EZ 4 ratios

Q3
 
1. In the absence of industry benchmarks what is the assumed ideal quick
ratio for a business?
1:1
2:1
It does not matter so long as the business has sufficient
cash in the bank
It cannot be determined

The correct answer was A.

The ideal acid test ratio/quick ratio is 1:1 as given in textbooks.  

(1)   2. What is the ideal quick ratio for a business?
 
1:1
2:1
It does not matter so long as the business has sufficient
cash in the bank
It depends on the industry average

The correct answer was D.

The best comparator is the industry average.  
(1)   3. The following extract information is taken from a company's
 
statement of financial position. The company has £1.25 million in
debentures, equity shares of £0.75 million, preference shares of £0.25
million, general reserves of £1.1 million and a share premium of £0.1
million. Using these book values calculate the gearing percentage for
the company (Gearing is calculated as debt to total capital employed).
147%
77%
43%
39%

The correct answer was C. Gearing = Debt/ (debt plus equity).

Gearing = (1.25+0.25)/ (1.25+0.25+0.75+1.1+0.1) x 100 = 43%
(0)   4. Working capital is:
 
Non-current assets plus net current assets
 Total assets less total liabilities

→ Current assets less current liabilties

Liquid current assets less current liabilties

The correct answer was C.

(0)   5. The inventory turnover period is eight times when:
 
Net purchases are £120,000 and closing inventory is
£15,000.
Sales are £160,000 and average inventory at selling
price is £20,000.
Purchases are £320,000 and average inventory at cost
is £40,000.
→ Cost of goods sold is £240,000 and average inventory
at cost is £30,000.

Inventory turnover is average inventory cost/cost of goods sold. 

(0)   6. If the cost of goods sold was £8,000 for goods which eventually sold
 
for £20,000, what is the gross profit ratio?
40%

→ 60%
150%
250%
(0)   7. If a company has long-term borrowings of £12,000 and equity of
 
£138,000, what is its gearing ratio?
8.7%
11.5%

→ 8%

9.5%
(1)   8. The statement of financial position of Rosie Ltd. includes the
 
following entries: inventory £25,000, trade receivables £12,000, cash
£11,000 and current liabilities £25,000 (made up of trade payables
£16,000, short-term borrowing £800 and £8,200 current tax payable).
Calculate the current ratio.
0.9: 1
1:1
0.4:1
 1.9:1

(£25,000 + £12,000 + £11,000) / £25,000 = £48,000 / £25,000 = 1.92 

(1)   9. The statement of financial position of Rosie Ltd. includes the
 
following entries: inventory £25,000, trade receivables £12,000, cash
£11,000 and current liabilities £25,000 (made up of trade payables
£16,000, short-term borrowing £800 and £8,200 current tax payable).
Calculate the liquidity ratio.
0.9: 1
1:1
0.4:1
1.9:1

(£12,000 + £11,000) / £25,000 = £23,000 / £25,000 = 0.92 

(1)   10. A company has capital employed of £5,000,000.  It achieves a net
 
profit margin of 4% and a Return on Capital Employed of 12%.  What
is the asset turnover ratio for the company?  (Use Turnover/Capital
employed as definition of asset turnover.)
3.0 times
2.05 times
2.5 times
4.0 times

Net Profit = 12% x £5,000,000 = £600,000. Sales = £600,000 / 4%=

£15,000,000. Asset Turnover = £16,000,000 / £5,000,000 = 3.0