MCQ Quiz

Question 1 of 21

A company has working capital turnover of 4.0. What does this indicate?

The company generates 4 of revenue for every 1 of working capital.
The company generates 1 of revenue for every 4 of working capital.
The company takes 4 days to convert working capital into revenue.

Question 2 of 21

According to the text's Lenovo example, if accounts receivable are increasing faster than sales growth while the percentage of receivables over 30 days old is also increasing, what is the most likely interpretation?

The company has improved its collection efficiency.
The company may be extending customer financing to drive sales growth or underestimating impairment.
The company has tightened its credit standards to reduce credit risk.

Question 3 of 21

A company has DOH of 45 days, DSO of 35 days, and Days Payable of 50 days. What is the cash conversion cycle?

30 days
80 days
130 days

Question 4 of 21

According to the text, when is working capital turnover incapable of being meaningfully interpreted?

When the company has negative net income.
When working capital is near zero or negative.
When the company operates in a capital-intensive industry.

Question 5 of 21

Activity ratios are also known by which alternative names and measure which aspect of company performance?

Asset utilization ratios; they measure how effectively a company uses its working capital and long-term assets.
Leverage ratios; they measure how effectively a company uses debt to finance operations.
Coverage ratios; they measure how effectively a company covers its fixed obligations.

Question 6 of 21

An analyst calculates that a company has inventory turnover of 12 times per year. How should the analyst interpret the Days of Inventory on Hand (DOH)?

The company holds approximately 12 days of inventory.
The company holds approximately 30 days of inventory.
The company holds approximately 365 days of inventory.

Question 7 of 21

Which formula correctly calculates inventory turnover?

Revenue ÷ Average Inventory
Cost of Goods Sold ÷ Average Inventory
Average Inventory ÷ Cost of Goods Sold

Question 8 of 21

Why do activity ratios typically use average balance sheet figures rather than ending balances?

Average figures are easier to calculate than ending balances.
Income statement data represents flows over a period, so they should be matched with average stocks during that period.
Ending balances are often distorted by seasonal effects.

Question 9 of 21

A company's Days Sales Outstanding (DSO) has increased from 30 days to 45 days while industry DSO remained at 30 days. Which conclusion is most appropriate?

The company is collecting cash from customers more quickly than before.
The company may have loosened credit standards or is experiencing collection difficulties.
The company's liquidity has improved due to better working capital management.

Question 10 of 21

A company has high days payable relative to the industry. To determine if this indicates payment difficulties or lenient supplier terms, an analyst should examine:

The company's revenue growth rate compared to industry.
The company's liquidity ratios to assess availability of cash and short-term assets.
The company's fixed asset turnover to determine capital intensity.

Question 11 of 21

Trade receivables at the beginning of the year: USD4,468,392; Trade receivables at year-end: USD4,972,722; Revenue for the year: USD45,349,943. Calculate receivables turnover.

9.11 times
9.61 times
10.14 times

Question 12 of 21

A company has quarterly (90-day) Cost of Goods Sold of 35,000 and average inventory of 11,000. What is the annualized inventory turnover?

3.18 times
12.72 times
28.30 times

Question 13 of 21

A company has a high inventory turnover ratio relative to industry norms. Which interpretation requires additional investigation?

The company has highly effective inventory management resulting in minimal carrying costs.
The company does not carry adequate inventory, potentially leading to stockouts and lost sales.
The company has significant obsolete inventory that should be written down.

Question 14 of 21

According to the text, what numerator is generally used in calculating receivables turnover, and why?

Credit sales only, because this represents sales for which receivables were created.
Total revenue, because credit sales information is usually not available to external analysts.
Cash collections, because this represents the actual cash received from customers.

Question 15 of 21

In the Apple example from the text, what explains the negative cash conversion cycle?

Apple's DOH is negative because it sells products before purchasing inventory.
Apple's days payable (112 days) exceeds the sum of DOH (9 days) and DSO (27 days).
Apple has a negative DSO because customers pay in advance.

Question 16 of 21

A company has a high payables turnover ratio (low days payable) relative to its industry. Which is the most likely explanation?

The company is experiencing difficulty paying suppliers on time.
The company is taking advantage of early payment discounts or not fully utilizing available credit.
The company has negotiated extended payment terms with suppliers.

Question 17 of 21

Total asset turnover measures a company's overall ability to generate revenues with a given level of assets. What does a ratio of 1.20 indicate?

The company generates 1.20 of assets for every 1 of revenue.
The company generates 1.20 of revenue for every 1 of average assets.
The company's assets turn over every 1.20 years.

Question 18 of 21

A company with newer, less-depreciated assets would most likely have a fixed asset turnover ratio that is:

Higher than a company with older, more-depreciated assets, assuming similar revenue levels.
Lower than a company with older, more-depreciated assets, assuming similar revenue levels.
Unaffected by the age and depreciation status of assets.

Question 19 of 21

The cash conversion cycle (net operating cycle) is calculated as:

DOH + DSO + Number of Days of Payables
DOH + DSO − Number of Days of Payables
DSO − DOH − Number of Days of Payables

Question 20 of 21

A company has Cost of Goods Sold of 600,000 for the year. Beginning inventory was 80,000 and ending inventory was 120,000. What is the inventory turnover ratio?

5.0 times
6.0 times
7.5 times

Question 21 of 21

A company has annual revenue of 730 million and average receivables of 100 million. What is the Days Sales Outstanding (DSO)?

7.3 days
50 days
73 days

Activity Ratios

First Principles Thinking: Interpreting the Turnover Ratio

First Principles Thinking: Linking Multiple Signals

First Principles Thinking: Net Operating Cycle

First Principles Thinking: Denominator Constraints

First Principles Thinking: Defining Activity Ratios

First Principles Thinking: Converting Turnover to Days

First Principles Thinking: Matching Numerator and Denominator

First Principles Thinking: Matching Flows to Stocks

First Principles Thinking: DSO as a Collection Efficiency Metric

First Principles Thinking: Distinguishing Between Interpretations

First Principles Thinking: Lenovo Example from Text

First Principles Thinking: Converting Quarterly to Annual

First Principles Thinking: Dual Interpretations of High Turnover

First Principles Thinking: Practical Constraints in Ratio Calculation

First Principles Thinking: Exceptional Working Capital Management

First Principles Thinking: High Turnover Means Quick Payment

First Principles Thinking: Revenue Generation per Asset Unit

First Principles Thinking: Impact of Asset Age on Book Value

First Principles Thinking: The Timeline of Cash Flows

First Principles Thinking: Calculating Average Inventory

First Principles Thinking: Two-Step Calculation