Financial Efficiency Test This test consists of 10 questions designed to test your understanding of financial efficiency ratios The links provide you with a choice of answer, along with explanations and solutions. You will need a calculator to complete this test.
Question 1. A firm has a Current Ratio of 4.5 : 1. Does this indicate a. Over investment in current assets b. A proportionately high level of current liabilities c. 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.
Question 2. A firm has a gearing level of 80%. Does this indicate. A firm has a gearing level of 80%. Does this indicate. A. A relatively low level of borrowing B. A high level of liquid assets C. A high proportion of long term liabilities
80% indicates a relatively high proportion of funding from long term liabilities
Liquid assets are measured by current ratio or acid test ratio.
Correct. Borrowing makes up a relatively high proportion of funds invested in the business,
Question 3. A firm has an Acid Test Ratio of 0.3: 1. Does this indicate A. A high level of liquidity B. A low level of liquidity. C. Effective management of stock
An Acid Test Ratio of 1:1 is regarded as normal for many types of business Try again
Correct.
Stock is excluded from current assets when calculating ATR! Try again
Question 4. A firm has a debtor days ratio of 87 days. Does this indicate A. Effective management of debtors B. Effective management of creditors C. A likelihood of increasing bad debts
It is normal to expect payment from debtors within 30 days. Try again
Management of creditors is measured through the Creditor Days Ratio. Try again
Correct.
Question 5. Which of the following defines Gearing? A. The proportion of a companies profits that arise from granting of credit. B. The proportion of a companies capital that is financed by borrowing.
Wrong. B was the correct solution.
Correct.
Question 6. A firm has a creditor days ratio of 67 days. How might this affect its relationship with its suppliers? A. Difficulty in obtaining further credit B. Enhanced credit rating C. Likely to have no effect
Correct. It is likely that Suppliers will want payment before further credit is granted.
Wrong. Suppliers do not enjoy being made to wait for payment. Try again
Wrong. Suppliers do not enjoy being made to wait for payment. Try again
Question 7. Which of the following explains why stock is removed from current ratio to calculate ATR? A.Stock may already be ear-marked for a specific buyer B.Stock is not a fully liquid asset, it may be hard to turn into cash.
Wrong. B was the correct answer, remember stock will include work in progress as well as raw materials.
Correct, this is because stock will include work in progress as well as raw materials.
Question 8. A firm has current assets of £78,000 and current liabilities of £65,000. What is the firms current ratio? A. 1 : 1.2 B. 1.2 : 1 C. £13,000
Wrong. You have reversed the figures. Try again
Correct.
Wrong. The formula is Current Assets to Current Liabilities Try again
Question 9. A firm has current assets of £127,000, stock of £58,000 and current liabilities of £94,000. What is the firms ATR? A. 1 :0.73 B : 1 C : 1
Wrong. You have reversed the figures Try again
Wrong. You have added stock to CA, instead of taking it away. Try again
Correct.
Question 10. A firm has a cost of sales of £389,000 and creditors of £29,000. What is the firms creditor days ratio? A. 7.45% B days C days
Wrong. The ratio is expressed in days. Divide creditors by cost of sales and multiply by 365. Try again
Wrong.. Divide creditors by cost of sales and multiply by 365.
Correct. The ratio is expressed in days. You divided creditors by cost of sales and multiplied by 365.
You have now completed the test. For further more detailed revision please use the case studies on the ALoA web site.