Question

1. Market ratios can answer all the following except:

a. Short term return expectations on investment

b. How well the company has rewarded investment in prior accounting periods

c. Amount of income earned per share of stock

d. Market expectations of future profitability

2. Which of the following does not accurately describe the acid test ratio?

a. A more conservative look at the company’s ability to meet current liabilities by focusing only on cash and cash equivalents as they relate to current liabilities

b. Tells us how many times the company can meet its current liabilities with all current asset in consideration

c. Answers the question “If we do not make another sell, how well positioned are we to meet our current obligations?”

d .Is also referred to as the quick ratio

Answer 1

1. Market ratios can answer all the following except:

   d) Market expectations for future profitability.

   Explanation: Market value per share ratio is used to get the market price and ascertain the short term benefit, as in short term period only revenue is from sale and no other form of return is received. Dividend Yield, Earning per share evaluate the return on investment awarded by company, and amount of income earned per share of stock, however no ratio helps in computing market expectations of future profitability.

2. Acid test ratio accurately describes except:

   b) Tells us how many times the company can meet its current liabilities with all current assets in consideration.

   Explanation: Acid test ratio which is also known as quick ratio takes only cash and cash equivalents into consideration, for this it does not consider stock of inventory, even though it is a current asset. Thus all current assets are not considered.