financial efficiency test

Financial Efficiency TestFinancial Efficiency Test

This test consists of 10 questions This test consists of 10 questions designed to test your understanding designed to test your understanding of financial efficiency ratiosof financial efficiency ratios

The links provide you with a choice of The links provide you with a choice of answer, along with explanations answer, along with explanations and solutions.and solutions.

You will need a calculator to complete You will need a calculator to complete this test.this test.

Question 1.Question 1.

A firm has a Current Ratio of 4.5 : 1. Does A firm has a Current Ratio of 4.5 : 1. Does this indicatethis indicate

a. Over investment in current assetsa. Over investment in current assets

b. A proportionately high level of current b. A proportionately high level of current liabilitiesliabilities

c. a high level of gearingc. a high level of gearing

Your answer is correct. Too high a level

( above 2.5 :1), indicates perhaps too much cash tied up in current assets.

Current Ratio measures liquidity of a business. If current liabilities are proportionately high, this indicates a ratio in balance, around 1:1

Current ratio does not mention gearing, but looks at short term liabilities, and current assets.


A firm has a gearing level of 80%. Does this A firm has a gearing level of 80%. Does this indicate.indicate.

A. A relatively low level of borrowingA. A relatively low level of borrowing

B. A high level of liquid assetsB. A high level of liquid assets

C. A high proportion of long term liabilitiesC. A high proportion of long term liabilities

80% indicates a relatively high proportionof funding from long term liabilities

Liquid assets are measured by current ratio or acidtest ratio.

Correct. Borrowing makes up a relatively highproportion of funds invested in the business,


A firm has an Acid Test Ratio of 0.3: 1. Does A firm has an Acid Test Ratio of 0.3: 1. Does this indicatethis indicate

A. A high level of liquidityA. A high level of liquidity

B. A low level of liquidity.B. A low level of liquidity.

C. Effective management of stockC. Effective management of stock

An Acid Test Ratio of 1:1 is regarded asnormal for many types of business

Try again

Correct.

Stock is excluded from current assets whencalculating ATR!

Try again


A firm has a debtor days ratio of 87 days. A firm has a debtor days ratio of 87 days. Does this indicateDoes this indicate

A. Effective management of debtorsA. Effective management of debtors

B. Effective management of creditorsB. Effective management of creditors

C. A likelihood of increasing bad debtsC. A likelihood of increasing bad debts

It is normal to expect payment from debtorswithin 30 days.

Try again

Management of creditors is measured throughthe Creditor Days Ratio.

Try again

Correct.


Which of the following defines Gearing?Which of the following defines Gearing?

A. The proportion of a companies profits that A. The proportion of a companies profits that arise from granting of credit.arise from granting of credit.

B. The proportion of a companies capital that B. The proportion of a companies capital that is financed by borrowing.is financed by borrowing.

Wrong. B was the correct solution.

Correct.


A firm has a creditor days ratio of 67 days. A firm has a creditor days ratio of 67 days. How might this affect its relationship with How might this affect its relationship with its suppliers?its suppliers?

A. Difficulty in obtaining further creditA. Difficulty in obtaining further credit

B. Enhanced credit ratingB. Enhanced credit rating

C. Likely to have no effectC. Likely to have no effect

Correct. It is likely thatSuppliers will want payment before further credit is granted.

Wrong. Suppliers do not enjoy beingmade to wait for payment. Try again


Which of the following explains why stock is Which of the following explains why stock is removed from current ratio to calculate removed from current ratio to calculate ATR?ATR?

A.Stock may already be ear-marked for a A.Stock may already be ear-marked for a specific buyer specific buyer

B.Stock is not a fully liquid asset, it may be B.Stock is not a fully liquid asset, it may be hard to turn into cash.hard to turn into cash.

Wrong. B was the correct answer,remember stock will include work in progressas well as raw materials.

Correct, this is because stock will include work in progressas well as raw materials.


A firm has current assets of £78,000 and A firm has current assets of £78,000 and current liabilities of £65,000. What is the current liabilities of £65,000. What is the firms current ratio?firms current ratio?

A. 1 : 1.2A. 1 : 1.2

B. 1.2 : 1B. 1.2 : 1

C. £13,000C. £13,000

Wrong. You have reversed the figures.Try again

Correct.

Wrong. The formula is Current Assets to Current LiabilitiesTry again


A firm has current assets of £127,000, stock A firm has current assets of £127,000, stock of £58,000 and current liabilities of of £58,000 and current liabilities of £94,000. What is the firms ATR?£94,000. What is the firms ATR?

A. 1 :0.73A. 1 :0.73

B. 1.96 : 1B. 1.96 : 1

C. 0.73 : 1C. 0.73 : 1

Wrong. You have reversed the figuresTry again

Wrong. You have added stock to CA, insteadof taking it away.Try again

Correct.

Question 10.Question 10.A firm has a cost of sales of £389,000 and A firm has a cost of sales of £389,000 and

creditors of £29,000. What is the firms creditors of £29,000. What is the firms creditor days ratio?creditor days ratio?

A. 7.45%A. 7.45%

B. 7.45 daysB. 7.45 days

C. 27.2 daysC. 27.2 days

Wrong. The ratio is expressed in days.Divide creditors by cost of sales andmultiply by 365.Try again

Wrong..Divide creditors by cost of sales andmultiply by 365.

Correct. The ratio is expressed in days.You divided creditors by cost of sales andmultiplied by 365.

You have now completed the test. For further more detailed revision please use the case studies on

the ALoA web site. www.aloa.co.uk

financial efficiency test

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