Financial Reporting And Analysis MCQ - Financial Reporting And Analysis Section 2

41 Which of the following is least likely correct?

A
A relatively high DSO indicates an inefficient collection of receivables.
B
A high total asset turnover ratio implies an efficient usage of assets.
C
A payables turnover ratio that is low relative to industry could indicate that the company is not making full use of the available credit facilities.

Statements A and B are correct. Statement C is incorrect because a payables turnover ratio that is high relative to industry could indicate that the company is not making full use of the available credit facilities.

42 The following table shows the balance sheet extract for Pulpy Peaches Ltd.

CurrentAssets		CurrentLiabilities
Cash	$75,000	Accounts payables	$65,000
Marketable securities	$60,000	Short term notes payable	$80,000
Accounts receivables	$56,000
Inventory	$40,000

What is the cash ratio for the company?

Cash Ratio = (Cash + Marketable securities) / Current liabilities = (75,000 + 60,000) / (65,000 + 80,000) = 0.93

43 Mary Higgins is a financial analyst. She has the following information available for a leading company in the agricultural sector.

Days of inventory on hand	36.48
Days of sales outstanding	49.22
Payables turnover	8.99

Assume that there are 360 days in a year. What is the cash conversion
cycle for the firm?

Cash Conversion Cycle = DOH + DSO - Number of days of payables Cash Conversion Cycle = 36.48 + 49.22 - (360 / 8.99) = 45.66

44 Which of the following is least likely correct about the interpretation of liquidity ratios?

The longer the cash conversion cycle, the lower will be the liquidity of the company. Therefore, statement C is incorrect.

45 Steven Clark is a credit analyst. He is evaluating the solvency of NYC Public Limited. The following balance sheet extract is made use of for this analysis.

Balance Sheet Extract(millions of USD)	2011	2010
Total equity	567	491
Long term debt	800	700
Other long term liabilities	450	450
Current liabilities	300	280
Total equity and liabilities	2,117	1,921

What is the average financial leverage of the company for 2011?

Financial Leverage = Average total assets / Average total equity = ((2,117+1,921) / 2) / ((567 + 491) / 2) = 3.82