The acid test ratio shows the ability of a company to pay its current liabilities without having to
Answer (D) is correct. The acid test (quick) ratio consists of the quick assets (cash, marketable securities, and net accounts receivable) divided by current liabilities. Thus, the numerator consists of those assets that are more liquid than inventory.
When a fixed asset is sold for less than book value, which one of the following will decrease?
Answer (C) is correct. When an asset is sold for less than book value, an accrual-basis loss is incurred. This reduces net profit.
If a company has a current ratio of 2.1 and pays off a portion of its accounts payable with cash, the current ratio will
Answer (B) is correct. The current ratio is the ratio of current assets to current liabilities. Since the numerator before the transaction was greater than the denominator, a reduction to both factors of an equal dollar amount will have a proportionally greater effect on the denominator, causing the ratio as a whole to increase.
Clauson, Inc., grants credit terms of 1/15, net 30 and projects gross sales for next year of $2,000,000. The credit manager estimates that 40% of their customers pay on the discount date, 40% on the net due date, and 20% pay 15 days after the net due date. Assuming uniform sales and a 360-day year what is the projected days’ sales outstanding (rounded to the nearest whole day)?
Answer (C) is correct. The days’ sales outstanding can be determined by weighting the collection period for each group of receivables by its collection percentage. Hence, the projected days’ sales outstanding equal 27 days [( 15 days × 40%) + (30 days × 40%) + (45 days × 20%)].
Alliance Ltd. has $80 million in current assets, comprised of $30 million in inventory and $50 million in cash and marketable securities The company’s current liabilities total $50 million If Alliance purchases an additional $10 million in inventory with $10 million in cash, the effect of this transaction on the company would be to
Answer (B) is correct. The quick ratio decreases from 1.00 ($50 million ÷ $50 million) to .80 ($40 million ÷ $50 million) due to the $10 million decrease in cash. The current ratio remains unchanged because the $10 million decrease in cash is offset by the $10 million increase in inventory.
Carson Corporation computed the following items from its financial records for the current year:
Current ratio 2 to 1
Inventory turnover 54 days
Accounts receivable turnover 24 days
Current liabilities turnover 36 days
The number of days in Carson’s operating cycle for the current year was
Answer (C) is correct. The operating cycle is the time needed to turn cash into inventory, inventory into receivables, and receivables back into cash. It is equal to the sum of the number of days’ sales in inventory and the number of days’ sales in receivables. The number of Carson’s days’ sales in inventory is given as 54 days The number of days’ sales in receivables is given as 24. Therefore, the number of days in the operating cycle is 78 (54 + 24).
To determine the operating cycle for a retail department store, which one of the following pairs of items is needed?
Answer (C) is correct. The operating cycle is the time needed to turn cash into inventory, inventory into receivables, and receivables back into cash. For a retailer, it is the time from purchase of inventory to collection of cash. Thus, the operating cycle of a retailer is equal to the sum of the number of days’ sales in inventory and the number of days’ sales in receivables. Inventory turnover equals cost of goods sold divided by average inventory The days’ sales in inventory equals 365 (or another period chosen by the analyst) divided by the inventory turnover. Accounts receivable turnover equals net credit sales divided by average receivables The days’ sales in receivables equals 365 (or other number) divided by the accounts receivable turnover.
Accounts receivable turnover ratio will normally decrease as a result of
Answer (D) is correct. The accounts receivable turnover ratio equals net credit sales divided by average receivables. Hence, it will decrease if a company lengthens the credit period or the discount period because the denominator will increase as receivables are held for longer times.
Which one of the following inventory cost flow assumptions will result in a higher inventory turnover ratio in an inflationary economy?
Answer (B) is correct. The inventory turnover ratio equals the cost of goods sold divided by the average inventory. LIFO assumes that the last goods purchased are the first goods sold and that the oldest goods purchased remain in inventory. The result is a higher cost of goods sold and a lower average inventory than under other inventory cost flow assumptions if prices are rising. Because cost of goods sold (the numerator) will be higher and average inventory (the denominator) will be lower than under other inventory cost flow assumptions, LIFO produces the highest inventory turnover ratio.
The days’ sales in receivables ratio will be understated if the company
Answer (A) is correct. The days’ sales in receivables ratio equals the days in the year divided by the receivables turnover ratio (sales ÷ average receivables) Days’ sales may also be computed based only on ending receivables. In either case, use of the natural business year tends to understate the ratio because receivables will usually be at a low point at the beginning and end of the natural year. For example, a ski resort may close its books on May 31, a low point in its operating cycle.