Tag: elements of accounts

Questions Related to elements of accounts

The turnover ratio indicates ________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. the number of times the capital has been rotated in the process of doing business

  2. the efficiency with which the capital employed is rotated in the business

  3. Both (A) and (B)

  4. Financial position of the company

Show answer
Correct Option: C
Explanation:

Turnover ratio is a measurement of the number of times a company's inventory is replaced during a given period of time. It is calculated by dividing cost of goods sold by average inventory during a given period of time. It indicates the number of times the capital has been rotated in the process of doing business as well as the efficiency with which the capital employed is totated in the business.

If the average balance of debtors has increased, which of the following might not show a change in general?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Total Sales

  2. Average Payables

  3. Current Ratio

  4. Bad Debt loss

Show answer
Correct Option: B
Explanation:

Change in average balance of debtors does not have any relation with average payable. 

State the formula for turnover ratio.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $\dfrac {\text {Current assets}}{\text {Current liabilities}}$

  2. $\dfrac {Sales}{\text {Capital employed}}$

  3. $\dfrac {\text {Fixed assets}}{\text {Long-term funds}}$

  4. $\dfrac {\text {Current assets}}{Sales}$

Show answer
Correct Option: B
Explanation:

Turnover ratio is a measurement of the number of times a company's inventory is replaced during a given period of time. It is calculated by dividing cost of goods sold by capital employed during a given period of time. 

When the Debt Turnover Ratio is $4$, what is the average collection period?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $5$ months

  2. $4$ months

  3. $3$ months

  4. $2$ months

Show answer
Correct Option: C
Explanation:

Debt Turnover ratio = Net credit sales/ Average trade receivables = $4$

Average collection period = $12$ months / Debt turnover ratio
                                             = $12$ months / $4$
                                              = $3$ months

If the inventory turnover is high, the working capital requirements will be ___________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. High

  2. Low

  3. Equal

  4. None of the above

Show answer
Correct Option: B
Explanation:

Inventory Turnover = [Cost of goods sold/Sales] / Average inventory.

A high inventory turnover is good from the point of liquidity position and vice versa. If the inventory turnover is high it means that the inventory is being used or sold in a short time, which means that the funds of the company are not being blocked and so the working capital requirements would be low.

The ______ measures the activity of a firm's inventory.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Average payment period

  2. Inventory turnover

  3. Average collection period

  4. Current ratio

Show answer
Correct Option: B
Explanation:

Inventory turnover ratio measures the activity of a firm's inventory i.e. the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.

The _____ ratio may indicate the firm is experiencing stock outs and lost sales. 

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Average payment period

  2. Inventory turnover

  3. Average collection period

  4. Quick

Show answer
Correct Option: A
Explanation:

The average payment period (APP) is defined as the number of days a company takes to pay off credit purchases. It is calculated as accounts payable/ (total annual purchases/360).  As the average payment period increases, cash should increases as well, but working capital remains the same. APP ratio may indicate the firm is experiencing stock outs and lost sales.

ABC co. extends credit term of 45 days to its customers. Its credit collection would be considered poor if its average collection period was ____________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 30 days

  2. 36 days

  3. 47 days

  4. 42 days

Show answer
Correct Option: C
Explanation:

By monitoring average collection policy, the firm can see if its term are generally being met. ABC company's credit collection would be considered poor if collection period is more than 45 days i.e. Customers on average are significantly slower in paying than company policies allow.

Calculate debtor turnover ratio from the following information:
Total sales = Rs. 4,00,000
Cash sales = 20% of total sales
Debtor beginning of the year = Rs. 40,000
Debtors end of the year =  Rs. 1,20,000

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 3 times

  2. 4 times

  3. 6 times

  4. 5 times

Show answer
Correct Option: B
Explanation:

Average debtors = (Rs. 40,000 + Rs. 1,20,000)/2 = Rs. 80,000

Cash sales = 20% of total sales
                   = Rs. 4,00,000 x 20%
                   = Rs. 80,000
Net credit sales = Total sales - Cash sales

                           = Rs. 4,00,000 -  Rs. 80,000

                           = Rs. 3,20,000
Debtors turnover ratio = Net credit sales/Average debtors
                                      = Rs. 3,20,000/Rs. 80,000
                                      = 4 Times

Low assets turnover may indicate                .

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Low assets

  2. High cost of maintenance

  3. Idle assets

  4. Higher sales

  5. Both (B) and (C) above

Show answer
Correct Option: C
Explanation:

Net Asset Turnover ratio = Sales/ Net Asset

Asset turnover highlights the amount of assets that the firm used to produce its total sales. Therefore a low asset turnover would indicate that the firm has idle or improperly use assets.