Question 1

A current ratio of 2.4:1 means that a small company has $2.40 in current liabilities for every $1 has in current assets.

Accepted Answer

A current ratio of 2.4:1 means that a small company has $2.40 in CURRENT ASSETS for every $1 in CURRENT LIABILITIES.

Question 2

Ratio analysis allows a business owner to identify potential problem areas in her business before they become business-threatening crises.

Accepted Answer

Ratio analysis helps a business owner understand the financial health of their business by comparing different financial ratios to industry averages or historical data. By identifying potential problem areas, the owner can take proactive measures to address them before they become significant challenges.

Question 3

The small business with a high debt-to-net worth ratio has more borrowing capacity than a firm with a low ratio.

Accepted Answer

A high debt-to-net worth ratio indicates that a business has a higher level of debt in proportion to its net worth, which may make it less attractive to lenders and increase the risk of default. A low ratio, on the other hand, indicates a healthier financial position with less reliance on debt financing. Therefore, a low ratio would have more borrowing capacity than a high ratio.

Question 4

Generally,the higher the current ratio,the stronger the small firm's financial position.

Accepted Answer

A higher current ratio indicates that a small firm has more current assets to cover its current liabilities, which implies a stronger financial position.

Question 5

Operating ratios measure the extent to which an entrepreneur relies on debt capital rather than equity capital to finance the business.

Accepted Answer

Operating ratios measure the operational efficiency of a business and do not directly measure the capital structure of the business in terms of debt and equity.

Question 6

A company with a low debt-to-net worth ratio has less capacity to borrow than a company with a high debt-to-net worth ratio.

Accepted Answer

A company with a low debt-to-net worth ratio has a stronger financial position and is considered less risky by lenders. This means they may actually have more capacity to borrow than a company with a high debt-to-net worth ratio, which may be seen as riskier to lenders.

Question 7

A quick ratio of more than 1:1 suggests that a small company is overly dependent on inventory and future sales to satisfy its short-term debt.

Accepted Answer

A quick ratio of greater than 1:1 indicates that a small company has enough liquid assets to pay off its short-term liabilities without relying on inventory and future sales. Therefore, it means that the company is in a better position to meet its short-term debt obligations.

Question 8

Creditors often look for a times-interest-earned ratio of at least 4:1 to 6:1 before pronouncing a company a good credit risk.

Accepted Answer

This statement is true. Creditors typically look for a times-interest-earned ratio of at least 4:1 to 6:1 to ensure that a company has sufficient earnings to cover its interest payments and is considered a good credit risk.

Question 9

A company with a times-interest-earned ratio that is well above the industry average would likely have difficulty making the interest payments on its loans,as creditors would see that it was overextended in its debts.

Accepted Answer

A higher times-interest-earned ratio indicates a company is better positioned to meet its interest payments on loans.

Question 10

A high current ratio guarantees that the small firm's assets are being used in the most profitable manner.

Accepted Answer

A high current ratio only indicates that a small firm has enough current assets to pay off its current liabilities. It does not guarantee profitability or efficient use of assets.

Question 11

Liquidity ratios such as the current ratio and the quick ratio tell whether a small business will be able to meet its short-term obligations as they come due.

Accepted Answer

Liquidity ratios such as the current ratio and the quick ratio are specifically designed to measure a business's ability to meet its short-term obligations as they come due. Therefore, the statement is true.

Question 12

Liquidity ratios help a business owner evaluate a small company's performance and indicate how effectively it employs its resources.

Accepted Answer

The answer of Liquidity ratios help a business owner evaluate...

Question 13

Ratio analysis is a useful managerial tool that can help business owners maintain financial control over their businesses,but it is of no use to a business owner trying to obtain a bank loan.

Accepted Answer

Ratio analysis can also be helpful for businesses seeking bank loans as it provides a clear picture of the financial health and performance of the business, which the bank would consider before approving the loan.

Question 14

Most firms calculate their quick assets by subtracting the value of their inventory from their current asset total.

Accepted Answer

Quick assets are assets that can be easily converted into cash within 90 days or less. Most firms calculate their quick assets by subtracting the value of their inventory from their current asset total, as inventory may take longer to convert into cash.

Question 15

The times-interest-earned ratio tells how many times the company's earnings cover the interest payments on the debt it is carrying.

Accepted Answer

The times-interest-earned ratio is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expense. This ratio indicates how easily the company can meet its interest payments on debt. A higher ratio indicates better coverage and a lower risk of default.

Question 16

As a company's debt-to-net worth ratio approaches 1:1,its creditors' interest in that business approaches that of the owners.

Accepted Answer

As the debt-to-net worth ratio approaches 1:1, it means that the company has high debt compared to its equity. This indicates that the company is heavily financed by debt, which increases the creditor's interest in the business. Therefore, as the ratio approaches 1:1, the creditors' interest in the business approaches that of the owners.

Question 17

Small businesses with high leverage ratios are more vulnerable to economic downturns,but they have greater potential for large profits.

Accepted Answer

This is because high leverage ratios typically indicate that a company has a large amount of debt relative to its assets or equity. This means that in times of economic hardship, the company may struggle to meet its debt obligations and may be at risk of defaulting. However, if the company is successful, its profits can be amplified by the use of leverage, resulting in potentially higher returns for its owners or investors.

Question 18

Leverage ratios measure the financing supplied by the firm's owner against that supplied by his creditors.

Accepted Answer

The answer of Leverage ratios measure the financing supplied by...

Question 19

Taking on debt destroys a business; therefore,small business owners should avoid it at all costs.

Accepted Answer

While taking on excessive debt can be harmful to a business, sometimes borrowing money is necessary for a small business to grow and succeed. Strategic borrowing can help a business invest in new opportunities, purchase inventory or equipment, or hire additional staff. It's important for small business owners to assess their financial situation carefully and borrow only what they can realistically pay back.

Question 20

Concerning how much cash to have at startup,one rule of thumb is to have enough to cover operating expenses (less depreciation)for two inventory turnover periods.

Accepted Answer

The answer of Concerning how much cash to have at...

Quiz 11: Creating a Successful Financial Plan