Deck 8: Working Capital

Question 1

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

Answer 1

B

Question 2

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

Answer 2

a.Credit sales b.Actual uncollected amounts adjusted for purchase discounts.c.Bad debts already written off.d.Estimated uncollectible accounts

Question 3

Which of the following statements is not valid as it applies to inventory costing methods?

A)If inventory quantities are to be maintained,part of the earnings must be invested plowed back)in inventories when FIFO is used during a period of rising prices.
B)LIFO tends to smooth out the net income pattern,since it matches current cost of goods sold with current revenue,when inventories remain at constant quantities.
C)When a firm using the LIFO method fails to maintain its usual inventory position reduces stock on hand below customary levels),there may be a matching of old costs with current revenue.
D)The use of FIFO permits some control by management over the amount of net income for a period through controlled purchases,which is not true with LIFO.

Answer 3

C

Question 4

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

Question 5

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

Question 6

The total amount of working capital is

A)$155,000.
B)$145,000.
C)$60,000.
D)$150,000.

Question 7

A successful discount retail store such as Wal-Mart would probably have
a.A low inventory turnover
b.A high inventory turnover
c.Zero profit margin
d.Low volume

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

The current ratio is

A)1.86 : 1.
B)2.00 : 1.
C)3.38 : 1.
D)2.93 : 1.

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

Question 16

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

Question 17

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

Question 18

Working capital is a measure of

A)Financial flexibility
B)Liquidity.
C)Profitability.
D)Solvency.

Question 19

A common measure of liquidity is

A)Return on assets.
B)Accounts receivable turnover.
C)Profit margin.
D)Debt to equity.

Question 20

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

Question 21

Discuss the perpetual vs.the periodic methods of accounting for inventories.

Question 22

Define working capital.