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Business 9203 Section 2
MANAGING FINANCIAL RESOURCES
QUIZ
June 2011
STUDENT NUMBER _____________________________
You have a maximum of 80 minutes for the quiz. Please provide your answers on this paper in the spaces provided and hand in your paper at the end of the quiz. Only short precise answers are required and you can use point form. The weight given to each question is indicated at the end of the question. The total possible marks are 70. The quiz is open book and you may feel free to use Excel. You must abide by the Ivey Professional Code of Conduct and cannot use any external sources of information such as the WEB or other classmates to assist with your answers.
1. The current ratio and acid test ratios are often used as measures of a company’s liquidity. Describe how these ratios are calculated and the underlying rationale. Indicate two reasons why these ratios might be poor indicators of liquidity. [ 4 marks]
The current ratio is equal to current assets over current liabilities. The acid test ratio deducts from current assets any “less liquid” items such as inventory and prepaid expenses and again uses current liabilities in the denominator. These ratios might be poor indicators of liquidity as (1) they measure assets at one point in time only, (2) the ratios are greatly affected by a company’s decision to borrow short term versus long term, and (3) they do not measure the cash flows of the business.
2. Banks will often require a personal guarantee from small business borrowers. What is a personal guarantee and provide two reasons why a personal guarantee is taken. [ 3 marks ]
A personal guarantee represents a promise by a person, typically the owner of the business, to pay the company’s debts should the firm have inability to pay its loans. Banks require a personal guarantee for several reasons: (1) as a measure of the owner’s commitment to the success of the business, (2) to increase the
MANAGING FINANCIAL RESOURCES
QUIZ
June 2011
STUDENT NUMBER _____________________________
You have a maximum of 80 minutes for the quiz. Please provide your answers on this paper in the spaces provided and hand in your paper at the end of the quiz. Only short precise answers are required and you can use point form. The weight given to each question is indicated at the end of the question. The total possible marks are 70. The quiz is open book and you may feel free to use Excel. You must abide by the Ivey Professional Code of Conduct and cannot use any external sources of information such as the WEB or other classmates to assist with your answers.
1. The current ratio and acid test ratios are often used as measures of a company’s liquidity. Describe how these ratios are calculated and the underlying rationale. Indicate two reasons why these ratios might be poor indicators of liquidity. [ 4 marks]
The current ratio is equal to current assets over current liabilities. The acid test ratio deducts from current assets any “less liquid” items such as inventory and prepaid expenses and again uses current liabilities in the denominator. These ratios might be poor indicators of liquidity as (1) they measure assets at one point in time only, (2) the ratios are greatly affected by a company’s decision to borrow short term versus long term, and (3) they do not measure the cash flows of the business.
2. Banks will often require a personal guarantee from small business borrowers. What is a personal guarantee and provide two reasons why a personal guarantee is taken. [ 3 marks ]
A personal guarantee represents a promise by a person, typically the owner of the business, to pay the company’s debts should the firm have inability to pay its loans. Banks require a personal guarantee for several reasons: (1) as a measure of the owner’s commitment to the success of the business, (2) to increase the