Calculating Current Ratio for Liquidity Analysis

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What is the primary purpose of the current ratio?

To evaluate a company's long-term solvency
To assess the quality of a company's inventory management
To determine the optimal level of cash reserves for a company
To measure a company's ability to meet its short-term obligations using its current assets (correct)

Which of the following statements about the current ratio is true?

The acceptable range for the current ratio is consistent across all industries
The current ratio takes into account the timing of cash receipts and payments
A current ratio below 1 is always an indication of liquidity issues
A very high current ratio is generally considered favorable (correct)

What is the primary limitation of the current ratio?

It does not account for a company's long-term debt obligations
It does not consider the quality of a company's assets
It does not provide information about a company's profitability
It does not take into account the timing of cash receipts and payments (correct)

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 (B) Signup and view all the answers

Which of the following statements is true regarding the interpretation of the quick ratio?

The quick ratio may exclude bank overdrafts from current liabilities (A) Signup and view all the answers

According to the information provided, what is the generally accepted range for the current ratio?

Between 1.2 and 2.0 (D) Signup and view all the answers

What do leverage ratios, debt or gearing ratios, and solvency ratios measure?

Degree of protection for suppliers/providers of long-term funds (C) Signup and view all the answers

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 (A) Signup and view all the answers

What does a high Debt to Equity (D/E) ratio compared to similar companies suggest?

The company is efficiently using debt financing for growth (A) Signup and view all the answers

How is Total Debt calculated in the Debt to Equity ratio?

Short Term Debt plus Long Term Debt (B) Signup and view all the answers

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 (C) Signup and view all the answers

How does a higher Debt to Equity ratio impact a company's risk profile?

Increases risk as it may struggle with debt obligations (B) Signup and view all the answers

What is the purpose of the debt ratio?

To indicate the percentage of assets financed by debt (A) Signup and view all the answers

If a company has a debt ratio of 1 or 100%, what does it signify?

The company has more debt than assets (B) Signup and view all the answers

What is the purpose of the long-term debt to asset ratio?

To indicate the percentage of assets financed by long-term debt (C) Signup and view all the answers

What does a higher equity ratio signify?

Lower financial risk for the company (D) Signup and view all the answers

What is the purpose of the equity ratio?

To determine the residual claim of shareholders on the business (C) Signup and view all the answers

Which of the following is another name for the equity ratio?

Net worth ratio (C) Signup and view all the answers