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Profitability Ratios in Accounting

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Questions and Answers

What is the primary objective of management in relation to inventories?

To maximize investment in inventories

To maintain an optimal level of inventories

To minimize investment in inventories (correct)

To eliminate inventories completely

What is the purpose of liquidity ratios in financial analysis?

To measure a company's capacity to meet current obligations (correct)

To evaluate a company's long-term solvency

To assess a company's profitability

To evaluate a company's asset utilization

What is excluded from current assets in calculating the Quick Ratio?

Prepaid expenses

Accounts receivable

Cash and cash equivalents

Inventories (correct)

What does the Inventory Turnover ratio measure?

A company's asset utilization Signup and view all the answers

What is the primary concern in long-term financing mix?

The mix of debt and equity financing Signup and view all the answers

What is the purpose of Leverage Ratios in financial analysis?

To measure a company's dependence on outside creditors Signup and view all the answers

What does the Gross Profit Margin ratio reflect?

The company's ability to cover its manufactured or purchased cost of merchandise Signup and view all the answers

Which ratio indicates the company's ability to generate returns on its average investment?

Return on Equity Signup and view all the answers

What does the Total Asset Turnover ratio measure?

The aggregate, company-wide efficiency in asset utilization Signup and view all the answers

What is the formula for calculating Net Profit Margin?

Net income / sales Signup and view all the answers

What does the Accounts Receivable Turnover ratio measure?

The relationship between credit sales and average accounts receivable balance Signup and view all the answers

What is the formula for calculating Inventory Turnover?

Cost of goods sold / average inventory Signup and view all the answers

What is the primary objective of financial ratio analysis?

To analyze the company's financial status and performance. Signup and view all the answers

Which financial ratio category evaluates a company's ability to recover its operating expenses?

Profitability ratio Signup and view all the answers

What is the main purpose of evaluating a company's liquidity ratios?

To evaluate a company's ability to pay short-term debts Signup and view all the answers

What is the primary purpose of analyzing a company's asset utilization?

To determine a company's asset utilization efficiency Signup and view all the answers

Which financial ratio category is used to evaluate a company's long-term debt sustainability?

Leverage or long-term solvency ratio Signup and view all the answers

What is the main purpose of conducting financial ratio analysis?

To assess a company's financial performance and status Signup and view all the answers