Small business finance chpt 12 &13

The ability of a business to pay its bills over the next year can be measured with ______________.

liquidity ratios. Liquidity ratios measure the ability of a business to pay its bills over the next year.

debt

money borrowed by the business that must be repaid.

leverage ratios

the ability of a business to repay debt.

Leverage ratios measure __________________.

the ability of a business to repay its debt. Leverage ratios measure the ability of a business to repay its debt.

fixed payment coverage ratio

the ability of the company to generate sufficient earnings to meet its fixed payment liabilities, including any payments required on asset leases.

debt to equity ratio

the amount of debt a company has in comparison to the amount of equity invested in the company.

current liabilities

the debts the business must pay within the next year.

debt

the money borrowed by the business that must be repaid.

Which of the following is not a current asset?

Accounts payable. Current assets include cash, accounts receivable and inventory.

Which of the following is a current liability?

Accounts payable. Current assets include cash, accounts receivable and inventory. Accounts payable is a current liability.

A lower liquidity ratio is better than a higher liquidity ratio.

False. the larger the liquidity ratio, the better the companyís bill paying ability.

Which of the following is the formula for the interest coverage ratio?

Operating profit divided by interest payments. The interest coverage ratio is calculated as operating profit divided by interest payments.

Which of the following is true when a business leases a significant number of assets on which it must make monthly payments?

The fixed payment coverage ratio is the best measure of the ability to generate earnings to meet fixed obligations. When a business leases its assets, the fixed payment coverage ratio is the best measure of the ability to generate earnings to meet fixed obligations as it includes both interest payments and asset lease payments.

liquidity ratios

measure the ability of a business to pay its bills over the next year.

If there is a concern that inventory might not be able to be converted to cash quickly, the ___________ should be used to measure liquidity.

quick ratio. The quick ratio measures bill paying ability with inventory.

current assets

the assets of the business that are already in cash, or that the business can expect to convert to cash within one year. In addition to cash, current assets include the business's accounts receivable and inventory, as these are likely to be turned into cash within one year.

. A debt to equity ratio of 3.0 means _________________.

the company has 3 times as much debt as shareholder ís equity. A debt to equity ratio of 3.0 means the company has 3 times as much debt as shareholderís equity.

. A debt to equity ratio of 3.0 means _________________.

the company has 3 times as much debt as shareholderís equity. A debt to equity ratio of 3.0 means the company has 3 times as much debt as shareholderís equity.

The formula for current ratio is ______________.

current assets / current liabilities. The current ratio is calculated by dividing current assets by current liabilities.

The formula for the quick ratio is _____________.

(current assets - inventory) / current liabilities. The quick ratio is calculated by dividing current assets less inventory by current liabilities.

Current assets are $50,000 (including $25,000 of inventory), and current liabilities are $40,000. Calculate the quiz ratio.

0.625. The current ratio is calculated by dividing current assets less inventory by current liabilities, in this example, ($50,000 - $25,000) / $40,000 = $25,000 / $40,000 = 0.625.

A current ratio greater than ______ indicates that a business has sufficient assets to pay its bills over the next year.

1.0. A current ratio greater than 1.0 indicates that a business has sufficient assets to pay its bills over the next year.

A current ratio less than ______ indicates a business might have difficulty paying their bills over the next year.

1.0. A current ratio less than 1.0 indicates a business might have difficulty paying their bills over the next year.

An interest coverage ratio greater than ________ indicates a business has sufficient profits to make its interest payments.

1.0. Interest coverage ratios in excess of 1.0 indicate that a business has sufficient profits to make its interest payments.

An interest coverage ratio greater than ________ indicates a business has sufficient profits to make its interest payments.

1.0.Interest coverage ratios in excess of 1.0 indicate that a business has sufficient profits to make its interest payments.

Current assets are $50,000 (including $25,000 of inventory), and current liabilities are $40,000. Calculate the current ratio.

1.25. The current ratio is calculated by dividing current assets by current liabilities, in this example, $50,000 / $40,000 = 1.25.

Monthly profits are $45,000, monthly interest payments are $15,000 and monthly asset lease payments are $5,000. Calculate the fixed payment coverage ratio.

2.50. The fixed payment coverage ratio is the sum of profits and asset lease payment divided by the sum of interest payments, principal payments, and asset lease payments, in this example, ($45,000 + $5,000) / ($15,000 + 0 + $5,000) = $50,000 / $20,000 = 2.50.

Monthly profits are $45,000, and monthly interest payments are $15,000. Calculate the interest coverage ratio.

3.0. The interest coverage ratio is calculated by dividing profits by interest payments, in this case, $45,000 / $15,000 = 3.0.

A business has total liabilities of $125,000 and total ownersí equity of $25,000. Calculate the debt to equity ratio.

5.0. Debt to equity is calculated by dividing total liabilities by total equity, in this example, $125,000 / $25,000 = 5.0.

Which of the following is a source of funds a business can use to acquire assets for use in the production processes?

All of the above. Profits earned by the business, equity investment in the business by the owner, and borrowings from a bank are all sources of funds a business can use to acquire assets for the production process.

Which of the following is a source of funds a business can use to acquire assets for use in the production processes?

Borrowings from a bank Profits earned by the business All of the above Equity investment in the business by the owner. Profits earned by the business, equity investment in the business by the owner, and borrowings from a bank are all sources of funds a business can use to acquire assets for the production process.

Which of the following is the formula for the fixed payment coverage ratio?

Operating profit plus asset lease payments divided by the sum of interest, principal, and asset lease payments. The fixed payment coverage ratio is calculated as operating profit plus asset lease payments divided by the sum of interest, principal, and asset lease payments.

Which of the following is the most significant difference between the interest coverage ratio and the fixed payment coverage ratio?

The fixed payment coverage ratio includes asset lease payments while the interest coverage ratio does not. The fixed payment coverage ratio includes asset lease payments, while the interest coverage ratio only includes interest payments.

Which of the following is true when a business leases a significant number of assets on which it must make monthly payments?

The fixed payment coverage ratio is the best measure of the ability to generate earnings to meet fixed obligations.When a business leases its assets, the fixed payment coverage ratio is the best measure of the ability to generate earnings to meet fixed obligations as it includes both interest payments and asset lease payments.

Which of the following is the formula for the debt to equity ratio?

Total liabilities divided by total equity. Debt to equity is calculated by dividing total liabilities by total equity.

A business without much debt in relation to its equity will have _______________.

a low debt to equity ratio. A business without much debt in relation to its equity will have a low debt to equity ratio.

. The purpose of the interest coverage ratio is to help a lender determine ________________.

if a business has sufficient operating earnings before taxes to make their interest payments. The purpose of the interest coverage ratio is to help a lender determine if a business has sufficient operating earnings before taxes to make their interest payments.

The purpose of the interest coverage ratio is to help a lender determine ________________.

if a business has sufficient operating earnings before taxes to make their interest payments. The purpose of the interest coverage ratio is to help a lender determine if a business has sufficient operating earnings before taxes to make their interest payments.

fixed payment coverage ratio

measures the ability of the company to generate sufficient earnings to meet its fixed payment liabilities, including any payments required on asset leases.

The acid test is another name for _________________.

the quick ratio. The acid test is another name for the quick ratio.

interest coverage ratio

the ratio of earnings before interest and taxes (aka operating profit) to annual interest costs.

asset lease payments

the required payments on assets a business has leased rather than purchased.