Question 1

During the year, Dempsey Corporation's current ratio increased while its quick ratio decreased. Which of the following could help explain this situation?

Accepted Answer

An increase in inventory levels during the year would cause the current ratio to increase as inventory is included in the current assets, but it would cause the quick ratio to decrease as inventory is not included in the quick assets. The other options would not directly impact the quick ratio.

Question 2

What is the effect of the payment of an account payable on the current ratio and the quick ratio, respectively? (Assume the current ratio was 2.3 times and the quick ratio was 2.1 times before this transaction.)

Accepted Answer

The answer of What is the effect of the payment...

Question 3

Following are the financial statements for Starman Corporation for the year ended December 31, 20xx. Assume that all balance sheet amounts represent both average and ending figures. 
$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Balance Sheet } \
\hline \text { December } 31,20 x x \
\hline \text { Assets }\\hline
\end{array}$

$\begin{array}{|l|l|}
\hline \text { Cash } & \$ 20,000 \
\hline \text { Marketable securities } & 30,000 \
\hline \text { Accounts receivable } & 50,000 \
\hline \text { Inventory } & 100,000 \
\hline \text { Long-term receivables } & 35,000 \
\hline \text { Property, plant, and equipment } & 65,000 \
\hline \text { Total assets } & \$ 300,000 \
\hline
\end{array}$

$\begin{array}{l}
\begin{array}{|l|l|}
\hline \text { Liabilities and Stockholders' Equity }\
\hline \text { Current liabilities } & \$ 100,000 \
\hline \text { Long-term liabilities } & 60,000 \
\hline \text { Stockholders' equity } & 140,000 \
\hline \text { Total liabilities and stockholders' equity } & \$ 300,000 \
\hline
\end{array}
\end{array}$

$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Income Statement } \
\hline \text { For the Year Ended December } 31,20 \mathrm{xx} \
\hline
\end{array}$

$\begin{array}{|l|r|}
\hline \text { Net sales } & \$ 400,000 \
\hline \text { Cost of goods sold } & 240,000 \
\hline \text { Gross margin } & \$ 160,000 \
\hline \text { Operating expenses } & 40,000 \
\hline \text { Income before income taxes } & \$ 120,000 \
\hline \text { Income taxes expense } & 30,000 \
\hline \text { Net income } & \$ 90,000 \
\hline
\end{array}$
-
What is the inventory turnover for this corporation? Round your answer to one decimal place.

Accepted Answer

Inventory turnover is calculated as Cost of Goods Sold divided by Average Inventory. Given that Cost of Goods Sold is $240,000 and Inventory is $100,000, the turnover is $240,000 / 100,000 = 2.4$ times.

Question 4

Following are the financial statements for Starman Corporation for the year ended December 31, 20xx. Assume that all balance sheet amounts represent both average and ending figures. 
$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Balance Sheet } \
\hline \text { December } 31,20 x x \
\hline \text { Assets }\\hline
\end{array}$

$\begin{array}{|l|l|}
\hline \text { Cash } & \$ 20,000 \
\hline \text { Marketable securities } & 30,000 \
\hline \text { Accounts receivable } & 50,000 \
\hline \text { Inventory } & 100,000 \
\hline \text { Long-term receivables } & 35,000 \
\hline \text { Property, plant, and equipment } & 65,000 \
\hline \text { Total assets } & \$ 300,000 \
\hline
\end{array}$

$\begin{array}{l}
\begin{array}{|l|l|}
\hline  \text { Liabilities and Stockholders' Equity }\
\hline \text { Current liabilities } & \$ 100,000 \
\hline \text { Long-term liabilities } & 60,000 \
\hline \text { Stockholders' equity } & 140,000 \
\hline \text { Total liabilities and stockholders' equity } & \$ 300,000 \
\hline
\end{array}
\end{array}$

$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Income Statement } \
\hline \text { For the Year Ended December } 31,20 \mathrm{xx} \
\hline
\end{array}$

$\begin{array}{|l|r|}
\hline \text { Net sales } & \$ 400,000 \
\hline \text { Cost of goods sold } & 240,000 \
\hline \text { Gross margin } & \$ 160,000 \
\hline \text { Operating expenses } & 40,000 \
\hline \text { Income before income taxes } & \$ 120,000 \
\hline \text { Income taxes expense } & 30,000 \
\hline \text { Net income } & \$ 90,000 \
\hline
\end{array}$ 
-
What is the receivable turnover for this corporation?

Accepted Answer

Receivable turnover is calculated as Net Sales divided by Average Accounts Receivable. Given that Net Sales are $400,000 and Accounts Receivable is $50,000, the receivable turnover is $ \frac{400,000}{50,000} = 8.0 $ times.

Question 5

Which of the following best describes the debt to equity ratio?

Accepted Answer

The debt to equity ratio is calculated by dividing total liabilities by stockholders' equity, which measures a company's financial leverage.

Question 6

The receivable turnover and inventory turnover ratios are used to analyze

Accepted Answer

The receivable turnover and inventory turnover ratios are both used to analyze the liquidity of a business. The receivable turnover ratio measures how quickly a company collects its outstanding customer payments, while the inventory turnover ratio measures how quickly a company sells its inventory. Both ratios provide insight into how efficiently a company is managing its assets and generating cash flow, which is important for assessing its ability to meet short-term obligations. Therefore, the best choice is D, liquidity.

Question 7

Assuming that the current ratio was 1.6 times and the quick ratio was 1.4 times before this transaction, the entry to record the payment of a previously declared and recorded cash dividend will

Accepted Answer

The answer of Assuming that the current ratio was 1.6...

Question 8

The number of days' sales uncollected is determined by dividing

Accepted Answer

The number of days' sales uncollected is calculated by dividing the number of days in a year (usually 365 days) by the receivable turnover ratio. This ratio measures how quickly a company collects cash from its credit sales.

Question 9

Following are the financial statements for Starman Corporation for the year ended December 31, 20xx. Assume that all balance sheet amounts represent both average and ending figures. 
$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Balance Sheet } \
\hline \text { December } 31,20 x x \
\hline \text { Assets }\\hline
\end{array}$

$\begin{array}{|l|l|}
\hline \text { Cash } & \$ 20,000 \
\hline \text { Marketable securities } & 30,000 \
\hline \text { Accounts receivable } & 50,000 \
\hline \text { Inventory } & 100,000 \
\hline \text { Long-term receivables } & 35,000 \
\hline \text { Property, plant, and equipment } & 65,000 \
\hline \text { Total assets } & \$ 300,000 \
\hline
\end{array}$

$\begin{array}{l}
\begin{array}{|l|l|}
\hline \text { Liabilities and Stockholders' Equity }\
\hline \text { Current liabilities } & \$ 100,000 \
\hline \text { Long-term liabilities } & 60,000 \
\hline \text { Stockholders' equity } & 140,000 \
\hline \text { Total liabilities and stockholders' equity } & \$ 300,000 \
\hline
\end{array}
\end{array}$

$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Income Statement } \
\hline \text { For the Year Ended December } 31,20 \mathrm{xx} \
\hline
\end{array}$

$\begin{array}{|l|r|}
\hline \text { Net sales } & \$ 400,000 \
\hline \text { Cost of goods sold } & 240,000 \
\hline \text { Gross margin } & \$ 160,000 \
\hline \text { Operating expenses } & 40,000 \
\hline \text { Income before income taxes } & \$ 120,000 \
\hline \text { Income taxes expense } & 30,000 \
\hline \text { Net income } & \$ 90,000 \
\hline
\end{array}$ 
-
What is the return on assets for this corporation? Round your answer to one decimal place.

Accepted Answer

The return on assets (ROA) is calculated as Net Income / Total Assets. For Starman Corporation, this is $90,000 / $300,000 = 0.3 or 30.0 percent.

Question 10

How would the collection of an account receivable affect the current ratio and the quick ratio, respectively?

Accepted Answer

The answer of How would the collection of an account...

Question 11

Following are the financial statements for Starman Corporation for the year ended December 31, 20xx. Assume that all balance sheet amounts represent both average and ending figures. 
$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Balance Sheet } \
\hline \text { December } 31,20 x x \
\hline \text { Assets }\\hline
\end{array}$

$\begin{array}{|l|l|}
\hline \text { Cash } & \$ 20,000 \
\hline \text { Marketable securities } & 30,000 \
\hline \text { Accounts receivable } & 50,000 \
\hline \text { Inventory } & 100,000 \
\hline \text { Long-term receivables } & 35,000 \
\hline \text { Property, plant, and equipment } & 65,000 \
\hline \text { Total assets } & \$ 300,000 \
\hline
\end{array}$

$\begin{array}{l}
\begin{array}{|l|l|}
\hline  \text { Liabilities and Stockholders' Equity }\
\hline \text { Current liabilities } & \$ 100,000 \
\hline \text { Long-term liabilities } & 60,000 \
\hline \text { Stockholders' equity } & 140,000 \
\hline \text { Total liabilities and stockholders' equity } & \$ 300,000 \
\hline
\end{array}
\end{array}$

$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Income Statement } \
\hline \text { For the Year Ended December } 31,20 \mathrm{xx} \
\hline
\end{array}$

$\begin{array}{|l|r|}
\hline \text { Net sales } & \$ 400,000 \
\hline \text { Cost of goods sold } & 240,000 \
\hline \text { Gross margin } & \$ 160,000 \
\hline \text { Operating expenses } & 40,000 \
\hline \text { Income before income taxes } & \$ 120,000 \
\hline \text { Income taxes expense } & 30,000 \
\hline \text { Net income } & \$ 90,000 \
\hline
\end{array}$ 
-
What is the current ratio for this corporation? Round your answer to two decimal places.

Accepted Answer

The answer of Following are the financial statements for Starman...

Question 12

A change from FIFO to LIFO in a period of rising prices will

Accepted Answer

In a period of rising prices, switching from FIFO (First In, First Out) to LIFO (Last In, First Out) accounting for inventory will typically result in lower ending inventory values on the balance sheet, because the cost of goods sold (COGS) will be higher with LIFO (reflecting the more recent, higher prices of goods). This decrease in ending inventory value reduces the current ratio (current assets divided by current liabilities) because inventory is a component of current assets. Meanwhile, the inventory turnover ratio (COGS divided by average inventory) increases because the COGS is higher while the average inventory may decrease or stay relatively constant, leading to a higher turnover ratio.

Question 13

Following are the financial statements for Starman Corporation for the year ended December 31, 20xx. Assume that all balance sheet amounts represent both average and ending figures. 
$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Balance Sheet } \
\hline \text { December } 31,20 x x \
\hline \text { Assets }\\hline
\end{array}$

$\begin{array}{|l|l|}
\hline \text { Cash } & \$ 20,000 \
\hline \text { Marketable securities } & 30,000 \
\hline \text { Accounts receivable } & 50,000 \
\hline \text { Inventory } & 100,000 \
\hline \text { Long-term receivables } & 35,000 \
\hline \text { Property, plant, and equipment } & 65,000 \
\hline \text { Total assets } & \$ 300,000 \
\hline
\end{array}$

$\begin{array}{l}
\hline \begin{array}{|l|l|}
\text { Liabilities and Stockholders' Equity }\
\hline \text { Current liabilities } & \$ 100,000 \
\hline \text { Long-term liabilities } & 60,000 \
\hline \text { Stockholders' equity } & 140,000 \
\hline \text { Total liabilities and stockholders' equity } & \$ 300,000 \
\hline
\end{array}
\end{array}$

$\begin{array}{|l|}
\hline \text { Starman Corporation } \
\hline \text { Income Statement } \
\hline \text { For the Year Ended December } 31,20 \mathrm{xx} \
\hline
\end{array}$

$\begin{array}{|l|r|}
\hline \text { Net sales } & \$ 400,000 \
\hline \text { Cost of goods sold } & 240,000 \
\hline \text { Gross margin } & \$ 160,000 \
\hline \text { Operating expenses } & 40,000 \
\hline \text { Income before income taxes } & \$ 120,000 \
\hline \text { Income taxes expense } & 30,000 \
\hline \text { Net income } & \$ 90,000 \
\hline
\end{array}$
-
 What is the profit margin for this corporation? Round your answer to one decimal place.

Accepted Answer

Profit margin is calculated as (Net Income / Net Sales) * 100. For Starman Corporation, it's (\$90,000 / \$400,000) * 100 = 22.5%.

Question 14

Which of the following describes the return on assets ratio?

Accepted Answer

The return on assets ratio is calculated by dividing net income by average total assets, making option D the correct choice. This ratio measures how efficiently a company is using its assets to generate profits.

Question 15

Which of the following describes the interest coverage ratio?

Accepted Answer

The interest coverage ratio is calculated as income before income taxes plus interest expense divided by interest expense. This measures a company's ability to make interest payments on its debt.

Question 16

Days' inventory on hand is used to analyze

Accepted Answer

Days' inventory on hand measures the average number of days it takes a company to sell its inventory. This ratio is used to assess a company's liquidity, or its ability to meet short-term obligations. It is not used to analyze cash flow adequacy, profitability, or long-term solvency.

Question 17

Which of the following describes the asset turnover ratio?

Accepted Answer

The asset turnover ratio measures how efficiently a company is using its assets to generate revenue. It is calculated by dividing net sales by average total assets. This ratio indicates how much sales are generated per unit of assets, and a higher ratio typically indicates better efficiency.

Question 18

A company with a current ratio of 2.4 times will see that ratio decrease when the company

Accepted Answer

Borrowing cash by issuing a short-term note payable increases current liabilities without increasing current assets, which decreases the current ratio.

Question 19

A quick ratio that is much smaller than the current ratio indicates that

Accepted Answer

The quick ratio excludes inventories from current assets because they are considered less liquid. A significantly lower quick ratio compared to the current ratio suggests that a large portion of the company's current assets is tied up in inventories, which are not as readily convertible to cash.

Question 20

The current ratio is a

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay its short-term obligations with its current assets. A higher current ratio indicates that the company is more capable of meeting its short-term obligations.

Quiz 13: Financial Analysis of Performance

During the year, Dempsey Corporation's current ratio increased while its quick ratio decreased. Which of the following could help explain this situation?

What is the effect of the payment of an account payable on the current ratio and the quick ratio, respectively? (Assume the current ratio was 2.3 times and the quick ratio was 2.1 times before this transaction.)

Which of the following best describes the debt to equity ratio?

The receivable turnover and inventory turnover ratios are used to analyze

Assuming that the current ratio was 1.6 times and the quick ratio was 1.4 times before this transaction, the entry to record the payment of a previously declared and recorded cash dividend will

The number of days' sales uncollected is determined by dividing

How would the collection of an account receivable affect the current ratio and the quick ratio, respectively?

A change from FIFO to LIFO in a period of rising prices will

Which of the following describes the return on assets ratio?

Which of the following describes the interest coverage ratio?

Days' inventory on hand is used to analyze

Which of the following describes the asset turnover ratio?

A company with a current ratio of 2.4 times will see that ratio decrease when the company

A quick ratio that is much smaller than the current ratio indicates that

The current ratio is a