Question 1

Assume a company has a current ratio of 2.5,and has working capital equal to $750,000.If the company's total current liabilities are equal to $500,000,its total current assets are:

Accepted Answer

The total current assets can be calculated using the formula for working capital (Current Assets - Current Liabilities = Working Capital) and the given working capital of $750,000 and current liabilities of $500,000. Rearranging the formula gives Current Assets = Working Capital + Current Liabilities = $750,000 + $500,000 = $1,250,000.

Question 2

Which of the following statements about inventory turnover is most appropriate?

Accepted Answer

While a high inventory turnover ratio is generally desirable as it indicates efficient management of inventory, a company should also consider the cost of carrying too little inventory. In some cases, a lower turnover ratio may lead to higher profit margins, as it allows the company to take advantage of bulk discounts, improve vendor relationships, and avoid stockouts. Therefore, the most profitable inventory turnover ratio may not necessarily be the highest.

Question 3

If the ending inventory balance was overstated on the financial statements and the beginning inventory balance was understated,but all other items were properly reported,the calculated inventory turnover ratio would be:

Accepted Answer

The answer of If the ending inventory balance was overstated...

Question 4

If all else is held equal,an increase in the current ratio of a company is generally considered to be an indication that:

Accepted Answer

An increase in the current ratio indicates that the company has a higher proportion of current assets to current liabilities. This means that the company has more liquid assets to pay off short-term debts, indicating that the company will be better able to meet short-term debt obligations.

Question 5

Net credit sales for Torro Corporation for 2017 were $600,000.Net accounts receivable at the beginning of the year were $125,000 and were $150,000 at the end of the year.What was the accounts receivable turnover?

Accepted Answer

Accounts receivable turnover ratio = Net credit sales / Average accounts receivable
Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2
= ($125,000 + $150,000) / 2
= $137,500
Accounts receivable turnover ratio = $600,000 / $137,500
= 4.36 (rounded to two decimal places)

Question 6

If cost of goods sold for the year was overstated,but all other financial statements items were properly reported,the calculated inventory turnover ratio would:

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory level during a period. If the cost of goods sold is overstated, the ratio would be artificially inflated, making it appear that inventory is being turned over more times than it actually is. This could lead to incorrect conclusions about the efficiency of inventory management and could also impact other financial ratios that are dependent on the inventory turnover ratio, such as the days sales in inventory ratio.

Question 7

Cost of goods sold for 2017 was $250,000 while net sales amounted to $575,000.On January 1,2017,inventory was $150,000,and on December 31,2017,inventory was $175,000.Inventory turnover for 2017 was:

Accepted Answer

Inventory turnover = Cost of goods sold / Average inventoryAverage inventory = (Beginning inventory + Ending inventory) / 2= ($150,000 + $175,000) / 2= $162,500Inventory turnover = $250,000 / $162,500= 1.54

Question 8

Which of the following ratios is considered a measure of a company's ability to pay current liabilities?

Accepted Answer

The acid-test ratio, also known as the quick ratio, is a measure of a company's ability to pay its current liabilities. It includes only the most liquid assets (cash, accounts receivable, and marketable securities) in its calculation, excluding inventories and prepaid expenses that may take longer to convert to cash. The other ratios listed are not specific measures of a company's ability to pay current liabilities.

Question 9

Net credit sales for Kalkay Corporation for 2017 were $952,000.Net accounts receivable at the beginning of the year were $325,000 and were $200,000 at the end of the year.What was the accounts receivable turnover?

Accepted Answer

The answer of Net credit sales for Kalkay Corporation for...

Question 10

Assume for Down Corporation that current assets are $500,000.Included in this amount is $40,000 for merchandise inventory and $60,000 for prepaid expenses.Current liabilities are $200,000 and total liabilities are $550,000.What is the acid-test ratio?

Accepted Answer

The answer of Assume for Down Corporation that current assets...

Question 11

Which of the following statements about the acid-test ratio is TRUE?

Accepted Answer

The acid-test ratio, also known as the quick ratio, measures a company's ability to pay its current liabilities without relying on the sale of inventory. It is a more stringent measure than the current ratio because it excludes inventory and other less liquid assets. A ratio of 0.90 to 1.00 indicates that a company has 90 cents of liquid assets for every dollar of current liabilities, which is generally considered acceptable in many industries, though opinions on what constitutes a "good" ratio can vary by industry and economic conditions.

Question 12

Current assets for Distributions Inc.are $260,000 and total assets are $600,000.Current liabilities are $170,000 and total liabilities are $300,000.Included in the current assets are merchandise inventory and prepaid expenses of $25,000 and $15,000,respectively.What is the acid-test ratio?

Accepted Answer

The acid-test ratio is calculated by subtracting inventory and prepaid expenses from current assets and dividing by current liabilities.

Acid-test ratio = (Current assets - Inventory - Prepaid expenses) / Current liabilities
Acid-test ratio = ($260,000 - $25,000 - $15,000) / $170,000
Acid-test ratio = $220,000 / $170,000
Acid-test ratio = 1.29

Therefore, the best choice is D) 1.29 as it is the correct acid-test ratio for Distributions Inc. The other choices are incorrect calculations of the acid-test ratio.

Question 13

Which of the following statements about the current ratio is most appropriate?

Accepted Answer

The current ratio varies by industry and company, so it is best to compare a company's current ratio to industry norms. A current ratio less than 1.0 may not necessarily be unacceptable, as it could indicate that a company has short-term liquidity issues but could still be a viable company in the long-term. A current ratio greater than 2.0 may not necessarily be normal, as it could indicate that a company is holding excess cash and not utilizing it efficiently. A current ratio greater than 1.0 is not always acceptable, as it depends on various factors such as the company's industry, size, and business model.

Question 14

Cost of goods sold for Grant Corporation for 2017 was $300,000 and net credit sales for 2017 were $625,000.Beginning inventory for 2017 was $150,000 and ending inventory for 2017 was $200,000.What was the inventory turnover?

Accepted Answer

The answer of Cost of goods sold for Grant Corporation...

Question 15

Assume a company has a current ratio of 1.5 and working capital equal to $40,000.Total current assets are:

Accepted Answer

The current ratio is calculated as Current Assets / Current Liabilities. Given a current ratio of 1.5 and working capital (Current Assets - Current Liabilities) of $40,000, we can set up the equation 1.5 = Current Assets / (Current Assets - 40,000). Solving for Current Assets gives $120,000.

Question 16

Assume a company has a current ratio of 1.5 and working capital equal to $25,000.Total current liabilities are equal to:

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. If the current ratio is 1.5, then current assets are 1.5 times the current liabilities. Working capital is current assets minus current liabilities, which is given as $25,000. Let current liabilities be X. Then, 1.5X - X = $25,000, which simplifies to 0.5X = $25,000. Solving for X gives X = $50,000.

Question 17

All the following ratios are measures of a company's ability to sell inventory and collect receivables except:

Accepted Answer

Rate of return on net sales is a measure of a company's profitability, not its ability to sell inventory and collect receivables. The other ratios listed - accounts receivable turnover, inventory turnover, and days' sales in receivables - are specifically related to a company's ability to manage its inventory and receivables.

Question 18

Assume for Down Corporation that current assets are $50,000 and total assets are $300,000.Current liabilities are $40,000 and total liabilities are $100,000.What is the current ratio?

Accepted Answer

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $50,000 / $40,000 = 1.25

Question 19

The acid-test ratio is calculated as:

Accepted Answer

The acid-test ratio, also known as the quick ratio, measures a company's ability to meet its short-term financial obligations using only its most liquid assets. It is calculated by dividing the sum of cash, short-term investments, and net current receivables by total current liabilities. This ratio provides a more stringent assessment of a company's liquidity than the current ratio, which includes all current assets.

Question 20

Cost of goods sold for 2017 was $450,000 while net sales amounted to $800,000.On January 1,2017,inventory was $200,000 while on December 31,2017,inventory was $250,000.Inventory turnover for 2017 was:

Accepted Answer

The answer of Cost of goods sold for 2017 was...

Quiz 7: Financial Statement Analysis