Question 1

One approach to measuring liquidity is to use the current ratio.

Accepted Answer

The current ratio measures a company's ability to pay off its short-term obligations by comparing its current assets to its current liabilities. This helps investors and analysts assess a company's liquidity position.

Question 2

Cindy is a college student working in the accounting department of a company for a co-op program.She is learning about accounting and asks her supervisor how she should classify the salaries paid to employees.What will the supervisor tell Cindy?

Accepted Answer

Salaries paid to employees are considered operating expenses as they are necessary costs for running the business operations. They are not assets, liabilities, or dividends.

Question 3

Accounts receivable consist of payments due from a company's customers from previous credit sales.

Accepted Answer

Accounts receivable are indeed payments that are due from a company's customers from credit sales that have already occurred.

Question 4

Carefully maintained cash records showing all receipts and disbursements are necessary to safeguard cash.

Accepted Answer

Careful record keeping is essential for protecting and managing cash.

Question 5

A financial manager is evaluating the sources of cash for the company as part of cash budget analysis.Which of the following would she include as a source of cash?

Accepted Answer

Borrowed funds are considered a source of cash because they provide the company with additional liquidity.

Question 6

A cash budget that compares actual expenditures with budgeted expenditures is a feature that is available on most computer software packages.

Accepted Answer

Many computer software packages offer the feature of a cash budget that compares actual expenses with budgeted expenses. This allows users to track their spending and adjust their budget as needed.

Question 7

Accounts receivable records are vital in order to maintain good customer relations.

Accepted Answer

Accounts receivable records help businesses keep track of what customers owe them and when payments are due. By maintaining accurate records, businesses can minimize instances of missed or late payments and ensure positive relationships with their customers.

Question 8

Current ratio is a measure of the company's relative debt,determined by multiplying current assets by current liabilities.

Accepted Answer

Current ratio is a measure of a company's liquidity, determined by dividing current assets by current liabilities.

Question 9

The cash flow statement covers a specific period of time.

Accepted Answer

The cash flow statement is a financial statement that shows the inflow and outflow of cash during a specific period, which could be a month, quarter or year.

Question 10

Inventory is a relatively permanent asset that is intended for use in the business rather than for sale.

Accepted Answer

Inventory consists of goods and materials a business holds for the purpose of resale and is not intended for permanent use in the business.

Question 11

A company's president arranges a business loan with the bank to help the company expand into overseas markets rather than selling common shares.Which term applies to the arrangement made with the bank?

Accepted Answer

Financial leverage refers to the use of borrowed funds (debt) to finance the expansion of a business, rather than using equity (selling shares). This increases the potential return to the shareholders but also increases the risk.

Question 12

Operating expenses are costs related to administrative expenses.

Accepted Answer

Operating expenses include administrative expenses such as salaries, rent, utilities, and office supplies.

Question 13

Financial statements provide fairly good estimates of a company's financial performance.

Accepted Answer

The answer of Financial statements provide fairly good estimates of...

Question 14

The major difference between cash-basis accounting and accrual-basis accounting lies in when the firm reports revenue and expenses.

Accepted Answer

In cash-basis accounting, revenue and expenses are recognized only when money is received or paid out, while in accrual-basis accounting, revenue and expenses are recognized when they are earned or incurred regardless of the timing of the actual cash flow.

Question 15

Gross profit is the sales less the cost of goods sold

Accepted Answer

Gross profit is calculated by subtracting the cost of goods sold from the total revenue/sales. Therefore, the statement is true.

Question 16

One of the owners of a sports bar franchise wants to take extra money out of the business,given the organization's successful year.What accounting figure should he look at to determine how much money can be distributed to himself and the other owners?

Accepted Answer

The owner should look at the net profit figure to determine how much money can be distributed to himself and the other owners. This is because net profit represents the amount of money the business has made after deducting all expenses, including taxes, interest, and other costs. This figure tells the owner how much money the business has available to distribute as profits or reinvest in the business. Gross profit only takes into account the cost of goods sold, not all expenses. Gross revenue and net revenue are not commonly used accounting terms.

Question 17

Entrepreneurs should aim to minimize and control,rather than maximize and own,resources.

Accepted Answer

By minimizing and controlling resources, entrepreneurs can stay lean, agile, and flexible, allowing them to adapt quickly to changing market conditions and customer needs. Maximizing and owning resources can lead to excess costs, inefficiencies, and rigid structures that hinder innovation and growth.

Question 18

An investor is inquiring about purchasing a company and wants to determine the total amount invested in the business by the owner plus the accumulation of profits in the business.What will provide this information?

Accepted Answer

Owners' equity represents the funds that the owner has invested in the business as well as the accumulated profits (or losses) of the business over time.

Question 19

An owner of an antique shop sold a dining room set from the 1800s.He is not quite sure if he made a profit.What accounting information does he need to verify to determine if a profit was made?

Accepted Answer

To determine if a profit was made, the owner needs to calculate the cost of goods sold (COGS). COGS is the amount of money spent on producing or acquiring the products being sold. By subtracting the COGS from the revenue generated by the sale, the owner can determine if a profit was made. Therefore, the owner needs to verify the cost of goods sold.

Question 20

A partner who handles the financial side of the business estimates that a new machine will useful for 10 years before it will have to be replaced.He plans to allocate one-tenth of the cost to each year that the machine is in use.What is the proper accounting term for this cost?

Accepted Answer

The proper accounting term for this cost is depreciation. Depreciation is the allocation of the cost of a long-term asset over the period in which it will be used. In this case, the partner plans to allocate one-tenth of the cost to each year that the machine is in use, which is a form of depreciation.

Quiz 13: Understanding Financial Statements and Forecasting