Question 1

When the allowance method of recognizing bad debt expense is used,the entries at the time of collection of an account previously written off would
A)Increase net income
B)Have no effect on total current assets
C)Increase working capital
D)Decrease total current liabilities

Accepted Answer

When an account previously written off is collected under the allowance method, the entry to record the collection reverses the write-off and recognizes the collection, which affects the allowance for doubtful accounts and cash, but does not change the total current assets because one asset (cash) increases while another (allowance for doubtful accounts) decreases by the same amount.

Question 2

The advantage of relating a company's bad debt experience to its accounts receivable is that this approach
A)Gives a reasonable correct statement of receivables in the balance sheet
B)Relates bad debts expense to the period of sale
C)Is the only generally accepted method for valuing accounts receivable
D)Makes estimates of uncollectible accounts unnecessary

Accepted Answer

A

Question 3

The total amount of working capital is
A)$155,000.
B)$145,000.
C)$60,000.
D)$150,000.

Accepted Answer

B

Question 4

An account that would be classified as a current liability is
A)Dividends payable in stock
B)Accounts payable - debit balance
C)Reserve for possible losses on purchase commitments
D)Excess of replacement cost over LIFO cost of basic inventory temporarily liquidated

Accepted Answer

The answer of An account that would be classified as...

Question 5

A common measure of liquidity is
A)Return on assets.
B)Accounts receivable turnover.
C)Profit margin.
D)Debt to equity.

Accepted Answer

Accounts receivable turnover measures how quickly a company collects payment from its customers, which is a reflection of its ability to convert its assets into cash. It is a key indicator of liquidity, as a high accounts receivable turnover ratio means the company has a strong cash flow and is able to meet its financial obligations.

Question 6

Which of the following inventory cost flow methods involves computations based on broad inventory pools of similar items?
A)Regular quantity of goods LIFO
B)Dollar-value LIFO
C)Weighted average
D)Moving average

Accepted Answer

Dollar-value LIFO involves computations based on broad inventory pools of similar items, allowing for the grouping of goods into pools that are valued using the LIFO (Last In, First Out) principle, but on a dollar basis rather than item by item. This method simplifies the tracking and valuation of inventory by focusing on the total value of the inventory pool rather than the specific details of individual items.

Question 7

If inventory levels are stable or increasing an argument that favors the FIFO method as compared to LIFO is
A)Income taxes tend to be reduced in periods of rising prices
B)Cost of goods sold tends to be stated at approximately current cost in the income statement
C)Cost assignments typically parallel the physical flow of the goods
D)Income tends to be smoothed as prices change over time

Accepted Answer

The answer of If inventory levels are stable or increasing...

Question 8

Working capital is a measure of
A)Financial flexibility
B)Liquidity.
C)Profitability.
D)Solvency.

Accepted Answer

Working capital is a measure of a company's liquidity, which refers to its ability to meet its short-term obligations with its current assets. It is determined by subtracting current liabilities from current assets. A company with a healthy level of working capital can cover its short-term expenses and has flexibility to invest in growth opportunities.

Question 9

Under what circumstances should a company with high rate of return on sales consider the inventory sold?
A)When the retailer gives a confirmation that the goods won't be returned
B)When the goods are sold on installment
C)When it can reasonably estimate the amount of returns
D)When the payment for goods is received

Accepted Answer

Companies should consider the inventory sold when they can reasonably estimate the amount of returns, as returns can affect the company's revenue and profitability. It is important to have an accurate estimate of returns in order to properly calculate the rate of return on sales. The other options listed (A, B, and D) do not necessarily indicate whether returns should be considered in the calculation of the rate of return on sales.

Question 10

When inventory declines in value below original historical)cost,and this decline is considered other than temporary,what is the maximum amount that the inventory can be valued at?
A)Sales price net of conversion costs
B)Net realizable value
C)Historical cost
D)Net realizable value reduced by a normal profit margin

Accepted Answer

When inventory declines in value below original historical cost, and this decline is considered other than temporary, the inventory can be valued at net realizable value reduced by a normal profit margin. This means that the inventory is valued at the estimated selling price minus the estimated costs of completion, disposal, and a normal profit margin. This approach recognizes the decline in value of the inventory while still allowing for the possibility of future sales and a reasonable profit margin.

Question 11

Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future,failure to follow this practice usually does not make the balance sheet misleading because
A)Most short-term receivables are not interest bearing
B)The allowance for uncollectible accounts includes a discount element
C)The amount of the discount is not material
D)Most receivables can be sold to a bank or factor

Accepted Answer

The fact that the discounted value of short-term receivables is not used on the balance sheet may not make it misleading if the amount of the discount is not material. This means that if the difference between the face value and the discounted value is not significant, it may be acceptable to present short-term receivables at face value.

Question 12

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is
A)FIFO
B)LIFO
C)Conventional retail
D)Weighted average

Accepted Answer

LIFO (Last-In-First-Out) assumes that the newest inventory items are sold first, leaving the oldest items in inventory. This means that the cost of the oldest inventory items rarely have an effect on the ending inventory valuation.

Question 13

Which inventory costing method most closely approximates current cost for each of the following: Ending Inventory Cost of Goods Sold
A)FIFO LIFO
B)LIFO FIFO
C)LIFO LIFO
D)FIFO FIFO

Accepted Answer

FIFO (first-in, first-out) closely approximates current cost for ending inventory and cost of goods sold because it assumes that the oldest inventory items are sold first, which means that the most recent inventory purchases are still on hand and are reflected in the ending inventory cost. This method typically results in a higher ending inventory cost and a lower cost of goods sold compared to LIFO (last-in, first-out).

Question 14

The net realizable value of receivables is calculated as the face value of the receivables less adjustments for
A)Credit sales
B)Actual uncollected amounts adjusted for purchase discounts.
C)Bad debts already written off.
D)Estimated uncollectible accounts

Accepted Answer

The net realizable value of receivables is calculated as the face value of the receivables less estimated uncollectible accounts. Option A is incorrect because credit sales do not affect the calculation of net realizable value. Option B is incorrect because purchase discounts are not relevant to the calculation. Option C is incorrect because bad debts already written off are not included in the receivables balance.

Question 15

Liquidity ratios measures the
A)Operating success of a company over a period of time
B)The ability of a company to survive over a long period of time
C)The short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash
D)The number of times interest is earned

Accepted Answer

Liquidity ratios measure a company's ability to meet its short-term obligations, including the ability to pay its maturing debts and unexpected cash needs. This is important for a company to ensure its survival and avoid financial distress. Options A and D are incorrect as they measure operating success and the ability to service debt, respectively, but do not specifically measure liquidity. Option B is incorrect as it is a broader measure of a company's long-term viability and includes factors beyond liquidity.

Question 16

Of the following items,the one that should be classified as a current asset is
A)Trade installment receivables normally collectible in 18 months
B)Cash designated for the redemption of callable preferred stock
C)Cash surrender value of a life insurance policy of which the company is beneficiary
D)A deposit on machinery ordered,delivery of which will be made within six months

Accepted Answer

A deposit on machinery ordered, delivery of which will be made within six months, should be classified as a current asset because it is expected to be converted into cash or used up within one year or operating cycle, whichever is longer. Trade installment receivables, cash designated for the redemption of callable preferred stock, and cash surrender value of a life insurance policy are not expected to be converted into cash or used up within one year.

Question 17

Liquidity is the ability
A)To increase net assets through regular operations
B)To generate cash from sources other than regular operations
C)To convert existing assets into cash
D)Of financial statement users to predict a company's cash flows

Accepted Answer

Liquidity refers to the ability of a company to convert its existing assets into cash quickly and easily. Option A refers to profitability, not liquidity. Option B refers to cash inflows, but not necessarily liquidity. Option D refers to cash flow predictability, which is related to liquidity but is not the definition of liquidity itself.

Question 18

The current ratio is
A)1.86: 1.
B)2.00: 1.
C)3.38: 1.
D)2.93: 1.

Accepted Answer

The answer of The current ratio is
A)1.86: 1.
B)2.00: 1.
C)3.38: 1.
D)2.93:...

Question 19

Jamison Corporation's inventory cost on its statement of financial position was lower using first-in,first-out than last-in,first-out.Assuming no beginning inventory,what direction did the cost of purchases move during the period?
A)Up
B)Down
C)Steady
D)Cannot be determined

Accepted Answer

Since the inventory cost was lower using first-in, first-out, it means that the cost of goods sold was higher and there was a lower ending inventory. This indicates that the cost of purchases during the period increased, hence moving upwards.

Question 20

The original cost of an inventory item is above the replacement cost.The replacement cost is below the net realizable value less the normal profit margin.Under the lower of cost or market method the inventory item should be priced at its
A)Original cost
B)Replacement cost
C)Net realizable value
D)Net realizable value less the normal profit margin

Accepted Answer

According to the lower of cost or market method, inventory should be valued at the lower of its original cost or its market value. Market value is defined as replacement cost, net realizable value, or net realizable value less the normal profit margin, whichever is lower. In this case, the replacement cost is lower than the net realizable value less the normal profit margin, so the inventory item should be priced at its net realizable value less the normal profit margin. Therefore, the correct answer is D.

Quiz 8: Working Capital

When the allowance method of recognizing bad debt expense is used,the entries at the time of collection of an account previously written off would

The advantage of relating a company's bad debt experience to its accounts receivable is that this approach

The total amount of working capital is

An account that would be classified as a current liability is

A common measure of liquidity is

Which of the following inventory cost flow methods involves computations based on broad inventory pools of similar items?

If inventory levels are stable or increasing an argument that favors the FIFO method as compared to LIFO is

Working capital is a measure of

Under what circumstances should a company with high rate of return on sales consider the inventory sold?

When inventory declines in value below original historical) cost,and this decline is considered other than temporary,what is the maximum amount that the inventory can be valued at?

Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future,failure to follow this practice usually does not make the balance sheet misleading because

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is

Which inventory costing method most closely approximates current cost for each of the following: Ending Inventory Cost of Goods Sold

The net realizable value of receivables is calculated as the face value of the receivables less adjustments for

Liquidity ratios measures the

Of the following items,the one that should be classified as a current asset is

Liquidity is the ability

The current ratio is

Jamison Corporation's inventory cost on its statement of financial position was lower using first-in,first-out than last-in,first-out.Assuming no beginning inventory,what direction did the cost of purchases move during the period?

The original cost of an inventory item is above the replacement cost.The replacement cost is below the net realizable value less the normal profit margin.Under the lower of cost or market method the inventory item should be priced at its