Accounting Online Program Accounting Financial Ratios 3 — Questions and Answers
Question 1: A company has current assets of $500,000, inventory of $150,000, and current liabilities of $200,000. What is the quick ratio?
- 1.75 (Correct answer)
- 2.50
- 2.00
- 1.60
Correct answer: 1.75
Quick ratio = (Current Assets − Inventory) / Current Liabilities = ($500,000 − $150,000) / $200,000 = 1.75.
Question 2: Which of the following best describes the DuPont analysis framework?
- A method to decompose ROE into net profit margin, asset turnover, and equity multiplier (Correct answer)
- A technique for calculating the current ratio
- A formula for determining a company's market capitalization
- An approach to estimating bad debt expense
Correct answer: A method to decompose ROE into net profit margin, asset turnover, and equity multiplier
DuPont analysis breaks ROE into three components: net profit margin, asset turnover, and the equity multiplier (financial leverage).
Question 3: If inventory turnover is 8 times per year, the average days in inventory is approximately:
- 30 days
- 45 days
- 46 days (Correct answer)
- 60 days
Correct answer: 46 days
Days in inventory = 365 / Inventory Turnover = 365 / 8 ≈ 45.6 days.
Question 4: A company with a high asset turnover ratio but a low net profit margin most likely competes in which type of industry?
- Luxury goods
- Pharmaceuticals
- Grocery retail (Correct answer)
- Software
Correct answer: Grocery retail
Grocery retailers typically operate on thin margins but turn over assets rapidly due to high sales volume relative to asset base.
Question 5: The equity multiplier in DuPont analysis is calculated as:
- Net Income / Total Equity
- Total Assets / Total Equity (Correct answer)
- Total Debt / Total Equity
- Net Sales / Total Assets
Correct answer: Total Assets / Total Equity
The equity multiplier = Total Assets / Total Equity, and it measures financial leverage.
Question 6: A declining current ratio over multiple periods may indicate:
- Improving short-term financial strength
- Increasing liquidity risk or rising short-term obligations (Correct answer)
- Better management of long-term debt
- Higher profitability
Correct answer: Increasing liquidity risk or rising short-term obligations
A falling current ratio suggests either current liabilities are growing faster than current assets, raising potential liquidity concerns.
Question 7: Which ratio is most useful for comparing profitability across companies with different capital structures?
- Net profit margin
- Return on equity
- Return on assets (ROA) (Correct answer)
- Earnings per share
Correct answer: Return on assets (ROA)
ROA measures profit relative to total assets regardless of how those assets are financed, making it useful across firms with different debt levels.
Accounting Online Program Accounting Financial Ratios 3
A company has current assets of $500,000, inventory of $150,000, and current liabilities of $200,000.
What is the quick ratio?