Accounting Exam Questions

The liquidity ratio measures a company’s ability to pay and meet its financial obligations or obligations within a specified time (Rist & Pizzica, 2015). Supplier of cash, quick ratio and current ratio whether the company pays at the agreed ratio if the annual liquidity ratio is:

2013

2014

2015

2

2.5

3

It can be concluded that the company has improved its financial position. You can also use your current assets to pay off your liabilities because your current assets have exceeded your current liabilities in the last three years.

Question 2

The profitability ratio measures the ability of a firm to raise profits to the shareholders. The profit, in this case, is the remainder after the firm has paid off all the expenses that are related to the business earnings. Examples include the return on investment, return on sales and the gross profit margin. The profitability ration can be used to make a comparison of the profit nature of two companies in the industry. For instance, a comparison can be made between Facebook and Google company profitability to see which company generates high profit.

Gross profit margin ratio

2013

2014

2015

0.975

0.756

0.2344

From the above gross profit margin ratio, it can be concluded that the company is not raising enough revenue from the declining profitability ratio (the efficiency is declining).

Question 3

The solvency ratio measures the firm’s sustain operations indefinitely (Garrett & James III, 2013). The ratio tends to quantify the exact size of the organization after income tax deductions, not counting expenses and depreciation. The ratio provides an overview of the organization’s ability to continue congregating the debt obligations. The long-term lenders can use this ratio to measure whether the company will pay them their debt within the time or not.

Debt-to-Equity

2014

2015

2016

33.3%

40%

50%

From the above ratio, it is clear the debtor’s stake in the company has been rising in the past three years. The scenario is adverse since the company will use a lot of funds to service debt.

References

Garrett, S., & James III, R. N. (2013). Financial Ratios and Perceived Household Financial Satisfaction. Journal of Financial Therapy, 4(1). doi:10.4148/jft.v4i1.1839

Rist, M., & Pizzica, A. J. (2015). Financial ratios for executives: How to assess company strength, fix problems, and make better decisions.