Title: Financial Ratios
Course: Demo 1

Q: ________ measures a company’s ability to pay its debts, while ________ measures the company’s ability to earn a profit.
- solvency tests : profitability tests
- cash flow ratios : owner’s equity
- liquidity ratios : profitability tests
A: liquidity ratios : profitability tests

Q: The company’s inventory turnover ratio:
- shows the number of times inventory is sold in a period.
- requires careful attention to the way that inventory is valued.
- is calculated as average sales divided by average inventory.
A: shows the number of times inventory is sold in a period.; requires careful attention to the way that inventory is valued.

Q: Which of the following statements are true about the current ratio?
- It defines how much of the company’s assets are available to pay current liabilities.
- It is calculated as current assets divided by current liabilities.
- A lower current ratio indicates that the company is less risky.
A: It defines how much of the company’s assets are available to pay current liabilities.; It is calculated as current assets divided by current liabilities.

Q: Which of the following statements are true about the contribution margin ratio?
- It is calculated as profit divided by sales.
- A higher contribution margin ratio indicates a more profitable company.
- It shows how much profit a company will make on each dollar of sales.
A: It shows how much profit a company will make on each dollar of sales.

Q: The acid-test (quick) ratio is different from the current ratio in that it:
- excludes inventories.
- emphasizes assets that are quickly and reliably turned into cash.
- measures liquidity.
A: excludes inventories.; emphasizes assets that are quickly and reliably turned into cash.

Q: Lid on It hat shop had $1.55 million in annual sales. During the same period its cost of goods sold was $620,000 and held average inventory of $100,000. What is the inventory turnover?
- 15.5
- 10.0
- 6.2
A: 6.2

Q: The Golden Braid Bookstore currently has $340,000 in cash, $280,000 in inventory, and $40,000 in accounts receivable. The company also has $65,000 in accounts payable, and $15,000 in other current liabilities. What is its current (or working capital) ratio?
- 4.75 : 1
- 4.25 : 1
- 8.25 : 1
A: 8.25 : 1

Q: The Golden Braid Bookstore currently has $340,000 in cash, $280,000 in inventory, and $40,000 in accounts receivable. The company also has $65,000 in accounts payable, and $15,000 in other current liabilities. What is its quick ratio?
- 8.25 : 1
- 4.25 : 1
- 4.75 : 1
A: 4.75 : 1

Q: Act II Costumes currently has $120,000 in cash, $340,000 in inventory, and $20,000 in accounts receivable. The company also has $20,000 in accounts payable, and $20,000 in other current liabilities. What is its current (or working capital) ratio?
- 4.75 : 1
- 9 : 1
- 12 : 1
A: 12 : 1

Q: Act II Costumes currently has $120,000 in cash, $340,000 in inventory, and $20,000 in accounts receivable. The company also has $20,000 in accounts payable, and $20,000 in other current liabilities. What is its quick ratio?
- 12 : 1
- 9 : 1
- 3.5 : 1
A: 3.5 : 1