Question 1

Trendy Traders reported total sales amounting to $1,800,000 in the year 2018, of which 80% were on credit. At 31 December, customers owed $200,000. If the firm operates for 365 days a year, how long, on average, does it take to collect money from its debtors?
A)29 days.
B)13 days.
C)10 days.
D)51 days.

Accepted Answer

First, we need to calculate the amount of credit sales:

$1,800,000 x 80% = $1,440,000

Then, we can calculate the average accounts receivable:

($1,440,000 + $200,000) / 2 = $820,000

We can then use the following formula to calculate the average collection period:

Average Collection Period = (Accounts Receivable / Total Credit Sales) x Number of Days

= ($820,000 / $1,440,000) x 365

= 208.33 days

Therefore, on average, it takes Trendy Traders 51 days (rounded up) to collect money from its debtors.

The correct answer choice is D.

Question 2

U2 Ltd is considering whether to offer trade credit to A1 Ltd. The ratio from A1's accounts that will be most useful in assessing the firm's ability to repay its trade debts on time is the:
A)gearing.
B)asset turnover period.
C)interest cover.
D)average settlement period for accounts payable.

Accepted Answer

The average settlement period for accounts payable will provide information on how quickly A1 Ltd pays its invoices to its suppliers. This will help U2 Ltd assess A1's ability to repay its trade debts on time. A shorter settlement period suggests better liquidity and management of cash flow, which is important for a company's ability to meet its financial obligations.

Question 3

Which of the following businesses would you expect to have the highest current ratio?
A)Service business that sells on credit.
B)Manufacturer.
C)Retailer.
D)Service business that sells for cash.

Accepted Answer

The answer of Which of the following businesses would you...

Question 4

Sports Ltd reports the following information: $$\begin{array} { l l } 
\text { Net profit } & \$ 30,000 \
\text { Total assets } & 950,000 \
\text { Current liabilities } & 285,000 \
\text { Deferred liabilities } & 405,000
\end{array}$$ If current assets represent 60% of total assets, Sports Ltd's current ratio is:
A)150%.
B)67%.
C)200%.
D)50%.

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Current assets are 60% of total assets, so they are $570,000 (60% of $950,000). The current ratio is $570,000 / $285,000 = 2, or 200%.

Question 5

The following information was extracted from the financial records of Ross Ltd for the year ended 30 June 2018: $$\begin{array} { l r } 
\text { Cash Sales } & \$ 50,000 \
\text { Credit Sales } & 200,000 \
\text { Accounts receivable } & 25,000 \
\text { Cost of Sales } & 130,000
\end{array}$$ If there are 365 trading days per year, calculate for the managing director the number of days that accounts receivable are outstanding at 30 June 2018.
A)86 days.
B)51 days.
C)114 days.
D)46 days.

Accepted Answer

The answer of The following information was extracted from the...

Question 6

Dollar Ltd has a current ratio of 2:1. This means that:
A)there is $2 of current assets for every $1 of current liabilities.
B)its current assets are half its current liabilities.
C)its current assets are insufficient to meet its current liabilities.
D)its current assets are equal to its current liabilities.

Accepted Answer

A current ratio of 2:1 means that there are $2 of current assets for every $1 of current liabilities, indicating that the company has sufficient current assets to meet its current liabilities.

Question 7

If the turnover period for accounts receivable is 8.1 times per annum, what is the average number of days it takes to collect cash from accounts receivable?
A)81 days.
B)45 days.
C)295 days.
D)60 days.

Accepted Answer

To calculate the average number of days it takes to collect cash from accounts receivable, we need to divide the number of days in a year (365 or 360) by the turnover period. 
Thus, average number of days = 365/8.1 = 45.06 days.
Therefore, the best choice is B: 45 days.

Question 8

Which of these is not an advantage of a shorter inventory turnover period?
A)It means fewer funds are tied up in inventory so more are available for use in the business.
B)It means less storage space is needed for inventory.
C)It means that management can have the cost advantage of buying in bulk.
D)It means that inventory is less likely to become obsolete or out of date.

Accepted Answer

A shorter inventory turnover period means that inventory is sold quickly and replenished frequently, reducing the amount of money tied up in inventory and minimizing the risk of obsolescence. It also means that storage space requirements are reduced. However, it does not necessarily mean that management can have the cost advantage of buying in bulk, as buying in bulk often results in lower unit costs but also ties up more funds in inventory, which contradicts the advantage of a shorter inventory turnover period.

Question 9

Because a company's inventory is less liquid than its other current assets when investors are assessing liquidity, they should examine the:
A)debt-equity ratio.
B)accounts receivable turnover ratio.
C)acid test ratio.
D)current ratio.

Accepted Answer

The acid test ratio, also known as the quick ratio, only includes a company's most liquid assets, such as cash, marketable securities, and accounts receivable. Since inventory is not considered a highly liquid asset, it is not included in this ratio. Therefore, examining the acid test ratio would provide a clearer picture of a company's liquidity than the other options listed.

Question 10

Which ratios are specifically concerned with assessing the efficiency with which assets have been used by the business?
A)liquidity ratios.
B)efficiency ratios.
C)gearing ratios.
D)investment ratios.

Accepted Answer

Efficiency ratios are specifically concerned with assessing the efficiency with which assets have been used by the business. Liquidity ratios assess a company's ability to meet short-term obligations, gearing ratios measure the extent to which a company is financed by debt, and investment ratios assess a company's ability to generate returns for its investors.

Question 11

If Line Ltd has a current ratio of 2.5:1 and current assets are $600,000, how much are the company's current liabilities?
A)$240,000.
B)$300,000.
C)$360,000.
D)$200,000.

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Given a current ratio of 2.5:1 and current assets of $600,000, we can set up the equation 2.5 = $600,000 / current liabilities. Solving for current liabilities gives us $600,000 / 2.5 = $240,000.

Question 12

Which statement concerning the average settlement period for accounts payable is correct?
A)It is always best for the business to make creditors wait for their money for as long as possible.
B)It is best to pay accounts payable as quickly as possible.
C)Accounts payable provide a free source of finance for a business.
D)A change in the accounts payable turnover period of 56 days to 65 days means that accounts payable are being paid faster.

Accepted Answer

Accounts payable represent a form of credit from suppliers, allowing businesses to hold onto their cash for longer periods without incurring immediate costs, effectively acting as an interest-free loan.

Question 13

Using the information below find the average inventory turnover for Vox Ltd in days. $$\begin{array} { l r } 
\text { Sales } & \$ 1,800,000 \
\text { Cost of sales } & 1,200,000 \
\text { Stock on hand start } & 360,000 \
\text { Stock on hand end } & 312,000
\end{array}$$
A)102.2 days.
B)63.26 days.
C)94.8 days.
D)68 days.

Accepted Answer

The average inventory is (360,000 + 312,000) / 2 = 336,000. The inventory turnover ratio is Cost of Sales / Average Inventory = 1,200,000 / 336,000 = 3.57. To find the turnover in days, divide 365 by the turnover ratio: 365 / 3.57 ≈ 102.2 days.

Question 14

Which statement is not correct?
A)A business will prefer a shorter settlement time for its accounts receivable rather than a longer settlement period.
B)An asset turnover figure of 1.5 times is preferred to a figure of 1.2 times.
C)A business will prefer a longer average inventory turnover time rather than a shorter turnover time.
D)None of the statements, i.e., all are correct.

Accepted Answer

A longer average inventory turnover time means that a business is taking longer to sell its inventory and could indicate poor sales or inefficient inventory management, so a shorter turnover time is preferred. The other statements are correct as a shorter settlement time for accounts receivable means the business gets paid faster, and a higher asset turnover figure indicates more efficient use of assets.

Question 15

What does the inventory turnover period ratio measure?
A)the liquidity of the firm.
B)how much the firm's current assets could decrease and still leave it able to pay its current liabilities.
C)profitability.
D)the average time an organisation holds inventory.

Accepted Answer

The inventory turnover period ratio measures the average time an organization holds inventory before selling it.

Question 16

If current assets exceed current liabilities, the payment of accounts payable will:
A)decrease the current ratio.
B)increase the level of cash held.
C)increase the current ratio.
D)do none of the above.

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. If current assets increase relative to current liabilities, this will result in a higher current ratio. Therefore, the payment of accounts payable will increase the current ratio.

Question 17

Solvent Ltd has a quick ratio of 1.2:1 and its current liabilities amount to $200,000. If it purchased $40,000 of inventory on credit, its new quick ratio would be:
A)unable to be calculated.
B)higher.
C)unaffected by the transaction.
D)lower.

Accepted Answer

Quick ratio = (Current assets - Inventory)/Current liabilities
Before the purchase of inventory, the current assets were 1.2 times the current liabilities or:
Current assets = 1.2 x $200,000 = $240,000
If the company purchases $40,000 of inventory on credit, the current assets will increase to $280,000 ($240,000 + $40,000). 
Quick ratio = ($280,000 - $40,000)/$200,000 = 1
Thus, the new quick ratio would be lower than the previous quick ratio. Therefore, the correct answer is option D, lower.

Question 18

What does the current ratio measure?
A)use of assets.
B)profitability.
C)investments.
D)liquidity.

Accepted Answer

The current ratio measures a company's ability to pay its short-term debts and obligations, and is therefore a measure of liquidity. It is calculated by dividing a company's current assets by its current liabilities. The higher the current ratio, the more capable the company is of paying off its short-term debts using its current assets.

Question 19

Which of these ratios is not directly relevant to the evaluation of a company's short-term liquidity position?
A)Operating profit ratio.
B)Current ratio.
C)Quick ratio.
D)Acid test ratio.

Accepted Answer

The operating profit ratio measures the operating profit generated by a company compared to its revenue, and is not a direct measure of a company's short-term liquidity position. The current ratio, quick ratio, and acid test ratio are all ratios that evaluate a company's ability to meet short-term financial obligations.

Question 20

What does the acid test ratio eliminate from its calculation, because it is considered the least liquid of the current assets?
A)bank bills
B)accounts receivable
C)government securities
D)inventory

Accepted Answer

The acid test ratio, also known as the quick ratio, eliminates inventory from its calculation because it is considered the least liquid of the current assets. The ratio is used to measure a company's ability to use its most liquid assets to pay off its current liabilities without needing to sell inventory or other less liquid assets. Bank bills, accounts receivable, and government securities are all considered more liquid than inventory and are included in the calculation of the acid test ratio.

Quiz 8: Analysis and Interpretation of Financial Statements

Trendy Traders reported total sales amounting to $1,800,000 in the year 2018, of which 80% were on credit. At 31 December, customers owed $200,000. If the firm operates for 365 days a year, how long, on average, does it take to collect money from its debtors?

U2 Ltd is considering whether to offer trade credit to A1 Ltd. The ratio from A1's accounts that will be most useful in assessing the firm's ability to repay its trade debts on time is the:

Which of the following businesses would you expect to have the highest current ratio?

Dollar Ltd has a current ratio of 2:1. This means that:

If the turnover period for accounts receivable is 8.1 times per annum, what is the average number of days it takes to collect cash from accounts receivable?

Which of these is not an advantage of a shorter inventory turnover period?

Because a company's inventory is less liquid than its other current assets when investors are assessing liquidity, they should examine the:

Which ratios are specifically concerned with assessing the efficiency with which assets have been used by the business?

If Line Ltd has a current ratio of 2.5:1 and current assets are $600,000, how much are the company's current liabilities?

Which statement concerning the average settlement period for accounts payable is correct?

Using the information below find the average inventory turnover for Vox Ltd in days. $\begin{array} { l r } \text { Sales } & \$ 1,800,000 \\\text { Cost of sales } & 1,200,000 \\\text { Stock on hand start } & 360,000 \\\text { Stock on hand end } & 312,000\end{array}$

Which statement is not correct?

What does the inventory turnover period ratio measure?

If current assets exceed current liabilities, the payment of accounts payable will:

Solvent Ltd has a quick ratio of 1.2:1 and its current liabilities amount to $200,000. If it purchased $40,000 of inventory on credit, its new quick ratio would be:

What does the current ratio measure?

Which of these ratios is not directly relevant to the evaluation of a company's short-term liquidity position?

What does the acid test ratio eliminate from its calculation, because it is considered the least liquid of the current assets?