Financial Statement Analysis: Liquidity and Credit Analysis

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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?

Assets that can be realized in cash within one year or the operating cycle Signup and view all the answers

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

Obligations to be satisfied within one year Signup and view all the answers

What is working capital according to the text?

The excess of current assets over current liabilities Signup and view all the answers

What does the current ratio measure?

Short-term liquidity Signup and view all the answers

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 Signup and view all the answers

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

Efficient and profitable asset utilization Signup and view all the answers

What does a current ratio above 2:1 indicate?

Superior coverage of current liabilities Signup and view all the answers

What is the net trade cycle computed as?

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

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

Working capital Signup and view all the answers

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

To ensure long-term solvency Signup and view all the answers

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

'A' is correct Signup and view all the answers

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

'A' and 'B' are correct 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:

'A' and 'C' Signup and view all the answers

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

Restricted opportunities Signup and view all the answers

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

Restricted opportunities Signup and view all the answers

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

Coverage of current obligations Signup and view all the answers

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

It signifies coverage of current obligations Signup and view all the answers

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

Cash and other assets Signup and view all the answers

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

Restricted opportunities Signup and view all the answers

What is the net trade cycle computed as?

Ending inventory minus beginning inventory Signup and view all the answers

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

Payables vary with sales Signup and view all the answers

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

Superior coverage of current liabilities 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:

Quality of both current assets and current liabilities Signup and view all the answers

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

Prospective cash outlays Signup and view all the answers

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

Efficient and profitable asset utilization 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?

Turnover rate of both current assets and current liabilities 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?

Failure to reflect open lines of credit 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:

There is no direct relation between balances of working capital accounts and likely patterns of future cash flows. Signup and view all the answers

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

Working capital - Excess of current assets over current liabilities Signup and view all the answers

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?

Which of the following best defines liquidity?

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

According to the text, what are current assets?

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

What is working capital according to the text?

What does the current ratio measure?

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

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

What does a current ratio above 2:1 indicate?

What is the net trade cycle computed as?

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

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

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

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

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

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

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

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

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

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

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

What is the net trade cycle computed as?

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

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

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

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

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

'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?

'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?

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

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

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