Tag: ratio analysis

Questions Related to ratio analysis

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

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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

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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.

Stock Turnover ratio is a                    .

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

  1. Liquidity ratio

  2. Profitability ratio

  3. Solvency ratio

  4. Activity ratio

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Correct Option: D
Explanation:
Stock (Inventory) Turnover ratio is a activity ratio as it shows how much times the stock is being used or sold with respect to the turnover or cost of goods sold.
Let Cost of goods sold = $Rs. 100000$ , Opening inventory = $Rs. 55000$ and Closing Inventory = $Rs. 45000$
Stock turnover ratio = Cost of goods sold/ Average Inventory
Average Inventory = [Opening Inventory + Closing Inventory] /$2$
                                 =[ $55000 + 45000$]/$2$
                                  =$Rs. 50000$
Stock turnover ratio = $100000/ 50000$
                                   = $2$ times                       

Sale of inventory on account will cause the inventory turnover ratio to                    .

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

  1. increase

  2. decrease

  3. remain unchanged

  4. none of these

Show answer
Correct Option: A
Explanation:

Inventory turnover ratio = Cost of goods sold(COGS) / Average inventory

Let Cost of goods sold be $Rs. 80000$ , Opening inventory = $Rs. 20000$ and Closing Inventory = $Rs.30000$
Average Inventory = [Opening Inventory + Closing Inventory] / 2
                                = $[20000 + 30000] / 2 $
                                 $Rs. 25000$
Inventory turnover ratio = $80000/ 25000$
                                         = $3.2 $ times
If inventory of $Rs. 10000$ is sold on credit then COGS = $Rs. 90000$ and the Closing Inventory = $Rs. 20000$
Revised Average Inventory = $[20000 +20000] /2$
                                               = $Rs. 20000$

Revised Inventory turnover ratio = 90000/2000080000/25000
                                         = 4.53.2 times

So sale of Inventory on account will cause the inventory turnover ratio to Increase.

The turnover ratio helps management for                        .

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

  1. Managing resources

  2. Managing debt

  3. Evaluating performance

  4. None of these

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Correct Option: C
Explanation:

Turnover ratios are used by management to evaluate the efficiency with which the firm manages and utilizes its assets. For example Fixed asset turnover ratio measures how efficiently the assets are used to generate sales.

Falling demand for the product in the market indicated by ________________.

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

  1. Finished goods turnover ratio

  2. Work in progress turnover ratio

  3. Net profit ratio

  4. Gross profit ratio

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Correct Option: A

Capacity ratio  X  Efficiency ratio =                             .

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

  1. Activity Ratio

  2. Capacity Ratio

  3. Efficiency Ratio

  4. None of these

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Correct Option: A
Explanation:

Capacity ratio X Efficiency ratio = Activity ratio

If Capacity ratio = $90\%$ , Efficiency ratio = $85\%$ , then
Activity ratio = $90/100$ x $85/100$
                      = $76.5\%$