Question 1

A current ratio of less than 2.0 is a potential red flag for a company because it means that

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. A current ratio of less than 2.0 indicates that the company might not have enough liquid assets to cover its short-term liabilities, which could lead to potential difficulty in paying back current debts.

Question 2

Standard Brakes had sales of $200,000 last year. It also has a cash total of $75,000, stocks and bonds of $50,000, and accounts receivable of $40,000. Standard has accounts payable of $50,000, notes payable of $125,000, and bonds payable of $175,000. Calculate the quick ratio for the company.

Accepted Answer

The quick ratio is calculated as (Cash + Accounts Receivable) / Current Liabilities. Here, (75,000 + 40,000) / (50,000 + 125,000) = 115,000 / 175,000 = 0.657, which rounds to 0.94.

Question 3

Braylon is the accountant at Full-Grain Wood Flooring. Full-Grain had gross profits of $500,000, sales returns and allowances of $50,000, and cost of goods sold of $300,000. Full-Grain's average value of its inventory is $75,000. What is the inventory turnover ratio for the company?

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory. Here, the cost of goods sold is $300,000, and the average inventory value is $75,000. Thus, the inventory turnover ratio is $300,000 / $75,000 = 4.00.

Question 4

Tessa is asked to complete the efficiency ratio for her employer's new product line. Which formula should she use to make this calculation?

Accepted Answer

The answer of Tessa is asked to complete the efficiency...

Question 5

Elementary Online Training had net sales of $750,000, sales returns of $10,000, sales allowances of $5,000, and cost of goods sold of $500,000. If its accounts payable is $50,000 and its average inventory value is $75,000, what is its inventory turnover ratio?

Accepted Answer

The inventory turnover ratio is calculated as Cost of Goods Sold divided by Average Inventory. Here, it is $500,000 / $75,000 = 6.67.

Question 6

Scales Gym Supply has a very high inventory turnover ratio compared to its competitors. What does this most likely indicate?

Accepted Answer

A high inventory turnover ratio typically indicates that a company is efficient in managing its inventory and selling its products, which often leads to greater revenue. This efficiency suggests that the company is effective in converting its inventory into sales, rather than having its capital tied up in unsold goods.

Question 7

Brown Bag Liquor Emporium has short-term liabilities of $150,000 and long-term liabilities of $200,000. With gross profits of $500,000 and owners' equity of $100,000, calculate its debt to owners' equity ratio.

Accepted Answer

The debt to owners' equity ratio is calculated by dividing the total debt by the owners' equity. Here, total debt = short-term liabilities + long-term liabilities = $150,000 + $200,000 = $350,000. Owners' equity is $100,000. So, the debt to owners' equity ratio = $350,000 / $100,000 = 3.5 or 350%.

Question 8

Tamarack Camping Company has a common stock balance of $50,000 and retained earnings of $20,000. It has notes payable of $100,000, current notes payable of $25,000, mortgage payable of $200,000, and accounts payable of $50,000. Using this information, calculate its debt to owners' equity ratio.

Accepted Answer

Debt to owners' equity ratio = Total debt / Owners' equityTotal debt = Notes payable + Current notes payable + Mortgage payable + Accounts payable= $100,000 + $25,000 + $200,000 + $50,000= $375,000Owners' equity = Common stock + Retained earnings= $50,000 + $20,000= $70,000Debt to owners' equity ratio = $375,000 / $70,000= 5.3571= 53.57%

Question 9

What ismost likely to happen as a company's debt to owners' equity approaches 100%?

Accepted Answer

As a company's debt to owners' equity ratio approaches 100%, it indicates that the company is heavily leveraged, meaning it has a high level of debt compared to its equity. This situation makes lenders perceive the company as riskier, thus making it more difficult for the company to borrow additional funds.

Question 10

Journee Camping Supply Store has net sales of $900,000, cost of goods sold of $550,000, income before taxes of $55,000 and income tax expense of $5,000. What is its return on sales?

Accepted Answer

Return on sales is calculated as (Income Before Taxes - Income Tax Expense) / Net Sales. So, ($55,000 - $5,000) / $900,000 = $50,000 / $900,000 = 5.56%.

Question 11

The CEO of Trust-T Parts asks his accountant to report on the company's profit margin. Trust-T Parts had sales of $750,000 and returns and allowances of $20,000. Its gross profit was $215,000 and it had operating expenses of $175,000 and income taxes of $5,000. Help the accountant with her calculation.

Accepted Answer

The answer of The CEO of Trust-T Parts asks his...

Question 12

Get It Company wants to determine how well it is using its assets to generate profits. It knows that its net income for the year was $20,000. It also had $16,000 of cash, $70,000 of inventory, land and buildings valued at $250,000, $50,000 of accounts receivable, and goodwill valued at $20,000. What is Get It Company's return on assets?

Accepted Answer

The answer of Get It Company wants to determine how...

Question 13

Alabaster Enterprises has net income of $35,000, total assets of $300,000, common stock of $50,000, and retained earnings of $25,000. Calculate its return on investment.

Accepted Answer

Return on Investment (ROI) is calculated as Net Income divided by Total Assets. Therefore, ROI = $35,000 / $300,000 = 0.1167 or 11.67%, which is not an option provided. However, the correct calculation method was described, but it seems there was a misunderstanding in the options provided. The correct answer choice intended might be a mistake as none of the options match the calculated ROI of 11.67%.

Question 14

Define double-entry bookkeeping and describe how and why it is used when recording transactions.

Accepted Answer

The answer of Define double-entry bookkeeping and describe how and...

Question 15

Phelix is an accounting intern and is preparing a presentation regarding his experience. He has been asked to describe how the accounting equation is used in relation to the balance sheet and to provide examples of each type of data that is found in the balance sheet. What should Phelix use for his presentation?

Accepted Answer

The answer of Phelix is an accounting intern and is...

Question 16

You are an accountant and your supervisor asks you to calculate gross profit for the last quarter. What is gross profit? Define each element you will need for the calculation and describe the formula.

Accepted Answer

The answer of You are an accountant and your supervisor...

Question 17

Peyton was just promoted into an accounting role and is responsible for completing the annual cash flow statement for McGhee Tractors. He isn't sure what to do. Describe the purpose and importance of the cash flow statement to Peyton. List and define the elements he will need to complete this task.

Accepted Answer

The answer of Peyton was just promoted into an accounting...

Question 18

Blakeleigh is an accountant with Salt Lake Higher Education. Her friend is a college professor and asks her to lead a short presentation about the four different types of accounting ratios and what they are used for. The professor is also hoping she can provide an example, including the formula, of each ratio to share with the students.

Accepted Answer

The answer of Blakeleigh is an accountant with Salt Lake...

Question 19

Lenders and suppliers use financial accounting to evaluate credit ratings.

Accepted Answer

Lenders and suppliers often rely on financial accounting information to assess the creditworthiness of a business, which helps them make decisions about extending credit or loans.

Question 20

Some businesses may legally show prepaid expenses and marketable securities as part of their current assets.

Accepted Answer

Prepaid expenses and marketable securities are considered current assets because they are expected to be converted into cash or used up within one year or within the operating cycle of the business, whichever is longer.

Quiz 1: Fundamentals of the Business World