Question 1

A liquid asset is one that is calculated by dividing net income by owner's equity.

Accepted Answer

This statement is incorrect. A liquid asset is an asset that can be easily converted into cash without significant loss in value, such as cash, stocks, and bonds. It has nothing to do with the calculation of net income or owner's equity.

Question 2

Wages paid to workers is an example of implicit or opportunity costs.

Accepted Answer

Wages paid to workers are considered explicit costs because they represent direct out-of-pocket payments to employees for their labor.

Question 3

Activity-based costing is a technique to assign product costs based on links between activities that drive costs and the production of specific products.

Accepted Answer

Activity-based costing (ABC) is a technique used to assign product costs based on links between activities that drive costs and the production of specific products. It is a more accurate and detailed approach than traditional costing methods that allocate costs based on arbitrary factors such as direct labor or machine hours.

Question 4

Indirect costs tend to be a result of the firm's general operation rather than the production of any specific product.

Accepted Answer

Indirect costs are expenses that are not directly related to the production of a specific product or service, but rather they are incurred as part of the firm's overall operations. Examples of indirect costs include rent, utility bills, salaries of administrative staff, and office supplies.

Question 5

Whether a particular financial ratio is considered good or bad depends, in part, on the industry.

Accepted Answer

Financial ratios are relative measures and different industries might have unique requirements or patterns. Therefore, the interpretation of financial ratios in isolation can lead to incorrect conclusions without contextual analysis of industry standards.

Question 6

If a company keeps an average of 100 finished bicycles in inventory each month, and it sold 1000 bicycles this year, then it turned its inventory ten times.

Accepted Answer

Inventory turnover is calculated by dividing the total sales by the average inventory level. In this case, 1000 bicycles sold / 100 bicycles in inventory = 10 turns per year.

Question 7

An example of a fixed cost would be the interest on a bank loan.

Accepted Answer

Fixed costs are expenses that remain constant regardless of the level of production or sales. Examples include rent, salaries, and insurance premiums. The interest on a bank loan is also a fixed cost as it does not vary with the level of production or sales.

Question 8

Activity-based costing is a much simpler and easier method to implement than the direct labour method.

Accepted Answer

Activity-based costing requires a detailed analysis of all activities involved in the production process and their associated costs, which can be time-consuming and complex. Direct labor method, on the other hand, involves the simple calculation of labor costs per unit, making it a relatively straightforward method.

Question 9

Current ratio is calculated by dividing current assets by current liabilities.

Accepted Answer

This statement correctly defines the formula for calculating the current ratio.

Question 10

Variable costs rise when a firm increases its production of goods and services.

Accepted Answer

Variable costs are expenses that change in proportion to the level of production or sales. As production increases, variable costs also increase. This is because the costs associated with producing each additional unit of output, such as labor, raw materials, and energy, also increase. Therefore, when a firm increases its production of goods and services, its variable costs will rise accordingly.

Question 11

A high debt-to-equity ratio indicates that a firm is "highly leveraged."

Accepted Answer

A high debt-to-equity ratio means that a company is using a significant amount of debt financing compared to equity financing, which suggests that the company is highly leveraged. A high debt-to-equity ratio may indicate that the company is at risk of defaulting on its debts or may have a higher cost of capital due to its greater reliance on debt financing.

Question 12

The current ratio helps financial managers evaluate the ability of a firm to pay short-term liabilities as they come due.

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay off its short-term liabilities with its current assets. Therefore, it helps financial managers evaluate the ability of a firm to pay short-term liabilities as they come due.

Question 13

Managerial accounting provides information, not intended for the general public, to internal stakeholders such as the managers of specific divisions or departments.

Accepted Answer

Managerial accounting is focused on providing relevant financial information to internal stakeholders, such as managers and executives, to make informed decisions about the operations of their specific divisions or departments. This information is not intended for external parties, such as investors or the general public.

Question 14

It is standard practice to compare a firm's financial ratios to industry averages.

Accepted Answer

Comparing a firm's financial ratios to industry averages is a common practice in financial analysis to determine how the firm performs in relation to others in the same industry.

Question 15

Accountants define cost as the value of what is given up in exchange for something else.

Accepted Answer

This definition of cost is correct and widely accepted by accountants. It is based on the concept of opportunity cost, which refers to the value of the next best alternative that is forgone as a result of choosing one option over another.

Question 16

BUSN101 is one of the university courses delivered in classroom D310, which the cleaning staff maintains; therefore, the wages paid to the cleaning staff is considered a direct cost of delivering the BUSN101 course.

Accepted Answer

The wages paid to the cleaning staff are considered an indirect cost because they are not directly attributable to the delivery of a specific course like BUSN101; instead, they support the overall facility in which various courses are taught.

Question 17

Managerial accounting uses procedures developed internally that are not required to follow accounting standards.

Accepted Answer

Managerial accounting is concerned with providing information to internal users. Therefore, the procedures and methods developed by a company's management may not necessarily follow generally accepted accounting principles (GAAP) or accounting standards. The purpose of managerial accounting is to provide relevant and timely information for decision-making, planning, and control within an organization.

Question 18

A high inventory turnover ratio is bad because it indicates the firm has too much inventory.

Accepted Answer

A high inventory turnover ratio actually indicates that the company is selling its inventory quickly, which is a good thing. This means that the company does not have excess inventory sitting around, which can tie up resources and increase storage costs. A low inventory turnover ratio would indicate that the company is selling its inventory slowly or not at all, which is generally a bad thing as it can lead to cash flow problems and outdated inventory.

Question 19

Fixed costs remain the same even when the firm changes its level of production.

Accepted Answer

Fixed costs are expenses that do not vary with changes in production levels, such as rent, insurance, and property taxes. Therefore, they remain constant regardless of the level of production.

Question 20

Liquidity ratios measure the ability of an organization to convert assets into the cash it needs to pay off liabilities that come due in the next year.

Accepted Answer

Liquidity ratios, such as the current ratio and quick ratio, are used to evaluate an organization's ability to meet short-term financial obligations by measuring its ability to convert assets into cash.

Quiz 7: Accounting: Decision Making by the Numbers