Chapter_4_Questions - Chapter4Questions 1.

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Chapter 4 Questions 1. Why is the current ratio the most commonly used to measure of  short term liquidity? Because the current ratio is calculated by dividing current assets by current  liabilities. It indicates the extent to which current liabilities are covered by  those assets expected to be converted to cash in the near future. 2. What is a major problem with the current ratio?  Explain how is it  resolved? 3. If one firm is growing rapidly and another is not, how might this  distort a comparison of their inventory turnover ratios? Inventory turnover ratio = Sales / Inventories The growing rapidly firm will have larger sales and smaller inventories than  another firm, so the inventory turnover ratio of the growing rapidly firm will  higher than another. 4. Briefly describe the days sales outstanding (DSO) ratio.  What is  the ratio compared to? DSO ratio is calculated by dividing accounts receivable by average sales per  day; it indicates the average length of time the firm must wait after making a  sale before it receives cash. DSO compares to the terms on which the firm sells its goods. 5. What are potential problems of the fixed asset turnover ratio? Inflation has caused the value of many assets that were purchased in the past  to be seriously understated. Therefore, if we compared an old firm that had  acquired many of its fixed assets years ago at low prices with a new company  with similar operations that had acquired its fixed assets only recently, the old 
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This note was uploaded on 03/31/2011 for the course ACT 1111 taught by Professor Asd during the Spring '11 term at Troy.

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Chapter_4_Questions - Chapter4Questions 1.

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