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Finance and Securities: Liquidity and Asset Management Ratios

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Finance and Securities: Liquidity and Asset Management Ratios

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Questions and Answers

What is the primary purpose of liquidity ratios in finance?

To measure a company's profitability

To evaluate a company's asset management efficiency

To determine a company's ability to pay its debts (correct)

To analyze a company's leverage and equity structure

What is the optimal current ratio in finance?

2:1 (correct)

3:1

4:1

1:1

What does a high inventory turnover ratio indicate?

Goods are sold slowly and inventory is building up

Weak sales and excess inventory

Goods are sold quickly and inventory is being replenished (correct)

There is a lack of cash flow in the company

What is the debt-to-equity ratio measuring?

A company's leverage and solvency Signup and view all the answers

What is the average collection period measuring?

The amount of time a company takes to collect its accounts receivable Signup and view all the answers

What is the net working capital indicating?

A company's current assets that can be used to pay short-term liabilities Signup and view all the answers

What is the primary purpose of establishing credit standards in a business?

To evaluate the creditworthiness of customers Signup and view all the answers

What is the major difference between debt and equity financing?

Debt financing requires repayment, while equity financing does not Signup and view all the answers

What is the purpose of a line of credit agreement?

To establish a formal legal agreement with a bank for borrowing and repaying money Signup and view all the answers

What is the formula used to calculate the Net Present Value (NPV) of an investment?

NPV = Cash flow / (1 + i)^t Signup and view all the answers

What is the primary purpose of factoring in a business?

To sell accounts receivable to another company at a discounted rate Signup and view all the answers

What is the term for the cumulative net earnings of a company after a certain period?

Retained earnings Signup and view all the answers