Question 1

Which one of the following is a use of cash?
A) Decrease in fixed assets
B) Decrease in inventory
C) Increase in long-term debt
D) Decrease in accounts receivables
E) Decrease in accounts payable

Accepted Answer

Decrease in accounts payable is a use of cash because it represents the company paying off its liabilities, which results in a cash outflow.

Question 2

On a common-size balance sheet all accounts for the current year are expressed as a percentage of:
A) sales for the period.
B) the base year sales.
C) total equity for the base year.
D) total assets for the current year.
E) total assets for the base year.

Accepted Answer

In a common-size balance sheet, all accounts for the current year are expressed as a percentage of total assets for the current year. This allows for easier comparison of financial statements over time or between companies by standardizing the numbers.

Question 3

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?
A) Accounts payable
B) Cash
C) Inventory
D) Accounts receivable
E) Fixed assets

Accepted Answer

The quick ratio is calculated as (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. Increasing accounts receivable improves the quick ratio without affecting the cash ratio, which is calculated as (Cash + Marketable Securities) / Current Liabilities.

Question 4

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:
A) total assets.
B) total equity.
C) net income.
D) taxable income.
E) sales.

Accepted Answer

A common-size income statement expresses all of a firm's expenses as a percentage of its sales. This allows for easy comparison between different companies or between different periods for the same company.

Question 5

Ratios that measure a firm's liquidity are known as ________ ratios.
A) asset management
B) long-term solvency
C) short-term solvency
D) profitability
E) book value

Accepted Answer

Liquidity ratios measure a company's ability to meet its short-term obligations. Therefore, the correct option would be short-term solvency ratios.

Question 6

Activities of a firm that require the spending of cash are known as:
A) sources of cash.
B) uses of cash.
C) cash collections.
D) cash receipts.
E) cash on hand.

Accepted Answer

Uses of cash refer to the activities or expenses of a firm that require the outflow of cash, including payments for operating expenses, investments, and financing activities. Sources of cash, on the other hand, refer to the inflow of cash into the firm, including sales revenue, loans, and investments. Cash collections and cash receipts refer specifically to the collection of cash from customers, while cash on hand refers to the amount of cash that a firm currently has available.

Question 7

A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit?
A) Current
B) Cash
C) Debt-equity
D) Quick
E) Total debt

Accepted Answer

The answer of A supplier, who requires payment within 10...

Question 8

Which one of the following ratios is a measure of a firm's liquidity?
A) Cash coverage ratio
B) Profit margin
C) Debt-equity ratio
D) Quick ratio
E) NWC turnover

Accepted Answer

The quick ratio, also known as the acid-test ratio, is a measure of a firm's liquidity, indicating its ability to meet short-term obligations with its most liquid assets.

Question 9

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following?
A) Pay all of its debts that are due within the next 48 hours
B) Pay all of its debts that are due within the next 48 days
C) Cover its operating costs for the next 48 hours
D) Cover its operating costs for the next 48 days
E) Meet the demands of its customers for the next 48 hours

Accepted Answer

An interval measure refers to the number of days or hours that a firm's liquid assets can cover its operating costs. In this case, the firm has an interval measure of 48, which means it has enough liquid assets to cover its operating costs for the next 48 days. Therefore, option D is the correct answer. Option A and E are too specific and do not reflect the full extent of the firm's financial flexibility. Option B is too broad, as the interval measure only applies to operating costs, not all debts. Option C is closer to the correct answer, but 48 hours is too short of a period and may not cover all of the firm's operating costs.

Question 10

According to the statement of cash flows, an increase in interest expense will ________ the cash flow from ________ activities.
A) decrease; operating
B) decrease; financing
C) increase; operating
D) increase; financing
E) Increase; investment

Accepted Answer

An increase in interest expense would be reported under the operating activities section in the statement of cash flows as it is classified as an operating expense. An increase in expense reduces the cash flow, therefore the cash flow from operating activities decreases.

Question 11

On the statement of cash flows, which one of the following is considered a financing activity?
A) Increase in inventory
B) Decrease in accounts payable
C) Increase in net working capital
D) Dividends paid
E) Decrease in fixed assets

Accepted Answer

Dividends paid are a financing activity because they involve distributing earnings to the company's owners/shareholders, which is a use of funds from financing sources. Choices A, B, and E are all related to investing and operating activities. Choice C includes a change in current assets and liabilities but does not specify whether it involves financing, investing, or operating activities.

Question 12

The sources and uses of cash over a stated period of time are reflected on the:
A) income statement.
B) balance sheet.
C) tax reconciliation statement.
D) statement of cash flows.
E) statement of operating position.

Accepted Answer

The statement of cash flows shows the sources and uses of cash over a stated period of time, including operating activities, investing activities, and financing activities. This statement provides important information about a company's liquidity and ability to generate cash to meet its obligations. The income statement shows the company's revenues and expenses during a period of time. The balance sheet shows the company's assets, liabilities, and equity at a specific point in time. The tax reconciliation statement shows the computation of tax expense or benefit for the period. The statement of operating position is not a recognized financial statement.

Question 13

Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?
A) Statement of standardization
B) Statement of cash flows
C) Common-base year statement
D) Common-size statement
E) Base reconciliation statement

Accepted Answer

The common-base year statement standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time, typically a base year. This allows for year-to-year comparisons by minimizing the impact of inflation or changes in the size of the company. The other options (A, B, D, E) do not refer to this specific method of standardization.

Question 14

According to the statement of cash flows, an increase in inventory will ________ the cash flow from ________ activities.
A) increase; operating
B) decrease; financing
C) decrease; operating
D) increase; financing
E) increase; investment

Accepted Answer

An increase in inventory means the company has spent cash to purchase more inventory, which is classified as an operating activity. Therefore, it will decrease the cash flow from operating activities.

Question 15

On the statement of cash flows, which one of the following is considered an operating activity?
A) Increase in net fixed assets
B) Decrease in accounts payable
C) Purchase of equipment
D) Dividends paid
E) Repayment of long-term debt

Accepted Answer

Decrease in accounts payable represents a cash outflow for the company, which is considered an operating activity on the statement of cash flows. Increases in net fixed assets, purchase of equipment, repayment of long-term debt, and payment of dividends are all investing or financing activities.

Question 16

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.
A) Increase in the cash ratio
B) Increase in the net working capital to total assets ratio
C) Decrease in the quick ratio
D) Decrease in the cash coverage ratio
E) Increase in the current ratio

Accepted Answer

The quick ratio (also known as acid test ratio) is a measure of a company's ability to pay its current liabilities with its most liquid assets (excluding inventory). Since current liabilities are included in the calculation of the quick ratio, an increase in current liabilities will decrease the ratio, indicating a reduced ability to pay short-term debts.

Option A is incorrect because an increase in current liabilities will reduce the amount of cash available for the company, leading to a decrease in the cash ratio.

Option B is incorrect because an increase in current liabilities will decrease the net working capital, which is the difference between current assets and current liabilities. Therefore, the net working capital to total assets ratio will decrease.

Option D is incorrect because the cash coverage ratio is a measure of a company's ability to pay interest expenses with cash flow from operations. Current liabilities are not directly related to interest expenses.

Option E is incorrect because the current ratio measures a company's ability to pay its current liabilities with its current assets, including inventory. Since inventory is not included in the calculation of the quick ratio, an increase in current liabilities alone will not necessarily cause an increase in the current ratio.

Question 17

Which one of the following is a source of cash?
A) Repurchase of common stock
B) Acquisition of debt
C) Purchase of inventory
D) Payment to a supplier
E) Granting credit to a customer

Accepted Answer

Acquisition of debt increases a company's cash because it involves borrowing money, which provides the company with more cash to use for its operations or investments.

Question 18

Which one of the following is a source of cash?
A) Increase in accounts receivable
B) Decrease in common stock
C) Increase in fixed assets
D) Decrease in accounts payable
E) Decrease in inventory

Accepted Answer

Decrease in inventory is a source of cash because it indicates that a company is selling its inventory without immediately replenishing it, which converts inventory into cash, improving the company's cash position.

Question 19

Which one of the following is a source of cash for a tax-exempt firm?
A) Increase in accounts receivable
B) Increase in depreciation
C) Decrease in accounts payable
D) Increase in common stock
E) Increase in inventory

Accepted Answer

An increase in common stock represents a source of cash for a tax-exempt firm. When a firm issues new shares of common stock, it receives cash in return. This is a common way for firms to raise capital, and it is particularly attractive for tax-exempt firms because they do not have to pay taxes on the proceeds from stock issuances. Options A, B, C, and E do not represent sources of cash; instead, they represent changes in balance sheet accounts that could either increase or decrease a firm's cash balance, depending on the circumstances.

Question 20

On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?
A) Current year sales
B) Current year total assets
C) Base-year sales
D) Base-year total assets
E) Base-year accounts receivables

Accepted Answer

In a common-base year financial statement, all items are expressed relative to a specific base year to facilitate comparison over time. Therefore, accounts receivables for the current year will be expressed relative to the base-year accounts receivables to show growth or decline.

Quiz 3: Working with Financial Statements

Which one of the following is a use of cash?

On a common-size balance sheet all accounts for the current year are expressed as a percentage of:

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

Ratios that measure a firm's liquidity are known as ________ ratios.

Activities of a firm that require the spending of cash are known as:

A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit?

Which one of the following ratios is a measure of a firm's liquidity?

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following?

According to the statement of cash flows, an increase in interest expense will the cash flow from activities.

On the statement of cash flows, which one of the following is considered a financing activity?

The sources and uses of cash over a stated period of time are reflected on the:

Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?

According to the statement of cash flows, an increase in inventory will the cash flow from activities.

On the statement of cash flows, which one of the following is considered an operating activity?

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.

Which one of the following is a source of cash?

Which one of the following is a source of cash?

Which one of the following is a source of cash for a tax-exempt firm?

On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?