Question 1

A firm has $12 million in current assets, of which $8 million is inventory. If the company has $4 million in current liabilities, then its current ratio equals 1.0.

Accepted Answer

To calculate the current ratio, we divide current assets by current liabilities. 
Current ratio = Current Assets / Current Liabilities
= ($12 million - $8 million) / $4 million 
= $4 million / $4 million 
= 1.0 
However, the inventory is also considered a current asset, so the calculation should be: 
Current ratio = Current Assets / Current Liabilities 
= $12 million / $4 million 
= 3.0 
Therefore, the statement is false. The current ratio of the firm is actually 3.0, not 1.0.

Question 2

If a firm has an asset turnover ratio of 2.00, it means that it needs $2 in assets to generate a $1 in sales.

Accepted Answer

A firm's asset turnover ratio is calculated by dividing its net sales by its average total assets. Therefore, an asset turnover ratio of 2.00 means that for every $1 in assets, the firm is generating $2 in sales.

Question 3

Companies often focus more on increasing revenue than on controlling costs. If the company can increase its revenue, it can remain in business for a long time.

Accepted Answer

While increasing revenue is important, controlling costs is equally crucial for long-term sustainability. High costs can erode profits, regardless of revenue levels.

Question 4

An owner withdraws capital through the repurchase of existing shares. On the company's 'statement of changes in equity', the amount of equity will increase.

Accepted Answer

If the owner withdraws capital through the repurchase of existing shares, it means that the company is using its funds to buy back shares from existing shareholders. This will result in a decrease in equity, not an increase.

Question 5

Current ratio is an example of liquidity ratios. It's calculated by dividing total liabilities by total assets.

Accepted Answer

Current ratio is calculated by dividing total current assets by total current liabilities.

Question 6

A budget is essentially a long-term financial plan.

Accepted Answer

A budget is a short-term financial plan that outlines an organization's financial goals and objectives for a specific period, typically a year or less. It includes estimates of income, expenses, and cash flow, and serves as a tool for monitoring and controlling spending.

Question 7

Return on equity is a profitability ratio.

Accepted Answer

Return on equity (ROE) measures the net income earned by a company in relation to the amount of shareholder equity, making it a profitability ratio.

Question 8

Profitability ratios measure a firm's ability to meet its short-term obligations.

Accepted Answer

Profitability ratios measure the firm's ability to generate earnings in relation to its expenses and investments, not its ability to meet short-term obligations. Liquidity ratios, on the other hand, measure a firm's ability to meet its short-term obligations.

Question 9

When examining a statement of cash flows, investors obtain relevant information about a firm's cash receipts and payments for its operations, investments, and financing during an accounting period.

Accepted Answer

This statement is true. A statement of cash flows provides information on a company's cash inflows and outflows in three categories: operating activities, investing activities, and financing activities. This information can be valuable to investors in analyzing a company's financial health and future prospects.

Question 10

Cash budgets are typically prepared on a weekly basis.

Accepted Answer

Cash budgets are often prepared on a monthly basis, although the frequency can vary depending on the specific needs and cash flow cycles of the business.

Question 11

A company's overall operating budget is a composite of many individual budgets for separate units of the firm.

Accepted Answer

This statement is true. A company's operating budget typically consists of individual budgets for sales, production, marketing, research and development, and other units of the firm.

Question 12

A firm's acid-test ratio can NEVER be higher than its current ratio.

Accepted Answer

The acid-test ratio is a more conservative measure of liquidity than the current ratio because it excludes inventory from current assets. Inventory can be difficult to sell quickly, so it is not as reliable a source of liquidity as cash, marketable securities, and accounts receivable. Therefore, the acid-test ratio can never be higher than the current ratio.

Question 13

Inventory ratio is the most frequently used activity ratio. It is the cost of sold goods divided by average inventory.

Accepted Answer

The statement is correct. Inventory ratio is also known as inventory turnover ratio, and it is a measure of how efficiently a company is managing its inventory. The formula for inventory turnover ratio is cost of goods sold divided by average inventory.

Question 14

The budget establishes the standards with which actual performance may be compared.

Accepted Answer

This is because a budget sets out the expected results and allows for measurement against those targets. Actual performance can be evaluated based on the predetermined criteria established in the budget.

Question 15

A debt ratio of 20 percent means that the firm is relying more on borrowed money than owners' equity.

Accepted Answer

A debt ratio of 20 percent means that the firm has borrowed 20 percent of its total assets and the remaining 80 percent is financed through owners' equity. Therefore, the firm is not relying more on borrowed money than owners' equity. A debt ratio of more than 50 percent would indicate that the firm is relying more on borrowed money than owners' equity.

Question 16

Ratios assist managers by interpreting actual performance and making comparisons with what should have happened.

Accepted Answer

Ratios are a tool for managers to evaluate and analyze actual performance and compare it to expected or desired outcomes. They provide a quick and easy way to measure performance and identify areas of improvement.

Question 17

Accrual accounting recognizes revenues and expenses when cash changes hands.

Accepted Answer

Accrual accounting recognizes revenues and expenses when they are earned/incurred, regardless of when cash is received/paid.

Question 18

The current ratio is a leverage ratio.

Accepted Answer

The answer of The current ratio is a leverage ratio....

Question 19

Depreciation is reported as an expense on the firm's income statement, but does NOT involve any actual cash.

Accepted Answer

Depreciation is a non-cash expense that is recorded on the income statement to allocate the cost of a fixed asset over its useful life. It reduces the value of the asset on the balance sheet but does not involve any actual cash outflow.

Question 20

Two commonly used liquidity ratios are the inventory turnover ratio and the leverage ratio.

Accepted Answer

The two commonly used liquidity ratios are the current ratio and the quick ratio. The inventory turnover ratio measures how efficiently a company manages its inventory, while the leverage ratio measures financial risk.

Quiz 15: Understanding Accounting and Financial Statements