18 Questions
What is the primary purpose of the current ratio?
To measure a company's ability to meet its short-term obligations using its current assets
Which of the following statements about the current ratio is true?
A very high current ratio is generally considered favorable
What is the primary limitation of the current ratio?
It does not take into account the timing of cash receipts and payments
What is the difference between the current ratio and the quick ratio (acid test ratio)?
The quick ratio excludes inventory from current assets, while the current ratio includes it
Which of the following statements is true regarding the interpretation of the quick ratio?
The quick ratio may exclude bank overdrafts from current liabilities
According to the information provided, what is the generally accepted range for the current ratio?
Between 1.2 and 2.0
What do leverage ratios, debt or gearing ratios, and solvency ratios measure?
Degree of protection for suppliers/providers of long-term funds
How does a large proportion of debt in a company's capital structure affect its risk?
Increases the risk of not meeting principal or interest obligations
What does a high Debt to Equity (D/E) ratio compared to similar companies suggest?
The company is efficiently using debt financing for growth
How is Total Debt calculated in the Debt to Equity ratio?
Short Term Debt plus Long Term Debt
What does a low Debt to Equity ratio indicate about a company's financing strategy?
The company is risk averse and not taking advantage of debt financing
How does a higher Debt to Equity ratio impact a company's risk profile?
Increases risk as it may struggle with debt obligations
What is the purpose of the debt ratio?
To indicate the percentage of assets financed by debt
If a company has a debt ratio of 1 or 100%, what does it signify?
The company has more debt than assets
What is the purpose of the long-term debt to asset ratio?
To indicate the percentage of assets financed by long-term debt
What does a higher equity ratio signify?
Lower financial risk for the company
What is the purpose of the equity ratio?
To determine the residual claim of shareholders on the business
Which of the following is another name for the equity ratio?
Net worth ratio
Learn how to calculate and interpret the current ratio, an important liquidity ratio that measures an enterprise's ability to meet short-term obligations using its short-term assets. Understand the significance of having a ratio greater than 1 for ensuring financial stability and growth.
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