Question 1

A more stringent measure of liquidity than the current ratio is referred to as
A)Current asset turnover.
B)Acid-test.
C)Collectability test.
D)Debt to Equity ratio.

Accepted Answer

The acid-test, also known as quick ratio, is a more stringent measure of liquidity than the current ratio as it includes only the most liquid current assets (such as cash, marketable securities, and accounts receivable) in relation to current liabilities. This measure provides a clearer picture of a company's ability to meet its short-term obligations. The other answer choices are not measures of liquidity.

Question 2

The accounts receivable turnover is calculated as

Accepted Answer

The answer of The accounts receivable turnover is calculated as...

Question 3

Which of the following will probably not be a result if a company's liquidity is poor?
A)Workers will quit if they are not paid on time.
B)Debt or Equity will exceed the company's maximum allowed amount.
C)Banks may not loan the company funds.
D)Customers will seek other sources of goods when the company's product is not available.

Accepted Answer

Poor liquidity means the company is unable to meet its short-term financial obligations, such as paying workers and servicing debts. Option B suggests that the company has exceeded its allowed maximum for debts or equity, which is a separate issue from liquidity. A, C, and D are all potential outcomes of poor liquidity.

Question 4

The average days to sell inventory is calculated as

Accepted Answer

The answer of The average days to sell inventory is...

Question 5

The calculation of working capital is
A)Current assets plus current liabilities.
B)Current assets less current liabilities.
C)Current assets times current liabilities.
D)Current assets divided by current liabilities.

Accepted Answer

Working capital is calculated by subtracting current liabilities from current assets. This is because current assets are the resources that a company can readily convert to cash within one year, while current liabilities are the debts that a company expects to pay within one year. Therefore, subtracting current liabilities from current assets gives us the amount of capital that a company has available for its daily operations.

Question 6

Because the assets included in the current ratio have different levels of liquidity that reflect different degrees of collectability,many companies use which of the following ratios to measure current liquidity?
A)Current ratio.
B)Working capital.
C)Quick ratio.
D)Debt ratio.

Accepted Answer

The quick ratio (also known as acid-test ratio) is calculated by subtracting inventories (which are less liquid) from current assets and dividing by current liabilities. This ratio provides a more accurate picture of a company's liquidity by excluding inventories, which may not be easily converted into cash. Therefore, the quick ratio is a better measure of a company's ability to pay its short-term obligations.

Question 7

The inventory turnover measures
A)How many days,on average,it takes between when an order is placed until the inventory is shipped.
B)How many times,on average,a company's inventory is sold during the year.
C)How many times,on average,the company takes to replace inventory during the year.
D)How many days,on average,it takes between when inventory is received to its sale to customers.

Accepted Answer

Inventory turnover measures how many times, on average, a company's inventory is sold during the year. It is calculated by dividing the cost of goods sold by the average inventory for the year. This ratio helps to measure the efficiency of a company's inventory management and is an important metric for financial analysis.

Question 8

The following financial statement items are shown for J&T Manufacturing.  Calculate the common-size percentage for Insurance Expense.
A)3.3%
B)5.8%
C)23.3%
D)50.0%

Accepted Answer

The answer of The following financial statement items are shown...

Question 9

The average collection period is calculated as

Accepted Answer

The answer of The average collection period is calculated as...

Question 10

Probably the most common measure of short-term liquidity is the
A)Acid-test.
B)Current ratio.
C)Quick ratio.
D)Working capital.

Accepted Answer

The current ratio is the most common measure of short-term liquidity, as it compares current assets to current liabilities, indicating a company's ability to cover its short-term obligations.

Question 11

Investigating liquidity is important because
A)If a company cannot pay its bills on time,it will have difficulty obtaining resources needed to continue operating.
B)A company needs the ability to take advantage of opportunities as they arise.
C)Both if a company cannot pay its bills on time,it will have difficulty obtaining resources needed to continue operating and a company needs the ability to take advantage of opportunities as they arise.
D)Neither if a company cannot pay its bills on time,it will have difficulty obtaining resources needed to continue operating nor a company needs the ability to take advantage of opport

Accepted Answer

Investigating liquidity is important because both options A and B are correct. If a company cannot pay its bills on time, it may have difficulty obtaining resources needed to continue operating. On the other hand, a company needs to have the ability to take advantage of opportunities as they arise. Therefore, investigating liquidity is crucial for a company's financial stability and growth.

Question 12

A firm's ability to pay its obligations as they come due and to meet any unforeseen needs for cash is called
A)Current ratio.
B)Liquidity.
C)Working capital.
D)Accounts receivable turnover.

Accepted Answer

The term "liquidity" refers specifically to a firm's ability to meet its short-term obligations and unexpected cash needs. While measures like the current ratio and working capital are also important indicators of a firm's financial health, neither focuses specifically on short-term liquidity. Accounts receivable turnover is a measure of how frequently a firm's receivables are converted to cash, and is not directly related to liquidity.

Question 13

Which of the following is not a measure of liquidity?
A)Working capital
B)Average collection period
C)Acid-test
D)Price-earnings ratio

Accepted Answer

Working capital, average collection period, and acid-test are all measures of liquidity which assess a company's ability to meet its short-term obligations. The price-earnings ratio is a measure of a company's valuation and does not relate to liquidity.

Question 14

The difference between a firm's current assets and its current liabilities is
A)Cash flow.
B)Working capital.
C)Current ratio.
D)Return on Assets.

Accepted Answer

The difference between a firm's current assets and its current liabilities is known as working capital. Working capital is an important measure of a company's short-term financial health and its ability to meet its financial obligations. A positive working capital indicates that the firm has enough current assets to cover its current liabilities.

Question 15

Because the assets included in the current ratio have different levels of liquidity that reflect different degrees of collectability,many companies use which of the following ratios to measure current liquidity?
A)Current ratio.
B)Acid-test.
C)Working capital.
D)Return on Equity.

Accepted Answer

The acid-test ratio, also known as quick ratio, measures a company's ability to pay off its short-term liabilities with its most liquid assets. It does not include inventory and prepaid expenses, which are less liquid than cash, accounts receivable, and short-term investments. Therefore, it provides a more conservative and realistic assessment of a company's current liquidity than the current ratio, which includes all current assets regardless of their liquidity. Working capital and return on equity are not measures of current liquidity.

Question 16

The inventory turnover is calculated as

Accepted Answer

The answer of The inventory turnover is calculated as ...

Question 17

A problem with the current and acid test ratios is that,although they provide information about liquidity,they do not
A)Indicate the dollar amounts of the differences.
B)Indicate the underlying quality of the current assets.
C)Include all the current assets.
D)Include all the liabilities.

Accepted Answer

The current and acid test ratios only provide information about liquidity, but do not indicate the underlying quality of the current assets. This means that a company with high current and acid test ratios may still face difficulties in paying off its current liabilities if its current assets are low quality or difficult to convert into cash quickly. Hence, the ratios do not provide a complete picture of a company's liquidity position.

Question 18

The average collection period reveals
A)How many days,on average,it takes between when an order is placed until the cash is collected.
B)How many days,on average,the company takes to collect cash from a credit sale.
C)How many days,on average,the company takes to collect past due accounts.
D)How many days,on average,it takes between when an original contact is made to collect an account until the cash is collected.

Accepted Answer

The average collection period represents the average number of days that a company takes to collect payments from its credit sales. It is calculated by dividing the total outstanding receivables by the average daily sales. Option A is incorrect because it includes the time between order placement and cash collection, which is not necessarily the same as credit sales. Option C is incorrect because it only refers to past due accounts, not all credit sales. Option D is too broad and not specific to credit sales.

Question 19

The acid-test is calculated as:

Accepted Answer

The acid-test ratio is a liquidity ratio that measures a company's ability to pay off its liabilities with quick assets. A "good" acid-test ratio is generally considered to be 1 or higher, indicating that a company can cover its current liabilities with its liquid assets in the short term. The given acid-test ratio of 11ea84e3_9028_d8fd_abcc_3158c8bdf5c2_TB3446_00 cannot be evaluated as it is not a valid number. Therefore, none of the choices are suitable.

Question 20

The current ratio is calculated as
A)Current assets divided by current liabilities.
B)Current assets divided by total assets.
C)Current liabilities divided by current assets.
D)Current liabilities divided by total liabilities.

Accepted Answer

The current ratio measures a company's ability to pay short-term financial obligations. It is calculated by dividing current assets by current liabilities. Therefore, choice A is the correct answer.

Quiz 12: Financial Statement Analysis

A more stringent measure of liquidity than the current ratio is referred to as

The accounts receivable turnover is calculated as

Which of the following will probably not be a result if a company's liquidity is poor?

The average days to sell inventory is calculated as

The calculation of working capital is

Because the assets included in the current ratio have different levels of liquidity that reflect different degrees of collectability,many companies use which of the following ratios to measure current liquidity?

The inventory turnover measures

The following financial statement items are shown for J&T Manufacturing. Calculate the common-size percentage for Insurance Expense.

The average collection period is calculated as

Probably the most common measure of short-term liquidity is the

Investigating liquidity is important because

A firm's ability to pay its obligations as they come due and to meet any unforeseen needs for cash is called

Which of the following is not a measure of liquidity?

The difference between a firm's current assets and its current liabilities is

Because the assets included in the current ratio have different levels of liquidity that reflect different degrees of collectability,many companies use which of the following ratios to measure current liquidity?

The inventory turnover is calculated as

A problem with the current and acid test ratios is that,although they provide information about liquidity,they do not

The average collection period reveals

The acid-test is calculated as:

The current ratio is calculated as