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

Question 1

Abbott Company presents the following data for 2012. $$\begin{array}{l}\begin{array} {lll } \text {Receivables, end of year, less allowances for losses and discounts of \$115,960}&\$2,370,100\\\text {Recervables, beginning of year, less allowance for losses and discounts of \$ 102,330 }&2,443,140\\\text {Net Sales }&24,417,090\\\end{array}\end{array}$$ The accounts receivable turnover in times per year is:

A)6.9.
B)7.9.
C)10.7.
D)9.7.
E)11.0.

Answer 1

9.7.

Question 2

Which of the following reasons should not be considered in order to explain why the receivables appear to be abnormally high?

A)Sales volume expanded materially late in the year.
B)Receivables have collectibility problems and possibly some should have been written off.
C)The company seasonally dates invoices.
D)Material amount of receivables are on the installment basis.
E)Sales volume decreases materially late in the year.

Answer 2

E

Question 3

Which of the following ratios does not represent some form of comparison between accounts in current assets and accounts in current liabilities?

A)Working capital
B)Current ratio
C)Acid-test ratio
D)Cash ratio
E)Merchandise inventory turnover

Answer 3

E

Question 4

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

A)A retail clothing store
B)A grocery store
C)A wholesale furniture store
D)A car manufacturer
E)A car dealer

Question 5

Smith Company presents the following data for 2012. $$\begin{array} { l } \text {Inventories, beginning of year}&\$310,150 \\\text {Inventories, end of year}&340,469 \\\text {Cost of Goods Sold}&2,103,696\\\text {Net Sales}&8,690,150\\\end{array}$$ The number of days' sales in inventory is:

A)65.8.
B)60.8.
C)59.1.
D)58.1.
E)60.4.

Question 6

Which of the following would not be classified as a current asset?

A)Cash
B)Marketable securities
C)Receivables
D)Inventories
E)Investments

Question 7

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

A)Prepayments
B)Accounts receivable
C)Inventory
D)Marketable securities
E)Notes receivable

Question 8

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

A)5.6.
B)15.6.
C)7.5.
D)7.7.
E)5.2.

Question 9

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

A)working capital.
B)current ratio.
C)acid-test.
D)cash ratio.
E)days' sales in receivables.

Question 10

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

A)A decline in sales
B)A decline in the current ratio
C)A decline in days' sales in inventory
D)A stable current ratio with declining quick ratios
E)A rise in total asset turnover

Question 11

Which of the following would not be a reasonable conclusion when comparing LIFO-FIFO under an inflationary condition?

A)FIFO generally results in a lower profit than does LIFO.
B)FIFO reports a higher inventory ending balance.
C)LIFO results in a lower profit figure than does FIFO.
D)LIFO would probably be used for inventory that has a high turnover rate because there would be an immaterial difference in the results between LIFO ad FIFO.
E)The cash flow under LIFO is greater than the cash flow under FIFO by the difference in the resulting tax between the two methods.

Question 12

Which of the following accounts would not be classified as a current asset?

A)Cash restricted for retirement of bonds
B)Cash and equivalents
C)Cash and certificates of deposit
D)Time deposits
E)Cash

Question 13

Which of the following does not bear on the quality of receivables?

A)Shortening the credit terms
B)Lengthening the credit terms
C)Right of return privilege
D)Lengthening the outstanding period
E)All of the answers bear on the quality of receivables

Question 14

Szabo Company computed the following data for 2012. $\begin{array}{ll}\text { Days' sales in receivables } & 38.7 \text { days } \\\text { Accounts receivable turnover } & 9.6 \text { times } \\\text { Accounts receivable turnover in days } & 35.1 \text { days } \\\text { Days' sales in inventory } & 68.5 \text { days }\\\text { Merchandise inventory turnover } & 5.9 \text { times } \\\text { Inventory turnover in days } & 58.7 \text { days }\\\end{array}$ The estimated operating cycle for 2012 is:

A)97.4 days.
B)107.2 days.
C)93.8 days.
D)108.0 days.
E)90.7.

Question 15

Prepayments should be reported in the:

A)stockholders' equity section of the balance sheet.
B)income statement.
C)current assets section of the balance sheet.
D)current liabilities section of the balance sheet.
E)long-term liabilities section of the balance sheet.

Question 16

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?

A)It is impossible to compare two firms with different inventory methods.
B)Company B will have relatively higher profit and higher inventory turnover.
C)Company B will have relatively higher profit and lower inventory turnover.
D)Company A will have a higher current ratio and acid test ratio, with the same profit.
E)Company B will have relatively higher profit and a higher current ratio.

Question 17

Jones Company presents the following data for 2012. $$\begin{array} { lr } \text {Receivables, less allowance for losses and discounts of \$12,196}&\$266,700\\\text {Net Sales}&2,360,108\\\text {Cost of Goods Sold}&1,580,360\\\end{array}$$ The days' sales in receivables is

A)53.1.
B)48.2.
C)43.1.
D)38.1.
E)40.0.

Question 18

Which of the following is not an acceptable inventory costing method?

A)Specific identification
B)Last-In, First-Out (LIFO)
C)First-In, First-Out (FIFO)
D)Average cost
E)Next-In, First-Out (NIFO)

Question 19

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

A)Working capital
B)Current ratio
C)Acid test
D)Cash ratio
E)Days' sales in receivables

Question 20

Which of the following types of business would normally have the longest operating cycle?

A)A seller of resort property
B)A car dealer
C)A car manufacturer
D)A grocery store
E)A record store

Question 21

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

Question 22

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.

Question 23

By reporting marketable equity securities under current assets, management picks up a liquidity advantage.

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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.

Question 29

The days' sales in receivables ratio gives an indication of the length of time that the receivables have been outstanding at the end of the year.This indication can be misleading if sales are seasonal and/or the company uses a natural business year.

Question 30

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

Question 31

Which of the following ratios would generally be used to evaluate a firm's overall liquidity position?

A)Working capital
B)Current ratio
C)Acid-test ratio
D)Cash ratio
E)Inventory turnover in days

Question 32

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

Question 33

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

Question 34

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

Question 35

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.

Question 36

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

Question 37

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

Question 38

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

Question 39

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.

Question 40

When doing external analysis, many of the reasons why the days' sales in receivables is abnormally high or low cannot be determined without access to internal information.

Question 41

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

Question 42

In order to classify cash as a current asset, it must be free from any restrictions that would prevent its deposit or use to pay creditors classified as long-term.

Question 43

The LIFO inventory costing method results in the acid-test ratio being overstated.

Question 44

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

Question 45

If the company closes the year when the activities are at a peak, the number of days' sales in inventory would tend to be overstated and the liquidity would be overstated.

Question 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

The company with the natural business year tends to overstate its accounts receivable turnover, thus overstating its liquidity.

Question 52

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

Question 53

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

Question 54

Management should usually strive to keep the cash ratio high.

Question 55

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

Question 56

Current assets are assets that (1) are in the form of cash, (2) will be realized in cash, or (3) conserve the use of cash within the operating cycle of a business or for one year, whichever is shorter.

Question 57

Liquidity problems with receivables and/or inventory means that the current ratio needs to be much higher than when there are no such liquidity problems.

Question 58

Working capital of a business is the excess of current assets over current liabilities.

Question 59

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