CH#06: Liquidity of Short-Term Short-Term Assets; Related Debt-ayi!" Ability 6-0 De$oole Com$a!y ma!ufa%tures i!dustrial $rodu%ts a!d em$loys a %ale!dar year for fi!a!%ial re$orti!" $ur$oses& 'tems (a) throu"h (e) $rese!t se*eral of De$oole+s tra!sa%tio!s duri!" 00,& The total of %ash equi*ale!ts mar.etable se%urities& A!d !et re%ei*ables e/%eeded total %urre!t liabilities both before a!d after ea%h tra!sa%tio! des%ribed& De$oole has $ositi*e $rofits i! 00, a %redit bala!%e throu"hout 00, i! its retai!ed ear!i!" a%%ou!t& Required: A!ser the folloi!" multi$le-%hoi%e questio!s: 1& ayme!t of a trade a%%ou!t $ayable of 2 63400 ould a. b. c. d. e.
Increase Increase the current current ratio, but but the acid-test acid-test ratio ratio would would not be affected. affected. Increase Increase the acid-test acid-test ratio, ratio, but the the current ratio ratio would would not be affected. affected. Increas Increase e both the the current current and acidacid-tes testt ratios. ratios. Decrease Decrease both both the current and acid-t acid-test est ratios. ratios. Have no no effect effect on the current current and acid-tes acid-testt ratios. ratios.
& The $ur%hase of ra materials for 2 54000 o! o$e! a%%ou!t ould a. b. c. d. e.
Increas Increase e the the current current ratio. ratio. Decrease Decrease the current current ratio. ratio. Increas Increase e net net workin working g capi capital tal.. Decrease Decrease net workin working g capit capital. al. Increase Increase both the current current ratio ratio and net working working capita capital. l.
& The %olle%tio! of %urre!t a%%ou!ts re%ei*able of 2,000 ould a. b. c. d. e.
Increas Increase e the the current current ratio. ratio. Decrease Decrease the current current ratio. ratio. Increas Increase e the the acid-t acid-test est ratio. ratio. Decrease Decrease the acid-t acid-test est ratio. ratio. No effect effect the the current current and and acid-tes acid-testt ratios. ratios.
3& 7bsolete i!*e!tory of 214000 as ritte!-off duri!" 00,&This ould a. b. c. d. e.
Decrease Decrease the acid-t acid-test est ratio. ratio. Increas Increase e the the acid acid-te -test st ratio. ratio. Increas Increase e net net workin working g capi capital tal.. Decrease Decrease the current current ratio. ratio. Decrease Decrease both both the current and acid-t acid-test est ratios. ratios.
4& The early liquidatio! of lo!"-term !ote ith %ash ould a. b. c. d.
Affect Affect the current current ratio ratio to a greater greater degree degree than than the acid-test acid-test ratio. Affect Affect the acid-tes acid-testt ratio ratio to a greater greater degree than the the current ratio. Affect Affect the current and acid-test acid-test ratios to the the same degree. degree. Affect Affect the current ratio, but not the acid-tes acid-testt ratio. ratio.
e. Affect the acid-test ratio, but not the current ratio. (C8A Ada$ted) 6-1 '!formatio! from 9re" Com$a!y+s bala!%e sheet follos: Curre!t Assets: Cash
!,"##,###
$arketable securities
%,!##,###
Accounts receivable
&#,&##,###
Inventories
'&,###,###
(repaid e)penses Total %urre!t assets
",###,### 14500000
Curre!t liabilities: Notes pa*able
",+##,###
Accounts pa*able
",###,###
Accrued e)pense
"",###,###
Income ta) pa*able (a*ments due within *ear on long-term debt Total %urre!t liabilities
'##,### ,###,### 3000000
e/uired0 answer the following multiple-choice /uestions. 1& hat is the a%id-test ratio of 9re" Com$a!y a. b. c. d.
".'# ".%' ".1# !.!#
& hat is the effe%t of the %olle%tio! of a%%ou!ts re%ei*able o! the %urre!t ratio a!d !et or.i!" %a$ital res$e%ti*ely Curre!t ratio
a. No effect b. Increase. c. Increase d. No effect
No effect Increase No effect Increase
6- The folloi!" data a$$ly to items (a) a!d (b)& 8r& S$ar.s the o!er of s%hool su$$lies '!%& a!ts to mai!tai! %o!trol o*er a%%ou!ts re%ei*able& He u!dersta!ds that a%%ou!ts re%ei*able tur!o*er ill "i*e a "ood i!di%atio! of ho ell re%ei*ables are bei!" ma!a"ed& S%hool Su$$lies '!%& does =0> of its busi!ess duri!" ?u!e ?uly a!d Au"ust& The term of sale are @10 !et@60& Net sales for the *ear ended December ", !##1, and receivables balances follow0 Net sales
",&##,###
eceivables, less allowance for doubtful Accounts of ### at 2anuar* ", !##1.
%!,###
eceivables, less allowance for doubtful Accounts of "#,### at December ", !##1.
'#,###
Required: A!ser the folloi!" multi$le-%hoi%e questio!s: 1& The a*era"e a%%ou!ts re%ei*able tur!o*er %al%ulated from the $re*ious data is a. b. c. d. e.
!#.# times !&.# times !!. % times ".%& time !#. times
& The a*era"e a%%ou!ts re%ei*able tur!o*er for S%hool Su$$lies '!%& i! item (a) is a. epresentative for the entire *ear b. 3verstated c. 4nderstated (C8A Ada$ted)
6- 'tems (a) throu"h (d) are based o! the folloi!" i!formatio!: SHARB C7R7RAT'7< Sele%ted i!a!%ial Data
As of De%ember 1 !##1
!##
Cash
###
'#,###
$arketable securities
!,###
,###
Accounts receivable
+#,###
""#,###
Inventor*
#,###
"+#,###
Net propert*, plant, and e/uipment
!+#,###
!#,###
Accounts pa*able
'#,###
"##,###
5hort-term notes pa*able
#,###
&#,###
Cash sales
",&##,###
",+##,###
Credit sales
'##,###
1##,###
",!'#,###
",+#,###
Cost of goods sold
Required: A!ser the folloi!" multi$le-%hoi%e questio!s: 1& Shar.ey+s a%id-test ratio as of De%ember 1 00, is a. b. c. d.
#.' #.%# #.1 #.11
& Shar.ey+s re%ei*able tur!o*er for 00, is a. b. c. d.
times ' times "! times "+ times
& Shar.ey+s i!*e!tory tur!o*er for 00, is a. b. c. d.
"".+& times "#.&# times 1.& times .+& times
3& Shar.ey+s %urre!t ratio at De%ember 1 00, is a. ".+# b. !.'# c. ".1#
d. ".% 4& 'f %urre!t assets e/%eed %urre!t liabilities $ayme!t to %reditors made o! the last day of the year ill a. b. c. d.
Decrease current ratio Increase current ratio Decrease working capital Increase working capital
6-3 required: A!ser the folloi!" multi$le-%hoi%e questio!s& 1& A Com$a!y+s %urre!t ratio is & to 1 a!d qui%. (a%id-test) ratio is 1&0 to 1 at the be"i!!i!" of the year& At the e!d of the year the %om$a!y has a %urre!t ratio of &4 to 1 a!d a qui%. ratio of 0&5 to 1& hi%h of the folloi!" %ould hel$ e/$lai! the di*er"e!%e i! the ratios from the be"i!!i!" to the e!d of the year a. b. c. d. e.
An increase in inventor* levels during the current *ear. An increase in credit sales in relationship to cash sales. An increase in the use of trade pa*ables during the current *ear. An increase in the collection rate of accounts receivable. 6he sale of marketable securities at a price below cost.
& 'f Eust $rior to a $eriod of risi!" $ri%es a %om$a!y %ha!"ed its i!*e!tory measureme!t method from '7 to L'7 the effe%t i! the !e/t $eriod ould be to a. b. c. d. e.
Increase both the current ratio and inventor* turnover. Decrease both the current ratio and inventor* turnover. Increase the current ratio and decrease inventor* turnover. Decrease the current ratio and increase inventor* turnover. 7eave the current ratio and inventor* turnover unchanged.
& Sele%ted year-e!d data for Fayer Com$a!y are as follos: Current liabilities
'##,###
Acid-test ratio
!.&
Current ratio
.#
Cost of sales
&##,###
Fayer Com$a!y+s i!*e!tory tur!o*er based o! these year-e!d data is a. b. c. d. e.
".!# !.+# ".'% 5ome amount other than those given. Not determinable from the data given.
3& 'f a firm has a hi"her %urre!t ratio but a lo a%id-test ratio o!e %a! %o!%lude that a. b. c. d. e.
6his firm has a large outstanding accounts receivable balance. 6his firm has a large investment in inventor*. 6he firm has a large amount of current liabilities. 6he cash ratio is e)tremel* high. 6he two ratios must be recalculated because both conditions cannot occur simultaneousl*.
4& '!*estme!t i!strume!ts used to i!*est tem$orarily idle %ash bala!%es should ha*e hi%h of the folloi!" %hara%teristi%s a. b. c. d. e.
High e)pected return, low marketabilit*, and a short term to maturit*. High e)pected return, readil* marketable, and no maturit* date. 7ow default risk, low marketabilit*, and a short term to maturit*. 7ow default risk, readil* marketable, and a long term to maturit*. 7ow default risk, readil* marketable, and a short term to maturit*.
6& The $rimary obEe%ti*e i! the ma!a"eme!t of a%%ou!ts re%ei*able is a. 6o achieve a combination of sales volume, bad-debt e)perience, and receivables turnover that ma)imi8es the profits of the corporation. b. 6o reali8e no bad debts because of the opportunit* cost involved. c. 6o provide treasurer of the corporation with sufficient cash to pa* the compan*9s bills on time. d. 6o coordinate the activities of manufacturing, marketing, and financing so that the corporation can ma)imi8e its profits. e. 6o allow the most liberal credit acceptance polic* because increased sales mean increased profits, =& A firm requires short-term fu!ds to %o*er $ayroll e/$e!ses& These fu!ds %a! %ome from a. b. c. d. e.
6rade credit Collection of receivables. :ank loans Dela*ed pa*ments of accounts pa*able. All of the above.
(C8A Ada$ted)
