ACC 240 Chapter 3

Which statements about working capital are correct? (Choose every correct answer.)

=It is expressed as a dollar amount, rather than as a financial ratio. -It is the excess of a firm's current assets over its current liabilities.

Which of the following statements are true regarding the working capital calculation? (Choose every correct answer.)

Accounts receivable are included in current assets. Accounts payable are included in current liabilities.

What are reasons why a well-managed company sometimes attempts to reduce its current ratio? (Choose every correct answer.)

Assets like accounts receivable and merchandise inventory do not earn a high ROI. A high current ratio may be a sign that the company has not made the most productive use of its assets. Funds freed up by reducing the current ratio can be invested in new production equipment or marketing efforts.

What are reasons why a well-managed company sometimes attempts to reduce its current ratio? (Choose every correct answer.)

Assets like accounts receivable and merchandise inventory do not earn a high ROI. Funds freed up by reducing the current ratio can be invested in new production equipment or marketing efforts. A high current ratio may be a sign that the company has not made the most productive use of its assets.

Which statements correctly describe return on investment (ROI)? (Choose every correct answer.) Multiple select question. It is normally calculated using net income as the measure of the return. It is calculated by dividing the average net income by the average total assets. It is sometimes referred to as return on assets (ROA). It is normally calculated using average total assets as the measure of the investment. It is calculated by dividing net income earned during the year by the total assets at the end of the year.

It is normally calculated using net income as the measure of the return. It is sometimes referred to as return on assets (ROA). It is normally calculated using average total assets as the measure of the investment.

Which of the following statements are true regarding the acid-test ratio? (Choose every correct answer.) Multiple select question. The acid-test ratio is sometimes called the quick ratio. Temporary cash investments are included in the numerator of the acid-test ratio. The acid-test ratio uses the same denominator as does working capital. The acid-test ratio can be calculated as (Cash (including temporary cash investments) + accounts receivable) divided by current liabilities. Accounts payable are included in the numerator of the acid-test ratio.

The acid-test ratio is sometimes called the quick ratio. Temporary cash investments are included in the numerator of the acid-test ratio. The acid-test ratio can be calculated as (Cash (including temporary cash investments) + accounts receivable) divided by current liabilities.

Which of the following statements are true regarding arithmetic vertical scales? (Choose every correct answer.)

The distance between values shown on the vertical axis will always be uniform. It may be helpful to truncate the non relevant portion of the vertical scale to highlight the key data ranges being depicted.

Calculate working capital, assuming that cash + accounts receivable = $50,000, merchandise inventory = $10,000, noncurrent assets = $40,000, current liabilities = $20,000, noncurrent liabilities = $50,000, and stockholders' equity = $30,000.

Working Capital = Current assets - Current liabilities= 50,000+10,000-50,000=40,000

Assume that current assets = $300,000 and that current liabilities = $100,000. If an account payable of $50,000 were paid off, what would be the impact on the firm's working capital and current ratio?

Working capital would remain $200,000, but the current ratio would increase from 3.0 to 5.0.

Many well-managed companies attempt to reduce their current ratio because

an overly high current ratio sometimes can be a sign that the company is not making the most productive use of its assets

Which of the following statements are true regarding the current ratio? (Choose every correct answer.)

-Cash is included in the numerator. -Accounts payable are included in the denominator.

The current ratio is calculated as current assets (+ - x /) current liabilities.

/

Calculate the acid-test ratio, assuming that cash = $6,000, land = $105,000, accounts receivable = $19,000, merchandise inventory = $20,000, accounts payable = $15,000, long-term debt = $80,000, and retained earnings = $55,000. (Round your answer to one decimal place, if necessary.)

1.7

Calculate the acid-test ratio, assuming that cash + accounts receivable = $50,000, merchandise inventory = $10,000, noncurrent assets = $40,000, current liabilities = $20,000, noncurrent liabilities = $50,000, and stockholders' equity = $30,000. (Round your answer to one decimal place, if necessary.)

2.5

Which of the following statements are true regarding the relationship between the current ratio and the acid-test ratio? (Choose every correct answer.)

For any given company, the current ratio will generally be higher than the acid-test ratio. The acid-test ratio demonstrates the extent to which a firm can meet its current obligations even if none of its inventory can be sold.

Working capital is calculated as current assets (+ - x /) current liabilities.

-

Working capital is calculated as current assets , (+ - x /) current liabilities.

-

Which of the following are normally included in a credit application?

- Other credit relationships- Bank accounts- Liabilities

Which of the following statements are true regarding a semilogarithmic graph? (Choose every correct answer.)

If the data increases at a constant rate over the period of time shown on the horizontal scale, the plot will be a straight line. Semilogarithmic graphs are frequently used to plot data that is expected to change significantly over time, such as a company's sales data.

Which of the following are normally included in a credit application? (Choose every correct answer.)

Information about employment Information about bank accounts Information about salary

Which of the following statements are true regarding the working capital calculation? (Choose every correct answer.)

Merchandise inventory is part of current assets. Cash is part of current assets.

Which of the following statements are true regarding the current ratio and the acid-test ratio? (Choose every correct answer.)

The acid-test ratio is a more conservative measure of a firm's liquidity. Both the current ratio and the acid-test ratio use current liabilities as the denominator.

Which of the following statements are true regarding the acid-test ratio? (Choose every correct answer.)

The acid-test ratio is a more conservative measure of liquidity than the current ratio. The acid-test ratio excludes merchandise inventory from the numerator. The acid-test ratio uses the same denominator as does the current ratio.

Which of the following statements are true regarding the current ratio? (Choose every correct answer.)

The current ratio is calculated as current assets divided by current liabilities. Rent payable is included in the denominator. Merchandise inventory is included in the numerator.

A firm's liquidity refers to

its ability to meet its current obligations as they become due

Calculate the current ratio assuming that cash = $6,000, land = $105,000, accounts receivable = $19,000, merchandise inventory = $20,000, accounts payable = $15,000, long-term debt = $80,000, and retained earnings = $55,000. (Round your answer to one decimal place, if necessary.)

3.0 Current ratio = Current assets / Current liabilities = (6000+105,000+20,000)/15,000=3.0

Calculate the current ratio, assuming that cash + accounts receivable = $50,000, merchandise inventory = $10,000, noncurrent assets = $40,000, current liabilities = $20,000, noncurrent liabilities = $50,000, and stockholders' equity = $30,000. (Round your answer to one decimal place, if necessary.)

3.0Current ratio = Current assets / Current liabilities= (50,000+10,000)/20,000) = 3.0

Which statements about a firm's return on equity (ROE) are correct? (Choose every correct answer.) Multiple select question. It is normally calculated using net income in the denominator. It expresses profits earned by the firm as a rate of return on all the resources employed by the firm. It is normally calculated using average stockholders' equity in the denominator. It expresses profits earned by the firm as a rate of return on the equity provided by stockholders.

It is normally calculated using average stockholders' equity in the denominator. It expresses profits earned by the firm as a rate of return on the equity provided by stockholders.

True or false: The distance between values shown on the vertical axis will always be uniform with arithmetic vertical scale.

True

With a semilogarithmic graph, the scale is logarithmic.

vertical

If a company had a current ratio of 2.0 and a short-term bank loan was to be repaid just before the balance sheet date, its ______.

working capital would not change, but the current ratio would increase