FInancial accounting cours 10

Question 1

What is the use of management ratios?

Answer 1

They are ratios that provide a better understanding of a company’s business or Cash Conversion cycle.

Question 2

What is the Cash Conversion cycle?

Answer 2

• The period between purchasing raw materials (or goods) and collecting sales revenue.
• It is the time required to complete the cycle that depends on the nature of the business.

Question 3

What is the beginning of the management cycle?

Answer 3

Purchase of raw material (or goods) from the supplier.

Question 4

Describe the management cycle after the first step.

Answer 4

Payment of the supplier –> Sale of goods to the customer –> Receipt of sums due by the customers

Question 5

Describe the Days Accounts Payables Outstanding.

Answer 5

It represents the average number of days between the time the company purchases its inventory and the time it pays the suppliers.

Question 6

What is the formula for the Days Accounts Payables Outstanding?

Answer 6

(Accounts Payable/Purchases)*365 days (number of days)

Question 7

How do you calculate the purchases?

Answer 7

• They must be calculated based on inventory (beginning and closing) and the Cost of Sales.
• Purchases = Cost of Sales + Closing Inventory - Beginning inventory

Question 8

Describe the Accounts Payable Turnover.

Answer 8

This ratio shows the frequency of payments for purchases during the fiscal year.

Question 9

What is the formula for Accounts Payable Turnover?

Answer 9

Purchases/Accounts Payable (number of times)

Question 10

Describe the Days Inventory Outstanding.

Answer 10

It represents the number of days between the purchase and sale of inventory (or goods).

Question 11

What is the formula for Days Inventory Outstanding?

Answer 11

(Inventory/Cost of sales)*365 days (number of days)

Question 12

What is the comparability with the Days Inventory Outstanding?

Answer 12

You need to keep the Days Inventory Outstanding close to the industry standard.

Question 13

Describe Inventory Turnover.

Answer 13

This is the frequency of inventory turnover during the fiscal year.

Question 14

What is the formula for Inventory Turnover?

Answer 14

Cost of sales/Inventory (number of times)

Question 15

Give examples of low inventory turnover.

Answer 15

• Risk of obsolescence.
• High storage costs.

Question 16

Give examples of high inventory turnover.

Answer 16

The problem of too many goods being “out of stock”

Question 17

Describe Days Sales Outstanding.

Answer 17

It represents the number of days between the sale of inventory (or goods) and the receipt of money due from the customer.

Question 18

What is the formula for the Days Sales Outstanding?

Answer 18

(Accounts receivable/Revenues)*365 days (number of days)

Question 19

Describe the account receivables Turnover.

Answer 19

This ratio calculates the frequency of sales collection during a fiscal year.

Question 20

What is the formula for Receivables Turnover?

Answer 20

Revenues/Accounts Receivable (number of times)

Question 21

How do you calculate the inventory conversion cycle?

Answer 21

Days Inventory Outstanding + Days Sales Outstanding

Question 22

What does the inventory conversion cycle represent?

Answer 22

It represents the delay between the receipt (or end of production) of inventory and its transformation into cash.

Question 23

How do you calculate the Cash Conversion Cycle?

Answer 23

Time to sell inventory + customer collection time - Days Payable Outstanding

Question 24

Describe Asset Turnover. ($)

Answer 24

This ratio indicates what each dollar invested in the Assets generates in dollars of Sales.

Question 25

What is the formula for Asset Turnover?

Answer 25

Revenues/Total Assets

Question 26

Describe the interpretation of Asset Turnover.

Answer 26

• Relationship between sales volume and company size.
• The higher the ratio, the more the company uses all its resources.
• If interpreted in combination with the Net Profit Margin ratio, the Asset Turnover ratio gives an idea of the strategy (margin or volume).

Question 27

What happens if there is a high asset turnover ratio and a low Net Margin?

Answer 27

It’s a volume-oriented strategy.

Question 28

What happens if there is a low asset turnover ratio and a high Net Margin?

Answer 28

It’s a margin-oriented strategy.

Question 29

Describe the liquidity ratios.

Answer 29

• These ratios make it possible to assess the company’s ability to meet its current obligations, which appear in the Current Liabilities.
• There’s a link between these ratios and the quality of management.
• The higher the ratios, the better the company’s solvency situation.

Question 30

What is another name for liquidity ratios?

Answer 30

Solvency

Question 31

What is the order of the 3 liquidity ratios?

Answer 31

Acid Test < Quick ratio < Current ratio

Question 32

How do you calculate the Current ratio?

Answer 32

Current asset/Current liability

Question 33

How do you calculate the Quick ratio?

Answer 33

(Cash + Current investments + Accounts Receivable)/Current liability

Question 34

How do you calculate the Acid Test?

Answer 34

(Cash and cash equivalents + Current Investments)/Current liability

Question 35

What is the other name for the Acid Test?

Answer 35

The Cash ratio

Question 36

What happens if the Current ratio is inferior to 1?

Answer 36

Working Capital Liquidity is negative.

Question 37

What happens if the Current ratio is superior to 1?

Answer 37

Working Capital Liquidity is positive.