Questions Video Ratio Analysis
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Accounting and Financial Management for Bankers — JAIIB.
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What is ratio analysis in the context of financial management?
Ratio analysis is a quantitative technique used to evaluate a firm's financial performance by establishing mathematical relationships between two or more items from financial statements such as the balance sheet and income statement.
What is the formula for the Current Ratio?
Current Assets divided by Current Liabilities.
What does the Current Ratio measure?
The Current Ratio measures a firm's short-term liquidity by comparing current assets to current liabilities; a ratio of 2:1 is traditionally considered ideal for most businesses.
What is considered an ideal Current Ratio for a manufacturing firm?
2:1 is considered the ideal current ratio.
How is the Quick Ratio (Acid Test Ratio) calculated?
Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities; it measures the ability to meet short-term obligations without relying on the sale of inventory.
What is the ideal Quick Ratio recommended by bankers?
1:1 is the ideal quick ratio for credit appraisal.
What is the significance of the Debt-Equity Ratio?
The Debt-Equity Ratio indicates the proportion of debt and equity used to finance a firm's assets; a higher ratio implies greater financial risk and dependence on external borrowings.
Which ratios are used to assess a firm's short-term liquidity position?
Current ratio, quick ratio, and cash ratio.
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