Question 1

The acid test ratio is the best test to determine the ability to pay short-term debt.

Accepted Answer

The acid test ratio (also known as quick ratio) is a liquidity ratio that measures a company's ability to pay its short-term liabilities with its most liquid assets (cash, marketable securities, and accounts receivable). This ratio is considered a more reliable measure of liquidity than the current ratio because it excludes inventory, which may not be easily converted into cash in a short period of time. Therefore, the acid test ratio is a good test to determine the ability to pay short-term debt.

Question 2

Accounts receivable turnover is calculated by dividing gross sales by the average gross amount of accounts receivable.

Accepted Answer

The answer of Accounts receivable turnover is calculated by dividing...

Question 3

Topiary's Unlimited has a cost of goods sold of $1,400,000.The beginning merchandise inventory was $195,000 and its ending merchandise inventory is $205,000.Topiary's merchandise inventory turnover ratio is:

Accepted Answer

The answer of Topiary's Unlimited has a cost of goods...

Question 4

Tom's Toys has a cash balance of $100,000;temporary investments of $40,000;net receivables of $60,000;and inventory of $400,000.Tom's current liabilities total $125,000.His quick (acid test)ratio is:

Accepted Answer

The quick (acid test) ratio is calculated as (Cash + Temporary Investments + Net Receivables) / Current Liabilities. For Tom's Toys, this is ($100,000 + $40,000 + $60,000) / $125,000 = $200,000 / $125,000 = 1.60 to 1.

Question 5

The income before taxes and interest expense of Barry Builders for the year just ended is $210,000.Their interest expense is $20,000 and their income taxes are $80,500.The number of times interest would be earned is:

Accepted Answer

The answer of The income before taxes and interest expense...

Question 6

Merchandise inventory turnover measures the relationship between:

Accepted Answer

Merchandise inventory turnover measures how quickly a company sells its inventory during a specific period of time. It is calculated by dividing the cost of goods sold by the average inventory during that same period. Therefore, the relationship being measured is between the cost of goods sold and merchandise inventory.

Question 7

A current ratio of 1.5 times would mean that the business has 1.5 times more assets than liabilities.

Accepted Answer

A current ratio of 1.5 times means that the business has 1.5 times more current assets than current liabilities, not total assets compared to total liabilities.

Question 8

The net sales for James,Inc.were $4,000,000;net income before taxes was $810,000;and gross profit was $1,300,000.The return on sales ratio would be:

Accepted Answer

The answer of The net sales for James,Inc.were $4,000,000;net income...

Question 9

What is the rate of return on common stockholders' equity if net income before taxes is $21,200,sales are $200,000,and common stockholders' equity is $76,000?

Accepted Answer

The formula for rate of return on common stockholders' equity is net income divided by common stockholders' equity. First, we need to calculate the net income after taxes. Assuming a tax rate of 30%, net income would be $14,840 ($21,200 - 30%*$21,200). Then, dividing net income by common stockholders' equity yields a rate of return of approximately 27.9%, or choice C.

Question 10

A company has cash of $215,000;short-term investments of $45,000;net receivables of $75,000;and inventory of $100,000.Current liabilities total $80,000.The current ratio is:

Accepted Answer

Current assets = cash + short-term investments + net receivables + inventory
Current assets = $215,000 + $45,000 + $75,000 + $100,000
Current assets = $435,000

Current ratio = current assets / current liabilities
Current ratio = $435,000 / $80,000
Current ratio = 5.44:1

Therefore, the best choice is C and the current ratio is 5.44:1.

Question 11

Rick's Cars had a beginning account receivables balance of $320,000.The ending account receivables balance was $280,000.Net credit sales for the company were $4,200,000.The accounts receivable turnover for Rick's Cars is:

Accepted Answer

The answer of Rick's Cars had a beginning account receivables...

Question 12

Topiary's Unlimited has a cost of goods sold of $1,500,000.The beginning merchandise inventory was $125,000 and its ending merchandise inventory is $175,000.Topiary's merchandise inventory turnover ratio is:

Accepted Answer

Merchandise Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Average Inventory = ($125,000 + $175,000) / 2 = $150,000
Merchandise Inventory Turnover Ratio = $1,500,000 / $150,000
Merchandise Inventory Turnover Ratio = 10.0 times. 
Therefore, the best choice for the merchandise inventory turnover ratio is B - 10.0 times.

Question 13

Isaiah Company has net income before interest and taxes of $825,000;beginning total assets of $2,100,000;and ending total assets of $2,500,000.Isaiah's return on total assets is:

Accepted Answer

Return on total assets = Net income before interest and taxes / Average total assets= $825,000 / (($2,100,000 + $2,500,000) / 2)= $825,000 / $2,300,000= 33%

Question 14

The acid test ratio is usually lower than the current ratio.

Accepted Answer

The acid test ratio only takes into account the most liquid assets (cash, accounts receivable, and inventory), while the current ratio includes all current assets. Therefore, the acid test ratio tends to be lower than the current ratio.

Question 15

Net income before taxes - preferred dividends divided by common stockholders' equity is the calculation for:

Accepted Answer

The formula given is for calculating the rate of return on stockholders' equity.

Question 16

The liabilities of a company at the end of the year are $500,000 and the total stockholders' equity at the end of the year is $1,000,000.The debt to stockholders' equity ratio is:

Accepted Answer

The debt to stockholders' equity ratio is calculated by dividing total liabilities by total stockholders' equity. Here, $500,000 / $1,000,000 = 0.50 to 1.

Question 17

The reasons for changes in key ratios must be analyzed before drawing conclusions.

Accepted Answer

It is important to analyze the reasons behind any changes in key ratios before making any conclusions or decisions. This will ensure that any actions taken are based on informed and accurate analysis, rather than assumptions or incomplete information.

Question 18

To be meaningful,a small business should compare ratios with large companies.

Accepted Answer

Small businesses should compare ratios with similar-sized companies or industry averages to gain meaningful insights, as large companies may have different financial structures and scales.

Question 19

The net income before taxes for the year ended was $320,000.Equity for common stockholders' at the end of the year was $1,600,000 and $1,400,000 at the beginning of the year.The return on common stockholders' equity would be:

Accepted Answer

The answer of The net income before taxes for the...

Question 20

The debt-to-equity ratio measures the extent of (or proportion of)borrowed capital to equity,with which a business operates.

Accepted Answer

The statement is true. The debt-to-equity ratio is a financial ratio that compares a company's total debt to its total equity, representing the amount of borrowed capital compared to the company's own funds for investment and operations.

Quiz 22: Analyzing Financial Statements