Financial Reporting And Analysis - Financial Reporting And Analysis Section 2
41. Which of the following is least likely correct?
- A
A relatively high DSO indicates an inefficient collection of receivables.
- B
A high total asset turnover ratio implies an efficient usage of assets.
- C
A payables turnover ratio that is low relative to industry could indicate that the company is not making full use of the available credit facilities.
- Option : C
- Explanation : Statements A and B are correct. Statement C is incorrect because a payables turnover ratio that is high relative to industry could indicate that the company is not making full use of the available credit facilities.
42. The following table shows the balance sheet extract for Pulpy Peaches Ltd.
| CurrentAssets | CurrentLiabilities | ||
| Cash | $75,000 | Accounts payables | $65,000 |
| Marketable securities | $60,000 | Short term notes payable | $80,000 |
| Accounts receivables | $56,000 | ||
| Inventory | $40,000 |
- Option : B
- Explanation : Cash Ratio = (Cash + Marketable securities) / Current liabilities = (75,000 + 60,000) / (65,000 + 80,000) = 0.93
| Days of inventory on hand | 36.48 |
| Days of sales outstanding | 49.22 |
| Payables turnover | 8.99 |
cycle for the firm?
- Option : B
- Explanation : Cash Conversion Cycle = DOH + DSO - Number of days of payables Cash Conversion Cycle = 36.48 + 49.22 - (360 / 8.99) = 45.66
44. Which of the following is least likely correct about the interpretation of liquidity ratios?
- A
The quick ratio is more conservative than the current ratio and does not take inventory into account.
- B
The defensive interval ratio measures how long the company can continue to pay its expenses from its existing liquid assets.
- C
The longer the cash conversion cycle, the greater will be the liquidity of the company.
- Option : C
- Explanation : The longer the cash conversion cycle, the lower will be the liquidity of the company. Therefore, statement C is incorrect.
| Balance Sheet Extract(millions of USD) | 2011 | 2010 |
| Total equity | 567 | 491 |
| Long term debt | 800 | 700 |
| Other long term liabilities | 450 | 450 |
| Current liabilities | 300 | 280 |
| Total equity and liabilities | 2,117 | 1,921 |
- Option : B
- Explanation : Financial Leverage = Average total assets / Average total equity = ((2,117+1,921) / 2) / ((567 + 491) / 2) = 3.82
