Question

Which of the following does not indicate increasing overall liquidity?
      an increasing current ratio
      an increasing quick ratio
      an increasing cash flow liquidity ratio
      an increasing cash conversion cycle

What is the relationship between the average collection period and accounts receivable turnover?
      When average collection period increases, the accounts receivable turnover decreases.
      Both ratios are expressed in number of days.
      Both ratios are expressed in number of times receivables are collected per year.
      All of the above are correct.

Firms have several practical ways of managing their overall liquidity.
      True
      False

Small firms may have more difficulty in getting the capital structure they want than do large, publicly-traded firms.
      True
      False

Using financial leverage in funding the firm results in magnified returns, that is, return on equity will more than double if operating earnings double, but will drop by more than half if operating earnings are cut in half
      True
      False

A firm has the following financial data for a particular fiscal year: Sales for the year $3,000 Some year-end balance sheet figures: Cash $350 Accounts Receivable $750 Inventory $1,200 ------ Total Current Assets $2,300 Total Current Liabilities $1,500 The firm’s current ratio, quick ratio, and average collection period are (in order; use a 365-day year):
      1.53, 0.73, 91.25 days
      0.73, 2.00, 75.00 days
      1.53, 0.73, 146.00 days
      0.73, 1.53, 146.00 days

Why do firms use debt as part of their financing strategy?
      Debt is a safer way to finance the firm than equity
      Debt financing results in lower returns to equity
      Debt financing is a way of fooling creditors
      Debt financing is cheaper than equity financing

In comparing a debtor’s ratios to an industry average, which of the following conditions would make a debtor a greater credit risk than average?
      higher debt as a proportion of total financing
      lower total liquidity
      Both a and b
      Neither a nor b

Cash flow ratios add to a financial statement analysis by measuring whether accounting profits result in cash flows.
      True
      False

In analyzing a debtor, a trade creditor is primarily concerned with the debtor’s profitability.
      True
      False

Answer 1

1) The following does not indicate increasing overall liquidity:

- an increasing cash conversion cycle

Increase in cash conversion cycle means the stock is converted back to cash in more time from before, thus reducing liquidity.

2) The relationship between the average collection period and accounts receivable turnover:

- When average collection period increases, the accounts receivable turnover decreases.

The formula for Accounts receivable turnover is : 365 / Average collection period. Thus increase in average collection period decreases accounts receivable turnover.

3) Firms have several practical ways of managing their overall liquidity.

- True . Liquidity can be ensured by several measures.

4) Small firms may have more difficulty in getting the capital structure they want than do large, publicly-traded firms.

- True .

This is true as small firms face difficulty in raising from the sources it wants to raise.