Question

1.

Which of the following formulas gives the inventory turnover ratio?

a.Average inventory/Cost of goods sold.

b.Net credit sales/Average inventory.

c.Average inventory/Net credit sales.

d.Cost of goods sold/Average inventory.

2.

Which of the following is a total dollar measure of liquidity?

a.Number of days' sales in inventory.

b.Working capital.

c.Accounts receivable turnover ratio.

d.Cash-to-cash operating cycle.

3.

Which of the following is considered a profitability ratio?

a.Debt-to-equity ratio.

b.Acid-test ratio.

c.Earnings per share.

d.Inventory turnover ratio.

4.

In considering equity and debt financing, which of the following statements is true?

a.In general, the higher the proportion of total debt-to-equity ratio, the greater the likelihood the firm will have difficulty in meeting its obligations in some future period.

b.Interest and dividend payments are required to be made by the issuing corporation.

c.Compared to equity financing, debt is a more expensive source of funding.

d.Most firms prefer to have no debt and rely on equity financing.

5.

Crimson Company declared and paid $1,000,000 in dividends to the common stockholders. The effect of this transaction is that the

a.current ratio increased.

b.earnings per share increased.

c.debt-to-equity ratio increased.

d.earnings per share decreased.

Answer 1

1) answer : d) Cost of goods sold / Average inventory

explanation

inventory turnover explains the relationship between the cost of goods sold and the average inventory .it will be expressed in times .

Average inventory = (opening+closing inventory)/2

2) b) Working capital

explanation

since the working capital is the difference between the total current assets and the total current liabilities .so the working capital is the total dollar measure of liquidity .

working capital = total current assets - total current liabilities

3) answer c) Earning per share

explanation

Earning per share is considered a profitability ratio.since the earnin per share explains the relationship between the earnings available to common shareholders and the shares oiutstanding .

4) answer a) in general higher proportion of total debt equity ratio , the greater the likelihood the firm will have the difficultyin meeting its obligations in some future period

explanation

since the debt financing is the cheapest one but it increases the more risk in meeting the obligations in the future period.if more debt used in the firm , the shareholders may loose their control over the firm .

5) answer : c) Debt equity ratio increased

explanation

if the company declred and paid dividends this will  effect the following

cash will be decreased

retained earnings will be decreased

if retained earnings decreased the debt equity ratio will also be decreased .