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

Management should usually strive to keep the cash ratio high.

A shortening of the credit terms is an indication that there will be more risk in the collection of future receivables.

Company A uses LIFO and Company B uses FIFO for inventory valuation.Otherwise, the firms are of similar size and have the same revenue and expense.Assume inflation.In analyzing liquidity and profitability of the two firms, which of the following will hold true?

Compensating balances reduce the amount of cash available to the borrower to meet obligations and they decrease the effective interest rate for the borrower.

The ability of an entity to maintain its short-term, debt-paying ability is important to all users of financial statements.

Smith Company presents the following data for 2012. Inventories, beginning of year \3 10,150 Inventories, end of year 340,469 Cost of Goods Sold 2,103,696 Net Sales 8,690,150 The number of days' sales in inventory is:

Which of the following current assets will not generate cash in the future?

Under inflationary conditions, FIFO generally results in a lower profit than does LIFO, and this difference can be substantial.

The direct write-off method frequently results in the bad debt expense being recognized in the year subsequent to the sale, and thus results in a proper matching of expense with revenue.

The LIFO inventory costing method usually results in working capital being overstated.

Using the direct write-off method, the bad debt expense is recorded when a specific customer's account is determined to be noncollectible.

Which of the following would best indicate that the firm is carrying excess inventory?

To qualify as a marketable security, the investment must be readily marketable and it must be the intent of management to convert the investment to cash within the current operating cycle or a year, whichever is longer.

The receivables of a company with installment receivables would normally be considered to be of higher quality than the receivables of a company that did not have installment receivables.

Szabo Company computed the following data for 2012. Days' sales in receivables 38.7 days Accounts receivable turnover 9.6 times Accounts receivable turnover in days 35.1 days Days' sales in inventory 68.5 days Merchandise inventory turnover 5.9 times Inventory turnover in days 58.7 days The estimated operating cycle for 2012 is:

Which of the following types of businesses would normally have the shortest operating cycle?

Days' sales in receivables may be abnormally high at the end of the year if sales volume expanded materially late in the year.

Prepayments should be reported in the:

An approximation of the operating cycle can be determined from the receivable liquidity figures and the inventory liquidity figures.