You wish to know how well a company is managing its accounts receivable and inve

Question

You wish to know how well a company is managing its accounts receivable and inventory. You will be looking at

Liquidity ratios

Leverage ratios

Activity or asset management ratios (these terms are used interchangeably)

Profitability ratios

A company's ability to pay its loans would be captured in the _____ ratio

Debt

Times interest earned

Debt to equity

Acid test

What is true of this company?

Becoming more liquid evidenced by its cash coverage

Increasing its investment in inventory

Improving its ability to borrow

Becoming less liquid as evidenced by its debt ratio

Apex Company reports:

Depreciation     50

COGS              700

Sales            1,000

SG&A               100

Its peer group has a gross profit margin of 25%. How does Apex compare to its peers?

Apex 15% gross profit margin is inferior to its peer group

Apex 20% gross profit margin is inferior to its peer group

Apex 30% gross profit margin is superior to its peer group

Apex 25% gross profit margin is the same as its peer group--no better or worse

A company reports the following:

Which of the following is a correct statement?

The company is becoming less liquid as evidenced by the cash coverage ratio

The company is reducing its investment in accounts receivable

The owners are financing an increasing percentage of assets

The company is carrying more inventory than in previous years

Liquidity ratios

Leverage ratios

Activity or asset management ratios (these terms are used interchangeably)

Profitability ratios

Explanation / Answer

1 .c..Activity ratios Activity ratios indicate a company's performance in the form of sales, per another   asset account ,most importantly, current assets like accounts receivables & inventory 2. a. Debt ratio Measures the ability of the company to pay off its liabilities with its assets. 3. c. Improving its ability to borrow Debt ratio= Total debt(liabilities)/total assets Decreasing debt ratio indicates increased asset base (denominator)and more   scope to borrow more funds & also Increasing cash coverage ocer the years indicate availability of cash for interest payments in the event of borrowing. 4. c.Apex 30% gross profit margin is superior to its peer group Gross profit= Sales- COGS ie. 1000-700= 300 Apex Co.Gross profit margin = 300/1000= 30% Peer group margin= 25% Hence the answer c. 5. c. The owners are financing an increasing percentage of assets Decreasing debt ratio indicates that increased percentage of assets is being financed by debt -- as debt ratio is total debt/total assets

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