Question

In: Accounting

Which of the following ratios is NOT affected by a revaluation of property, plant and equipment?  ...

Which of the following ratios is NOT affected by a revaluation of property, plant and equipment?  

Select one:

a. Quick ratio.

b. Asset turnover.

c. Comprehensive income / equity.

d. Debt to equity.

e. Earnings before interest tax / interest.

Solutions

Expert Solution

Answer is 'Quick Ratio'

This ratio is also known as 'Acid test ratio' and 'Liquid ratio'. It is the relation between 'quick assets to quick liabilities'. It is determined by dividing 'quick assets' by 'quick liabilities'.

Quick ratio = Quick Assets / Quick Liabilities

The term 'Quick Assets' refers to current assets which can be converted into cash immediately. It comprises all current assets except stock and prepaid expenses. Quick or liquid liabilities refer to all current liabilities except bank overdraft.

There is no linkage between revaluation of fixed assets (properties, Plant etc.) with quick ratio. Quick ratios only deals with quick assets or quick liabilities.

Revaluation of Assets have following effects:

  • Increase in book value of asset, results in increase in total assets and equity. Therefore, revaluation of fixed assets will have an effect on ratios like Asset turnover, comprehensive income/ equity, debt to equity.
  • Decrease in book value of assets leads to decrease in net income. Therefore, Revaluation of fixed assets will have an effect on income related ratios like EBIT / interest.

ekkarill92 answered 2 years ago
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