Multiple-Choice questions:
a. A company’s current ratio is 2.2 to 1 and quick (acid-test) ratio is 1.0 to 1 at the beginning of the year. At the end of the year, the company has a current ratio of 2.5 to 1 and a quick ratio of 0.8 to 1. Which of the following could help explain the divergence in the ratios from the beginning to the end of the year?
1. An increase in inventory levels during the current year
2. An increase in credit sales in relationship to cash sales
3. An increase in the use of trade payables during the current year
4. An increase in the collection rate of accounts receivable
5. The sale of marketable securities at a price below cost
b. If, just prior to a period of rising prices, a company changed its inventory measurement method from FIFO to LIFO, the effect in the next period would be to
1. Increase both the current ratio and inventory turnover.
2. Decrease both the current ratio and inventory turnover.
3. Increase the current ratio and decrease inventory turnover.
4. Decrease the current ratio and increase inventory turnover.
5. Leave the current ratio and inventory turnover unchanged.
c. Selected year-end data for Bayer Company are as follows:
Current liabilities .......... $600,000
Acid-test ratio .......... 2.5
Current ratio ............. 3.0
Cost of sales ........... $500,000
Bayer Company’s inventory turnover based on these year-end data is
1. 1.20.
2. 2.40.
3. 1.67.
4. Some amount other than those given.
5. Not determinable from the data given.
d. If a firm has a high current ratio but a low acid-test ratio, one can conclude that
1. The firm has a large outstanding accounts receivable balance.
2. The firm has a large investment in inventory.
3. The firm has a large amount of current liabilities.
4. The cash ratio is extremely high.
5. The two ratios must be recalculated because both conditions cannot occur simultaneously.
e. Investment instruments used to invest temporarily idle cash balances should have which of the following characteristics?
1. High expected return, low marketability, and a short term to maturity
2. High expected return, readily marketable, and no maturity date
3. Low default risk, low marketability, and a short term to maturity
4. Low default risk, readily marketable, and a long term to maturity
5. Low default risk, readily marketable, and a short term to maturity
f. The primary objective in the management of accounts receivable is
1. To achieve a combination of sales volume, bad-debt experience, and receivables turnover that maximizes the profits of the corporation.
2. To realize no bad debts because of the opportunity cost involved.
3. To provide the treasurer of the corporation with sufficient cash to pay the company’s bills on time.
4. To coordinate the activities of manufacturing, marketing, and financing so that the corporation can maximize its profits.
5. To allow the most liberal credit acceptance policy because increased sales mean increased profits.
g. A firm requires short-term funds to cover payroll expenses. These funds can come from
1. Trade credit.
2. Collections of receivables.
3. Bank loans.
4. Delayed payments of accounts payable.
5. All of the above.
(CMA Adapted)