32 Questions
What is the conventional period for short-term as per the text?
Up to 1 year
Which of the following best defines liquidity?
The ability to convert assets into cash or obtain cash to meet short-term obligations
What does lack of liquidity limit, as per the text?
Coverage of current obligations and loss of capital investment
According to the text, what are current assets?
Assets that can be realized in cash within one year or the operating cycle
What is the definition of current liabilities according to the text?
Obligations to be satisfied within one year
What is working capital according to the text?
The excess of current assets over current liabilities
What does the current ratio measure?
Short-term liquidity
Which adjustments are needed to counter the limitations of the current ratio numerator?
Reflecting the revolving nature of accounts receivable and adjusting inventory values to market
What do managerial policies regarding receivables and inventories primarily focus on?
Efficient and profitable asset utilization
What does a current ratio above 2:1 indicate?
Superior coverage of current liabilities
What is the net trade cycle computed as?
(Cost of goods sold - Ending inventory) / Purchases per day
What is a constraint for technical default in many debt agreements?
Working capital
Why is the quality of both current assets and current liabilities important in evaluating the current ratio?
To ensure long-term solvency
What is the primary focus of managerial policies regarding receivables and inventories?
'A' is correct
What do rule of thumb analysis (2:1) suggest about the current ratio?
'A' and 'B' are correct
'No direct relation between balances of working capital accounts and likely patterns of future cash flows.' This statement emphasizes the importance of:
'A' and 'C'
What does severe illiquidity often precede, as mentioned in the text?
Restricted opportunities
What is the impact of a current ratio above 2:1, according to the text?
Restricted opportunities
What is the primary focus of managerial policies regarding receivables and inventories, based on the text?
Coverage of current obligations
What does rule of thumb analysis (2:1) suggest about the current ratio, according to the text?
It signifies coverage of current obligations
Which adjustments are needed to counter the limitations of the current ratio numerator, as per the text?
Cash and other assets
What is a constraint for technical default in many debt agreements, according to the text?
Restricted opportunities
What is the net trade cycle computed as?
Ending inventory minus beginning inventory
Which adjustments are needed to counter the limitations of the current ratio denominator?
Payables vary with sales
According to the text, what does a current ratio above 2:1 indicate?
Superior coverage of current liabilities
'No direct relation between balances of working capital accounts and likely patterns of future cash flows.' This statement emphasizes the importance of:
Quality of both current assets and current liabilities
What does lack of liquidity limit, as per the text?
Prospective cash outlays
What do managerial policies regarding receivables and inventories primarily focus on?
Efficient and profitable asset utilization
'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?
Turnover rate of both current assets and current liabilities
'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?
Failure to reflect open lines of credit
'No direct relation between balances of working capital accounts and likely patterns of future cash flows.' This statement emphasizes:
There is no direct relation between balances of working capital accounts and likely patterns of future cash flows.
What is a constraint for technical default in many debt agreements?
Working capital - Excess of current assets over current liabilities
Test your knowledge of liquidity, working capital, and credit analysis concepts in financial statement analysis with this quiz based on K.R. Subramanyam's book. Explore the ability to convert assets into cash, short-term obligations, and more.
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