The cash ratio determines how much of the company’s short-term
obligations can be settled with existing amounts of cash and
marketable securities.
Financial Reporting And Analysis MCQ - Financial Reporting And Analysis Section 2
37
The following information is available about ABC Company:
| $ Millions | |
| Sales | 2,400 |
| COGS | 1,440 |
| Purchases | 1,470 |
| Average receivables | 312.5 |
| Average inventory | 355 |
| Average payables | 72.5 |
XYZ’s cash conversion cycle (in days) is closest to:
Cash conversion cycle = Days sales outstanding + Days of inventory on
hand – Days of payables
Cash conversion cycle = 48 + 90 – 18 = 120
Days of sales outstanding
= (Number of days in the period) / (Receivables turnover)
= (Number of days in the period) / (Revenue / (Average Receivables))
Days of sales outstanding
= 360 / (150,000 / ((40,000 + 52,000) / 2)) ) = 110.4
Statement A is incorrect because a working capital turnover of 3.6
indicates that the company generates $3.6 of revenue for every $1 of
working capital. Statement B is incorrect because a low fixed asset
turnover ratio may indicate a capital intensive environment. Statement
C is correct.
