Financial Reporting And Analysis - Financial Reporting And Analysis Section 2
- Option : A
- Explanation : The cash ratio determines how much of the company’s short-term obligations can be settled with existing amounts of cash and marketable securities.
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:
- Option : A
- Explanation : Cash conversion cycle = Days sales outstanding + Days of inventory on hand – Days of payables Cash conversion cycle = 48 + 90 – 18 = 120
- Option : A
- Explanation : 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
40. Which of the following is most likely accurate about the interpretation of activity ratios?
- Option : C
- Explanation : 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.
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