Question 1

Leverage differs from profitability in that leverage measures

Accepted Answer

Leverage refers to the use of debt in a company's capital structure, whereas profitability measures the ability to earn revenues greater than costs.

Question 2

Rachel, the CEO of Telexon Inc., finds that her company's current ratio is 1:3. In this context, which of the following statements is true?

Accepted Answer

The current ratio of 1:3 indicates that the company has lesser liquid assets than liabilities. A current ratio of less than 1:1 would mean that the company has more liabilities than liquid assets, and a current ratio of 2:1 or higher is considered good. Therefore, the company may need to improve its liquidity position by generating more cash or reducing its short-term debt. The other options are not necessarily true based on the given information.

Question 3

Which of the following is the formula to measure debt ratio?

Accepted Answer

The debt ratio measures the proportion of a company’s total liabilities to its total assets. The formula for calculating debt ratio is Total Debts ÷ Total Assets. Therefore, option D is the correct choice for the formula to measure debt ratio.

Question 4

Calculate assets turnover for a car manufacturing company from the following information: Sales = $600,000
Land and building = $110,000
Cash at bank = $50,000
Inventories = $40,000.

Accepted Answer

The answer of Calculate assets turnover for a car manufacturing...

Question 5

Which of the following is the formula for measuring asset turnover?

Accepted Answer

Asset turnover is a measure of a company's efficiency in using its assets to generate revenue or sales. The formula for measuring asset turnover is total sales divided by total assets. Option C is the correct formula to measure asset turnover. Option A is the formula for calculating the current ratio, option B is the formula for calculating the quick ratio, option D is the formula for calculating return on assets (ROA), and option E is the formula for calculating the debt ratio.

Question 6

In the context of financial controls, which of the following best describes leverage?

Accepted Answer

Leverage refers to the use of debt financing or borrowed funds to increase potential returns on investment. It is the ability to earn more in returns than the cost of debt.

Question 7

Karzon Ltd., a car manufacturing company, calculated its debt ratio to be 2:5. Calculate the total debt for Karzon Ltd., from the following information: 
Cash in hand = $120,000
Cash at bank = $180,000
Bills receivable = $200,000
Bills payable = $180,000
Land and building = $250,000
Inventories = $50,000
Machinery = $100,000.

Accepted Answer

The answer of Karzon Ltd., a car manufacturing company, calculated...

Question 8

Which of the following ratios is also known as acid test?

Accepted Answer

The quick ratio is also known as acid test because it measures a company's ability to use its most liquid assets (such as cash and accounts receivable) to pay off its current liabilities immediately, without relying on the sale of inventory. This ratio provides a more conservative view of a company's financial health compared to the current ratio, which includes inventory in its calculation.

Question 9

Calculate the current ratio from the following information: 
Sales = $14,000
Bills receivable = $100,000
Cash in hand = $40,000
Current liabilities = $50,000
Inventories = $40,000
Net Income = $5,600.

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. Adding up the current assets, we have bills receivable + cash in hand + inventories = $100,000 + $40,000 + $40,000 = $180,000. Therefore, the current ratio is  $180,000/$50,000 = 3.6:1. Option B is the only choice that matches this calculation.

Question 10

In the context of financial controls, asset management refers to the ability to ___.

Accepted Answer

Asset management involves efficiently using resources (assets) to minimize costs and maximize returns. This includes effectively allocating resources, maintaining and protecting assets, and making strategic decisions about asset acquisition and disposal. It does not necessarily relate to revenue generation or meeting short-term obligations.

Question 11

___ = Current Assets ÷ Current Liabilities.

Accepted Answer

The formula given represents the Current Ratio, which measures the ability of a company to pay off its short-term liabilities using its current assets. A Current Ratio of 1 or higher is generally considered good, indicating that the company has enough current assets to cover its current liabilities. Therefore, option B is the correct choice. Option A (Acid Test) is another liquidity ratio similar to the Current Ratio but excludes inventory from current assets, providing a more stringent measure of a company's ability to pay off its short-term liabilities. Option C (Debt Ratio) is a solvency ratio that measures the proportion of a company's assets financed by debt, while Option D (Asset Turnover Ratio) is an efficiency ratio that measures how effectively a company is using its assets to generate revenue. Option E (Net Current Margin) is not a commonly used financial ratio.

Question 12

Calculate average inventory if sales is $400,000 and the inventory turnover is 1.6.

Accepted Answer

The answer of Calculate average inventory if sales is $400,000...

Question 13

Calculate the debt ratio from the following information: 
Land and building = $500,000
Machinery = $300,000
Cash in hand = $400,000
Total debts = $300,000.

Accepted Answer

Debt Ratio = Total Debts / Total Assets

Total Assets = Land and building + Machinery + Cash in hand
Total Assets = $500,000 + $300,000 + $400,000
Total Assets = $1,200,000

Debt Ratio = $300,000 / $1,200,000
Debt Ratio = 0.25 or 1:4

Therefore, the best choice is B, which represents the correct debt ratio of 1:4.

Question 14

Inventory turnover = ___.

Accepted Answer

Inventory turnover is calculated by dividing sales by average inventory. This ratio shows how many times a company sells and replaces its inventory over a specific period of time. A high inventory turnover indicates efficient inventory management and a strong demand for the company's products.

Question 15

Dilma, a finance manager at FinTel Inc., needs to understand the current financial position of the company in terms of meeting its short-term financial obligations. Dilma must calculate the ___ to accomplish this task.

Accepted Answer

The acid test ratio (also known as the quick ratio) measures a company's ability to meet its short-term financial obligations using only its most liquid assets (cash, marketable securities, and accounts receivable). This ratio is useful for managers like Dilma who need to quickly assess the company's ability to pay its bills in the near future. The debt ratio (A) measures the proportion of a company's assets that are financed by debt, the asset turnover (B) measures a company's efficiency in generating sales from its assets, the return on assets (C) measures a company's profitability relative to its total assets, and the inventory turnover (D) measures a company's efficiency in selling and replacing its inventory. These ratios are important for understanding different aspects of a company's financial position, but they are not specifically focused on short-term financial obligations.

Question 16

Acid Test = ___.

Accepted Answer

The acid test (also known as quick ratio) is a liquidity ratio that measures a company's ability to pay off its current liabilities with quick assets such as cash, marketable securities, and accounts receivable (excluding inventories). The formula for acid test is (Current Assets - Inventories) ÷ Current Liabilities. Therefore, the correct choice is E.

Question 17

With reference to profitability, Net margin = ___.

Accepted Answer

Net margin is calculated by dividing the net income (profit) by the sales revenue. It shows the percentage of each sales dollar that is left as profit after all expenses have been paid. Therefore, the correct formula for net margin is Net Income ÷ Sales.

Question 18

Liquidity differs from leverage in that liquidity is the

Accepted Answer

Liquidity refers to the ability of a company to generate cash to pay its bills and meet its financial obligations. Leverage, on the other hand, refers to the amount of debt a company uses to finance its operations. While both concepts are important in financial management, they are different in nature.

Question 19

The CFO of a company wanted to analyze the financial strength of his company. He specifically asked for information on the company's assets and liabilities. Which of the following would provide the necessary information?

Accepted Answer

The balance sheet shows the assets and liabilities of a company and would provide the necessary information for analyzing financial strength. The income statement shows revenue and expenses, not assets and liabilities. The balanced scorecard is a tool for measuring performance, not financial strength. Gantt charts are used for project management and breakeven analysis is used to determine the point at which a company's revenue will cover its expenses, neither of which provide information on assets and liabilities.

Question 20

Calculate the quick ratio from the following information of a manufacturing firm: Cash in hand = $200,000
Cash at bank = $100,000
Inventories = $100,000.
Current Liabilities = $100,000.

Accepted Answer

Quick ratio = (Cash in hand + Cash at bank + Marketable Securities)/Current Liabilities
Here, there are no Marketable Securities given, so we will use only the cash and ignore inventories which are not easily converted to cash. 
Quick ratio = (200,000 + 100,000)/100,000 = 3
Therefore, the quick ratio is 3:1. The closest choice is A) 2:1.

Quiz 9: Control Processes and Systems