Accounting Online Program Accounting Financial Ratios 5

Question 1

The cash ratio is considered the most conservative liquidity measure because it:

Accepted Answer

Only uses cash and cash equivalents in the numerator

Answer

The cash ratio = (Cash + Cash Equivalents) / Current Liabilities, using only the most liquid assets.

Question 2

A company has 50,000 shares outstanding, net income of $200,000, and pays $50,000 in dividends. What is the earnings per share (EPS)?

Accepted Answer

$4.00

Answer

EPS = Net Income / Shares Outstanding = $200,000 / 50,000 = $4.00 per share.

Question 3

Which of the following correctly describes the relationship between the times interest earned ratio and financial risk?

Accepted Answer

A higher ratio indicates the company can more easily service its debt

Answer

A higher times interest earned ratio means EBIT covers interest expense more comfortably, signaling lower default risk.

Question 4

A company's accounts payable turnover ratio is 6. What is the average days payable outstanding (DPO)?

Accepted Answer

61 days

Answer

DPO = 365 / Accounts Payable Turnover = 365 / 6 ≈ 60.8 days.

Question 5

Which ratio best captures how effectively management uses all available resources to generate profit?

Accepted Answer

Return on assets (ROA)

Answer

ROA = Net Income / Average Total Assets, measuring how efficiently the entire asset base is used to generate earnings.

Accounting Online Program Practice Test