Question 1

Which of the following is a measure of liquidity?

Accepted Answer

All three options listed (payables turnover, current ratio, and working capital) are commonly used measures of liquidity. Payables turnover measures the number of times a company pays its accounts payable during a given period, indicating how quickly it is able to meet its short-term obligations. The current ratio measures a company's ability to pay its short-term debts with its current assets, while working capital is the difference between a company's current assets and its current liabilities, providing a snapshot of its ability to cover its short-term operating costs. All three metrics are useful in evaluating a company's liquidity.

Question 2

Fergus Company is considering the purchase of a machine that will save the company $4,000 per year in operating costs for a period of seven years.The most it should pay for the machine is equal to

Accepted Answer

The present value of an annuity formula is used to determine the value of a series of equal payments made at the end of each period. In this case, the cost savings of $4,000 per year for 7 years is effectively an annuity. Therefore, the most Fergus Company should pay for the machine is equal to $4,000 times the present value of an ordinary annuity for 7 periods. This formula takes into account the time value of money and provides a more accurate measure of the value of the machine to the company. Option B is incorrect as it does not take into account the time value of money. Option C is incorrect as it uses the future value formula instead of present value. Option D is incorrect as it uses the future value of an annuity formula instead of present value.

Question 3

Which of the following phrases is not descriptive of an ordinary annuity?

Accepted Answer

An ordinary annuity refers to a series of equal payments made at the end of each period. Option A describes an annuity due, which is a type of annuity where payments are made at the beginning of each period.

Question 4

The payables turnover is measured

Accepted Answer

The payables turnover is measured in terms of times, indicating how many times a company pays off its accounts payable during a year. It is calculated by dividing the cost of goods sold by the average accounts payable balance.

Question 5

Use this information to answer the following question.  
-A deposit of $5,800 made at the end of each year for three years would grow to how much,assuming an APR of 12 percent?

Accepted Answer

This problem involves calculating the future value of an annuity, where a fixed amount ($5,800) is deposited at the end of each year for three years at an annual interest rate of 12%. The formula for the future value of an annuity is FV = P * [((1 + r)^n - 1) / r], where P is the payment amount, r is the annual interest rate, and n is the number of periods. Plugging in the values: FV = 5800 * [((1 + 0.12)^3 - 1) / 0.12] = 5800 * [(1.404928 - 1) / 0.12] = 5800 * 3.374 = $19,569.20.

Question 6

Compound interest is computed quarterly on $700 for seven years at 12 percent annual interest.The future value table is used by multiplying the $700 by which factor?

Accepted Answer

Compound interest calculated quarterly over seven years at an annual rate of 12% means the interest is compounded 4 times a year (quarterly) for 7 years, totaling 28 periods, and the interest rate per period is 12%/4 = 3%.

Question 7

Company A's current assets = $10,000,total assets = $26,000,current liabilities = $7,000 and total liabilities = $47,000.What is Company A's working capital?

Accepted Answer

Working capital is calculated by subtracting current liabilities from current assets. 
So, Working capital = Current assets - Current liabilities
= $10,000 - $7,000
= $3,000
Therefore, the answer is (A) $3,000.

Question 8

A company wishes to make annual contributions into a fund intended to retire $700,000 in debt five years from now.The amount to contribute each year equals $700,000

Accepted Answer

The correct answer is A because the company wants to find the amount to contribute each year to retire the debt in five years. The future value of an ordinary annuity factor is used to find the present value of a series of equal payments made at the end of each period.

Question 9

Days' payable is the shortest in which of the following industries?

Accepted Answer

Grocery stores typically have a high turnover and sell products with a short shelf life, which means they need to pay their suppliers quickly to ensure fresh products. This results in a shorter days' payable period compared to the other industries listed.

Question 10

A company enters into a contract to purchase a certain quantity of goods from another company during the following month.At this point,would a liability exist? Explain why or why not.

Accepted Answer

The answer of A company enters into a contract to...

Question 11

Which of the following is not a component of the operating cycle?

Accepted Answer

The operating cycle includes the purchase of inventory from suppliers, the conversion of inventory into finished goods, the sale of those goods to customers, and the collection of accounts receivable. Recognition of depreciation is not a part of this cycle.

Question 12

A company purchases an asset on a deferred payment plan,ultimately paying $15,000.On the payment date,the company would

Accepted Answer

The answer of A company purchases an asset on a...

Question 13

McAfee Corporation borrowed $20 million to finance the construction of a new building.In addition to the annual interest that is not included in the face,one-tenth of the principal amount borrowed is to be repaid each year.If the borrowing occurred one month prior to year end,how should the loan be presented on the upcoming balance sheet?

Accepted Answer

The answer of McAfee Corporation borrowed $20 million to finance...

Question 14

To find the days' payable,

Accepted Answer

Days payable is calculated by dividing 365 by the payables turnover ratio to determine the average number of days it takes a company to pay its invoices.

Question 15

Second National Bank computes interest semiannually.If the annualized interest rate (APR)is currently 6 percent,the amount deposited today should be multiplied by which future value factor to calculate the amount that will accumulate by the end of 10 years?

Accepted Answer

Since the interest is computed semiannually, there will be a total of 20 semiannual periods over 10 years. Using the formula for future value with semiannual compounding:

FV = PV x (1 + r/n)^(nt)

Where PV is the present value (amount deposited today), r is the annual interest rate (APR), n is the number of compounding periods in a year (2 for semiannual), and t is the number of years.

For this problem, we have:

PV x (1 + 0.06/2)^(2x10) = FV

Simplifying:

PV x 1.0618^20 = FV

The future value factor for 20 semiannual periods at 3% (half of the annual 6% rate) is 1.0618^20. Therefore, the answer is B.

Question 16

A company sells merchandise on a deferred payment plan,ultimately receiving $6,000 on the account receivable.On the payment date,the company would

Accepted Answer

When the company receives the payment of $6,000, it will credit Accounts Receivable for the full amount of $6,000 to remove the receivable from its books, as the payment has been received.

Question 17

Hilda wishes to deposit an amount into her savings account that will enable her to withdraw $1,600 per year for the next four years.She should deposit an amount equal to $1,600 multiplied by the

Accepted Answer

Hilda wants to withdraw equal amounts for the next four years, which is an ordinary annuity. Therefore, she should use the present value of an ordinary annuity factor to determine how much to deposit into her savings account.

Question 18

The future value of an ordinary annuity table would not include the factor

Accepted Answer

The factor 0.909 is typically associated with present value calculations, not future value.

Question 19

Use this information to answer the following question.  
-If an accumulation of $16,000 is desired at the end of three years,what amount must be deposited at the end of each of the three years,assuming an APR of 12 percent?

Accepted Answer

To find the amount that must be deposited at the end of each of the three years to accumulate $16,000, we use the future value of an ordinary annuity formula: $FV = P \times \left( \frac{(1 + r)^n - 1}{r} \right)$, where FV is the future value, P is the payment, r is the interest rate per period, and n is the number of periods. Rearranging the formula to solve for P gives us $P = FV \div \left( \frac{(1 + r)^n - 1}{r} \right)$. Plugging in the values (FV = $16,000, r = 0.12, n = 3), we find that the annual deposit required is approximately $4,742.15.

Question 20

Company A's current assets = $10,000,total assets = $26,000,current liabilities = $7,000 and total liabilities = $47,000.What is Company A's working ratio?

Accepted Answer

Working ratio (also known as current ratio) is found by dividing current assets by current liabilities. 
Working ratio = current assets / current liabilities 
Working ratio = 10,000 / 7,000 
Working ratio = 1.43 
Therefore, the answer is C.

Quiz 11: Current Liabilities and Fair Value Accounting