Tag: elements of accounts

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Questions Related to elements of accounts

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

The turnover ratio indicates ________.

  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
Reveal answer Fill a bubble to check yourself
C Correct answer
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.

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

State the formula for turnover ratio.

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

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

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

  4. $\dfrac {\text {Current assets}}{Sales}$
Reveal answer Fill a bubble to check yourself
B Correct answer
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. 

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

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

  1. $5$ months

  2. $4$ months

  3. $3$ months

  4. $2$ months
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

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

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

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

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

  1. High

  2. Low

  3. Equal

  4. None of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
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.

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

The ______ measures the activity of a firm's inventory.

  1. Average payment period

  2. Inventory turnover

  3. Average collection period

  4. Current ratio
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Inventory turnover ratio measures the activity of a firm's inventory i.e. the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.

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

The _____ ratio may indicate the firm is experiencing stock outs and lost sales. 

  1. Average payment period

  2. Inventory turnover

  3. Average collection period

  4. Quick
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The average payment period (APP) is defined as the number of days a company takes to pay off credit purchases. It is calculated as accounts payable/ (total annual purchases/360).  As the average payment period increases, cash should increases as well, but working capital remains the same. APP ratio may indicate the firm is experiencing stock outs and lost sales.

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

ABC co. extends credit term of 45 days to its customers. Its credit collection would be considered poor if its average collection period was ____________.

  1. 30 days

  2. 36 days

  3. 47 days

  4. 42 days
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

By monitoring average collection policy, the firm can see if its term are generally being met. ABC company's credit collection would be considered poor if collection period is more than 45 days i.e. Customers on average are significantly slower in paying than company policies allow.

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

Calculate debtor turnover ratio from the following information:
Total sales = Rs. 4,00,000
Cash sales = 20% of total sales
Debtor beginning of the year = Rs. 40,000
Debtors end of the year =  Rs. 1,20,000

  1. 3 times

  2. 4 times

  3. 6 times

  4. 5 times
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Average debtors = (Rs. 40,000 + Rs. 1,20,000)/2 = Rs. 80,000

Cash sales = 20% of total sales
                   = Rs. 4,00,000 x 20%
                   = Rs. 80,000
Net credit sales = Total sales - Cash sales

                           = Rs. 4,00,000 -  Rs. 80,000

                           = Rs. 3,20,000
Debtors turnover ratio = Net credit sales/Average debtors
                                      = Rs. 3,20,000/Rs. 80,000
                                      = 4 Times

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

Low assets turnover may indicate                .

  1. Low assets

  2. High cost of maintenance

  3. Idle assets

  4. Higher sales

  5. Both (B) and (C) above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Net Asset Turnover ratio = Sales/ Net Asset

Asset turnover highlights the amount of assets that the firm used to produce its total sales. Therefore a low asset turnover would indicate that the firm has idle or improperly use assets.