A firm has a current ratio of 1. to increase that ratio the firm might ________.
Chapter 6: Financial Statement AnalysisJust click on the button next to each answer and you'll get immediate feedback.Note: Your browser must support JavaScript in order to use this quiz. Show 1. Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total assets are $8 million, and ROI is 8 percent.1.60 2.05 2.50 4.00 2. Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net profit margin of 5 percent. What are its sales?$3,750,000 $480,000 $300,000 $1,500,000 3. Which of the following would NOT improve the current ratio?Borrow short term to finance additional fixed assets. Issue long-term debt to buy inventory. Sell common stock to reduce current liabilities. Sell fixed assets to reduce accounts payable. 4. The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened ifcost of goods sold increased relative to sales. sales increased relative to expenses. the U.S. Congress increased the tax rate. dividends were decreased. 5. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the companywill not experience any difficulty with its creditors. has less liquidity than other firms in the industry. will be viewed as having high creditworthiness. has greater than average financial risk when compared to other firms in its industry. 6. Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to . (Assume a 365-day year.)$26.1 million $23.7 million $7.4 million $18.7 million 7. A company can improve (lower) its debt-to-total assets ratio by doing which of the following?Borrow more. Shift short-term to long-term debt. Shift long-term to short-term debt. Sell common stock. 8. Which of the following statements (in general) is correct?A low receivables turnover is desirable. The lower the total debt-to-equity ratio, the lower the financial risk for a firm. An increase in net profit margin with no change in sales or assets means a poor ROI. The higher the tax rate for a firm, the lower the interest coverage ratio. 9. Retained earnings for the "base year" equals 100.0 percent. You must be looking ata common-size balance sheet. a common-size income statement. an indexed balance sheet. an indexed income statement. 10. Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio?.2 .6 .667 .333 11. A firm's operating cycle is equal to its inventory turnover in days (ITD)plus its receivable turnover in days (RTD). minus its RTD. plus its RTD minus its payable turnover in days (PTD). minus its RTD minus its PTD. 12. When doing an "index analysis," we should expect that changes in a number of the firm's current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable) would move roughly together with for a normal, well-run company.net sales cost of goods sold earnings before interest and taxes (EBIT) earnings before taxes (EBT) The following item is NEW to the 13th edition. 13. The process of convergence of accounting standards around the world aims to . move non-US accounting standards towards US Generally Accepted Accounting Principles (US GAAP) create one set of rules-based accounting standards for all countries Retake Quiz Multiple-Choice Quiz questions are Copyright © by Pearson Education Limited. Used by permission. All rights reserved. Previous Quiz |Back to Main Index | Next QuizThe current ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations. It compares a firm's current assets to its current liabilities, and is expressed as follows:- Current ratio = Current Assets/Current LiabilitiesThe current ratio is an indication of a firm's liquidity. Acceptable current ratios vary from industry to industry.[1] In many cases, a creditor would consider a high current ratio to be better than a low current ratio, because a high current ratio indicates that the company is more likely to pay the creditor back. Large current ratios are not always a good sign for investors. If the company's current ratio is too high it may indicate that the company is not efficiently using its current assets or its short-term financing facilities.[2] If current liabilities exceed current assets the current ratio will be less than 1. A current ratio of less than 1 indicates that the company may have problems meeting its short-term obligations.[3] Some types of businesses can operate with a current ratio of less than one, however. If inventory turns into cash much more rapidly than the accounts payable become due, then the firm's current ratio can comfortably remain less than one. Inventory is valued at the cost of acquiring it and the firm intends to sell the inventory for more than this cost. The sale will therefore generate substantially more cash than the value of inventory on the balance sheet.[4] Low current ratios can also be justified for businesses that can collect cash from customers long before they need to pay their suppliers. What happens if the current ratio is 1?2. If a current ratio is at 1. If a company calculates its current ratio to be at, or slightly above, 1, this means that the company's assets can pay for its debts that are due at the end of the year. This means an organization is likely to make money or break even.
What does a current ratio of 1 Tell the business?A 1-1 ratio indicates a company has sufficient current assets to cover its short-term liabilities without having to sell fixed assets. But any number under 1 would indicate that a company cannot cover its liabilities.
What does a current ratio under 1 mean?If current liabilities exceed current assets the current ratio will be less than 1. A current ratio of less than 1 indicates that the company may have problems meeting its short-term obligations.
What if current ratio is more than 1?If a company has a high ratio (anywhere above 1) then they are capable of paying their short-term obligations. The higher the ratio, the more capable the company. On the other hand, if the company's current ratio is below 1, this suggests that the company is not able to pay off their short-term liabilities with cash.
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