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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.
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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 Spring '09
 BU

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