Question

Which of the following financial ratios would be most useful to an auditor seeking information on a company’s ability to cover current obligations?

a. Earnings per share

b. Quick ratio

c. Gross profit margin

d. Sales to assets

Answer 1

The financial ratio which is most useful to an auditor seeking information on a company's liability to cover current obligations is Quick Ratio. It is a measure of how well a company can meets its liabilities. The ratio is calculated as follows-

Quick Ratio= Current Assets-Inventory/ Current liabilities

the formula shows how can the liquid assets such as cash, debtors can help meet the current liabilities.

Talking about other options,

Earning per share is a indicator of company's profitability. It is earning of the company per outstanding shares of its common stock. EPS helps in picking stocks. An investor can see for himself how much value the market is willing to pay for each dollar of earning.

Gross profit margin calculated as Sales Minus cost of goods sold is indicative of company's sale and production performance. A higher margin indicates efficient processes of company.

Sales to Asset is an asset utilization ratio that helps understand if the company requires investments in assets to generate revenue. Mostly applicable to capital intensive industries. The higher the ratio the better it is.

Hence the remaining three options do not help the auditor in seeking information on a company’s ability to cover current obligations.