Financial Statement Analysis: Liquidity and Credit Analysis
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Questions and Answers

What is the conventional period for short-term as per the text?

  • Up to 2 years
  • Up to 1 year (correct)
  • Up to 18 months
  • Up to 6 months

    • Which of the following best defines liquidity?

  • Generating long-term profits from investments
  • The profitability of an organization
  • The excess of current assets over current liabilities
  • The ability to convert assets into cash or obtain cash to meet short-term obligations (correct)

    • What does lack of liquidity limit, as per the text?

  • Coverage of current obligations and loss of capital investment (correct)
  • Management actions and loss of owner control
  • Severe illiquidity often precedes profitable opportunities
  • Advantages of discounts and lower profitability

    • According to the text, what are current assets?

    <p>Assets that can be realized in cash within one year or the operating cycle (A)</p> Signup and view all the answers

    What is the definition of current liabilities according to the text?

    <p>Obligations to be satisfied within one year (C)</p> Signup and view all the answers

    What is working capital according to the text?

    <p>The excess of current assets over current liabilities (D)</p> Signup and view all the answers

    What does the current ratio measure?

    <p>Short-term liquidity (A)</p> Signup and view all the answers

    Which adjustments are needed to counter the limitations of the current ratio numerator?

    <p>Reflecting the revolving nature of accounts receivable and adjusting inventory values to market (C)</p> Signup and view all the answers

    What do managerial policies regarding receivables and inventories primarily focus on?

    <p>Efficient and profitable asset utilization (A)</p> Signup and view all the answers

    What does a current ratio above 2:1 indicate?

    <p>Superior coverage of current liabilities (C)</p> Signup and view all the answers

    What is the net trade cycle computed as?

    <p>(Cost of goods sold - Ending inventory) / Purchases per day (A)</p> Signup and view all the answers

    What is a constraint for technical default in many debt agreements?

    <p>Working capital (B)</p> Signup and view all the answers

    Why is the quality of both current assets and current liabilities important in evaluating the current ratio?

    <p>To ensure long-term solvency (D)</p> Signup and view all the answers

    What is the primary focus of managerial policies regarding receivables and inventories?

    <p>'A' is correct (C)</p> Signup and view all the answers

    What do rule of thumb analysis (2:1) suggest about the current ratio?

    <p>'A' and 'B' are correct (C)</p> Signup and view all the answers

    'No direct relation between balances of working capital accounts and likely patterns of future cash flows.' This statement emphasizes the importance of:

    <p>'A' and 'C' (D)</p> Signup and view all the answers

    What does severe illiquidity often precede, as mentioned in the text?

    <p>Restricted opportunities (B)</p> Signup and view all the answers

    What is the impact of a current ratio above 2:1, according to the text?

    <p>Restricted opportunities (D)</p> Signup and view all the answers

    What is the primary focus of managerial policies regarding receivables and inventories, based on the text?

    <p>Coverage of current obligations (A)</p> Signup and view all the answers

    What does rule of thumb analysis (2:1) suggest about the current ratio, according to the text?

    <p>It signifies coverage of current obligations (D)</p> Signup and view all the answers

    Which adjustments are needed to counter the limitations of the current ratio numerator, as per the text?

    <p>Cash and other assets (B)</p> Signup and view all the answers

    What is a constraint for technical default in many debt agreements, according to the text?

    <p>Restricted opportunities (D)</p> Signup and view all the answers

    What is the net trade cycle computed as?

    <p>Ending inventory minus beginning inventory (B)</p> Signup and view all the answers

    Which adjustments are needed to counter the limitations of the current ratio denominator?

    <p>Payables vary with sales (B)</p> Signup and view all the answers

    According to the text, what does a current ratio above 2:1 indicate?

    <p>Superior coverage of current liabilities (A)</p> Signup and view all the answers

    'No direct relation between balances of working capital accounts and likely patterns of future cash flows.' This statement emphasizes the importance of:

    <p>Quality of both current assets and current liabilities (B)</p> Signup and view all the answers

    What does lack of liquidity limit, as per the text?

    <p>Prospective cash outlays (C)</p> Signup and view all the answers

    What do managerial policies regarding receivables and inventories primarily focus on?

    <p>Efficient and profitable asset utilization (A)</p> Signup and view all the answers

    'Working capital requirements vary with industry conditions and the length of a company’s net trade cycle.' Which element is integral to the use of current ratio, according to the text?

    <p>Turnover rate of both current assets and current liabilities (C)</p> Signup and view all the answers

    'Liquidity depends to a large extent on prospective cash flows and to a lesser extent on the level of cash and cash equivalents.' What is an important consideration for the numerator in the current ratio, as per the text?

    <p>Failure to reflect open lines of credit (B)</p> Signup and view all the answers

    'No direct relation between balances of working capital accounts and likely patterns of future cash flows.' This statement emphasizes:

    <p>There is no direct relation between balances of working capital accounts and likely patterns of future cash flows. (C)</p> Signup and view all the answers

    What is a constraint for technical default in many debt agreements?

    <p>Working capital - Excess of current assets over current liabilities (C)</p> Signup and view all the answers

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