Question 1

Which one of the following statements about book value per share is most correct?

Accepted Answer

Book value per common share is based on historical data and does not account for future expectations or growth potential. The market price of a share of stock, on the other hand, reflects what investors expect for the company's future performance. Therefore, option B is the most correct statement. Option A is incorrect because the market price may be higher or lower than book value depending on various factors such as company's growth potential and market conditions. Option C is incorrect because a market price higher than book value doesn't necessarily mean the stock is overvalued. Finally, option D is incorrect because book value per common share is the amount of equity allocated to each outstanding common share, not the price of the company in a sale.

Question 2

Data from Fontecchio Corporation's most recent balance sheet appear below:  The corporation's acid-test ratio is closest to:

Accepted Answer

Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $18,000 + $24,000 + $39,000 + $0 = $81,000
Acid-test ratio = Quick assets ÷ Current liabilities
= $81,000 ÷ $120,000 = 0.675

Question 3

A company's current ratio and an acid-test ratio are both greater than 1.Payment of an account payable would:

Accepted Answer

The answer of A company's current ratio and an acid-test...

Question 4

The price-earnings ratio is determined by dividing market price per share of stock by the earnings per share.

Accepted Answer

The price-earnings ratio (P/E ratio) is indeed determined by dividing the market price per share of stock by the earnings per share.

Question 5

Which of the following is not a source of financial leverage?

Accepted Answer

Prepaid rent is not a source of financial leverage as it is a liability that has already been paid in advance and does not create any additional financing for the company. Bonds payable, accounts payable, and taxes payable are all examples of financial leverage as they represent borrowed funds that can be used to invest in the company's operations and potentially increase its profitability.

Question 6

Earnings per share is computed by multiplying net income by the average number of common shares outstanding.

Accepted Answer

Earnings per share (EPS) is computed by dividing net income by the average number of common shares outstanding.

Question 7

A company's current ratio is greater than 1.Purchasing raw materials on credit would:

Accepted Answer

Purchasing raw materials on credit would increase the current liabilities, which would decrease the current ratio.

Question 8

The gross margin percentage is equal to:

Accepted Answer

Gross margin percentage is calculated by adding net operating income and selling and administrative expenses together, then dividing by sales. This formula accounts for the total revenue minus the cost of goods sold and operating expenses, providing a percentage that reflects the efficiency of a company in managing its direct costs and overhead in relation to its sales revenue.

Question 9

Norton Inc.could improve its current ratio of 2 by:

Accepted Answer

Selling merchandise on credit at a profit increases both assets (accounts receivable) and equity (through profit), without affecting current liabilities, thus improving the current ratio.

Question 10

Turner Co.presently has a current ratio of 0.8.The company has been informed by its bank that it must improve its current ratio to qualify for a line of credit.Which of the following actions would improve the current ratio?

Accepted Answer

The answer of Turner Co.presently has a current ratio of...

Question 11

The market price of Friden Company's common stock increased from $15 to $18.Earnings per share of common stock remained unchanged.The company's price-earnings ratio would:

Accepted Answer

The price-earnings ratio is calculated by dividing the market price per share by the earnings per share. Since the market price of Friden Company's common stock increased while the earnings per share remained unchanged, the market price per share would be higher than before relative to the earnings per share. Therefore, the price-earnings ratio would increase.

Question 12

All other things the same,if the company purchases equipment on credit,this transaction would have no impact on the company's book value per share.

Accepted Answer

Purchasing equipment on credit would not affect the company's equity or assets, as the company would record both a liability (the amount owed on the credit) and an equal amount of equipment on the balance sheet. Therefore, there would be no change in the book value per share, which is calculated by dividing the equity by the number of outstanding shares.

Question 13

Purchasing inventory on credit increases the book value per share of a retailer.

Accepted Answer

Purchasing inventory on credit does not increase the book value per share of a retailer, as the increase in inventory is offset by the increase in liabilities (accounts payable). Therefore, there is no overall increase in shareholder equity per share.

Question 14

Zack Company has a current ratio of 2.5.What will be the effect of a purchase of inventory with cash on the acid-test ratio and on working capital?

Accepted Answer

The answer of Zack Company has a current ratio of...

Question 15

The ratio of total cash,marketable securities,accounts receivable,and short-term notes to current liabilities is:

Accepted Answer

The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is the acid-test ratio. This ratio measures a company's ability to pay off its short-term liabilities with its most liquid assets. It excludes inventory because it may not be quickly converted to cash.

Question 16

The Seabury Corporation has a current ratio of 3.5 and an acid-test ratio of 2.8.The corporation's current assets consist of cash,marketable securities,accounts receivable,and inventories.Inventory equals $49,000.Seabury Corporation's current liabilities must be:

Accepted Answer

Current assets = Quick assets + Inventory
Current assets = Quick assets + $49,000
Acid-test ratio = Quick assets ÷ Current liabilities
2.8 = Quick assets ÷ Current liabilities
Quick assets = 2.8 × Current liabilities
Current ratio = Current assets ÷ Current liabilities
3.5 = Current assets ÷ Current liabilities
3.5 = (Quick assets + $49,000)÷ Current liabilities
3.5 = [(2.8 × Current liabilities)+ $49,000] ÷ Current liabilities
3.5 = 2.8 + ($49,000 ÷ Current liabilities)
3.5 - 2.8 = $49,000 ÷ Current liabilities
0.7 = $49,000 ÷ Current liabilities
Current liabilities = $49,000 ÷ 0.7 = $70,000

Question 17

If current assets exceed current liabilities,prepaying an expense on the last day of the year will:

Accepted Answer

The answer of If current assets exceed current liabilities,prepaying an...

Question 18

Accounts receivable turnover will normally decrease as a result of:

Accepted Answer

The answer of Accounts receivable turnover will normally decrease as...

Question 19

Selling used equipment at book value for cash will:

Accepted Answer

Selling used equipment at book value for cash increases working capital because it converts a non-current asset into cash (a current asset) without changing current liabilities, thus increasing the difference between current assets and current liabilities.

Question 20

Sand Company has an acid-test ratio of 0.8.Which of the following actions would improve the acid-test ratio?

Accepted Answer

Selling some equipment for cash would increase the amount of cash on hand and decrease the total current liabilities, as equipment is a non-current asset. This would raise the acid-test ratio, which measures a company's ability to pay off its current liabilities with its most liquid assets. Collecting accounts receivable (A) would also increase the company's cash position, but may not be as effective in improving the acid-test ratio. Acquiring inventory on account (B) and using cash to pay off accounts payable (D) would both decrease the company's cash position and increase current liabilities, lowering the acid-test ratio.

Quiz 14: Capital Budgeting Decisions