Liquidity and Gearing Ratios Test
-
Upload
heather-carson -
Category
Documents
-
view
26 -
download
2
description
Transcript of Liquidity and Gearing Ratios Test
![Page 1: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/1.jpg)
Liquidity and Gearing Ratios Test
This test consists of 10 questions designed to test your understanding of liquidity and borrowing ratios. The ratios tested are Current Ratio , Acid Test Ratio and Gearing Ratio
The links provide you with a choice of answer, along with explanations and solutions.
You will need a calculator to complete this test.
![Page 2: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/2.jpg)
Question 1.
A firm has a Current Ratio of 6.5 : 1. Is this likely to indicate
a. over investment in current assets
b. a high level of current liabilities
c. a high level of gearing
![Page 3: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/3.jpg)
Your answer is correct. Too high a level
( above 2.5 :1), indicates perhaps too much cash tied up in current assets.
![Page 4: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/4.jpg)
Current Ratio measures liquidity of a business. If current liabilities are proportionately high, this indicates a ratio in balance, around 1:1
![Page 5: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/5.jpg)
Current ratio does not mention gearing, but looks at short term liabilities, and current assets.
![Page 6: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/6.jpg)
Question 2.
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
![Page 7: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/7.jpg)
80% indicates a relatively high proportionof funding from long term liabilities
![Page 8: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/8.jpg)
Liquid assets are measured by current ratio or acidtest ratio.
![Page 9: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/9.jpg)
Correct. Borrowing makes up a relatively highproportion of funds invested in the business,
![Page 10: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/10.jpg)
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 working capital.
C. Effective management of stock
![Page 11: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/11.jpg)
An Acid Test Ratio of 1:1 is regarded asnormal for many types of business
Try again
![Page 12: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/12.jpg)
Correct.
![Page 13: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/13.jpg)
Stock is excluded from current assets whencalculating ATR!
Try again
![Page 14: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/14.jpg)
Question 4.
A firm has a gearing ratio of 75% . This might be expected when
A. Most funds come from shareholders
B. The firm has borrowed to expand
C. ROCE is high
![Page 15: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/15.jpg)
Wrong.
Try again
![Page 16: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/16.jpg)
Try again
![Page 17: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/17.jpg)
Correct.
![Page 18: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/18.jpg)
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.
![Page 19: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/19.jpg)
Wrong. B was the correct solution.
![Page 20: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/20.jpg)
Correct.
![Page 21: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/21.jpg)
Question 6.
A firm has a Current Ratio of 0.5 to 1. How might this affect its payment relationship with its suppliers?
A. It may try to delay payments
B. It will be eager to pay suppliers quickly
![Page 22: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/22.jpg)
Correct.
![Page 23: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/23.jpg)
Wrong.
![Page 24: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/24.jpg)
Wrong.. Try again
![Page 25: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/25.jpg)
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.
![Page 26: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/26.jpg)
Wrong. B was the correct answer,remember stock will include work in progressas well as raw materials.
![Page 27: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/27.jpg)
Correct, this is because stock will include work in progressas well as raw materials.
![Page 28: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/28.jpg)
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
![Page 29: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/29.jpg)
Wrong. You have reversed the figures.Try again
![Page 30: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/30.jpg)
Correct.
![Page 31: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/31.jpg)
Wrong. The formula is Current Assets to Current LiabilitiesTry again
![Page 32: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/32.jpg)
Question 9.
A firm has current assets of £127,000, stock of £58,000 and other current liabilities of £94,000. What is the firms ATR?
A. 0.83: 1
B. 1.96 : 1
C. 1.35 : 1
![Page 33: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/33.jpg)
Wrong. Try again
![Page 34: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/34.jpg)
Wrong. You have added stock to CA.Try again
![Page 35: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/35.jpg)
Correct.
![Page 36: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/36.jpg)
Question 10.
A firm has LTL of £389,000 and capital employed of £1,290,000. What is the firms gearing ratio ratio?
A. 25.6%
B. 42.3%
C. 30.1%
![Page 37: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/37.jpg)
Wrong.
![Page 38: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/38.jpg)
Wrong..
![Page 39: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/39.jpg)
Correct.
![Page 40: Liquidity and Gearing Ratios Test](https://reader035.fdocuments.us/reader035/viewer/2022062517/5681351a550346895d9c6f3a/html5/thumbnails/40.jpg)
You have now completed the test. For further more detailed revision please use the case studies on
the NGFL web site