Tag: activity (or turnover) ratios

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Questions Related to activity (or turnover) ratios

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.

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

Stock Turnover ratio is a                    .

  1. Liquidity ratio

  2. Profitability ratio

  3. Solvency ratio

  4. Activity ratio
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation
Stock (Inventory) Turnover ratio is a activity ratio as it shows how much times the stock is being used or sold with respect to the turnover or cost of goods sold.
Let Cost of goods sold = $Rs. 100000$ , Opening inventory = $Rs. 55000$ and Closing Inventory = $Rs. 45000$
Stock turnover ratio = Cost of goods sold/ Average Inventory
Average Inventory = [Opening Inventory + Closing Inventory] /$2$
                                 =[ $55000 + 45000$]/$2$
                                  =$Rs. 50000$
Stock turnover ratio = $100000/ 50000$
                                   = $2$ times                       
Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

Sale of inventory on account will cause the inventory turnover ratio to                    .

  1. increase

  2. decrease

  3. remain unchanged

  4. none of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Inventory turnover ratio = Cost of goods sold(COGS) / Average inventory

Let Cost of goods sold be $Rs. 80000$ , Opening inventory = $Rs. 20000$ and Closing Inventory = $Rs.30000$
Average Inventory = [Opening Inventory + Closing Inventory] / 2
                                = $[20000 + 30000] / 2 $
                                 $Rs. 25000$
Inventory turnover ratio = $80000/ 25000$
                                         = $3.2 $ times
If inventory of $Rs. 10000$ is sold on credit then COGS = $Rs. 90000$ and the Closing Inventory = $Rs. 20000$
Revised Average Inventory = $[20000 +20000] /2$
                                               = $Rs. 20000$

Revised Inventory turnover ratio = 90000/2000080000/25000
                                         = 4.53.2 times

So sale of Inventory on account will cause the inventory turnover ratio to Increase.

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

The turnover ratio helps management for                        .

  1. Managing resources

  2. Managing debt

  3. Evaluating performance

  4. None of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Turnover ratios are used by management to evaluate the efficiency with which the firm manages and utilizes its assets. For example Fixed asset turnover ratio measures how efficiently the assets are used to generate sales.

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

Falling demand for the product in the market indicated by ________________.

  1. Finished goods turnover ratio

  2. Work in progress turnover ratio

  3. Net profit ratio

  4. Gross profit ratio
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A falling finished goods turnover ratio indicates that goods are not being sold as quickly as they are produced, which suggests a decline in market demand for the product.

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

Capacity ratio  X  Efficiency ratio =                             .

  1. Activity Ratio

  2. Capacity Ratio

  3. Efficiency Ratio

  4. None of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Capacity ratio X Efficiency ratio = Activity ratio

If Capacity ratio = $90\%$ , Efficiency ratio = $85\%$ , then
Activity ratio = $90/100$ x $85/100$
                      = $76.5\%$