Accounting 4.7

7) Using the account format to prepare a balance sheet is

A) as acceptable as using a report format.

An example of a current liability is

A) unearned revenue.

Clokgel Inc. likes to maintain a current ratio near 1.4; however, the CFO for Clokgel, Inc. has noticed a decline in previous months. The current ratio for April, 2012 produced a ratio of 0.6. What would be the CFO's major concern with a declining current ratio?

B) The company may have difficulty meeting its short-term obligations.

Working capital is defined as

B) the difference between current assets and current liabilities.

Which of the following statements regarding the current ratio is true?

C) The current ratio is widely used to evaluate liquidity.

The quick ratio provides

C) a more restrictive view of a company's liquidity compared to the current ratio.

An example of a current asset is

C) accounts receivable.

Liquidity is an entity's ability

C) to meet its near-term financial obligations with cash and near-cash assets as those obligations become due.

A classified balance sheet

D) groups accounts into subcategories to help readers quickly gain a perspective on the company's financial position.

9) In times of economic stress and instability, companies typically have A) higher operating expenses.

D) higher current ratios.

A balance sheet that groups the accounts into subcategories to help users gain a perspective on the company's financial position is referred to as a single-step balance sheet.

FALSE

A high current ratio means that a company is highly profitable.

FALSE

An entity's ability to meet its immediate financial obligations as they become due is known as profitability.

FALSE

Current assets must be greater than current liabilities.

FALSE

Current assets on the balance sheet are listed in descending order of monetary amount.

FALSE

The account format of the balance sheet reports assets at the top of the statement.

FALSE

The excess of cash over current liabilities is known as working capital.

FALSE

Working capital is the difference between total assets and total liabilities.

FALSE

Current assets are cash plus those assets that are expected to be converted to cash or sold or consumed during the next 12 months or within the normal operating cycle if longer than a year.

TRUE

Prepaid expenses are listed as current assets on the balance sheet.

TRUE

The current ratio can help users of financial statements assess a business entity's liquidity.

TRUE