SU 9

Absent a specific provision in its articles of incorporation, a corporation's board of directors has the power to do all of the following except

Amend the articles of incorporation.

Which one of the following would increase the net working capital of a firm?

Refinancing a short-term note payable with a 2-year note payable.

Starrs Company has current assets of $400,000 and current liabilities of $300,000. Starrs could increase its net working capital by the

Refinancing of $50,000 of short-term debt with long-term debt.

Peters Company has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if

The company sold merchandise on open account that earned a normal gross margin.

Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation?

The director must disclose the interest to the independent members of the board and refrain from voting.

Which one of the following changes will cause the demand curve for gasoline to shift to the left?

The price of cars increases.

Windham Company has current assets of $400,000 and current liabilities of $500,000. Windham Company's current ratio will be increased by

The purchase of $100,000 of inventory on account. BEC 15

Aaron Co.'s vendor will be offering a credit term of 5/15, net 30 next year. Which of the following descriptions is correct about the credit term?

The vendor will not offer any discount if Aaron Co. pays on the 25th day.

One characteristic of an effective internal control structure is the proper segregation of duties. The combination of responsibilities that would not be considered a violation of segregation of functional responsibilities is

Timekeeping and preparation of payroll journal entries.

Which one of the following is a spontaneous source of financing?

Trade credit.

Which security is most often held as a substitute for cash?

Treasury bills.

Darv Co. had a current ratio of 3-to-1 and a quick ratio of 1-to-1. Current liabilities were $322,000. What was the total amount for inventory and prepaid expenses?

$644,000

Given an acid-test ratio of 2.0, current assets of $5,000, and inventory of $2,000, the value of current liabilities is

$1,500

A company with $4.8 million in credit sales per year plans to relax its credit standards, projecting that this will increase credit sales by $720,000. The company's average collection period for new customers is expected to be 75 days, and the payment behavior of the existing customers is not expected to change. Variable costs are 80% of sales. The firm's opportunity cost is 20% before taxes. Assuming a 360-day year, what is the company's benefit (loss) on the planned change in credit terms?

$120,000

SQ Company sent an invoice of $3,000 to a customer with credit terms of 3/15, net 30 on February 1, 20X1. If the full amount of the invoice is paid on February 13, 20X1, what amount did SQ Company receive?

$2,910

Tosh Enterprises reported the following account information: What is Tosh Enterprises' quick (acid-test) ratio?

2.14

A vendor offered Wyatt Co. $25,000 in compensation for losses resulting from faulty raw materials. Alternatively, a lawyer offered to represent Wyatt in a lawsuit against the vendor for a $12,000 retainer and 50% of any award over $35,000. Possible court awards with their associated probabilities are as follows: Compared with accepting the vendor's offer, the expected value for Wyatt to litigate the matter to a verdict provides a

$4,000 loss.

The following information regards a change in credit policy. The company has a required rate of return of 10% and a variable cost ratio of 60%. The pre-tax cost of carrying the additional investment in receivables, using a 360-day year, would be

$5,760

Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through Dough's thrift store for $1. Dough assigns the following probabilities to selling additional boxes through regular stores: What is the expected value of Dough's decision to buy 100 additional boxes of muffins?

$52

The selected data pertain to Tilghman Company at December 31: Assuming no prepaid expenses are included in current assets, Tilghman Company's inventory balance at December 31 is

$72,000

The selected data pertain to Tilghman Company at December 31: Tilghman Company's current liabilities at December 31 equal

$80,000

A service company's working capital at the beginning of January of the current year was $70,000. The following transactions occurred during January: What is the amount of working capital at the end of January?

$80,500

At the end of its fiscal year, Krist, Inc., had the following account balances: What is Krist's quick (acid-test) ratio?

0.750

A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current liabilities of $900 million. What is its acid-test (quick) ratio?

0.78

Tosh Enterprises reported the following account information: Tosh Enterprises' amount of working capital is

1,200,000 400,000 + $200,000 + $800,000 + $80,000=1480000 260,000 + $20,000=280000 1,480,000 - 280,000

Strom, Inc., has current assets of $5,500,000. Their current ratio is 2.0 and their quick ratio is 1.5. What is Strom's total inventory?

1,375,000

Information from Dominic Company's year-end financial statements is as follows: What is the current ratio at December 31, Year 2?

2.33 to 1.

Selected data from Ostrander Corporation's financial statements for the years indicated are presented in thousands. The total debt-to-equity ratio for Ostrander Corporation in Year 2 is

1.3

The following financial information applies to Sycamore Company: What is the acid-test (or quick) ratio for Sycamore?

1.56 (10,000 + 18,000 + 120,000) ÷ (75,000 + 20,000)

Selected financial data from Barrymore Co. are Barrymore's quick (acid-test) ratio as of December 31 is

1.7 to 1.

A company has credit sales of $20,000 in January, $30,000 in February, and $50,000 in March. The company collects 75% in the month of sale and 25% in the following month. The balance in accounts receivable on January 1 was $25,000. What amount is the balance in accounts receivable at closing on March 31?

12,500

A company has an online order processing system. The company is in the process of determining the dollar amount of loss from user error. The company estimates the probability of occurrence of user error to be 90%, with evenly distributed losses ranging from $1,000 to $30,000. What is the expected annual loss from user error?

13950

Tucker Corporation had the following financial statements for the years ended December 31, Year 2, and December 31, Year 1: What is Tucker Corporation's accounts receivable turnover ratio for Year 2?

16.8 20,000 - 3,620=16380 (1,000 + 950) ÷ 2=975 16380/975

At the beginning of the year, M Corp. had current assets of $300,000 and current liabilities of $175,000. During the year, cash increased by $150,000, accounts receivable decreased by $75,000, and prepaid expenses decreased by $55,000. Furthermore, trade accounts payable increased by $25,000 and wages payable decreased by $40,000. If no other transactions affected current assets or current liabilities, what is the current ratio at year end?

2.00

During Year 1, EFG Corporation purchased equipment for $100,000 in cash. It also sold a building with a carrying amount of $125,000 and an accumulated depreciation of $25,000 for $135,000 and incurred a depreciation expense of $25,000. On January 1, Year 1, current assets and current liabilities equal $100,000 and $50,000, respectively. If these were the only transactions to occur in Year 1, what is the current ratio on December 31, Year 1?

2.7

A firm has current assets of $50,000, a current ratio (working capital ratio) of 2:1, and pays a short-term loan listed under current liabilities for $10,000 using existing cash. What is the firm's current ratio after the loan is paid?

2.7.

A buyer wants to receive improved credit terms from one of its vendors. The buyer knows that its cash flow cycle always permits payment in full 20 days after every order. Currently, the credit terms between the two parties are 3/15, net 30. The most beneficial new credit term is

2/20, net 30.

Tucker Corporation had the following financial statements for the years ended December 31, Year 2, and December 31, Year 3: The average collection period (using 360 days) for Tucker Corporation in Year 2 is

21.43 (AR year 2/ ( Credit Sales-sale return))/365

A maker of bowling gloves is investigating the possibility of liberalizing its credit policy. Currently, payment is made on a cash-on-delivery basis. Under a new program, sales would increase by $80,000. The company has a gross profit margin of 40%. The estimated bad debt loss rate on the incremental sales would be 6%. Ignoring the cost of money, what would be the return on sales before taxes for the new sales?

34.0%

Carter uses a 365-day year when computing ratios. Selected data from Carter's financial statements for the year ended December 30, Year 2, are as follows: The balance in accounts receivable at December 30, Year 2, is

477 (8,700 net sales ÷ 365 days) × 20 days

Tosh Enterprises reported the following account information: The current ratio for Tosh Enterprises is

5.29 1,480,000 ÷ 280,000

A company has $1,500,000 in current assets and $500,000 in current liabilities. The company's current inventory level is $250,000, and it plans to issue short-term debt to increase inventory. What is the largest amount of short-term debt the company may issue to increase inventory without dropping the current ratio below 2.0?

500,000

The sales manager of Serito Doll Company has suggested that an expanded advertising campaign costing $40,000 would increase the sales and profits of the company. He has developed the following probability distribution for the effect of the advertising campaign on company sales: The company sells the dolls at $5.20 each. The cost of each doll is $3.20. Serito's expected incremental profit, if the advertising campaign is adopted, is

53,000

A company has equity of $9,000. Long-term debt is $1,900. Net working capital, other than cash, is $2,500. Fixed assets are $2,200. What amount of cash does the company have?

6,200

Carter Co. had the following items on its balance sheet at the end of the current year: The amount of current liabilities at the end of the current year was $640,000. What is Carter's working capital at the end of the current year?

660,000

In comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current ratio is the better company?

A high current ratio may indicate inefficient use of various assets and liabilities.

An auto parts store must maintain inventory of a wide variety of parts to satisfy its diverse customer base. As a result, the store's inventory has a high risk of obsolescence. Which of the following features would be most desirable to the store's creditors during a financial review of the auto parts store?

A high quick ratio.

A lockbox system

Accelerates the inflow of funds.

Lockbox system

Accelerates the inflow of funds.

Which one of the following provides a spontaneous source of financing for a firm?

Accounts payable.

Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. Depoole's issuance of serial bonds in exchange for an office building, with the first installment of the bonds due late this year,

Affects all of the answers as indicated.

A company has a current ratio of 1.5. This ratio will decrease if the company

Borrows cash on a 9-month note.

The main reason that a firm would strive to reduce the number of days sales outstanding is to increase

Cash

The chief financial officer of Smith Glass, Inc., follows the policy of matching the maturity of assets with the maturity of financing. The implications of this policy include all of the following, except that

Cash, receivables, and inventory should be financed with long-term debt or equity.

Clay Corporation follows an aggressive financing policy in its working capital management while Lott Corporation follows a conservative financing policy. Which one of the following statements is correct?

Clay has a low current ratio while Lott has a high current ratio.

All of the following are alternative marketable securities suitable for short-term investment except

Convertible bonds.

CPZ Enterprises had the following account information. The company has an operating cycle of 5 months. What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of the accounts payable?

Current Ratio Increase Quick Ratio Increase

Net working capital is the difference between

Current assets and current liabilities.

How would the following ratios or measures be affected if a company issued additional capital stock for cash?

Decrease Increase

Mogul Co. wrote off obsolete inventory during the current year. What was the effect of this write-off on Mogul's ratio analysis?

Decrease in current ratio but not in quick ratio.

The Herb Salter Corporation is considering a plant expansion that will increase its sales and net income. The following data represent management's estimate of the impact the proposal will have on the company: The effect of the plant expansion on Salter's net working capital will be a(n)

Decrease of $10,000.

Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. Depoole's purchase of raw materials for $85,000 on open account will

Decrease the current ratio.

Excerpts from the statement of financial position for Landau Corporation as of September 30 of the current year are presented as follows. The board of directors of Landau Corporation met on October 4 of the current year and declared the regular quarterly cash dividend amounting to $750,000 ($.60 per share). The dividend is payable on October 25 of the current year to all shareholders of record as of October 12 of the current year. Assume that the only transactions to affect Landau Corporation during October of the current year are the dividend transactions and that the closing entries have been made. Landau Corporation's working capital was

Decreased by the dividend declaration and unchanged by the dividend payment.

An increasing federal deficit implies which of the following conditions?

Decreased tax revenues and increased entitlement payments.

Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. Obsolete inventory of $125,000 was written off by Depoole during the year. This transaction

Decreased the current ratio.

Working capital is reduced by

Factoring accounts receivable.

North Bank is analyzing Belle Corp.'s financial statements for a possible extension of credit. Belle's quick ratio is significantly better than the industry average. Which of the following factors should North consider as a possible limitation of using this ratio when evaluating Belle's creditworthiness?

Fluctuating market prices of short-term investments may adversely affect the ratio.

A concerted effort to avoid doing business with a particular supplier is known as a

Group boycott.

A small store has decided to start accepting credit cards as forms of payment. But subsequent sales were unchanged. Which of the following is true about the effects of accepting payment by credit card? No bad debts on credit card transactions are recognized. The cash collection cycle decreases. Working capital increases.

I and II.

Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. Depoole's payment of a trade account payable of $64,500 will

Increase both the current and quick ratios.

If a company converts a short-term note payable into a long-term note payable, this transaction will

Increase both working capital and the current ratio.

As a company becomes more conservative in its working capital policy, it tends to have a(n)

Increase in the ratio of current assets to current liabilities.

As a company becomes more conservative with respect to working capital financing policy, it would tend to have a(n)

Increase in the ratio of current assets to noncurrent assets.

Assuming no prepaid expenses are included in current assets, Tilghman Company's inventory balance at December 31 is

Increase in the ratio of current assets to noncurrent assets.

Calculation of ratios and the determination of other factors are considered important in analysis of financial statements. Prior to the independent events described below, the corporation concerned had current and quick ratios in excess of one to one and reported a net income (as opposed to a loss) for the period just ended. Income tax effects are to be ignored. The corporation had only one class of shares outstanding. Recording the payment (as distinguished from the declaration) of a cash dividend, the declaration of which was already recorded, will

Increase the current ratio but have no effect on working capital.

At December 30, Agnon Co. had cash of $200,000, a current ratio of 1.5:1, and a quick ratio of .5:1. On December 31, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Increased Quick Ratio Decreased

During the year, Mason Company's current assets increased by $120,000, current liabilities decreased by $50,000, and net working capital

Increased by $170,000. 120,000 + 50,000

Dawn Corp. uses a standard cost system. During the year, both the labor rate variance and the labor efficiency variance were unfavorable. Dawn wrote the variances off directly to cost of goods sold. If Dawn had allocated the variances to work in process, finished goods, and cost of goods sold instead, what would have been the effects on current ratio and net income?

Increases Increases

If a firm increases its cash balance by issuing additional shares of common stock, net working capital

Increases and the current ratio increases.

The activities of the user entity and the service organization have a high degree of interaction. The user auditor

Need not test the service organization's internal control if the user entity has effective controls related to service organization processing.

Russell, Inc., is evaluating four independent investment proposals. The expected returns and standard deviations for each of these proposals are presented below. Which one of the investment proposals has the least risk per unit of return?

Investment III.

Which one of the following statements is most likely to be true if a seller extends credit to a purchaser for a period of time longer than the purchaser's operating cycle? The seller

Is, in effect, financing more than just the purchaser's inventory needs.

Calculation of ratios and the determination of other factors are considered important in analysis of financial statements. Prior to the independent events described below, the corporation concerned had current and quick ratios in excess of one to one and reported a net income (as opposed to a loss) for the period just ended. Income tax effects are to be ignored. The corporation had only one class of shares outstanding. The effect of recording a 2-for-1 stock split is to

Leave working capital unaffected, decrease earnings per share, and decrease book value per share.

When managing cash and short-term investments, a corporate CFO is primarily concerned with

Liquidity and safety.

Which of the following effects would a lockbox most likely provide for receivables management?

Minimized collection float.

An organization would usually offer credit terms of 2/10, net 30 when

Most competitors are offering the same terms, and the organization has a shortage of cash.

Rice, Inc., uses the allowance method to account for uncollectible accounts. An account receivable that was previously determined uncollectible and written off was collected during May. The effect of the collection on Rice's current ratio and total working capital is

None None

Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account. Depoole's collection of a current accounts receivable of $29,000 will

Not affect the current or quick ratios.

Determining the appropriate level of working capital for a firm requires

Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency.

Mason Company's board of directors has determined four options to increase working capital next year. Option 1 is to increase current assets by $120 and decrease current liabilities by $50. Option 2 is to increase current assets by $180 and increase current liabilities by $30. Option 3 is to decrease current assets by $140 and increase current liabilities by $20. Option 4 is to decrease current assets by $100 and decrease current liabilities by $75. Which option should Mason choose to maximize net working capital?em

Option 1.

Bond Corporation has a current ratio of 2 to 1 and a (acid test) quick ratio of 1 to 1. A transaction that would change Bond's quick ratio but not its current ratio is the

Sale of inventory on account at cost.

Badoglio Co.'s current ratio is 3:1. Which of the following transactions would normally increase its current ratio?

Selling inventory on account.

Farrow Co. is applying for a loan in which the bank requires a quick ratio of at least 1. Farrow's quick ratio is 0.8. Which of the following actions would increase Farrow's quick ratio?

Selling obsolete inventory at a loss.

Which one of the following statements about trade credit is correct? Trade credit is

Subject to risk of buyer default.

The expected monetary value of an act is the

Sum of the conditional profit (loss) for each event times the probability of each event's occurrence.

The following account balances were taken from Spector Co.'s balance sheet at December 31 of the current and previous year: Which of the following statements regarding the current ratio and working capital is correct?

Working capital decreased in the current year.