Ratio Analysis and Financial Performance Quiz
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Questions and Answers

Which of the following ratios measures a company's ability to sustain its operations indefinitely by comparing debt levels with equity, assets, and earnings?

  • Profit Margin Ratio
  • Current Ratio
  • Debt-to-Equity Ratio (correct)
  • Times Interest Earned Ratio
  • Which of the following ratios focuses on a company's return on investment in inventory and other assets?

  • Return on Assets (ROA) (correct)
  • Activity Ratio
  • Quick Ratio
  • Gross Margin Ratio
  • Which of the following ratios refers to a company's ability to be efficient in its operations, specifically the speed with which various current accounts are converted into sales and cash?

  • Equity Ratio
  • Working Capital Ratio
  • Activity or Efficiency Ratio (correct)
  • Times Interest Earned Ratio
  • What is the main purpose of profitability ratios?

    <p>To show a company's ability to generate profits from its operations</p> Signup and view all the answers

    Which of the following ratios is considered a measure of a company's liquidity and ability to pay its short-term obligations?

    <p>Quick Ratio</p> Signup and view all the answers

    Which of the following ratios measures a company's ability to cover its interest payments from its operating profits?

    <p>Times Interest Earned Ratio</p> Signup and view all the answers

    What is the formula for calculating the current ratio?

    <p>Current Assets / Current Liabilities</p> Signup and view all the answers

    In the given scenario, what is the Quick Ratio?

    <p>(Cash + Accounts Receivable) / Current Liabilities</p> Signup and view all the answers

    If the Total Receivables are $23,500, what is the value of 'X' in the equation Total Receivables = 1.7 = (20,000 + 7,500 + X) ÷ 30,000?

    <p>$5,000</p> Signup and view all the answers

    What is the type of ratio represented by Income before interest and taxes (EBIT) ÷ Interest Expense?

    <p>Times Interest Earned Ratio (Interest Coverage Ratio)</p> Signup and view all the answers

    What does the Quick Ratio indicate about a company?

    <p>Ability to meet short-term obligations with liquid assets</p> Signup and view all the answers

    In terms of financial ratios, what does a current ratio of 3.11 suggest?

    <p>The company has high liquidity and can easily meet its short-term obligations</p> Signup and view all the answers

    Which of the following ratios measures the efficiency of a company's management in utilizing its assets?

    <p>Activity ratios</p> Signup and view all the answers

    What is the primary objective of profitability ratios?

    <p>To determine a company's overall financial performance and return on investment</p> Signup and view all the answers

    Which of the following is NOT a commonly used leverage ratio?

    <p>Inventory turnover ratio</p> Signup and view all the answers

    What is the primary purpose of liquidity ratios?

    <p>To assess a company's ability to meet its short-term obligations</p> Signup and view all the answers

    Which of the following ratios is used to measure a company's ability to generate sales from its assets?

    <p>Total asset turnover ratio</p> Signup and view all the answers

    What is the primary purpose of investment leverage ratios?

    <p>To evaluate a company's capital structure and leverage</p> Signup and view all the answers

    Study Notes

    Financial Ratio Analysis

    • Financial ratio analysis helps to:
      • Evaluate a company's ability to sustain operations
      • Identify going concern issues and a firm's ability to pay its bills in the long term
      • Compare a company's performance with others
      • Determine the degree of efficiency of management and utilization of assets
      • Assess overall profitability and return on investment

    Categories of Financial Ratios

      1. Liquidity Ratios:
      • Analyze a company's ability to pay off current and long-term liabilities
      • Evaluate cash levels and ability to turn assets into cash
      1. Leverage Ratios (Capital Structure or Solvency Ratios):
      • Debt-to-Equity Ratio: compares debt levels with equity
      • Debt Ratio: compares debt levels with assets and earnings
      1. Profitability Ratios:
      • Gross Margin Ratio
      • Profit Margin Ratio (Return on Sales)
      • Return on Assets (ROA)
      • Return on Capital Employed
      • Return on Equity
      • Return on Investment
      1. Activity or Efficiency Ratios:
      • Measure a company's ability to be efficient in its operations
      • Evaluate the speed with which current accounts are converted into sales and cash

    Ratio Calculations

    • Current Ratio: Current Assets ÷ Current Liabilities
    • Quick Ratio (Acid Test Ratio): Quick Assets ÷ Current Liabilities
    • Times Interest Earned Ratio (Interest Coverage Ratio): Income before interest and taxes (EBIT) ÷ Interest Expense

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    Description

    Test your knowledge on ratio analysis and its implications on operating efficiency and overall profitability of a firm. Understand how different ratios help in assessing management efficiency and profitability.

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