Unit 5: Ratio Analysis - Practice Quiz

1 What does ratio analysis primarily examine?

2 Which is a common use of ratio analysis?

3 Which is an advantage of ratio analysis?

4 Which factor limits comparisons made through ratio analysis?

5 Liquidity ratios measure a firm's ability to meet which obligations?

6 Which formula represents the current ratio?

7 Which item is normally excluded from quick assets when calculating the quick ratio?

8 What do activity ratios mainly measure?

9 Which ratio indicates how quickly inventory is sold?

10 Which formula is commonly used for the receivables turnover ratio?

11 A higher inventory turnover ratio generally indicates that inventory is sold:

12 What do profitability ratios primarily measure?

13 Which formula represents the gross profit ratio?

14 Return on capital employed compares operating profit with:

15 Solvency ratios mainly evaluate a firm's ability to meet:

16 Which formula represents the debt-equity ratio?

17 The interest coverage ratio shows how easily a firm can pay:

18 Market test ratios are mainly useful to which group?

19 Which formula represents earnings per share?

20 The price-earnings ratio compares market price per share with:

21 Two companies report the same net profit margin, but Company P has a substantially higher return on assets. Which conclusion is most reasonable?

22 A company compares its current year's ratios with those of the previous five years. What is the primary use of this comparison?

23 Company A values inventory using FIFO, while Company B uses weighted average. Why should their inventory-related ratios be compared cautiously?

24 A firm's profitability ratios improved during a period of substantial inflation, although its physical sales volume remained unchanged. Which limitation of ratio analysis is most relevant?

25 A company has current assets of $480,000, including inventory of $150,000 and prepaid expenses of $30,000. Current liabilities are $200,000. What is its quick ratio?

26 A company has current assets of $500,000 and current liabilities of $200,000. It uses $50,000 cash to pay a trade payable. What will be its new current ratio?

27 A firm has working capital of $180,000 and a current ratio of $2.20:1$. What is the amount of current liabilities?

28 A company reports cost of goods sold of $900,000 and average inventory of $150,000. Using 365 days, approximately how many days does inventory remain on hand?

29 Annual credit sales are $1,200,000 and average trade receivables are $150,000. Using 365 days, what is the approximate average collection period?

30 A firm initially has sales of $1,500,000 and average total assets of $750,000. It invests an additional $250,000 in assets, and sales rise by $300,000. How does total asset turnover change?

31 A company has net sales of $800,000 and cost of goods sold of $520,000. What is its gross profit ratio?

32 A business earns gross profit of $400,000 on net sales of $1,000,000 and incurs operating expenses of $220,000. What is its operating profit ratio?

33 A company reports EBIT of $240,000. Capital employed was $1,400,000 at the beginning of the year and $1,600,000 at the end. What is the return on average capital employed?

34 A company has total debt of $900,000 and shareholders' equity of $600,000. What is its debt-to-equity ratio?

35 A company has EBIT of $360,000 and annual interest expense of $90,000. If interest expense increases by $30,000 while EBIT remains unchanged, what will be the new interest coverage ratio?

36 A firm has shareholders' funds of $1,000,000 and total assets of $2,500,000. What is its proprietary ratio?

37 A company earns profit after tax of $540,000, pays preference dividends of $40,000, and has 250,000 equity shares outstanding. What is its earnings per share?

38 A company's equity share trades at $48 and its earnings per share are $6. What is its price-earnings ratio?

39 A company pays a dividend of $3 per equity share, and its market price is $60 per share. What is the dividend yield?

40 A company reports earnings available to equity shareholders of $450,000 and pays equity dividends of $180,000. What is its dividend payout ratio?

41 A company reports a substantial improvement in its current ratio over three years. During the same period, inflation has increased inventory replacement costs, while the company has changed from weighted-average inventory valuation to FIFO. Which conclusion is most defensible?

42 Two firms have identical gross profit ratios, current ratios, and debt-equity ratios. However, one firm uses aggressive revenue recognition and capitalizes development costs, whereas the other expenses comparable costs immediately. What is the principal analytical risk?

43 A business has a lower profit margin than its industry but a higher return on capital employed. Which explanation best reconciles these results?

44 A firm's current assets are $480,000, including inventory of $180,000 and prepaid expenses of $20,000. Current liabilities are $240,000. What is the most appropriate quick ratio, excluding inventory and prepayments?

45 A company has a current ratio of and current liabilities of $500,000. It uses $100,000 cash to pay a current liability. What will the new current ratio be?

46 A company has current assets of $900,000 and current liabilities of $300,000. It purchases inventory on credit for $150,000. Assuming no other change, what are the revised current ratio and quick ratio if quick assets initially equal $600,000?

47 A firm reports a current ratio of and a quick ratio of . Which interpretation is most appropriate, assuming the ratios are calculated consistently?

48 A firm's cost of goods sold is $2,400,000. Inventory was $300,000 at the beginning of the year and $500,000 at the end. Using average inventory, what is the inventory turnover ratio?

49 Credit sales are $3,600,000. Trade receivables were $240,000 at the beginning and $360,000 at the end of the year. Using a 360-day year, what is the average collection period?

50 A company has annual credit purchases of $2,700,000, opening trade payables of $420,000, and closing trade payables of $480,000. Using a 360-day year, what is the approximate average payment period?

51 A business has an inventory holding period of 75 days, a receivables collection period of 42 days, and a payables payment period of 50 days. Based on a 360-day year, what is its cash conversion cycle?

52 A company reports operating profit of $360,000. Capital employed was $1,800,000 at the beginning and $2,200,000 at the end of the year. What is ROCE using average capital employed?

53 A company has sales of $1,250,000 and a gross profit of $300,000. Operating expenses are $180,000. If sales increase by 20% while the gross margin remains unchanged and operating expenses increase by 10%, what will be the new operating profit margin?

54 A firm has a net profit margin of 8% and total asset turnover of 2.5 times. If financial leverage does not affect the selected measure, what is its return on assets?

55 A company has total assets of $5,000,000, including goodwill of $400,000. Total liabilities are $3,000,000, including preference share capital of $600,000. For a debt-to-equity analysis based on tangible ordinary equity, what is the ratio?

56 A company has EBIT of $600,000 and interest expense of $120,000. It issues additional debt that increases annual interest expense by $80,000, while EBIT remains unchanged. What is the revised interest coverage ratio?

57 A company has debt-equity ratios of and in two successive years. Its return on equity rises from 14% to 18% during the same period, while operating profitability is unchanged. Which inference is most reasonable?

58 A company has 200,000 ordinary shares, net profit attributable to ordinary shareholders of $1,000,000, and a market price of $30 per share. What are its EPS and price-earnings ratio?

59 A share trades at $48. The company declares an annual dividend of $2.40 per share, of which $1.20 is paid as an interim dividend. What is the dividend yield based on the declared annual dividend?

60 A company reports EPS of $8 and pays dividends of $2 per share. Its share price is $64. Which pair correctly states the dividend payout ratio and earnings yield?