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Author:
Harold Averkamp, CPA, MBA
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1.
Which of the following is not a current asset?
Inventory
Wrong.
Inventory IS a current asset.
Prepaid Insurance
Wrong.
Prepaid Insurance IS a current asset because it is likely to be used up within one year of the balance sheet date (or within the operating cycle, if the operating cycle is longer than one year).
Fixtures
Right!
Fixtures is NOT a current asset account. Fixtures is reported under property, plant and equipment (which is part of a company's long-term assets).
2.
Current asset MINUS current liabilities is the
Current Ratio
Wrong.
The current ratio is current assets DIVIDED BY current liabilities. Working capital is current assets MINUS current liabilities.
Net Worth
Wrong.
This answer is incorrect.
Working Capital
Right!
This is the correct answer.
3.
Current assets DIVIDED BY current liabilities is the
Current Ratio
Right!
This is the correct answer.
Net Worth Ratio
Wrong.
This answer is incorrect.
Working Capital
Wrong.
Working capital is current assets MINUS current liabilities. The current ratio is current asset DIVIDED BY current liabilities.
4.
The quick ratio EXCLUDES which of the following?
Accounts Receivable
Wrong.
The quick ratio includes Cash, Temporary Investments, and Accounts Receivable—the items that can be turned into cash QUICKLY. Inventory is NOT considered a quick asset.
Inventory
Right!
Inventory is NOT considered a quick asset. The quick ratio includes Cash, Temporary Investments, and Accounts Receivable—the items that can be turned into cash QUICKLY.
Cash
Wrong.
The quick ratio includes Cash, Temporary Investments, and Accounts Receivable—the items that can be turned into cash QUICKLY. Inventory is NOT considered a quick asset.
Use the following information to answer items 5 – 7:
At December 31 a company’s records show the following information:
5.
The company's working capital is
$60,000
Wrong.
See the calculations for $66,000.
$66,000
Right!
Working capital = current assets MINUS current liabilities. In this case that means $126,000 MINUS $60,000 = $66,000.
$196,000
Wrong.
See the calculations for $66,000.
6.
The company's current ratio is
1.0 : 1
Wrong.
See the calculations for 2.1 : 1.
2.0 : 1
Wrong.
See the calculations for 2.1 : 1.
2.1 : 1
Right!
The current ratio = [current assets DIVIDED BY current liabilities] : 1. In this case that means [$126,000 DIVIDED BY $60,000] : 1 = 2.1 : 1.
7.
The company's quick ratio is
0.7 : 1
Right!
The quick ratio or acid test ratio = [(Cash + Temporary Investments + Accounts Receivable) DIVIDED BY current liabilities] : 1 = [($10,000 + $0 + $30,000) DIVIDED BY $60,000] : 1 = 0.66667 : 1 or rounded to 0.7 : 1.
1.0 : 1
Wrong.
See the calculations for 0.7 : 1
2.0 : 1
Wrong.
See the calculations for 0.7 : 1
Use the following information to answer items 8 – 11:
For its most recent year a company had Sales (all on credit) of $830,000 and Cost of Goods Sold of $525,000. At the beginning of the year its Accounts Receivable were $80,000 and its Inventory was $100,000. At the end of the year its Accounts Receivable were $86,000 and its Inventory was $110,000.
8.
The inventory turnover ratio for the year was
4.8
Wrong.
See the calculations for 5.0.
5.0
Right!
The inventory turnover = Cost of Goods Sold DIVIDED BY average Inventory. In this case that means $525,000 DIVIDED BY $105,000 = 5.0
7.9
Wrong.
See the calculations for 5.0.
9.
The accounts receivable turnover ratio for the year was
6.3
Wrong.
See the calculations for 10.0.
7.5
Wrong.
See the calculations for 10.0.
10.0
Right!
The accounts receivable turnover = Credit Sales DIVIDED BY average Accounts Receivable. In this case that means $830,000 DIVIDED BY $83,000 = 10.0.
10.
On average how many days of sales were in Accounts Receivable during the year?
27
Wrong.
See the calculations for 37.
37
Right!
The number of days sales in Accounts Receivable during the year would be 365 days in the year DIVIDED BY the accounts receivable turnover of 10.0 = 36.5 or 37 days.
49
Wrong.
See the calculations for 37.
11.
On average how many days of sales were in Inventory during the year?
14
Wrong.
See the calculations for 73.
46
Wrong.
See the calculations for 73.
73
Right!
The number of days sales in Inventory during the year would be 365 days DIVIDED BY the inventory turnover of 5.0 = 73 days.
Use the following information for items 12 and 13:
A company’s net income after tax was $400,000 for its most recent year. The company’s income statement included Income Tax Expense of $140,000 and Interest Expense of $60,000. At the beginning of the year the company’s stockholders’ equity was $1,900,000 and at the end of the year it was $2,100,000.
12.
What is the times interest earned for the company?
6.7
Wrong.
See the calculations for 10.0.
9.0
Wrong.
See the calculations for 10.0.
10.0
Right!
The times interest earned is calculated by taking the earnings of the company before interest and income tax expense and dividing it by the amount of interest expense. In this case the earnings before interest and income tax expense is $400,000 + $140,000 + $60,000 which equals $600,000. That amount divided by the interest expense of $60,000 = 10.0.
13.
What is the after-tax return on stockholder's equity for the year?
20%
Right!
The return on stockholders' equity for the year is the company's net income after tax DIVIDED BY the average stockholders' equity during the year. In this case that means $400,000 DIVIDED BY $2,000,000 = 20%.
25%
Wrong.
See the calculations for 20%.
30%
Wrong.
See the calculations for 20%.
14.
The debt to equity ratio is computed as: (Total Liabilities ÷ Total __________Stockholders' Equity) : 1
15.
Which of the following will likely have the reported amounts on the balance sheet closest to their current value?
Current Assets
Right!
Since current assets generally 'turn over' within one year, the current value is close to the recorded and reported amounts. Current liabilities would also have current values close to the reported amounts.
Long-term Assets
Wrong.
Generally long-term assets were recorded several years earlier. That means that the current value will have changed during those years.
Stockholders' Equity
Wrong.
Since stockholders' equity is the difference in the reported amount of total assets and total liabilities, the net amount is not likely to be the same as the current value.
16.
A corporation's excellent reputation will be listed among the corporation's assets on its balance sheet.
True
Wrong.
Only transactions with a measurable amount get recorded in the accounting records.
False
Right!
Only transactions with a measurable amount get recorded in the accounting records.
17.
The current market value of a corporation is approximately the amount reported on the balance sheet as stockholders' equity.
True
Wrong.
Since stockholders' equity is the difference in the reported amount of total assets and total liabilities, the net amount is not likely to be the same as the current value.
False
Right!
18.
Free cash flow is the cash provided by operating activities minus the cash used by financing activities.
True
Wrong.
False
Right!
Free cash flow is cash provided by operating activities minus capital expenditures.
19.
The quality of a company's earnings are suspect when the company's net income is more than the cash flow from which activities?
20.
A balance sheet which reports percentages of total assets instead of dollar amounts is referred to as a __________common-size-__________common-size balance sheet.
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