Question 1

Zack Company has a current ratio of 2.5. What will be the effect of a purchase of inventory with cash on the acid-test ratio and on working capital? $\begin{array} { l c c } 
& \text { Acid-Test Ratio } & \text { Working Capital } \
\text { A) } & \text { decrease } & \text { decrease } \
\text { B) } & \text { decrease } & \text { no effect } \
\text { C) } & \text { no effect } & \text { decrease } \
\text { D) } & \text { no effect } & \text { no effect }
\end{array}$

Accepted Answer

The acid-test ratio decreases because cash (a quick asset) is reduced, while inventory (not a quick asset) increases. Working capital remains unchanged as both current assets and current liabilities are unaffected in total.

Question 2

Norton Inc. could improve its current ratio of 2 by:

Accepted Answer

Selling merchandise on credit at a profit increases both assets (accounts receivable) and equity (through profit), without affecting current liabilities, thus improving the current ratio.

Question 3

Selling used equipment at book value for cash will:

Accepted Answer

Selling used equipment at book value for cash increases working capital because it converts a non-current asset into cash (a current asset) without changing current liabilities, thus increasing the difference between current assets and current liabilities.

Question 4

The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company's price-earnings ratio would:

Accepted Answer

The market price of the stock increased, but the earnings per share remained unchanged. Therefore, the ratio of price to earnings has increased, resulting in an increase in the price-earnings (P/E) ratio.

Question 5

Turner Co. presently has a current ratio of 0.8. The company has been informed by its bank that it must improve its current ratio to qualify for a line of credit. Which of the following actions would improve the current ratio?

Accepted Answer

The answer of Turner Co. presently has a current ratio...

Question 6

A company's current ratio and an acid-test ratio are both greater than 1. Payment of an account payable would:

Accepted Answer

Paying an account payable reduces current liabilities, which increases both the current ratio and the acid-test ratio, as both ratios have current liabilities in the denominator.

Question 7

The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is:

Accepted Answer

The formula for the acid-test ratio is (cash + marketable securities + accounts receivable + short-term notes) / current liabilities. Therefore, the ratio of these assets to current liabilities is the acid-test ratio. The debt-to-equity ratio compares the amount of debt to equity on the balance sheet. The current ratio is the ratio of all current assets to current liabilities. Working capital is the difference between current assets and current liabilities.

Question 8

Accounts receivable turnover will normally decrease as a result of:

Accepted Answer

The answer of Accounts receivable turnover will normally decrease as...

Question 9

Purchasing inventory on credit increases the book value per share of a retailer.

Accepted Answer

Purchasing inventory on credit does not affect the book value per share of a retailer. It only increases the liability side of the balance sheet, not the equity side, which is used to calculate book value per share.

Question 10

Data from Fontecchio Corporation's most recent balance sheet appear below: $\begin{array}{lr}
\text {Cash. }&\$18,000\
\text {Marketable securities }&\$24,000\
\text {Accounts receivable. }&\$39,000\
\text {Short-term notes receivable. }&\$0\
\text {Inventory. }&\$60,000\
\text {Prepaid expenses }&\$14,000\
\text {Current liabilities. }&\$120,000\
\end{array}$
 The corporation's acid-test ratio is closest to:

Accepted Answer

The acid-test ratio is calculated by dividing the sum of cash, marketable securities, and accounts receivable by current liabilities. In this case, the acid-test ratio is ($18,000 + $24,000 + $39,000) / $120,000 = 0.68.

Question 11

If current assets exceed current liabilities, prepaying an expense on the last day of the year will:

Accepted Answer

The answer of If current assets exceed current liabilities, prepaying...

Question 12

Which one of the following statements about book value per share is most correct?

Accepted Answer

Book value per common share is a historical measure based on past transactions, whereas the market price of a share of stock reflects investors' expectations for the future. Therefore, B is the most accurate statement. A is incorrect because market price can differ significantly from book value per share. C is incorrect because a higher market price may indicate investor confidence in future prospects for the company. D is incorrect because book value represents the net assets of a company, and may not necessarily reflect the sale price in a hypothetical acquisition.

Question 13

Earnings per share is computed by multiplying net income by the average number of common shares outstanding.

Accepted Answer

Earnings per share (EPS) is computed by dividing net income by the average number of common shares outstanding.

Question 14

The Seabury Corporation has a current ratio of 3.5 and an acid-test ratio of 2.8. The corporation's current assets consist of cash, marketable securities, accounts receivable, and inventories. Inventory equals $49,000. Seabury Corporation's current liabilities must be:

Accepted Answer

Current assets = Quick assets + Inventory
Current assets = Quick assets + $49,000
Acid-test ratio = Quick assets ÷ Current liabilities
2.8 = Quick assets ÷ Current liabilities
Quick assets = 2.8 × Current liabilities
Current ratio = Current assets ÷ Current liabilities
3.5 = Current assets ÷ Current liabilities
3.5 = (Quick assets + $49,000) ÷ Current liabilities
3.5 = [(2.8 × Current liabilities) + $49,000] ÷ Current liabilities
3.5 = 2.8 + ($49,000 ÷ Current liabilities)
3.5 - 2.8 = $49,000 ÷ Current liabilities
0.7 = $49,000 ÷ Current liabilities
Current liabilities = $49,000 ÷ 0.7 = $70,000

Question 15

Sand Company has an acid-test ratio of 0.8. Which of the following actions would improve the acid-test ratio?

Accepted Answer

Selling some equipment for cash would increase the amount of cash on hand, which would improve the acid-test ratio. Collecting accounts receivable or using cash to pay off accounts payable would also improve the ratio, but neither of these options is listed as a choice. Acquiring inventory on account would decrease the ratio, making it the worst choice.

Question 16

All other things the same, if the company purchases equipment on credit, this transaction would have no impact on the company's book value per share.

Accepted Answer

Purchasing equipment on credit would increase the company's assets (equipment) and liabilities (accounts payable), but it would not affect the company's equity or book value per share.

Question 17

The price-earnings ratio is determined by dividing market price per share of stock by the earnings per share.

Accepted Answer

The price-earnings ratio (P/E ratio) is calculated by dividing the market price per share of stock by the earnings per share. This ratio helps investors and analysts evaluate a company's stock and compare it to similar companies in the industry.

Question 18

Which of the following is not a source of financial leverage?

Accepted Answer

Prepaid rent is not a source of financial leverage. Financial leverage refers to the use of borrowed funds to generate higher returns on investment. Bonds payable and accounts payable are forms of debt financing, while taxes payable represent a liability to the government. Prepaid rent, on the other hand, represents a prepaid expense and is not a form of debt financing.

Question 19

A company's current ratio is greater than 1. Purchasing raw materials on credit would:

Accepted Answer

Purchasing raw materials on credit would increase the company's current liabilities, which would decrease the current ratio (current assets/current liabilities). It would not have an impact on net working capital, which is calculated as current assets minus current liabilities.

Question 20

The gross margin percentage is equal to:

Accepted Answer

Gross margin percentage is calculated by adding net operating income and selling and administrative expenses together, then dividing by sales. This formula accounts for the total revenue minus the cost of goods sold and operating expenses, providing a percentage that reflects the efficiency of a company in managing its direct costs and overhead in relation to its sales revenue.

Quiz 15: Financial Statement Analysis