Question 1

Profitability is the key to survival for every entity.

Accepted Answer

While profitability is important, some entities, like non-profits or government organizations, may prioritize other goals such as social impact or public service over profitability.

Question 2

An entity's liquidity depends upon its cash flows.

Accepted Answer

Liquidity refers to the ability of an entity to meet its short-term obligations, which is directly influenced by its cash flows, as they provide the necessary funds to cover these obligations.

Question 3

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

Accepted Answer

Liquidity refers to the ease with which an entity can convert assets into cash to meet its short-term obligations.

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?

Accepted Answer

The cash flow cycle of a business refers to the pattern of how cash enters and exits a company over a period of time. Retailers and manufacturers have distinct cash flow cycles due to the nature of their operations. Here's how the statements provided relate to each of them:
a. Sell finished goods on credit to customers = Manufacturers
Manufacturers often sell their finished goods on credit to customers, which means they may have to wait for payment after the goods have been delivered. This can lead to a gap between when the costs are incurred to produce the goods and when the revenue is received.
b. Turn raw materials into finished goods = Manufacturers
Manufacturers purchase raw materials and use labor and overhead to convert these materials into finished goods. This process is a key part of a manufacturer's cash flow cycle, as it involves significant upfront costs before the product can be sold.
c. Sell bought in goods to customers for cash = Retailers
Retailers typically purchase finished goods from suppliers or manufacturers and sell them directly to customers for cash or immediate payment. This means that retailers can often recoup their investment quickly, shortening their cash flow cycle.
d. Goods for resale purchased on credit from suppliers = Retailers
Retailers often purchase inventory on credit from suppliers, which allows them to stock their shelves without immediately paying out cash. They then sell these goods to customers, ideally before the payment to suppliers is due, which helps manage their cash flow.
In summary, manufacturers have a cash flow cycle that involves selling on credit and turning raw materials into finished goods, which can lead to longer periods before cash is received. Retailers, on the other hand, tend to buy goods on credit and sell for cash, which can result in a quicker cash conversion cycle.

Question 5

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

Accepted Answer

Manufacturing companies turn raw materials into finished goods and sell finished goods on credit to customers.

Question 6

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

Accepted Answer

The quick (acid test) ratio measures short-term liquidity by comparing receivables and cash to current liabilities, excluding inventory.

Question 7

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

Accepted Answer

The current ratio measures a company's ability to pay short-term obligations with its short-term assets. A trade payable due for payment more than 12 months after the statement of financial position date is a long-term liability and does not factor into the current ratio calculation.

Question 8

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

Accepted Answer

The current ratio is a financial metric used to assess a company's ability to cover its short-term liabilities with its short-term assets.

Question 9

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

Accepted Answer

The answer of Based on the below figures, what is...

Question 10

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

Accepted Answer

Current assets = 25,000 + 9,000 + 6,000 = 40,000Current liabilities = 20,000 + 10,000 = 30,000Current ratio = 40,000 / 30,000 = 1.44:1

Question 11

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

Accepted Answer

The answer of Based on the below figures, what is...

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?

Accepted Answer

Current assets = £48,000 + £81,000 + £22,000 + £1,000 = £152,000Current liabilities = £68,000 + £15,000 = £83,000Current ratio = £152,000 / £83,000 = 1.60:1

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} $

Accepted Answer

The answer of Based on the below figures, what is...

Question 14

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

Accepted Answer

The quick ratio is calculated as (Trade receivables + Cash and cash equivalents + Taxation repayable) / (Trade payables + Accruals). This equals (28,000 + 15,000 + 12,000) / (35,000 + 6,000) = 55,000 / 41,000 = 1.34:1.

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?

Accepted Answer

The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. Current Assets excluding inventory are £24,500 (cash at bank) + £2,500 (cash in hand) + £88,000 (trade receivables) = £115,000. Current Liabilities are £80,000 (trade payables) + £20,000 (current tax payable) = £100,000. Quick ratio = £115,000 / £100,000 = 1.15:1. However, the closest option is 0.92:1, indicating a possible error in the provided options.

Question 16

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

Accepted Answer

The statement in choice D is not a criticism; it describes the intended purpose of the current and quick ratios, which is to assess the ability of short-term assets to meet short-term liabilities.

Question 17

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

Accepted Answer

Current and quick ratios are important measures of a company's liquidity, as they indicate the company's ability to meet its short-term obligations.

Question 18

Working capital = current assets + current liabilities.

Accepted Answer

Working capital is calculated as current assets minus current liabilities, not the sum of the two.

Question 19

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

Accepted Answer

Working capital components include inventories, trade receivables, and trade payables, as they are part of the current assets and liabilities used in day-to-day operations. The current portion of long-term borrowings is not typically considered a component of working capital.

Question 20

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

Accepted Answer

Working capital typically includes current assets and liabilities related to the day-to-day operations of a business, such as receivables, payables, and inventory. Tax payments on past profits are not part of these operational activities.

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

Profitability is the key to survival for every entity.

An entity's liquidity depends upon its cash flows.

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

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?

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

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

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

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

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

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

Working capital = current assets + current liabilities.

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

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