honeycfa

Which of the following ratios would least likely measure liquidity?

A) Quick ratio.

B) Current ratio.

C) Return on assets (ROA).

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ROA = (EBIT / average total assets) which measures management's ability and efficiency in using the firm's assets to generate operating profits. Other ratios that measure liquidity (if a company can pay its current bills) besides the quick, cash, and current ratios are the: receivables turnover, inventory turnover, and payables turnover ratios.

honeycfa

A company has a receivables turnover of 10, an inventory turnover of 5, and a payables turnover of 12. The company’s cash conversion cycle is closest to:

A) 30 days.

B) 37 days.

C) 79 days.

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Cash conversion cycle = receivables days + inventory processing days – payables payment period.
Receivables days = 365 / receivables turnover = 365 / 10 = 36.5 days.
Inventory processing days = 365 / inventory turnover = 365 / 5 = 73.0 days.
Payables payment period = 365 / payables turnover = 365 / 12 = 30.4 days.
Cash collection cycle = 36.5 + 73.0 – 30.4 = 79.1 days.

honeycfa

An analyst gathered the following data about a company:

• Current liabilities are $300.
• Total debt is $900.
• Working capital is $200.
• Capital expenditures are $250.
• Total assets are $2,000.
• Cash flow from operations is $400.

If the company would like a current ratio of 2, they could:

A) decrease current assets by 100 or increase current liabilities by 50.

B) increase current assets by 100 or increase current liabilities by 50.

C) increase current assets by 100 or decrease current liabilities by 50.

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For the current ratio to equal 2.0, current assets would need to move to $600 (or up by $100) or current liabilities would need to decrease to $250 (or down by $50). Remember that CA ? CL = working capital (500 ? 300 = 200).

honeycfa

Goldstar Manufacturing has an accounts receivable turnover of 10.5 times, an inventory turnover of 4 times, and payables turnover of 8 times. What is Goldstar’s cash conversion cycle?

A) 80.38 days.

B) 6.50 days.

C) 171.64 days.

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The cash conversion cycle = average receivables collection period + average inventory processing period – payables payment period. The average receivables collection period = 365 / average receivables turnover or 365 / 10.5 = 34.76. The average inventory processing period = 365 / inventory turnover or 365 / 4 = 91.25. The payables payment period = 365 / payables turnover ratio = 365 / 8 = 45.63. Putting it all together: cash conversion cycle = 34.76 + 91.25 – 45.63 = 80.38.

honeycfa

Which of the following is least likely a routinely used operating profitability ratio?

A) Net income/net sales.

B) Gross profit/net sales.

C) Sales/Total Assets

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Sales/Total Assets, or Total Asset Turnover is a measure of operating efficiency, not operating profitability.

honeycfa

Are the following ratios best classified as profitability ratios?

Ratio #1 – Cash plus short-term marketable investments plus receivables divided by average daily cash expenditures.

Ratio #2 – Earnings before interest and taxes divided by average total assets.

A) Only one of the ratios is a profitability ratio.

B) Both of the ratios are profitability ratios.

C) Neither of the ratios is a profitability ratio.

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(Cash + short-term marketable investments + receivables) divided by average daily cash expenditures is known as the defensive interval ratio. The defensive interval ratio is a liquidity ratio that measures the firm’s ability to pay cash expenditures in the absence of external cash flows, but does not directly measure profitability. EBIT / average total assets is one variation of the return on assets ratio. Return on assets is a profitability ratio that measures the efficiency of managing assets and generating profits.

honeycfa

An analyst has collected the following data about a firm:

• Receivables turnover = 10 times.
• Inventory turnover = 8 times.
• Payables turnover = 12 times.

What is the average receivables collection period, the average inventory processing period, and the average payables payment period? (assume 360 days in a year)

Receivables Collection Period

Inventory Processing Period

Payables Payment Period

A) 36 days 45 days 30 days

B) 30 days 30 days 60 days

C) 45 days 36 days 30 days

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Receivables collection period = 360 / 10 = 36 days

Inventory processing period = 360 / 8 = 45 days

Payables payment period = 360 / 12 = 30 days

honeycfa

An analyst has collected the following data about a firm:

• Receivables turnover = 20 times. 
• Inventory turnover = 16 times. 
• Payables turnover = 24 times.

What is the cash conversion cycle?

A) 26 days.

B) Not enough information is given.

C) 56 days.

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Cash conversion cycle = receivables collection period + inventory processing period – payables payment period.

Receivables collection period = (365 / 20) = 18
Inventory processing period = (365 / 16) = 23
Payables payment period = (365 / 24) = 15
Cash conversion cycle = 18 + 23 – 15 = 26

honeycfa

Are the quick ratio and the debt-to-capital ratio used primarily to assess a company’s ability to meet short-term obligations?

Quick ratio

Debt-to-capital ratio

A) Yes Yes

B) No Yes

C) Yes No

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The quick ratio is a liquidity ratio. Liquidity ratios are used to measure a firm’s ability to meet its short-term obligations. The debt-to-capital ratio is a solvency ratio. Solvency ratios are used to measure a firm’s ability to meet its longer-term obligations.

honeycfa

An analyst has gathered the following data about a company:

• Average receivables collection period of 95 days.
• Average inventory processing period of 183 days. 
• A payables payment period of 274 days.

What is their cash conversion cycle?

A) -4 days.

B) 4 days.

C) 186 days.

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Cash conversion cycle = average receivables collection period + average inventory processing period – payables payment period

= 95 + 183 – 274 = 4 days