Calculating Current Ratio for Liquidity Analysis
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Questions and Answers

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)?

    <p>The quick ratio excludes inventory from current assets, while the current ratio includes it</p> Signup and view all the answers

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

    <p>The quick ratio may exclude bank overdrafts from current liabilities</p> Signup and view all the answers

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

    <p>Between 1.2 and 2.0</p> Signup and view all the answers

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

    <p>Degree of protection for suppliers/providers of long-term funds</p> Signup and view all the answers

    How does a large proportion of debt in a company's capital structure affect its risk?

    <p>Increases the risk of not meeting principal or interest obligations</p> Signup and view all the answers

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

    <p>The company is efficiently using debt financing for growth</p> Signup and view all the answers

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

    <p>Short Term Debt plus Long Term Debt</p> Signup and view all the answers

    What does a low Debt to Equity ratio indicate about a company's financing strategy?

    <p>The company is risk averse and not taking advantage of debt financing</p> Signup and view all the answers

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

    <p>Increases risk as it may struggle with debt obligations</p> Signup and view all the answers

    What is the purpose of the debt ratio?

    <p>To indicate the percentage of assets financed by debt</p> Signup and view all the answers

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

    <p>The company has more debt than assets</p> Signup and view all the answers

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

    <p>To indicate the percentage of assets financed by long-term debt</p> Signup and view all the answers

    What does a higher equity ratio signify?

    <p>Lower financial risk for the company</p> Signup and view all the answers

    What is the purpose of the equity ratio?

    <p>To determine the residual claim of shareholders on the business</p> Signup and view all the answers

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

    <p>Net worth ratio</p> Signup and view all the answers

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