of the following terms are found in the interest cover ratio calculation? Please select all that apply.

A) Finance income.
B) Finance expense.
C) Profit before taxation.
D) Operating profit.

Question 44

Based on the below figures, what is the debt ratio?
$\begin{array}{lc} & £ 000 \\\text { Non-current assets } & 22,000 \\\text { Current assets } & 12,000 \\\text { Equity } & 14,000 \\\text { Non-current liabilities } & 10,000 \\\text { Current liabilities } & 10,000\end{array}$

A) 0.45:1
B) 0.59:1
C) 0.70:1
D) 0.83:1

Question 45

Which of the following are included in the debt ratio calculation? Please select all that apply.

A) Share capital.
B) Property, plant and equipment.
C) Non-current liability borrowings.
D) Inventory.

Question 46

Bunye Limited has the following balances in the statement of financial position at 31 December 2019.
Based on the below figures, what is the debt ratio?
$\begin{array}{lr}& £ \\\text { Property, plant and equipment } & 423,000 \\\text { Trade payables } & 88,000 \\\text { Retained earnings } & 186,000 \\\text { Borrowings (all non-current liabilities) } & 150,000 \\\text { Inventory } & 29,000 \\\text { Bank overdraft } & 4,200 \\\text { Trade and other receivables } & 57,500 \\\text { Taxation payable } & 18,800 \\\text { Non-current asset investments } & 22,500 \\\text { Share capital } & 35,000 \\\text { Share premium } & 50,000\end{array}$

A) 0.34:1
B) 0.49
C) 0.57
D) 2.04:1