The correct answer is: C. a-3, b-1, c-4, d-2
Debtors turnover ratio is an activity ratio that measures how efficiently a company collects its receivables. It is calculated by dividing net credit sales by average accounts receivable.
Proprietary ratio is a solvency ratio that measures the extent to which a company’s assets are financed by equity. It is calculated by dividing shareholders’ equity by total assets.
Operating ratio is an efficiency ratio that measures how efficiently a company generates sales from its expenses. It is calculated by dividing operating expenses by net sales.
Acid test ratio is a liquidity ratio that measures a company’s ability to meet its short-term obligations. It is calculated by dividing quick assets by current liabilities.
Profitability ratio is a profitability ratio that measures a company’s ability to generate profits from its sales. It is calculated by dividing net income by net sales.
Here is a brief explanation of each ratio:
- Debtors turnover ratio: This ratio measures how efficiently a company collects its receivables. A higher ratio indicates that a company is collecting its receivables more quickly, which is a good sign. However, a too-high ratio may indicate that a company is being too aggressive in collecting its receivables, which could damage its relationships with customers.
- Proprietary ratio: This ratio measures the extent to which a company’s assets are financed by equity. A higher ratio indicates that a company has a lower level of debt, which is a good sign. However, a too-high ratio may indicate that a company is not taking advantage of debt financing, which could be a missed opportunity to increase its returns.
- Operating ratio: This ratio measures how efficiently a company generates sales from its expenses. A lower ratio indicates that a company is generating more sales per dollar of expenses, which is a good sign. However, a too-low ratio may indicate that a company is not investing enough in its operations, which could hurt its long-term growth prospects.
- Acid test ratio: This ratio measures a company’s ability to meet its short-term obligations. A higher ratio indicates that a company has more liquid assets to meet its short-term obligations, which is a good sign. However, a too-high ratio may indicate that a company is not investing enough in its operations, which could hurt its long-term growth prospects.
- Profitability ratio: This ratio measures a company’s ability to generate profits from its sales. A higher ratio indicates that a company is more profitable, which is a good sign. However, a too-high ratio may indicate that a company is taking on too much risk, which could hurt its long-term profitability.