Question 1

An aircraft company would most likely have
A) a high inventory turnover.
B) a low profit margin.
C) high volume.
D) a low inventory turnover.

Accepted Answer

Aircraft companies typically have a low inventory turnover due to the high cost and long production times of aircraft, meaning they do not sell their inventory as quickly as companies in other industries.

Question 2

The quick ratio differs from the current ratio in that it
A) represents the amount of cash on hand instead of the amount of working capital.
B) is a stricter test of a company's ability to pay its current debts as they are due.
C) excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and possible default on payment.
D) is more difficult to calculate.

Accepted Answer

The quick ratio, also known as the acid-test ratio, is a stricter test of a company's ability to pay its current debts as they are due because it only considers the most liquid assets such as cash, marketable securities, and accounts payable. It excludes inventory and accounts receivable due to their potential illiquidity and obsolescence. Therefore, option B is the correct answer.

Question 3

Toller Drug Store had net credit sales of $6,000,000 and cost of goods sold of $2,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $350,000 and $250,000, respectively. The accounts receivable turnover ratio was
A) 17.1 times.
B) 10.0 times.
C) 13.3 times.
D) 20.0 times.

Accepted Answer

The answer of Toller Drug Store had net credit sales...

Question 4

Siri Company has $20,000 in cash, $8,000 in marketable securities, $36,000 in current receivables, $18,000 in inventories, and $68,000 in current liabilities. The company's quick ratio is closest to
A) .94.
B) .41.
C) 1.88.
D) 1.21.

Accepted Answer

The quick ratio is calculated as (Cash + Marketable Securities + Current Receivables) / Current Liabilities. For Siri Company, this is ($20,000 + $8,000 + $36,000) / $68,000 = $64,000 / $68,000 = .94.

Question 5

Miller Company had $120,000 in sales on account last year. The beginning accounts receivable balance was $8,000 and the ending accounts receivable balance was $14,000. The company's accounts receivable turnover ratio was closest to
A) 5.45.
B) 8.57.
C) 10.91.
D) 15.00.

Accepted Answer

Accounts receivable turnover ratio = Sales / Average accounts receivable

Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2
= ($8,000 + $14,000) / 2
= $11,000

Accounts receivable turnover ratio = $120,000 / $11,000
= 10.91

Therefore, the answer is C) 10.91.

Question 6

Which of the following is considered a liquidity analysis ratio?
A) return on total assets ratio
B) quick ratio
C) dividend yield ratio
D) return on sales ratio

Accepted Answer

The quick ratio is considered a liquidity analysis ratio as it measures a company's ability to meet short-term obligations with its most liquid assets. The other options listed, such as return on total assets ratio, dividend yield ratio, and return on sales ratio, are not primarily focused on assessing liquidity.

Question 7

The Grand Department Store had net credit sales of $12,000,000 and cost of goods sold of $8,000,000 for the year. The average inventory for the year amounted to $1,600,000. The inventory turnover ratio for the year is
A) 4.0 times.
B) 7.2 times.
C) 5.0 times.
D) 2.5 times.

Accepted Answer

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Cost of Goods Sold = $8,000,000
Average Inventory = $1,600,000

Inventory Turnover Ratio = $8,000,000 / $1,600,000 = 5 times

Therefore, the answer is choice C, 5.0 times.

Question 8

Which of the following is an example of liquidity analysis?
A) Bonds payable are divided by total liabilities and stockholders' equity.
B) Current assets are divided by current liabilities.
C) Net income is divided by the number of shares of stock outstanding.
D) Net income is divided by total assets.

Accepted Answer

Liquidity analysis involves the assessment of a company's ability to meet its short-term obligations, and the current ratio (current assets divided by current liabilities) is a common measure of liquidity. The other options do not relate to liquidity analysis.

Question 9

The Gift Shoppe's inventory turned over five times during the year. Similar gift shops have an inventory turnover equal to ten times per year. What explains the Gift Shoppe's inventory management?
A) The Gift Shoppe sold too much inventory during the year.
B) The Gift Shoppe needs to increase sales and decrease the amount of goods on hand.
C) The Gift Shoppe is performing twice as well as it competitors.
D) The Gift Shoppe should increase the amount of goods on hand to accommodate the additional inventory demand.

Accepted Answer

The fact that the Gift Shoppe's inventory turned over only five times suggests that the shop has too much inventory on hand and may need to increase sales, perhaps by better marketing or advertising, in order to generate more demand for their products. The fact that other gift shops have an inventory turnover of ten times per year suggests that this may be a more optimal level of inventory management that the Gift Shoppe should strive to achieve.

Question 10

The inventory turnover is calculated by dividing
A) cost of goods sold by the ending inventory.
B) cost of goods sold by the beginning inventory.
C) cost of goods sold by the average inventory.
D) average inventory by cost of goods sold.

Accepted Answer

The inventory turnover is calculated by dividing the cost of goods sold by the average inventory, which gives an idea of how many times a company has sold and replaced its inventory during a certain period. Using the beginning inventory or the ending inventory alone may not accurately represent the inventory turnover throughout the entire period.

Question 11

If the accounts receivable turnover is 42 days, what is the account receivable turnover ratio (assuming a 365 day year)?
A) 7.14 times
B) 8.69 times
C) 4.52 times
D) None of these

Accepted Answer

To calculate the accounts receivable turnover ratio, we use the formula:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

We are given the accounts receivable turnover (or number of days it takes to collect on receivables) as 42 days.

To convert this to an accounts receivable turnover ratio, we need to know the average collection period. This can be calculated as:

Average Collection Period = 365 days / Accounts Receivable Turnover

Plugging in 42 days, we get:

Average Collection Period = 365 days / 42 days = 8.69 times

So the accounts receivable turnover ratio is 8.69 times. Therefore, the correct answer is B.

Question 12

Arnold Company had $650,000 in sales on account last year. The beginning accounts receivable balance was $24,000 and the ending accounts receivable balance was $36,000. The company's accounts receivable turnover ratio was closest to
A) 21.67.
B) 10.83.
C) 27.08.
D) 18.06.

Accepted Answer

The answer of Arnold Company had $650,000 in sales on...

Question 13

The quick ratio
A) does not include inventory as part of the numerator.
B) does not include all current liabilities in the calculation.
C) is a quick calculation of an approximation of the current ratio.
D) includes prepaid expenses as part of the numerator.

Accepted Answer

The quick ratio, also known as the acid-test ratio, only includes cash, marketable securities, and accounts receivable in the numerator. It excludes inventory because inventory may take longer to convert to cash in case of an emergency. The quick ratio also considers all current liabilities in the denominator, unlike the current ratio which only includes some current liabilities. Prepaid expenses are not included in the quick ratio either.

Question 14

A company has an account receivable turnover ratio of 6. The average accounts receivable during the period are $350,000. What is the amount of net sales for the period?
A) $350,000
B) $2,100,000
C) $58,333
D) Cannot be determined from the information given.

Accepted Answer

The formula for the account receivable turnover ratio is Net Sales/Average Accounts Receivable.

We are given the following information:

Account Receivable Turnover Ratio = 6
Average Accounts Receivable = $350,000

We can use algebra to solve for net sales:

6 = Net Sales / $350,000 
6 * $350,000 = Net Sales 
Net Sales = $2,100,000

Therefore, the amount of net sales for the period is $2,100,000. The answer is B.

Question 15

Kringle Company, a retailer, had cost of goods sold of $1,400,000 last year. The beginning inventory balance was $125,000 and the ending inventory balance was $142,000. The company's inventory turnover ratio was closest to
A) 10.49.
B) 5.24.
C) 11.20.
D) 9.86.

Accepted Answer

The inventory turnover ratio is calculated as Cost of Goods Sold divided by Average Inventory. Average Inventory is calculated as (Beginning Inventory + Ending Inventory) / 2. So, for Kringle Company, Average Inventory = ($125,000 + $142,000) / 2 = $133,500. Inventory Turnover Ratio = $1,400,000 / $133,500 ≈ 10.49.

Question 16

Which of the following formulas would be used to determine the inventory turnover ratio?
A) Net credit sales/Average inventory
B) Average inventory/Net credit sales
C) Cost of goods sold/Average inventory
D) Average inventory/Cost of goods sold

Accepted Answer

The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory. This measures how many times a company sells and replaces its inventory over a certain period of time. Therefore, the formula for inventory turnover ratio is Cost of goods sold/Average inventory.

Question 17

A successful grocery store would probably have
A) a low inventory turnover.
B) a high inventory turnover.
C) zero profit margin.
D) low volume.

Accepted Answer

A high inventory turnover means that products are selling quickly and the store is able to keep up with demand. This leads to increased sales and profits. A low inventory turnover would indicate that products are not selling quickly, which could lead to excess inventory and potential losses for the store. A zero profit margin would mean that the store is not making any profit, which is not ideal for long-term success. Low volume could also indicate a lack of demand for the store's products, which could lead to financial difficulties.

Question 18

Eagle Company has $9,000 in cash, $11,000 in marketable securities, $26,000 in current receivables, $34,000 in inventories, and $40,000 in current liabilities. The company's quick ratio is closest to
A) 1.35.
B) 1.15.
C) 2.00.
D) 1.73.

Accepted Answer

The quick ratio is calculated by adding together cash, marketable securities, and accounts receivable, and then dividing by current liabilities.

Quick ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities 
= ($9,000 + $11,000 + $26,000) / $40,000 
= $46,000 / $40,000 
= 1.15

Therefore, the closest answer is (B) 1.15.

Question 19

Phillips Company had $300,000 in sales on account last year. The beginning accounts receivable balance was $25,000 and the ending accounts receivable balance was $18,000. The company's accounts receivable turnover ratio was closest to
A) 16.67.
B) 12.00.
C) 3.85.
D) 13.95.

Accepted Answer

Accounts Receivable Turnover Ratio = Net Sales / Average Accounts Receivable

Net Sales = $300,000

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

Average Accounts Receivable = ($25,000 + $18,000) / 2 = $21,500

Accounts Receivable Turnover Ratio = $300,000 / $21,500 = 13.95

Therefore, the closest answer choice is D) 13.95.

Question 20

Dartmouth Company has a quick ratio of 2.5 to 1. It has current liabilities of $40,000 and noncurrent assets of $70,000. If Dartmouth's current ratio is 3.1 to 1, its inventory and prepaid expenses must be
A) $12,400.
B) $24,000.
C) $30,000.
D) $40,000.

Accepted Answer

Quick ratio = (Current assets - Inventory - Prepaid expenses) / Current liabilities

2.5 = (70,000 - Inventory - Prepaid expenses) / 40,000

Solving for [Inventory + Prepaid expenses]:

Inventory + Prepaid expenses = 70,000 - (2.5 * 40,000)
Inventory + Prepaid expenses = $30,000

Current ratio = Current assets / Current liabilities

3.1 = Current assets / 40,000

Solving for Current assets:
Current assets = 40,000 * 3.1
Current assets = $124,000

We can now set up two equations:

Inventory + Prepaid expenses = $30,000
Current assets = $124,000

We can solve for Inventory + Prepaid expenses by subtracting Current assets by noncurrent assets:

Inventory + Prepaid expenses = $124,000 - $70,000
Inventory + Prepaid expenses = $54,000

Splitting this amount in a ratio of 2.5:1 results in:

Inventory + Prepaid expenses = (2.5 / 3.6) * $54,000
Inventory + Prepaid expenses = $37,500

Subtracting prepaid expenses of $7,500 (1/3.6 * $37,500) from this amount results in:

Inventory = $30,000

Therefore, the answer is B) $24,000.

Quiz 16: Financial Statement Analysis

An aircraft company would most likely have

The quick ratio differs from the current ratio in that it

Toller Drug Store had net credit sales of $6,000,000 and cost of goods sold of $2,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $350,000 and $250,000, respectively. The accounts receivable turnover ratio was

Siri Company has $20,000 in cash, $8,000 in marketable securities, $36,000 in current receivables, $18,000 in inventories, and $68,000 in current liabilities. The company's quick ratio is closest to

Miller Company had $120,000 in sales on account last year. The beginning accounts receivable balance was $8,000 and the ending accounts receivable balance was $14,000. The company's accounts receivable turnover ratio was closest to

Which of the following is considered a liquidity analysis ratio?

The Grand Department Store had net credit sales of $12,000,000 and cost of goods sold of $8,000,000 for the year. The average inventory for the year amounted to $1,600,000. The inventory turnover ratio for the year is

Which of the following is an example of liquidity analysis?

The Gift Shoppe's inventory turned over five times during the year. Similar gift shops have an inventory turnover equal to ten times per year. What explains the Gift Shoppe's inventory management?

The inventory turnover is calculated by dividing

If the accounts receivable turnover is 42 days, what is the account receivable turnover ratio (assuming a 365 day year) ?

Arnold Company had $650,000 in sales on account last year. The beginning accounts receivable balance was $24,000 and the ending accounts receivable balance was $36,000. The company's accounts receivable turnover ratio was closest to

The quick ratio

A company has an account receivable turnover ratio of 6. The average accounts receivable during the period are $350,000. What is the amount of net sales for the period?

Kringle Company, a retailer, had cost of goods sold of $1,400,000 last year. The beginning inventory balance was $125,000 and the ending inventory balance was $142,000. The company's inventory turnover ratio was closest to

Which of the following formulas would be used to determine the inventory turnover ratio?

A successful grocery store would probably have

Eagle Company has $9,000 in cash, $11,000 in marketable securities, $26,000 in current receivables, $34,000 in inventories, and $40,000 in current liabilities. The company's quick ratio is closest to

Phillips Company had $300,000 in sales on account last year. The beginning accounts receivable balance was $25,000 and the ending accounts receivable balance was $18,000. The company's accounts receivable turnover ratio was closest to

Dartmouth Company has a quick ratio of 2.5 to 1. It has current liabilities of $40,000 and noncurrent assets of $70,000. If Dartmouth's current ratio is 3.1 to 1, its inventory and prepaid expenses must be