Question 1

If the current ratio is 3.2, and the current liabilities are $110,000, what is the amount of current assets?

Accepted Answer

Current Ratio = Current Assets / Current Liabilities

3.2 = Current Assets / $110,000

Therefore, Current Assets = 3.2 x $110,000

Current Assets = $352,000.

Hence, the best choice is B, which is $352,000.

Question 2

The collection period is computed as 365 divided by one day's sales.

Accepted Answer

The collection period is calculated as average accounts receivable divided by average daily credit sales.

Question 3

A measure of the ability of an entity to pay all of its current liabilities if they come due immediately is the:

Accepted Answer

The quick ratio, also known as the acid-test ratio, measures the ability of an entity to pay off its current liabilities using quick assets only (such as cash, marketable securities, and accounts receivable) without relying on inventory or prepaid expenses. This measure excludes assets that may be difficult to convert to cash quickly, which makes it a more conservative measure of liquidity compared to the current ratio (which includes all current assets in the computation).

Question 4

Which of the following is considered to be a more stringent measure of a company's ability to pay its current liabilities than the current ratio?

Accepted Answer

The quick ratio, also known as the acid-test ratio, is considered a more stringent measure of a company's ability to pay its current liabilities because it only includes the most liquid assets (cash, marketable securities, and accounts receivable) in the numerator, while excluding inventory and other assets that may not be as readily converted to cash to pay off current debt. This gives a better indication of whether a company can meet its short-term obligations without having to resort to selling off inventory at discounted prices or taking on additional debt.

Question 5

Which of the following would NOT be included in the numerator of the acid-test ratio?

Accepted Answer

Inventories are not included in the numerator of the acid-test ratio because they are not considered easily convertible into cash. The acid-test ratio only includes assets that are highly liquid and can be quickly converted into cash, such as cash-equivalents, short-term investments, and accounts receivable.

Question 6

Net sales for the current period were $114,000 and average receivables were $96,250. What is the amount of day's sales in receivables?

Accepted Answer

The answer of Net sales for the current period were...

Question 7

The order of liquidity of current assets is:

Accepted Answer

Cash and cash-equivalents are the most liquid, followed by short-term investments, and accounts receivable. Prepaid expenses are not considered a current asset as they do not have a direct monetary value, and are therefore not relevant in terms of liquidity order.

Question 8

A company has $40,000 in cash, $75,000 in short-term investments, $263,000 in net current receivables, and $110,000 in inventory. The total current liabilities of the firm are $305,000. The quick ratio of the company is:

Accepted Answer

The quick ratio (also known as acid-test ratio) is calculated by adding the cash, short-term investments, and net current receivables, and then dividing by the total current liabilities. 
Quick ratio = (Cash + Short-term investments + Net current receivables) / Total current liabilities
= ($40,000 + $75,000 + $263,000) / $305,000
= $378,000 / $305,000
= 1.24
Therefore, the quick ratio of the company is 1.24. The best choice is B.

Question 9

The quick ratio and the number of days' sales in receivables measure:

Accepted Answer

The quick ratio and the number of days' sales in receivables both measure a company's liquidity, which refers to its ability to meet short-term obligations and pay off debts. The quick ratio measures a company's ability to pay its current liabilities with its most liquid assets, while the number of days' sales in receivables measures how quickly a company collects money from its customers. Neither of these ratios directly measure profitability or long-term debt-paying ability.

Question 10

An indication of how many days' sales remain in Accounts Receivable awaiting collection is the:

Accepted Answer

Days' sales in receivables is a measure of how long it takes a company to collect its accounts receivable. It is calculated by dividing the ending accounts receivable balance by the average daily sales. This gives an indication of how many days' sales are tied up in receivables and waiting to be collected. The other ratios listed do not provide this specific information.

Question 11

If credit sales are $2,920,000, then one day's sale is equal to $8,000.

Accepted Answer

To find out one day's sale, we need to divide the credit sales by the number of days. Since we do not have information about the number of days, we cannot calculate the exact amount of one day's sale. Therefore, we cannot say whether the statement is true or false.

Question 12

If the collection period of a company is 31 days, and the average receivables is $70,060, what is the total amount of the credit sales?

Accepted Answer

The collection period formula is: Average Receivables / (Credit Sales / 365). Rearranging gives Credit Sales = (Average Receivables * 365) / Collection Period. Plugging in the values: ($70,060 * 365) / 31 = $824,900.

Question 13

The numerator in the calculation of the quick ratio includes which of the following items?

Accepted Answer

The quick ratio, also known as the acid-test ratio, is a measure of a company's ability to meet its short-term obligations. The numerator of this ratio includes assets that can be easily converted into cash without affecting the price of the asset, such as cash, short-term investments, and net current receivables. Therefore, the correct answer is D. Options A, B, and C are not correct because they exclude at least one of these items.

Question 14

A company with net sales of 1,642,500, a beginning balance of net receivables of $187,500, and an ending balance of net receivables of $235,500 has a days' sales in receivables (rounded)of:

Accepted Answer

To calculate days' sales in receivables, we need to divide the average net accounts receivable by daily net sales. 
Average net accounts receivable = (beginning balance + ending balance) / 2
= ($187,500 + $235,500) / 2
= $211,500

Daily net sales = net sales / 365
= $1,642,500 / 365 
= $4,500

Days' sales in receivables = average net accounts receivable / daily net sales
= $211,500 / $4,500
= 47 days (rounded)

Question 15

The number of days it takes to collect the average amount of receivables is called the:

Accepted Answer

The average number of days it takes to collect receivables is referred to as the days' sales in receivables. This metric is determined by dividing the receivables balance by the average daily sales figure. It provides a clear understanding of how quickly a company can collect its receivables and convert them into cash. The other options (receivables turnover ratio, current ratio, and collection ratio) do not specifically refer to the number of days it takes to collect receivables.

Question 16

If the current ratio of a company equals 2.1, the quick ratio will always be lower than 2.1. (Assume that the company also has inventory and prepaid expenses.)

Accepted Answer

The quick ratio only takes into account a company's most liquid assets, which includes cash, marketable securities, and accounts receivable. It does not include inventory and prepaid expenses. Therefore, the quick ratio will always be lower than the current ratio, which includes all current assets.

Question 17

Alex Rhodes' net sales for the current period were $114,000 and average receivables were $96,250. What is the amount of one day's sales (rounded)?

Accepted Answer

One day's sales = Net sales / 365 days= $114,000 / 365 days= $312.33 (rounded to the nearest dollar)

Question 18

A company with net sales of $800,000, a beginning balance of net receivables of $70,000, and an ending balance of net receivables of $90,000 has a collection period (rounded)of:

Accepted Answer

The formula for calculating the collection period is:

Collection period = (Average accounts receivable ÷ Net credit sales) x 365

We need to find the average accounts receivable. To do this, we can use the following formula:

Average accounts receivable = (Beginning balance of net receivables + Ending balance of net receivables) ÷ 2

Average accounts receivable = ($70,000 + $90,000) ÷ 2 = $80,000

Now we can substitute the values in the collection period formula:

Collection period = ($80,000 ÷ $800,000) x 365 = 36.25 days

Rounding the answer, we get the closest choice, which is C (36 days).

Question 19

1.investments, $75,000 in net current receivables, and $12,000 in prepaid expenses. The total current liabilities of the firm are $90,000. Barts Industries' current ratio is:

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Current assets include cash, net current receivables, and prepaid expenses. So, ($50,000 + $75,000 + $12,000) / $90,000 = 1.47.

Question 20

To shorten the collection period, a company may:

Accepted Answer

To shorten the collection period, a company should decrease its average receivables. This can be achieved by improving the creditworthiness of customers, revising credit terms, and collecting outstanding receivables on a timely basis. Increasing average receivables, decreasing discount offered or decreasing total sales would not help in shortening the collection period.

Quiz 5: Short-Term Investments Receivables