Which statement is correct?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:**Question: Which statement is correct?**
- **A. current ratio < burn ratio**
- **B. ROA ≤ ROE**
- **C. Debt-to-Total Assets > 1.00**
- **D. gross margin > net margin**
**Explanation:**
- **Current Ratio**: A measure of a company’s ability to pay short-term obligations; calculated as current assets divided by current liabilities.
- **Burn Ratio**: Often referred to the rate at which a company is spending its capital to finance overhead before generating positive cash flow from operations.
- **ROA (Return on Assets)**: An indicator of how profitable a company is relative to its total assets; calculated as Net Income divided by Total Assets.
- **ROE (Return on Equity)**: A measure of financial performance calculated by dividing net income by shareholders' equity.
- **Debt-to-Total Assets Ratio**: Indicates the proportion of a company’s assets that are financed by debt. A ratio above 1.00 would imply that a company has more debt than assets.
- **Gross Margin**: Represents the percentage of total sales revenue that the company retains after incurring the direct costs associated with producing the goods it sells.
- **Net Margin**: The percentage of revenue left after all expenses have been deducted from sales.
**Graph or Diagram Explanation:**
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Expert Solution
Step 1
A current ratio is one of the ratios used to assess the liquidity of the company. It shows that the company is efficiently paying off its short-term obligations using its current assets. A current ratio of 2:1 is said to be ideal as it implies that the current assets are twice the current liabilities of the company.
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