“Business Ratios related Frequently Asked Questions in various Business Ratios based job Interviews by interviewer. The set of questions here ensures that you offer a perfect answer posed to you. So get preparation for your new job hunting”
The interest coverage ratio is a financial ratio used to measure a company's ability to pay the interest on its debt. (The required principal payments are not included in the calculation.) The interest coverage ratio is also known as the times interest earned ratio.
In accounting, base year may refer to the year in which a business had adopted the LIFO cost flow assumption for valuing its inventory and its cost of goods sold. Under the dollar-value LIFO technique a company's current inventory is restated to base-year prices in order to determine whether the quantity of inventory has increased or decreased.
Current liability is an obligation that is 1) due within one year of the date of a company's balance sheet and 2) will require the use of a current asset or will create another current liability. If a company's operating cycle is longer than one year, current liabilities are those obligation's due within the operating cycle.
Current liabilities are usually presented in the following order:
★ The principal portion of notes payable that will become due within one year
★ Accounts payable
★ The remaining current liabilities such as payroll taxes payable, income taxes payable, interest payable and other accrued expenses.
The parties who are owed the current liabilities are referred to as creditors. If the creditors have a lien on company assets, they are known as secured creditors. The creditors without a lien are referred to as unsecured creditors.
A current asset is cash and any other company asset that will be turning to cash within one year from the date shown in the heading of the company's balance sheet. (If a company has an operating cycle that is longer than one year, an asset that will turn to cash within the length of its operating cycle is considered to be a current asset.)
The average collection period is the average number of days between:
1) the date that a credit sale is made
2) the date that the money is received from the customer.
The average collection period is also referred to as the days' sales in accounts receivable.
Assuming that a company has an accounts receivable turnover ratio of 10 times per year, the average collection period is 36.5 days (365 divided by 10).
The payback period is calculated by counting the number of years it will take to recover the cash invested in a project.
Let's assume that a company invests $400,000 in more efficient equipment. The cash savings from the new equipment is expected to be $100,000 per year for 10 years. The payback period is 4 years ($400,000 divided by $100,000 per year).
A second project requires an investment of $200,000 and it generates cash as follows: $20,000 in Year 1; $60,000 in Year 2; $80,000 in Year 3; $100,000 in Year 4; $70,000 in Year 5. The payback period is 3.4 years ($20,000 + $60,000 + $80,000 = $160,000 in the first three years + $40,000 of the $100,000 occurring in Year 4).
Net working capital or working capital is defined as current assets minus current liabilities.
Liabilities are obligations and are usually defined as a claim on assets. However, liabilities and stockholders' equity are also the sources of assets. Generally, liabilities are considered to have a lower cost than stockholders' equity. On the other hand, too many liabilities result in additional risk.
Some liabilities have low interest rates and some have no interest associated with them. For example, some of a company's accounts payable may allow payment in 30 days. With those payables it is better to have the liability and to keep your cash in the bank until they become due.
In our personal lives, our first house was probably purchased with a down payment and mortgage loan. That mortgage loan was a big liability, but it allowed us to upgrade our living space. I viewed my mortgage loan liability as a good thing because it allowed me to own a nice home in a beautiful neighborhood.
So some liabilities are good-especially the ones that have a very low interest rate. Too many liabilities could cause financial hardships.
A change in the total amount of current assets without a change of the same amount in current liabilities will result in a change in the amount of working capital. Similarly, a change in the total amount of current liabilities without an identical change in the total amount of current assets will cause a change in working capital.
Liquidation is a term commonly used when a company sells parts of its business for cash, or when it sells assets in order to pay debts. Liquidation may also involve the winding down or the closing of a business.
Liquidity is often evaluated by comparing a company's current assets to its current liabilities. Working capital, the current ratio, and the quick ratio are referred to as liquidity ratios or short-term solvency ratios , since their calculations use some or all of the current assets and the current liabilities. Sometimes a company's accounts receivable turnover ratio, inventory turnover ratio, and free cash flow are also used to assess a company's liquidity.
Liquidation is a term commonly used when a company sells parts of its business for cash, or when it sells assets in order to pay debts. Liquidation may also involve the winding down or the closing of a business.
Liquidity usually refers to a company's ability to pay its bills when they become due. Liquidity is often evaluated by comparing a company's current assets to its current liabilities.
The days sales in inventory is high when the inventory turnover is low.
Since inventory turnover is associated with sales and average inventory, changes in either sales or inventory can cause a high amount of inventory days.
For example, if a company has maintained its inventory quantities, but economic factors cause a significant drop in its sales, the company's inventory days will increase dramatically.
If a retailer increases its inventory in order to generate additional sales, but sales do not increase, there will also be an increase in the number of inventory days.
The separation of duties is one of several steps to improve the internal control of an organization's assets. For example, the internal control of cash is improved if the money handling duties are separated from the record keeping duties. By separating these duties the likelihood of theft is reduced because it will now require two dishonest people working together to admit to each other that they are dishonest, plan the theft, and to then carry out the theft. One person will have to remove the cash and the other person will have to falsify the records.
Without the separation of duties, the theft of cash is easier. One dishonest person can steal the money and enter a fictitious amount into the records-thereby concealing the theft.
Another step in improving internal control over cash is to use a cash register, issue receipts, and have two people present when cash is handled.
An expense will decrease the amount of assets or increase the amount of liabilities, and will reduce the amount of owner's or stockholders' equity.
For example an expense might:
1) reduce a company's assets such as Cash, Prepaid Expenses, or Inventory,
2) increase the credit balance in a contra-asset account such as Allowance for Doubtful Accounts or Accumulated Depreciation,
3) increase the balance in the liability account Accounts Payable, or increase the amount of accrued expenses payable such as Wages Payable, Interest Payable, and so on.
The liability account Accounts Payable for suppliers' invoices that have been received and must be paid. As a result, the balance in Accounts Payable is likely to be a precise amount that agrees with supporting documents such as invoices, agreements, etc.
I would use the liability account Accrued Expenses Payable for the accrual type adjusting entries made at the end of the accounting period for items such as utilities, interest, wages, and so on. The balance in the Accrued Expenses Payable should be the total of the expenses that were incurred as of the date of the balance sheet, but were not entered into the accounts because an invoice has not been received or the payroll for the hourly wages has not yet been processed, etc. The amounts recorded in Accrued Expenses Payable will often be estimated amounts supported by logical calculations.
If the registration fee refers to an amount you are refunding because someone had originally registered for one of your programs, I would:
1) credit Cash for the amount you are paying out as the refund,
2) debit a contra-revenue account such as Refunds of Registration Fee Revenues. This will allow you to easily track the total amounts of refunds that you make during a year. On the other hand, if it is rare for your organization to refund registration fees, you could simply:
1) debit the amount you are refunding to the normal revenue account such as Registration Fee Revenues
2) credit Cash.
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