Question 1

The quick ratio measures a company's ability to pay its total liabilities.

Accepted Answer

The quick ratio measures a company's ability to pay its current liabilities, not total liabilities. It is calculated by taking the company's current assets minus inventory, then dividing by current liabilities.

Question 2

Current assets are $40,000 and long-term assets are $50,000. Total liabilities are $60,000, of which current liabilities are 50%. The current ratio is:

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Current liabilities are 50% of total liabilities, which is $60,000, so current liabilities are $30,000. The current ratio is $40,000 / $30,000 = 1.33.

Question 3

The operating cycle is the time required to:

Accepted Answer

The operating cycle includes the process of acquiring goods and services for sale, selling the goods and services, and collecting cash from customers. This cycle can vary in length depending on the nature of the business and the industry, but it represents the time it takes for the company to generate revenue from its operations. Options A and D relate more to accounting processes rather than the operating cycle, and while option B may be part of the operating cycle, it is not the primary focus.

Question 4

A measure of a company's ability to pay current liabilities with current assets is the:

Accepted Answer

The measure of a company's ability to pay current liabilities with current assets is the current ratio. The current ratio is calculated by dividing current assets by current liabilities. It is important for a company to have a higher current ratio as it indicates that it has enough resources to meet its short-term obligations. A current ratio of less than 1 indicates that the company may have difficulty paying its obligations.

Question 5

A high debt ratio is preferable to a low debt ratio, whereas a low current ratio is preferable to a high current ratio.

Accepted Answer

This statement is incorrect. A high debt ratio indicates that there is a large amount of debt relative to assets or equity, which can be risky for a company. On the other hand, a low debt ratio indicates that a company has less debt and is therefore considered less risky. Similarly, a high current ratio indicates that a company has more current assets relative to current liabilities, which can be a sign of financial strength. A low current ratio indicates that a company may struggle to pay off its short-term obligations.

Question 6

Which of the following is a temporary (or nominal)account?

Accepted Answer

Rent Expense is a temporary or nominal account because it records expenses incurred during a specific accounting period and gets closed at the end of that period. The other options, Salaries Payable, Unearned Revenue, and Dividends Payable, are all examples of balance sheet accounts which are not closed at the end of each accounting period.

Question 7

Current assets are $40,000 and long-term assets are $50,000. Total liabilities are $60,000, of which current liabilities are 50%. The debt ratio is:

Accepted Answer

Current assets = $40,000
Long-term assets = $50,000
Total assets = $90,000

Current liabilities = 50% of total liabilities = 0.5 x $60,000 = $30,000
Long-term liabilities = $60,000 - $30,000 = $30,000

Total liabilities = $60,000

Debt ratio = Total liabilities / Total assets
Debt ratio = $60,000 / $90,000
Debt ratio = 0.67

Therefore, the debt ratio is 0.67 or 67%. The best choice is B).

Question 8

The current ratio is computed by dividing current:

Accepted Answer

The answer of The current ratio is computed by dividing...

Question 9

Which of the accounts listed below is a NOT a permanent account?

Accepted Answer

Permanent accounts are those that are not closed at the end of an accounting period, and they carry over from one period to another. Dividends is a temporary account that is closed at the end of the accounting period as it is a distribution of profits to the investors. Prepaid Rent, Unearned Revenue, and Salary Payable are all examples of permanent accounts.

Question 10

As a general rule of thumb, a strong current ratio is:

Accepted Answer

A current ratio calculates a company's ability to cover its short-term liabilities with its current assets. A ratio of 1.0 or higher means a company has enough current assets to cover its current liabilities, but it may not have a significant cushion in case of unexpected expenses or a decrease in sales. A current ratio of .50 or higher is generally considered acceptable, but a strong current ratio is 1.5 or higher, indicating a company has a significant cushion and can easily cover its short-term liabilities.

Question 11

Current assets include:

Accepted Answer

Current assets include any assets that can be easily converted into cash within one year, such as cash, short-term investments, accounts receivable, and inventory. Therefore, the most appropriate choice among these options is C, which includes all three current assets.

Question 12

Which of the following combinations of ratios is preferable?

Accepted Answer

A high current ratio indicates that a company has enough current assets to cover its current liabilities and is therefore better able to meet its short-term obligations, while a low debt ratio indicates that the company has lower debt levels compared to its equity. This combination suggests that the company has a strong liquidity position and is not overly burdened by debt.

Question 13

Assume that a firm has total assets of $1,000,000 and current liabilities of $700,000. Eighty percent of the assets are current assets. An analyst reviewing this firm's current ratio would most likely conclude that the:

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. In this case, we can calculate the firm's current assets as 80% of its total assets, or $800,000. Dividing $800,000 by $700,000 gives a current ratio of 1.14. While this is not necessarily a weak ratio, it is not extremely strong either. The analyst may be concerned that the firm's current assets may not be sufficient to cover its current liabilities in the event of financial difficulty. Therefore, the most likely conclusion is that the firm may experience some trouble paying its debts.

Question 14

A company has current assets of $45,000, current liabilities of $30,000, and total liabilities of $55,000. The current ratio is:

Accepted Answer

The answer of A company has current assets of $45,000,...

Question 15

The debt ratio measures a firm's ability to:

Accepted Answer

The debt ratio measures the proportion of a firm's assets that are financed through debt, so it indicates the firm's ability to pay both current and long-term debt. A higher debt ratio means more debt financing and potentially higher financial risk.

Question 16

A company with a low debt ratio is well-positioned to pay its outstanding debt.

Accepted Answer

A low debt ratio reflects that a company has a lower level of debt compared to its assets and equity, which indicates that it is less reliant on debt financing. This puts the company in a stronger financial position to pay off any outstanding debt as it has more resources available to cover its debt obligations.

Question 17

Lefton Company made a $2 million sale on account. How will this transaction affect the current ratio and the debt ratio?

Accepted Answer

The answer of Lefton Company made a $2 million sale...

Question 18

The debt ratio is computed by dividing:

Accepted Answer

The debt ratio is a measure of a company's leverage, and it is calculated by dividing total liabilities by total assets. This ratio shows the proportion of a company's assets that is financed by debt, and a higher debt ratio indicates a greater degree of financial leverage.

Question 19

At the beginning of the year, Megaron Company's balance sheet showed current assets of $16,000 and current liabilities of $10,000. During the current year, Megaron issued common stock for $5,000 for cash and purchased $3,000 of inventory on account. After these transactions were recorded, Megaron's current ratio was:

Accepted Answer

Current assets increased by $5,000 (cash received from issuing common stock) and $3,000 (inventory purchased on account), bringing the total current assets to $24,000. Current liabilities remained at $10,000.

Current Ratio = Current Assets / Current Liabilities 
Current Ratio = $24,000 / $10,000 
Current Ratio = 2.4 or 1)85

Question 20

The debt ratio is the percentage of total assets financed by current debt.

Accepted Answer

The debt ratio is the percentage of total assets financed by total debt, not just current debt.

Quiz 3: Accrual Accounting Income