Tag: ratio analysis

Questions Related to ratio analysis

A higher accounts receivable turnover ratio means _______________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Lower debt collection period

  2. Higher debt collection period

  3. Lower sales

  4. Higher sales

Show answer
Correct Option: B
Explanation:

Accounts receivable turnover is the number of times per year that a business collects its average accounts receivables.

A high turnover ratio indicates a combination of a conservative credit policy and an aggressive collections department, as well as a number of high-quality customers.

Inventory turnover ratio $=$ Cost of __________ during the period $\div$ Cost of average inventory held during the period.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Inventory consumed

  2. Minimum inventory

  3. Maximum inventory

  4. None of these

Show answer
Correct Option: A
Explanation:

Inventory turnover ratio determines the number of times stock is turned into sales during the accounting period under consideration. It expresses the relationship between the cost of goods sold and stock of goods. The formula for its calculation is as follows:


Stock Turnover Ratio = Cost of Goods Sold/Average Stock


Where average stock refers to arithmetic average of opening and closing stock, and the cost of goods sold means sales less gross profit
It studies the frequency of conversion of stock of finished goods into sales. It is also a measure of liquidity. It determines how many times stock is purchased and replaced during a year. Low turnover of stock may be due to bad buying, obsolete stock, etc. and is a danger signal. High turnover is goods but is must be carefully interpreted as it may be due to buying into small lots or selling quickly at low margin to realize cash. Thus, it throws light on utilization of stock of goods.

Inventory turnover measures the relationship of inventory with _______.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Average sales

  2. Cost of goods sold

  3. Total purchases

  4. Total assets

Show answer
Correct Option: B
Explanation:

Inventory turnover ratio shows how many times a company's inventory is sold and replaced over a period of time. It is an efficiency ratio. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.

If the closing balance of receivables is less than the opening balance for a month then which one is true out of __________________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Collections > Current Purchases

  2. Collections > Current Sales

  3. Collections < Current Purchases

  4. Collections < Current Sales

Show answer
Correct Option: B
Explanation:

Collection is more than the current sales, In such situation closing balance of receivables will be less than the opening balance. As credit is more than the debit.

80% of sales of  10,00,000 of a firm are on credit. It has a receivable turnover of 8. What is the average collection period (360 days a year) and average debtors of the firm?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 45 days and 1,00,000

  2. 360 days and 1,00,000

  3. 45 days and 8,00,000

  4. 360 days and 1,25,000

Show answer
Correct Option: A
Explanation:

Debtors turnover ratios is an activity ratio measuring how efficiently a firm uses it assets. This can be calculated as:

Debtors Turnover Ratio=Credit sales/Average accounts receivables

In the given information:
Total Sales      Rs.1000000
Credit Sales    Rs.800000 (80% of sales)
Debtors T/O ratio- 8
Therefore
8=800000/Average receivables
Average Receivables are Rs.100000

Average Collection period=No of days in a year/debtors turnover ratio
=360/8
Average collection period is 45 days.

The turnover ratio indicates ________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. the number of times the capital has been rotated in the process of doing business

  2. the efficiency with which the capital employed is rotated in the business

  3. Both (A) and (B)

  4. Financial position of the company

Show answer
Correct Option: C
Explanation:

Turnover ratio is a measurement of the number of times a company's inventory is replaced during a given period of time. It is calculated by dividing cost of goods sold by average inventory during a given period of time. It indicates the number of times the capital has been rotated in the process of doing business as well as the efficiency with which the capital employed is totated in the business.

If the average balance of debtors has increased, which of the following might not show a change in general?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Total Sales

  2. Average Payables

  3. Current Ratio

  4. Bad Debt loss

Show answer
Correct Option: B
Explanation:

Change in average balance of debtors does not have any relation with average payable. 

State the formula for turnover ratio.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $\dfrac {\text {Current assets}}{\text {Current liabilities}}$

  2. $\dfrac {Sales}{\text {Capital employed}}$

  3. $\dfrac {\text {Fixed assets}}{\text {Long-term funds}}$

  4. $\dfrac {\text {Current assets}}{Sales}$

Show answer
Correct Option: B
Explanation:

Turnover ratio is a measurement of the number of times a company's inventory is replaced during a given period of time. It is calculated by dividing cost of goods sold by capital employed during a given period of time. 

When the Debt Turnover Ratio is $4$, what is the average collection period?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $5$ months

  2. $4$ months

  3. $3$ months

  4. $2$ months

Show answer
Correct Option: C
Explanation:

Debt Turnover ratio = Net credit sales/ Average trade receivables = $4$

Average collection period = $12$ months / Debt turnover ratio
                                             = $12$ months / $4$
                                              = $3$ months

If the inventory turnover is high, the working capital requirements will be ___________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. High

  2. Low

  3. Equal

  4. None of the above

Show answer
Correct Option: B
Explanation:

Inventory Turnover = [Cost of goods sold/Sales] / Average inventory.

A high inventory turnover is good from the point of liquidity position and vice versa. If the inventory turnover is high it means that the inventory is being used or sold in a short time, which means that the funds of the company are not being blocked and so the working capital requirements would be low.