Question

QUESTION 4 As a barometer of short-term liquidity the current ratio is limited by the nature of its components. All of the following are reasons that this is true except: C A firm could have a high current ratio but not be able to meet demands for cash because inventory is salable only at discounted rices. C The balance sheet is prepared as of a particular date and the actual amount of liquid assets may vary considerably from the date on which the balance sheet is prepared C A firm could have a high current ratio but not be able to meet demands for cash because the accounts receivable are of inferior quality. C The income statement may show losses rather than profits. QUESTION 5 Which statement below is false with regard to the cash conversion cycle? C The cash conversion cycle is the sum of the average collection period, days inventory held and days payable outstanding. C The cash conversion cycle will increase if the average collection period and days inventory held increases or if days payable outstanding decreases. The cash conversion cycle is also referred to as the net trade cycle. C The cash conversion cycle helps the analyst understand why cash flow generation has improved or deteriorated. QUESTION 6 All of the following statements are true except: C The accounts receivable, inventory and payable turnover ratios are mathematical complements to the ratios that make up the cash conversion cycle, and therefore, measure exactly what the average collection period, days inventory held, and days payable outstanding measure for a firm. C Large amounts of cash, cash equivalents, marketable securities, and long-term investments unrelated to core operations will cause the total asset turnover to be higher as the return on these items is recorded in sales. C The fixed asset turnover considers only the firm's investment in property, plant, and equipment and is extremely important for a capital-intensive firm. O The fixed and total asset turnover ratios are two approaches to assessing management's effectiveness in generating sales from investments in assets. QUESTION 7 All of the following statements are true except: C A firm with too much debt may have difficulty obtaining additional debt financing when needed or finds that credit is available only at extremely high rates of interest. Failure to satisfy the fixed charges associated with debt will ultimately result in bankruptcy The amount and proportion of debt in a company's capital structure is extremely important to the financial analyst because of the C trade-off between risk and return. C Having debt is always risky and does not provide increased benefits to the firm's owners.

Answer 1