which ratio is used in both measuring firm\'s liability and generating adequate
ID: 2748608 • Letter: W
Question
which ratio is used in both measuring firm's liability and generating adequate operating profitability ? a. average collection period b. operating profit margin c. acid-test ratio d. inventory turnover e. a and d which ratio is used in both measuring firm's liability and generating adequate operating profitability ? a. average collection period b. operating profit margin c. acid-test ratio d. inventory turnover e. a and d which ratio is used in both measuring firm's liability and generating adequate operating profitability ? a. average collection period b. operating profit margin c. acid-test ratio d. inventory turnover e. a and dExplanation / Answer
average collection period is of significant importance when used in conjunction with liquidity ratios.
A short collection period means prompt collection and better management of receivables. A longer collection period may negatively effect the short-term debt paying ability of the business in the eyes of analysts.
Average collecion period=Numbers of working days/debtors turnover ratio
The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. This measures how many times average inventory is "turned" or sold during a period.
=cost of goods sold/average inventory.
Operating margin or operating profit margin measures what proportion of a company's revenue is left over, after deducting direct costs and overhead and before taxes and other indirect costs such as interest.
Operating maring= operating income/net sales*100
Acid Test Ratio is an indicator of company's short-term liquidity. It measures the ability to use its immediate assets (cash, cash equivalents and marketable securities) to pay its current liabilities.
=Cash+Matketable securities/current liabilities
C. Acid - test ratio.
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