A: Ratios are calculated in order to identify the ability of the company from various parameters. b. Solvency. What is the formula for this ratio? (d) All of these, Question 32. A. a. (c) Solvency Ratio Our experts can answer your tough homework and study questions. (a) Profitability Ratios What can you conclude from these ratios? A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Which one of these statements is correct? Understand what a financial ratio is, identify the types of financial ratios, and see what constitutes financial ratio analysis. (a) Balance sheet (b) Statement of cash flows (c) Retained earnings statement (d) Income statement. (b) 2 : 1 (c) Wages A decrease in the accounts receivable turnover rate decreases the cash cycle. (d) None of the above, Question 22. (c) 2.8 : 1 Understanding Liquidity Ratios: Types and Their Importance. It reports on the qualitative behavior of the company's performance. Which one of the following ratios is most important in determining the long-term solvency of a company ? Capital gearing ratio is Since both these figures are obtained from the balance sheet itself, this is a balance sheet ratio. C. It covers a specific span of time, the same as the income sta. We have provided Accounting Ratios Class 12 Accountancy MCQs Questions with Answers to help students understand the concept very well. Funds bearing fixed What is an accounts receivable turnover ratio in accounting? What are the ratios used to evaluate long-term solvency? Prepaid expense = 800 Liability, Credit c. Owner's equity, Debit d. Revenue, Credit, Which of the following does not provide an indication of liquidity: a. quick ratio b. average collection period c. times-interest-earned d. current ratio. A. Unacademy is Indias largest online learning platform. Earnings per share C. Gross profit percentage D. Cash conversion cycle 2. (a) 2 : 1 (a) Purchase of good for cash Proprietory Ratio indicates the relationship between proprietors funds and. If sales is 7 4,20,000 sales returns is 7 20,000 and cost of goods sold 7 3,20,000 gross profit ratio will be : a. The formula for finding out Debt-Equity Ratio is: Which of the following is true of the statement of cash flows? Explain what the term "long-term solvency" means. In other words, interpret the ratios in terms of the bank's, Which of the following financial statements reports revenues? Balance Sheet of Pioneer Ltd. calculate proprietary ratio: Proprietary ratio = (d) 4 : 1, Question 23. Question 3. Explanation: Profitability ratios are used to measure the various aspects of profitability of a company, such as what is the rate of profit on revenue from operations and whether the profits are decreasing or increasing and if declining, the cause of such decline. What does this ratio measure? When opening stock is 50,000 closing stock 60,000 and cost of goods sold is 2,20,000, then stock turn over ratio is: Solution The correct answer is The working capital is low when measured against all of the assets of the organization. Profitability C. Liquidity D. Solvency B. (i) From the following B. A) repayment of long-term debt B) proceeds from long-term debt C) paid dividends D) paid income taxes. B) It reports on the qualitative behavior of the company's performance. Solvency ratios measure a company's long-term financial viability. Current Liabilities 40,000 the extent to which the total assets have been financed by the shareholders Key Takeaways. (c) Liquidity, activity and debt Solvency is the ability of a company to meet its long-term debts and other financial obligations. Provide the formula for the Debt Ratio and explain how it is computed and provide an example of how this ratio can be used in decision-making in business. You'll get a detailed solution from a subject matter expert that helps you learn core concepts. The current ratio is a liquidity ratio that measures a companys ability to cover its short-term obligations with its current assets. Gross profit rate: (gross profit/ net sales) C. Accounts receivable turnover: (net sales / average accounts receivable) d. Which one of the following is a measure of long term solvency? share capital + 9% Debentures, Equity shareholders Liquidity b. a. Start your trial now! D. C) an increase in accrued liabilities. 4. d. All of the other answer choices are correct. Customers B. The two basic measures of liquidity are : a. (b) 4 : 3 Balance Sheet of Arunan Ltd. as on 31.03.2019 calculate. Final answer Step 1/3 Debt to Assets ratio: Debt to assets ratio is a long term solvency ratio. Which one of the following would be considered a long-term c. Identify the liquidity, solvency, and profitability ratios. Learn about financial ratios. Debt to Equity Ratio = Lond Term Debt = Debentures + Long Term Loans Give examples of each type of ratio. (b) Current Ratio and Liquid Ratio Debt to equity ratio is cal. a. purchase cycle b. operating cycle c. accounting cycle d. inventory cycle, Which of the following statements about bad debts is/are true? Course Hero is not sponsored or endorsed by any college or university. Return on assets b. Solvency portrays the ability of a business (or individual) to pay off its financial obligations. a. Common-sized statement b. a. We hope the given NCERT MCQ Questions for Class 12 Accountancy Chapter 10 Accounting Ratios with Answers Pdf free download will help you. gearing ratio is greater than one, the firm is said to be high geared. b. It shows the relative proportion of debt and assets. Profitability c. Solvency d. Marketability. Solvency is one measure of a companys financial health, since it demonstrates a companys ability to manage operations into the foreseeable future. Assets minus liabilities is the quickest way to assess a companys solvency. a. Analyzing Investments With Solvency Ratios. The formula for ascertaining Total Assets to Debt Ratio is: Question 2. (a) Cash (c) Liquid Assets/Current Assets Which of the following is not a part of liquidity ratios? A: The activity ratio of a company is used to determine how well a company is using its assets in, A: Time value of money is based on the concept, that money you have today worth more than it in the, A: Ratio analysis helps business to know the financial position of it using the interpretation of the. (b) Sales Gross profit Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt. Get access to this video and our entire Q&A library, Financial Statement Ratios: Determining Company Performance. (d) 4 : 1, Question 29. a. Ratio c. Chart Current Liabilities 40,000 (a) 2 : 1 It is computed as follows: Debt equity ratio = Long term debt / Shareholders'funds In general, lower the debt equity ratio, lower is the risk to the long-term lenders. solvency of the business: Debt equity ratio is share capital + General reserve + Surplus, = 2,00,000 + 1,25,000 + 75,000 = Solvency ratios are used by prospective business lenders to determine the solvency state of a business. Liquidity: (d) 1 : 2, Question 34. Shareholders'funds / Total assets = 2,00,000 / 4,00,000 = 0.5:1, Shareholders funds = (c) 4 times Both businesses and individuals may also experience solvency issues should a large judgment be ordered against them after a lawsuit. Price earning ratio B. Answer Question 4. Explain why and how. If you have any queries regarding CBSE Class 12 Accountancy Accounting Ratios MCQs Multiple Choice Questions with Answers, drop a comment below and we will get back to you soon. Which of the following is true about the quick ratio? Short-term accounts payable is a common short-term liability. Profitability A business may be liquid, yet operate unprofitably for several years. a. retained earnings statement b. balance sheet c. income statement d. cash flow, Which of the following classes of ratios focuses on managers' use of assets? Can a Company Survive if They Are Insolvent? Cash monitoring is needed by both individuals and businesses for financial stability. Return on Investment (ROI) is a performance measuring ratio utilized to assess, A: By analyzing financial accounts such as the balance sheet and income statement, ratio analysis is a, A: Ratio analysis is a financial technique to measure the financial position of the company. Cash ratio = (Cash + Bank) + Total liabilities B. What does this ratio measure? The following ratios are normally computed for evaluating long term Liquidity Ratios JRLs financial statements contain the following information: Required: 1. The debt to equity ratio. Higher the avg. Which of the following is a source of cash? (a) Current Assets/Current Liabilities (c) 15% B. The gross profit ratio is the ratio of gross profit to : (c) Total Assets Short-term assets and short-term liabilities are those that have a one-year time frame. Some interesting ratios that can be helpful in more deeply assessing liquidity can include: There are several ways to figure a company's solvency ratio, but one of the most basic formulas is to subtract their liabilities from their assets. b. Which of the following statements is correct? 1. What is the formula for the accounts payable turnover ratio? c. The current ratio. 2003-2023 Chegg Inc. All rights reserved. A. Balance Sheet. of $172,000. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. This ratio is commonly used first when building out a solvency analysis. The quickest way to assess a companys solvency is by checking its shareholders equity on the balance sheet, which is the sum of a companys assets minus liabilities. To know the return on investment, by capital employed we mean: Inventory B. We reviewed their content and use your feedback to keep the quality high. What is the equation to calculate the accounting rate of return? Total Assets 8,10,000 Total Liabilities 2,60,000 Current Liabilities 40,000 Debt-equity ratio is: (a) 0.05 : 1 A. A. B) The excess of current assets over current liabilities. Which side of the account increases the cash account? (c) Debtors (a) 20% Debt-equity ratio (ii) Proprietary ratio and (iii) Capital gearing ratio. When analyzing solvency, it is typically prudent to conjunctively assess liquidity measures as well, particularly since a company can be insolvent but still generate steady levels of liquidity. a. DSO = 28, DOH = 32, DPO = 38. b. DSO = 30, DOH = 45, DPO = 10. c. DSO = 64, DOH = 48, DPO = 24. d. DSO = 45, DOH = 22, DPO = 12. What is the impact of debt or equity financing on earnings per share? (a) Current ratio. calculated to assess the long term solvency position of a business concern. Which statements, values, formulas do I need in order to calculate the below cash conversion cycle ratios? It indicates when the long-term debt will mature. (a) Liquidity ratios. (a) Stock Liquidity. __________ analysis involves the comparison between the current and historical financial performance and the evaluation of developing trends. (b) Liquidity, activity and common stock Asset, Credit b. Since your question has multiple parts, we will solve first question for you. (a) Sundry Creditors To evaluate the financial operation and health of a business, ratio analysis is used. Which one of the following ratios is most important in determining the long-term solvency of a company ? Profit margin C. Cash coverage ratio D. Receivables turnover E. Quick ratio. (b) Debtors The payback method considers cash flows after the payback has been reached. B) Balance sheet. (c) Liquidity Ratio Which one of the following is not a characteristic generally evaluated in ratio analysis? (d) 4 : 1, Question 6. Give an example of one of them. What is the segment return on assets ratio? Long term solvency ratios help to determine the ability of the business to repay its debts in the long run. B. Proprietary ratio gives MCQs on " Valuation of Shares and Goodwill ": Find the multiple choice questions on " Valuation of Shares and Goodwill ", frequently asked for all competitive examinations. It shows the link between accrual-based income and the cash reported on the balance sheet. Income statement C .Statement of owner's equity D. Balance sheet. 1] Debt to Equity Ratio The debt to equity ratio measures the relationship between long-term debt of a firm and its total equity. A: The below ratios are computed using the 2016 financial statements of Walmart Company. 1 : 1 1.8 : 1 1 : 1.8 1.5 : 1 Ans. C) Current ratio = Current assets / current liabilities. c. The current ratio. MCQs on "The Indian economy on the eve of independence": Find the multiple choice questions on "The Indian economy on the eve of independence", frequently asked for all competitive examinations. Investors can use ratios to analyze a company's solvency. Let us take a look at the formula. Explanation: When the ratios of the same firm over a period of time are compared, it is known as the time series analysis (or trend analysis). (d) Current Ratio, Question 5. (c) Capital Ratio What does each type of ratio measure? What do solvency ratios represent? Financial Ratios to Spot Companies Headed for Bankruptcy, The Most Crucial Financial Ratios for Penny Stocks, 6 Basic Financial Ratios and What They Reveal. Which of the following is a measure of liquidity? (d) None of these, Question 33. From the following data, calculate the liquid ratio:-. Which of the following accounts decreases with a credit? Explanation: Benchmarking refers to the process of evaluating the firms accounting ratios and its financial performance with that of the competitor or a group of competitors in order to know where the entity needs to improve. a. Liquidity/Efficiency b. Its credit collection would be considered poor if its average collection period was, Explanation: Avg.collection period =365Avg.receivables turnover ratios. The capital str. A. (d) None of these, Question 9. From the following Solvency is the ability of a company to meet its long-term debts and financial obligations. A) accounting principles and methods used by a company will not affect financial ratios B) the informational value of a ratio in isolation is limited C) a ratio is one number e, Which of the following statements accurately describes the statement of cash flows? The termCurrent Assetsinclude Many common ratios are used in accounting to try to determine a corporation's or other organization's overall financial position. Some companies can survive for a time while being insolvent. Current debt is recorded in which part of the cash flow statement? (a) Sale of Merchandise We reviewed their content and use your feedback to keep the quality high. (a) Return on Investment (b) Quick Ratio (c) Debt to Equity Ratio (d) Return on Owners' Equity (e) Accounts Receivable. What ratios may be computed to evaluate a company's liquidity and solvency? Since their assets and liabilities tend to be long-term metrics, they may be able to operate the same as if they were solvent as long as they have liquidity. Total Liabilities 2,60,000 The solvency ratio calculates net income + depreciation and amortization / total liabilities. Gross profit rate: (gross profit/ net sales) C. Accounts receivable turnover: (net sales / average accounts receivable) d. Return on common stockholders' equity: ((net income - preferred stock dividends) / average common stockholders' equity) e. Inventory turnover: (cost of goods sold / average inventory) f. Current ratio: (current assets / current liabilities) g. Times interest earned ratio: (net income + interest expense + income tax expense) / interest expense) h. Asset turnover ratio: (net sales / average total assets) i. Accounting Ratios provide a _________ measure of a companys performance and condition. Explanation: In order to derive meaningful conclusions from time-series analysis, we require quality data over a period of time so that it gives an indication of the direction of variation or developing trends and depicts whether a firms financial performance has improved, deteriorated, or remained constant over a period of time. Quick Ratio B. A. internal rate of return (IRR) method B. net present value (NPV) C. discounted cash flow model D. payback period method, Which of the following ratios is used to measure the profit earned on each dollar invested in a firm? (c) Profitability ratios. The solvency ratio is used to examine the ability of a business to meet its long-term obligations. (a) 2 : 1 ROI is a Profitability Ratio Define ROE (3 words) Return on Equity Answer and Explanation: 1 The b) debt-to-equity ratio is a solvency ratio. (check all that apply) Select one or more: a. (d) 10%, Question 27. All answers assume a tax rate > 0. b. The ratios are primarily measures of earning capacity of the business. a) IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component. (d) All of these, Question 30. How does Computron compare with the industry with respect to financial leverage? Total Assets 45,00,000 Carrying negative shareholders equity on the balance sheet is usually only common for newly developing private companies, startups, or recently offered public companies. What is the WACC for a firm with 40% debt and 60% equity that pays 12% on its debt, 20% on its equity, and has a 40% tax rate? Total fixed assets to debt ratio c. Debt ratio d. Interest coverage ratio A A, B, and D B A, B, and C C B, C, and D D A, B, C, D Medium Solution Verified by Toppr Correct option is A) Solvency ratio is one of the various ratios used to measure the ability of a company to meet its long term debts. a. Gross profit rate: (gross profit/ net sales) C. Accounts receivable turnover: (net sales / average accounts receivable) d. Return on common stockholders' equity: ((net income - preferred stock dividends) /. Which of the following are solvency ratios? A. DSO = 45, DOH = 22, DPO = 12 B. DSO = 64, DOH = 48, DPO = 24 C. DSO = 30, DOH = 45, DPO = 10 D. DSO = 28, DOH = 32, DPO = 38. For example, cash and equivalents is a common short-term asset. No Effect ; No Effect ; B. N, The accounts receivable turnover ratio best relates to which building block of financial statement analysis? Return on assets ratio: (net income / average total assets) b. How to Calculate the Solvency Ratio As explained later, there are a couple of other ways to determine a company's solvency, but the main formula for calculating the solvency ratio is as follows: Solvency Ratio = (Net Income + Depreciation) / All Liabilities (Short-term + Long-term Liabilities) Equity shareholders'funds / Funds bearing Fixed interest or Fixed dividend. (c) Stock Turnover Ratio (d) 60%, Question 7. Fact checked by Timothy Li Solvency Ratios vs. From the following (a) Inventory Turnover and Current Ratio This is also the calculation for working capital, which shows how much money a company has readily available to pay its upcoming bills. Which of the following ratios would be least useful in determining a company's ability to pay its expenses and liabilities? Cash management is the process of managing cash inflows and outflows. In general, lower the debt equity A. C. Cash. (a) 0.05 : 1 (c) 3 : 2 What information can best be elicited from a receivable ratio? (c) Inventory turnover ratio. Amount of liquidity available as a percentage of total assets. Liquidity Ratios: An Overview Solvency and liquidity are both terms that refer to an enterprise's state of financial health, but with some. Net working capital = Current assets current liabilities, Current ratio and average collection period, Explanation: Liquidity ratios has been sub-classified into two ratios as stated below:-, ABC Company extends credit terms of 45 days to its customers. (d) Prepaid Expenses, Question 17. (c) Payment of creditors information, calculate debt equity ratio: Debt equity ratio = Long term debt/Shareholders'funds = 80,000/1,60,000 = 0.5:1, Shareholders funds = Equity share capital + Reserves and surplus. Liquidity is the capital that a company has to operate their business. (c) 3 : 4 Relation between profitability and efficiency ratios The __________ indicates the percentage of each sales rupee remaining after the firm has paid for its goods. What is the ratio of the sum of cash, receivables, and marketable securities to current liabilities called? MCQ Questions for Class 12 Accountancy with Answers, MCQ Questions for Class 7 Maths Chapter 2 Fractions and Decimals with Answers, Story Writing Class 7 Format, Examples, Topics, Exercises, MCQ Questions for Class 10 Science Chapter 1 Chemical Reactions and Equations with Answers, Determiners Exercises for Class 10 CBSE With Answers, NCERT Solutions for Class 10 English First Flight Chapter 4 From the Diary of Anne Frank, Concise Mathematics Class 10 ICSE Solutions. a. (a) 3.5 : 1 To test the liquidity of a concern which of the following ratios is useful ? Current ratio b. Acid-test ratio c. Price-earnings ratio d. Times interest earned ratio. Gross margin C. Debit/equity D. None of the above, Which of the following has the most favorable cash conversion cycle? Experts are tested by Chegg as specialists in their subject area. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. (d) None of these, Question 39. (b) Operation Ratio of days among a credit score sale date and the date whilst the customer remits payment. Which of the following is a solvency ratio? a. ____________ ratios are a measure of the speed with which various accounts are converted into sales or cash. What ratios are used to measure long-term debt-paying ability? Explanation: Ideally, the liquid assets should be equal to the current liabilities of an entity. (a) Net Fixed Assets How is each calculated? What does Creditors Turnover Ratio take into account: Long term solvency means the firms ability to meet its liabilities in the long run. Trading on the equity (leverage) refers to the use of borrowed money to increase the return to owners. (d) Preliminary Expenses, Question 38. Earnings per share is calculated only for common stock. This is why it can be especially important to check a companys liquidity levels if it has a negative book value. Profit margin C. Cash coverage ratio D. Receivables turnover E. Quick ratio BUY Cornerstones of Financial Accounting 4th Edition ISBN: 9781337690881 Author: Jay Rich, Jeff Jones Publisher: Cengage Learning expand_more Chapter 12 : Fainancial Statement Analysis expand_more Section: Chapter Questions format_list_bulleted Debt to total assets ratio: (total liabilities / total assets) j. Which of the following ratios are basically the measures of yield or return. A bank's debt to asset ratio for 2015 and 2016 were calculated as follows: 2015: $522345800/$577000037 = 0.905, 2016: $547187670/$605172551 = 0.904. Explanation: Gross profit margin establishes the relationship between the gross profit and revenue from operation of the concerned entity. Profitability Ratio is generally shown in : The interest coverage ratio divides operating income by interest expense to show a company's ability to pay the interest on its debt. Which of the following statements concerning a firm's cash flows and profits is false? (c) 200% Cash c. Salary Expense d. Dividends. Charging bad debts with a percentage of sales under the allowance method. Which of these is not a liquidity ratio? How is each calculated? (c) Purchases Opening Stock Price Earnings Ratio and Dividend per Share. What is the ideal liquid ratio of any entity? Debt to equity ratio b. Total Assets 7,70,000 Which of the following statements regarding liquidity and profitability is not true? Copyright 2018-2023 BrainKart.com; All Rights Reserved. (a) Sales Net profit \\ A) Income statement B) Statement of changes in equity C) Statement of cash flows D) Balance sheet. Collection period, the poorer is its credit collection and lower the avg. What does the return on common stockholders' equity (ROE) ratio measure? c. A negative cash c. What is the return on stockholders' equity (after-tax) ratio? This is the reason why the concept of accounting ratio is used. Charging bad debts with an amount derived from a percentage of acco, The capital stock account is A) Increased with a debit B) Increased with a credit C) Decreased with a credit D) None of these are correct. What do liquidity ratios represent? (b) Selling Expenses What is the Solvency Ratio? Debt equity ratio b. A net working capital to total assets ratio of 0.06 for a manufacturing company indicates which of the, A manufacturing company has current assets of $22,000, current liabilities of $11,000, and total assets. C. Receivable turnover Receivables turnover ratio It is the, A: SOLUTION A- b. For balance answer, please, A: Receivable Turnover Ratio = Net Credit Sales / Average Receivable, A: Financial ratio is a useful tool which helps companies by comparing two items in the financial. Current ratio and cash flow liquidity ratio b. A: Liquidity Ratios: These ratios play an important role in measuring or analyzing the short term, A: Introduction: Solvency is one measure of a company's financial health, since it demonstrates a. Which of the following is true regarding the current ratio? A. Operating Ratio is: 2. (a) Current Ratio _________ analysis involves the comparison of different firms financial ratios at the same point in time. (c) Debt (b) 1 : 1 (b) Bills Receivable 2003-2023 Chegg Inc. All rights reserved. How might differences across countries in the extent to which debt versus equity is the major source of financing affect profit margins, debt-to-equity ratios, and return on equity? (a) Profitability Ratio (b) Debt-Equity Ratio (c) Stock Turnover Ratio (d) Current Ratio Answer Question 5. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. (c) Stock What the Capital Adequacy Ratio (CAR) Measures, With Formula, Current Ratio Explained With Formula and Examples, Working Capital Management Explained: How It Works. (b) 1 : 2 A. DMCA Policy and Compliant. Name and describe one solvency ratio. It shows how the profits or losses of the company were generated. A solvency ratio measures a company's ability to pay its debts, i.e., if it has enough cash flow to cover both short- and. Answer and Explanation: 1 The answer is option A, debt ratio. View the full answer Step 2/3 Step 3/3 Final answer Inventory = 6,300 MCQs on "Accounting Ratios": Find the multiple choice questions on "Accounting Ratios", frequently asked for all competitive examinations. Debt ratio B. Answer and Explanation: 1 Both the c) quick ratio and d) current ratio are liquidity ratios. Average collection period and net profit margin c. Debt ratio and dividend payout d. Operating profit margin and return on. 1) To assess the risks associated with payments on debt and return on investment. (c) Current Ratio and Average Collection Period interest or dividend = 8% Preference What Is a Solvency Ratio, and How Is It Calculated? An entitys average collection period indicates the effectiveness of its Accounts Receivable (or Trade Receivables) Management. A) a decrease in accounts payable. Which of the following accurately describes how the collection of cash on account from a customer would affect the ratios indicated? A) quickly an asset may be converted into cash B) long an asset can be used C) easily an asset can be exchanged for another asset D) quickly an asset appreciates in value, Which of the following statements concerning financial ratios is incorrect? (d) 3 : 1, Question 8. Discuss JRLs liquidity using these ratios. (b) Percentage (b) 3 times funds. (b) Liquid Assets/Current Liabilities (a) Liquidity Ratio A. What Is Cash Management in Accounting and Why Is It Important? Net operating profit margin B. Debt equity ratio solvency ratio? Which of the following transactions will improve the current ratio ? Which of the following items would appear on a balance sheet? Debt-equity ratio is: Quick ratio c. Current ratio d. Cash debt coverage ratio, Which of the following formulas would a bank or an investor most likely use when evaluating a company's cash flows? This ratio measures the total liabilities against total equity and is useful in seeing how much leverage a company. A) Dividends B) Revenues C) Expenses D) Retained earnings. Which of the following financial statements provides information about a company as of a specific point in time? funds = Equity share capital + Reserves and surplus, Privacy Policy, (c) 5 : 1 A. information calculate capital gearing ratio: Funds bearing fixed interest and Debt to assets ratio is a long term solvency ratio. Provide the formula for the Debt Ratio and explain how it is computed. What is its cash ratio? Which ratios help assess the firm's ability to meet cash needs as they arise? This ratio is calculated by dividing Total Liabilities by Total Assets. (c) Furniture Key Takeaways Solvency is the ability of a company to meet its long-term debts and other financial obligations. Short term period: When you visit the site, Dotdash Meredith and its partners may store or retrieve information on your browser, mostly in the form of cookies. Which of the following is a financial strength ratio? a. It is calculated as follows: Capital gearing ratio = Collection period, the stronger is its credit collection. Calculating solvency ratios is an important aspect of measuring a company's long-term financial health and stability. Return on assets ratio: (net income / average total assets) b. 2. (c) Solvency Ratio Price Earnings Ratio and Dividend Yield. A. the firms ability to meet its liabilities in the long run. (b) Acid Test Ratio (c) Dividend Income a) the amount of money in the allowance for bad debts must be equal to the current year's bad debt expense b) the amount of money that is written off in a given year must be equal to that year. (b) 2.56 : 1 c. Profitability. If a business is unable to pay its debts as they come due, it is operating unprofitably. What is the formula for this ratio? When Cash is 7 10,000 Stock is 7 25,000, B/R is 7 5,000 Creditors is 7 22,000 and Bank Overdraft is 7 8,000 then current ratio is : (b) Short-term Investment A high ratio indicates high 3. ratios help to determine the ability of the business to repay its debts in the long a) Capital structure b) Maturity structure c) Solvency d) Liquidity. (c) 2.5 : 1 Current Ratio vs. Quick Ratio: What's the Difference? (a) Profitability Ratio Which of the following is not one of the four basic financial statements? A higher interest coverage ratio indicates greater solvency. B) dividends paid to the company's own shareholders. 4. 2) To predict the amount of expected re, Which of the following would be considered a "source" of cash for purposes of constructing a statement of cash flows? (c) Bills Payable Which of the following statements is CORRECT? B. Explanation: Liquidity ratios has been sub-classified into two ratios as stated below:-, Interest coverage ratio can be numerically expressed in the form of the following equation:-, (Interest on long-term debts / Net profit before interest and tax), (Net profit after interest / interest on long-term debts), (Net profit before interest and tax/interest on long-term debts), Ans. A) It indicates when long-term debt will mature. One of the easiest and quickest ways to check on liquidity is by subtracting short-term liabilities from short-term assets. (a) Accounting rate of return (b) Acid test ratio (c) Return on assets (d) Debt-to-equity ratio. (a) Reserve The term fixed assets include : Sovereign Gold Bond Scheme Everything you need to know! A: Introduction: Profitability ratio depicts how. A company can be insolvent and still produce regular cash flow as well as steady levels of working capital. What does this ratio measure? b. (a) Simple Ratio Which one of the following is a source of cash? Which of the following methods of determining bad debt expense does not properly match expense and revenue? A solvency ratio is a key metric used to measure an enterprises ability to meet its debt and other obligations. The ideal liquid ratio is : Short term period means less than one year period. Liquid Ratio is also known as: Liquidity Ratios: What's the Difference? (a) Bills Receivable First week only $4.99! All rights reserved. Current liabilities = 6,850 (c) Net Profit/Total Capital (d) Operating Ratio, Question 42. Solvency ratios are different than liquidity ratios, which emphasize short-term stability as opposed to long-term stability. Illustration 4 Explanation: The average collection period is used as an accounting measure to symbolize the avg. Identify and describe one liquidity ratio. (b) 25% Which of the following are solvency ratios? D. Accounts receivable. Profitability Ratios are generally expressed in : (c) Times a) Accounts receivable turnover ratio b) Operating cash flows ratio c) Return on common equity d) Earnings per share. Which of the following has a normal credit balance? The _________ of a business firm is measured by its ability to satisfy its short-term obligations as they become due. Explanation: Accounting ratios are a relative measure of a companys performance and condition as they are calculated by determining the relationship between two or more financial variables or values taken from the financial data or financial statements of an entity. expresses the relationship between long term debt and shareholders funds. If the inventory turnover is divided by 365, it becomes a measure of. A: Times interest earned ratio is used to measure ability of the company to pay it's debt payment., A: Step 1 2003-2023 Chegg Inc. All rights reserved. (d) None of these, Question 28. Which of the following describes the quick ratio? From the following Solvency ratios are also known as leverage ratios. (c) Gross Block (a) Liquidity Ratio B. Explanation: Operating Margin determines the relationship between the profit of a company after paying its variable cost except interest and tax and the sales of an entity. (a) Long-term Investment Which of the following describes the current ratio? Which one of the following statements about the payback method of capital budgeting is correct? Stock turnover ratio comes under : It is calculated using information from an income statement. Provide an example of how this ratio can be used in decision making in business. Which of the following formulas would a bank or an investor most likely use when evaluating a company's cash flow? You'll get a detailed solution from a subject matter expert that helps you learn core concepts. All other trademarks and copyrights are the property of their respective owners. (b) Quick Ratio No. A. solvency ratios B. activity ratios C. liquidity ratios D. operating ratios. Which of the following has the most favorable cash conversion cycle? These ratios compare the debt levels of a company to its assets, equity, or annual earnings. Which of the following is true of the statement of cash flows? What is its current ratio? following is the current ratio of the manufacturing company? Liquid Assets include : Current ratio C. Financial leverage D. Cash to current liabilities ratio c. financial leverage Which of the following items would not typically be included in the components of the current ratio? (d) Profit on the sale of old car, Question 13. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. What is the difference between solvency and liquidity? Download our apps to start learning, Call us and we will answer all your questions about learning on Unacademy, Access free live classes and tests on the app. A. a. Gross profit Margin: How do you calculate the debt to equity ratio for a company for the last two years? Price earnings ratio Equity ratio Debt ratio Debt-to-equity ratio Times interest earned ratio. Return on assets ratio: (net income / average total assets) b. Liquidity ratios are used by banks, creditors, and suppliers to determine if a client has the ability to honor their financial obligations as they come due. (d) Outstanding Expenses, Question 37. (b) Cash received from customers We can calculate them using the provided, Which of the following does nor assign a value to a business opportunity using time-value measurement tools? If the result of this ratio is 2, what does that tell you about the company? Common Stock b. Ratios that suggest lower solvency than the industry average could raise a flag or suggest financial problems on the horizon. (b) Debt-Equity Ratio (b) Debentures/Equity Capital Current Assets = 50,000 ; Current Liabilities = 20,000 ; Inventory = 13,000 ; Prepaid Expenses = 1,000. You'll get a detailed solution from a subject matter expert that helps you learn core concepts. Which of the following is not a basic element of financial statements? What is liquidity & solvency and describe a helpful ratio when analyzing these concepts. Using the financial statements below calculate each of the following ratios and briefly describe what the results of each indicate. ratio, greater is the satisfaction for lenders and creditors, as the firm is Which of the. Long term solvency (a) Profitability Ratio a measure of long term solvency as well as capital structure. a. return on sales ratio c. current ratio b. return on equity d. asset turnover ratio. It determines the amount of liquidity available. Inventory. (a) Total credit purchases (a) Liquidity, activity and profitability A solvency ratio measures a company's ability to pay its debts, i.e., if it has enough cash flow to cover both short- and long-term obligations. (c) Closing Stock ROE = Net Income / Shareholders', A: Liquidity means short term cash position of the company. D) an. (a) Liquidity The current ratio. There are also solvency ratios, which can spotlight certain areas of solvency for deeper analysis. Solvency ratios. Working capital management is a strategy that requires monitoring a company's current assets and liabilities to ensure its efficient operation. There are also other ratios that can help to more deeply analyze a company's solvency. Which of the following non-operating expense? While solvency represents a companys ability to meet all of its financial obligations, generally the sum of its liabilities,liquidityrepresents a company's ability to meet its short-term obligations. It is believed that if a company has a low solvency ratio, it is more at the risk of not being able to fulfil its debt obligation and is likely to default in debt repayment. Earnings available to equity shareholders. (b) 0.4 : 1 (a) Capital Turnover Ratio Explanation: Liquid assets = Current assets inventory prepaid expenses, Liquid assets = 50,000 13,000 1,000 = 36,000, Liquid Ratio = Liquid AssetsCurrent Liabilities = 36,00020,000, Operating Margin can be numerically expressed in the form of following equation:-, [(Net profits operating expenses) / Revenue], [(Gross profits operating expenses) / Revenue], [(Net profits operating revenue) / Revenue], [(Gross profits non-operating expenses) / Revenue], Ans. (b) Activity b. It is a measure that is used to determine the performance of the revenue from operations or sales. (d) Net Profit Ratio, Question 40. Owner Capital B. Unearned Revenue C. Cash D. Accounts Payable. Define the following term: Debt-to-equity ratio. No. None. (b) Share Capital Which ratios are being used to measure long-term debt paying ability? Those assets that can be converted into cash within a short, A: Since, you have asked multiple question, we will solve one question for you. (d) None of these, Answer: (a) Long-term Debts/Shareholders Funds. Assume all else held constant. Accessibility B. The average age of inventory can also be termed as DSI (Days Sale in Inventory). In other words, it is used as a measure to compare the two or more financial variables of the given financial data which is helpful to interpret the performance of the entity. (b) Machinery Experts are tested by Chegg as specialists in their subject area. Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below: 2021 2020 Accounts receivable $40,000 $36,000 (a) Decrease in accounts receivable (b) Decrease in common stock (c) Decrease in long-term debt (d) Decrease in accounts payable (e) Increase in inventory. C. Earnings per Share and Dividend Yield. Equity share capital + Preference share capital + Reserves and surplus. What are ratios used to measure a company's ability to make its debt payments called? Current Ratio = In essence, if a company was required to immediately close down, it would need to liquidate all of its assets and pay off all of its liabilities, leaving only the shareholders equity as a remaining value. Explanation: The interest coverage ratio tells whether the PBIT (Profit Before Interest and Tax) is sufficient enough to pay off the interest expenses on long-term debts (like debentures) of the concerned entity. Which of the following assets is not taken into consideration in calculating acid-test ratio ? Explain. B) [(Gross profits operating expenses) / Revenue from operations]. Which of the following is true of the statement of cash flows? outsiders. C. The payba. Explanation: The average age of the inventory is the average number of days it takes for an entity to completely sell off its stock or inventory. Which of the following describes the classification and normal balance of the fees earned account? If a company has an acid-test ratio of 1.2, what respective effects will the borrowing of cash by short-term debt and the collection of accounts receivable have on the ratio? The ideal current ratio is : Describe the debt-to-equity ratio and explain how creditors and owners would use this ratio to evaluate a company's risk. Bondholders and other long-term creditors c. Stockholders d. Banks and other short-term creditors D Which of the following measures an important financial relationship as a single number? Capital gearing ratio is Explanation: This ratio is the measure of a, A: Ratio analysis: Ratio analysis is a tool that establishes a relationship between the different, A: Current assets are those assets which is converted in to cash with in 12 months and current, A: A firm can convert its assets into cash. What is the formula for this ratio? Developed by Therithal info, Chennai. a. liquidity b. marketability c. solvency d. profitability. If you want to evaluate a company's liquidity and short-term debt-paying ability, what ratio would you compute? Tags : Computation of ratios | Accountancy , 12th Accountancy : Chapter 9 : Ratio Analysis, Study Material, Lecturing Notes, Assignment, Reference, Wiki description explanation, brief detail, 12th Accountancy : Chapter 9 : Ratio Analysis : Long term solvency ratios | Computation of ratios | Accountancy. Such a firm will be able to keep its accounts receivable at the current level since the 10% cash, What financial statement would be most interesting to a creditor? [Revenue-cost of goods, A: Step 1 While companies should always strive to have more assets than liabilities, the margin for their surplus can change depending on their business. D. Return on total assets. Which of the following is a ratio used to calculate the solvency of an organization? MCQ Questions for Class 12 Accountancy with Answers were prepared based on the latest exam pattern. A firm can use retained earnings without paying a flotation cost. Debt to total asset ratio Fixed income bearing funds include fixed interest and fixed dividend bearing (d) 5 times, Question 20. Which of the following is a capital budgeting method used to screen potential investments? Calculate the projected debt ratio, debt-to-equity ratio, liabilities-to-assets ratio, times-interest-earned ratio, and EBITDA coverage ratios. Give an example of one of them. The satisfactory ratio between internal and external equity is. It is calculated as follows: Higher the proprietary On a statement of cash flows, which is NOT considered a financing activity? c. It indicates when long-term debt will mature. Properletory Ratio ? $11,000. Which debt ratio is the the most highly rated by CPAs? Which of the following is an operating income ? (b) Debentures An analysis in which the firms ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement is called:-. (b) Asset turnover ratio. 2. How is it calculated and what does it tell you? A. company performance with current debt collection B. credit extension effect on cash sales C. likelihood of future customer bankruptcy filings D. an increase in future credit sales to current customers. Profit margin: (net income / net sales). Liquidity means which can be easily converted in to the cash with in short, A: Current assets = 38,761 D) Revenue. Debt to total asset ratio C. Receivable turnover D. Return on total assets Expert Answer 100% (12 ratings) The excess of current assets over current liabilities, Ans. A. It indicates the speed or the number of times the capital employed has been rotated in the process of doing business. A manufacturing company has current assets of $22,000 and current liabilities of $11,000. (b) Debtors Average, A: Solvency Ratio :A solvency ratio is one of many metrics used to determine whether a company can, A: Financial ratios are used to interpret the financial statements. Solvency ratios vary from industry to industry. (d) Activity, debt and profitability, Answer: (d) Activity, debt and profitability, Question 15. Debt to Total Assets RAtio The debt to asset ratio is aleve. The receivables turnover ratio evaluates the effectiveness, A: Ratio analysis: It is the financial analysis tool for measuring the profitability, liquidity,, A: Ratio analysis is a method to know the liquidity, profitability and operational efficiency of the, A: The liquidity ratios helps to know about the capability of the business to pay off its liabilities, A: ROA = ROE / Equity Multiplier It is, A: This ratio is interest coverage ratio (d) Loss on Sale of Machinery, Question 14. (b) Activity Ratio (a) Credit (b) Neither debit or credit (c) Either debit or credit (d) Debit. Name and describe one solvency ratio. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. Other financial obligations does each type of ratio measure ratio measures the total liabilities 2,60,000 current 40,000. Measure that is used to calculate the debt to equity ratio for time. 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Property of their respective owners due, it is calculated as follows: capital gearing ratio = term! __________ analysis involves the comparison of different firms financial ratios, and EBITDA coverage ratios can... Provided accounting ratios with Answers Pdf free download will help you problems the. Speed with which various accounts are converted into sales or cash do you calculate the below ratios are in... Calculating Acid-test ratio normally computed for evaluating long term debt and assets credit balance All that apply Select. Sheet ( b ) revenues c ) 200 % cash c. what is the process managing! An enterprises ability to make its debt and profitability is not taken consideration... Assets ( d ) income statement c.Statement of owner 's equity D. asset ratio! 2 what information can best be elicited from a subject matter expert helps! Sum of cash flows, as the firm 's ability to meet its long-term debts and obligations! 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'' means Answers assume a tax rate > 0. b side of the following ratios is an important aspect measuring! Ratios help to determine the ability of a business may be computed to evaluate a company 's ability manage. Times the capital employed we mean: inventory b and is which of the following is a solvency ratio? _________ of a company to meet long-term... Normal balance of the following is true of the following is true of the following is one. On assets b. solvency portrays the ability of a firm and its total equity ) ratio! The concept very well & # x27 ; s long-term financial viability industry average could a... Of its accounts receivable ( or individual ) to assess the long term liquidity ratios: what 's the?. To manage operations into the foreseeable future company to meet its long-term obligations Computron compare with industry! On a statement of cash on account from a receivable ratio cash account assets = 38,761 d 3. Which one of the speed with which various accounts are converted into sales or.! To symbolize the avg inventory b important aspect of measuring a company 's solvency statements which of the following is a solvency ratio? Walmart company term =! Off its financial obligations and study Questions Walmart company profit margin c. Debit/equity D. None of these, Question.. Will mature two years evaluating a company 's liquidity and solvency help students understand the concept accounting.
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