Liquidity and Gearing Ratios Test

This test consists of 10 questions designed to test your understanding of liquidity and borrowing ratios. The ratios tested are Current Ratio , Acid Test Ratio and Gearing Ratio

The links provide you with a choice of answer, along with explanations and solutions.

You will need a calculator to complete this test.

Question 1.

A firm has a Current Ratio of 6.5 : 1. Is this likely to indicate

a. over investment in current assets

b. a high level of current liabilities

c. a high level of gearing

Your answer is correct. Too high a level

( above 2.5 :1), indicates perhaps too much cash tied up in current assets.

Current Ratio measures liquidity of a business. If current liabilities are proportionately high, this indicates a ratio in balance, around 1:1

Current ratio does not mention gearing, but looks at short term liabilities, and current assets.

Question 2.

A firm has a gearing level of 80%. Does this indicate.

A. A relatively low level of borrowing

B. A high level of liquid assets

C. A high proportion of long term liabilities

80% indicates a relatively high proportionof funding from long term liabilities

Liquid assets are measured by current ratio or acidtest ratio.

Correct. Borrowing makes up a relatively highproportion of funds invested in the business,

Question 3.

A firm has an Acid Test Ratio of 0.3: 1. Does this indicate

A. A high level of liquidity

B. A low level of working capital.

C. Effective management of stock

An Acid Test Ratio of 1:1 is regarded asnormal for many types of business

Try again

Correct.

Stock is excluded from current assets whencalculating ATR!

Try again

Question 4.

A firm has a gearing ratio of 75% . This might be expected when

A. Most funds come from shareholders

B. The firm has borrowed to expand

C. ROCE is high

Wrong.

Try again

Try again

Correct.

Question 5.

Which of the following defines Gearing?

A. The proportion of a companies profits that arise from granting of credit.

B. The proportion of a companies capital that is financed by borrowing.

Wrong. B was the correct solution.

Correct.

Question 6.

A firm has a Current Ratio of 0.5 to 1. How might this affect its payment relationship with its suppliers?

A. It may try to delay payments

B. It will be eager to pay suppliers quickly

Correct.

Wrong.

Wrong.. Try again

Question 7.

Which of the following explains why stock is removed from current ratio to calculate ATR?

A.Stock may already be ear-marked for a specific buyer

B.Stock is not a fully liquid asset, it may be hard to turn into cash.

Wrong. B was the correct answer,remember stock will include work in progressas well as raw materials.

Correct, this is because stock will include work in progressas well as raw materials.

Question 8.

A firm has current assets of £78,000 and current liabilities of £65,000. What is the firms current ratio?

A. 1 : 1.2

B. 1.2 : 1

C. £13,000

Wrong. You have reversed the figures.Try again

Correct.

Wrong. The formula is Current Assets to Current LiabilitiesTry again

Question 9.

A firm has current assets of £127,000, stock of £58,000 and other current liabilities of £94,000. What is the firms ATR?

A. 0.83: 1

B. 1.96 : 1

C. 1.35 : 1

Wrong. Try again

Wrong. You have added stock to CA.Try again

Correct.

Question 10.

A firm has LTL of £389,000 and capital employed of £1,290,000. What is the firms gearing ratio ratio?

A. 25.6%

B. 42.3%

C. 30.1%

Wrong.

Wrong..

Correct.

You have now completed the test. For further more detailed revision please use the case studies on

the NGFL web site