Chapter 16 Quiz

Question 1

Selling used equipment at book value for cash will:

Debt-to-Equity= Total liabilities / Stockholders’ equity
Working Capital= Current Assets – Current Liabilities

A) Decrease the debt-to-equity ratio.
B) Increase working capital.
C) Increase net income.
D) Decrease working capital.

Answer 1

Increase working capital.

Question 2

If current assets exceed current liabilities, prepaying an expense on the last day of the year will:

Acid-test ratio= (Cash + Marketable securities + Accounts receivable + Short-term notes receivable) / Current liabilities

Current ratio= Current assets / Current liabilities

A) Decrease the acid-test ratio.
B) Increase the current ratio.
C) Increase the acid-test ratio.
D) Decrease the current ratio.

Answer 2

Decrease the acid-test ratio.

Question 3

Norton Inc. could improve its current ratio of 2 by:

Current ratio= Current assets / Current liabilities

A) Purchasing inventory on credit.
B) Selling merchandise on credit at a profit.
C) Distributing a previously declared stock dividend.
D) Writing off an uncollectible receivable.

Answer 3

Selling merchandise on credit at a profit.

Question 4

Accounts receivable turnover will normally decrease as a result of:

Accounts receivable turnover= Sales on account / Average accounts receivable balance

A) An increase in cash sales in proportion to credit sales.
B) The write-off of an uncollectible account against the allowance for bad debts.
C) A change in credit policy to lengthen the period for cash discounts.
D) A significant sales volume decrease near the end of the accounting period.

Answer 4

A change in credit policy to lengthen the period for cash discounts.

Question 5

The market price of Friden Company’s common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company’s price-earnings ratio would:

Earnings per share= Net income / Average number of common shares outstanding
Price-earnings ratio= Market price per share / Earnings per share

A) Impossible to determine.
B) Decrease.
C) Remain unchanged.
D) Increase.

Answer 5

Increase

Question 6

Broch Corporation’s income statement appears below:

Income Statement
Sales (all on account) $1,220,000
Cost of goods sold 760,000
Gross margin 460,000
Operating expenses 415,692
Net operating income 44,308
Interest expense 14,000
Net income before taxes 30,308
Income taxes (35%) 10,608
Net income $19,700

The company’s times interest earned ratio is closest to:

Times-interest earned ratio= Earnings before interest expense and income taxes / Interest expense

A) 2.16
B) 4.87
C) 1.41
D) 3.16

Answer 6

3.16

Question 7

Louie Corporation has provided the following data:
(Year 2; Year 1)
Accounts receivable ($269,000; $290,000)
Inventory ($190,000; $160,000)
Sales, on account ($1,340,000)
Cost of goods sold ($860,000)

The company’s operating cycle for Year 2 is closest to:

Accounts receivable turnover= Sales on account / Average accounts receivable balance
Average collection period= 365 days / Accounts receivable turnover
Average sale period= 365 days / Inventory turnover
Inventory turnover= Cost of goods sold / Average inventory balance
Operating cycle= Average sale period + Average collection period

A) 79.2 days
B) 81.0 days
C) 9.7 days
D) 150.5 days

Answer 7

150.5 days