Chapter5_In_Class[1]

Chapter5_In_Class[1] - Chapter 5 Financial Ratios In Class...

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1 Chapter 5 Financial Ratios In Class Practice Questions 1. Liquidity ratios (1) Compute the current ratio for the years 2001 and 2002 In 2002, for every $ 1 of current liabilities, the Grand Hotel has $1.58 current assets. Thus, there is a cushion of $.58 for every dollar of current debt. By comparison, the 2001 current ratio for the Grand hotel was 1.15. An increase in the current ratio from 1.15 to 1.58 within one year is considerable and would no doubt please creditors. (2) Compute the quick ratio for the years 2001 and 2002 The 2002 quick ratio reveals quick assets of $1.44 for every $1.00 of current liabilities. This is an increase of .44 times over the 2001 quick ratio. Although the quick ratio was 1.00 for 2001, the Grand Hotel was not in difficult financial situation. Many hospitality firms are able to operate efficiently and effectively with a quick ratio of 1 or less, for they have minimal amounts of both inventory and accounts receivable. (3) Compute the accounts receivable turnover for the years 2001 and 2002 The accounts receivable turnover of 11.76 indicates that the total revenue for 2002 is 11.76 times the average receivable. This is lower than the Grand Hotel’s 2001 accounts receivable turnover of 13.68. Management would generally investigate the difference. The investigation may reveal problems, or that changes in the credit policy and/or collection procedures significantly contributed to the difference.
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2 2. Solvency ratios (1) Compute the debt ratio or solvency ratio for the years 2001 and 2002 At the end of 2002, the Grand Hotel has $1.78 of assets for each of $1.00 of liabilities. The Grand Hotel’s solvency ratio at the end of 2001 was 1.65 times. The 2001 ratio would be considered more favorable from the perspective of creditors. (2)
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Chapter5_In_Class[1] - Chapter 5 Financial Ratios In Class...

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