Question 1

The average age of inventory is viewed as the average length of time inventory is held by the firm or as the average number of days' sales in inventory.

Accepted Answer

The statement is true. The average age of inventory is commonly used as a measure of how long a company is holding its inventory before selling it, and it can be expressed either in terms of days or months. It is an important metric for inventory management and can help a company optimize its inventory levels and minimize costs.

Question 2

Inflation can distort

Accepted Answer

The answer of Inflation can distort
...

Question 3

Discuss the limitations of ratio analysis and the cautions which must be taken when reviewing a cross-sectional and time-series analysis.

Accepted Answer

The answer of Discuss the limitations of ratio analysis and...

Question 4

The average payment period can be calculated as accounts payable divided by average sales per day.

Accepted Answer

The average payment period is calculated as accounts payable divided by average purchases per day, not sales.

Question 5

If the only information you were given about Ryan Corporation, a large public company in business for many years, was that had a current ratio of 2.9, what could you determine from this?

Accepted Answer

The current ratio alone does not provide enough information to determine the financial health of a company. It is necessary to compare the current ratio of Ryan Corporation with the current ratio of its competitors and its trend over the last few years to get a better understanding of the company's financial health. Therefore, choice B, C, and D are incorrect.

Question 6

The average payment period can be calculated as accounts payable divided by average purchases per day.

Accepted Answer

The average payment period formula is accounts payable divided by average daily credit purchases.

Question 7

The current ratio provides a better measure of overall liquidity only when a firm's inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity.

Accepted Answer

The quick ratio is preferred when inventory cannot be easily converted into cash, as it excludes inventory from current assets to provide a more stringent measure of liquidity.

Question 8

If you were given the average collection period of a firm was currently 45 days, that the average collection of the firm for the past 3 years was 30 days and that the average collection period of the firm's industry for the past few years and currently was 30 days, would you want to know any other information to evaluate the effectiveness of the firm's credit and collection policies?

Accepted Answer

Knowing the firm's credit terms and if they recently changed from 30 to 45 days can provide insight into why the average collection period has increased. Other factors such as economic conditions, customer base, and payment methods should also be considered when evaluating the effectiveness of credit and collection policies. Comparing the firm's collection period to the industry's general trend can also provide useful information.

Question 9

Without adjustment, inflation may tend to cause ________ firms to appear more efficient and profitable than ________ firms, all else being the same.

Accepted Answer

The answer of Without adjustment, inflation may tend to cause...

Question 10

Total asset turnover commonly measures the liquidity of a firm's total assets.

Accepted Answer

Total asset turnover measures how efficiently a company uses its assets to generate revenue, not necessarily its liquidity.

Question 11

Since the differences in the composition of a firm's current assets and liabilities can significantly affect the firm's "true" liquidity, it is important to look beyond measures of overall liquidity to assess the activity (liquidity) of specific current accounts.

Accepted Answer

It is true that the composition of a firm's current assets and liabilities can have a significant impact on its actual liquidity, so it is important to assess the activity of specific accounts rather than just relying on overall measures of liquidity.

Question 12

The ________ of a business firm is measured by its ability to satisfy its short-term obligations as they come due.

Accepted Answer

Liquidity refers to a company's ability to meet its short-term obligations with its current assets. This is important for a company to handle unexpected expenses, debt payments, and short-term investments.

Question 13

________ ratios are a measure of the speed with which various accounts are converted into sales or cash.

Accepted Answer

Activity ratios, also known as efficiency ratios, measure how quickly a company can convert its resources such as inventory, accounts receivable, and accounts payable into sales or cash. Examples of activity ratios include inventory turnover, accounts receivable turnover, and accounts payable turnover.

Question 14

The ________ ratios are primarily measures of return.

Accepted Answer

Profitability ratios are metrics used to evaluate a company's ability to generate income and profits over a certain period of time. These ratios primarily assess a company's ability to generate earnings and profits from its operations, which ultimately leads to an increase in the shareholders' wealth. Therefore, profitability ratios are primarily measures of return. Liquidity ratios, on the other hand, evaluate a company's ability to meet short-term financial obligations, while activity ratios assess a company's efficiency in managing its assets. Debt ratios indicate the amount of leverage used by a company and its ability to meet long-term obligations.

Question 15

The liquidity of a business firm refers to the solvency of the firm's overall financial position.

Accepted Answer

The answer of The liquidity of a business firm refers...

Question 16

The average age of inventory can be calculated as inventory divided by 365.

Accepted Answer

The average age of inventory is calculated by dividing 365 by the inventory turnover ratio, not by dividing inventory by 365.

Question 17

The following groups of ratios primarily measure risk.

Accepted Answer

Liquidity ratios measure a firm's ability to meet short-term obligations, while activity ratios measure the efficiency of a firm's operations. While profitability ratios can provide some insight into risk, they primarily measure profitability rather than risk. On the other hand, debt ratios directly measure a firm's financial risk by comparing debt to equity or total assets. Therefore, the ratios that primarily measure risk are liquidity, activity, and debt ratios, making choice C the best option.

Question 18

The average age of inventory can be calculated as 365 divided by inventory turnover.

Accepted Answer

The formula for calculating the average age of inventory is 365 (the number of days in a year) divided by the inventory turnover ratio. This ratio tells us how many times the inventory is sold and replaced over a given period (usually one year). By dividing the number of days in a year by this ratio, we can determine the average number of days it takes for inventory to be sold and replaced, which is the average age of inventory. Therefore, the statement is true.

Question 19

The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they come due.

Accepted Answer

The liquidity of a business firm is measured by its ability to satisfy its short-term obligations as they come due. The ability to satisfy long-term obligations is measured by solvency.

Question 20

The average age of inventory can be calculated as inventory turnover divided by 365.

Accepted Answer

The average age of inventory is calculated as 365 divided by the inventory turnover ratio, not the other way around.

Quiz 3: Financial Statements and Ratio Analysis