Exam 6: Liquidity of Short-Term Assets; Related Debt-Paying Ability

Working capital is considered to be more indicative of the short-term, debt-paying ability than is the current ratio.

Abbott Company presents the following data for 2012. Receivables, end of year, less allowances for losses and discounts of \1 15,960 \2 ,370,100 Recervables, beginning of year, less allowance for losses and discounts of \ 102,330 2,443,140 Net Sales 24,417,090 The accounts receivable turnover in times per year is:

Customer concentration can be an important consideration in the quality of receivables.

Under the allowance method, the charge off of a specific account receivable does not influence the income statement nor the net receivable on the balance sheet at the time of the charge off.

A low sales to working capital ratio tentatively indicates an unprofitable use of working capital.

The use of the allowance for doubtful accounts results in the bad debt expense being charged to the period of sale.

Typically, which of the following would be considered to be the most indicative of a firm's short-term debt paying ability?

In terms of liquidity, it is to management's advantage to show investments under investments instead of marketable securities.

Inventory is particularly sensitive to changes in business activity.Therefore, management should keep inventory at a minimum.

Shaffer Company presents the following data for 2012. Net Sales, 2012 \3 ,007,124 Net Sales, 2011 93,247 Cost of Goods Sold, 2012 2,000,326 Cost of Goods Sold, 2011 1,000,120 Inventory, beginning of 2012 341,169 Inventory, end of 2012 376,526 The merchandise inventory turnover for 2012 is:

If days' sales in receivables are materially longer than the credit terms, this indicates a collection problem.

Because the cost of specific inventory items is not usually practical to determine, it is necessary for management to select a cost flow assumption.

If a firm has pledged its receivables and its inventory, then the best indicator of its short-term liquidity may be indicated by:

The operating cycle is the time between the acquisition of inventory and the realization of cash from selling the inventory.

Significant weight is seldom given to the cash ratio unless the firm is in financial trouble.

The cash ratio is usually a good indication of the liquidity of the firm.

Even an entity on a very profitable course will find itself bankrupt if it fails to meets its obligations to short-term creditors.

A firm that has been on lifo for many years may have some inventory costs that go back ten years or more.

Days' sales in receivables may be abnormally high if a material amount of sales are on a cash basis.

The valuation problem from waiting to collect a receivable is ignored in the valuation of receivables and notes that are classified as current assets.