PS4 quiz

Question 1

2. Which of the following items is NOT included in current assets?
   a. Accounts receivable.
   b. Inventory.
   c. Bonds.
   d. Cash.
   e. Short-term, highly liquid, marketable securities.

Answer 1

c. Bonds.

Question 2

5. Which of the following items cannot be found on a firm’s balance sheet under current
   liabilities?
   a. Accounts payable.
   b. Short-term notes payable to the bank.
   c. Accrued wages.
   d. Cost of goods sold.
   e. Accrued payroll taxes.

Answer 2

d. Cost of goods sold.

Question 3

6. Considered alone, which of the following would increase a company’s current ratio?
   a. An increase in net fixed assets.
   b. An increase in accrued liabilities.
   c. An increase in notes payable.
   d. An increase in accounts receivable.
   e. An increase in accounts payable.

Answer 3

d. An increase in accounts receivable.

Question 4

A firm wants to strengthen its financial position. Which of the following actions would
increase its current ratio?
a. Reduce the company’s days’ sales outstanding to the industry average and use the
resulting cash savings to purchase plant and equipment.
b. Use cash to repurchase some of the company’s own stock.
c. Borrow using short-term debt and use the proceeds to repay debt that has a
maturity of more than one year.
d. Issue new stock and then use some of the proceeds to purchase additional
inventory and hold the remainder as cash.
e. Use cash to increase inventory holdings.

Answer 4

Issue new stock and then use some of the proceeds to purchase additional
inventory and hold the remainder as cash.

Question 5

Companies generate income from their “regular” operations and from other sources like
interest earned on the securities they hold, which is called non-operating income. Lindley
Textiles recently reported $12,500 of sales, $7,250 of operating costs other than
depreciation, and $1,000 of depreciation. The company had no amortization charges and
no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest
rate, and its federal-plus-state income tax rate was 40%. How much was Lindley’s
operating income, or EBIT?

a. $3,462
b. $3,644
c. $3,836
d. $4,038
e. $4,250

Answer 5

e. $4,250

Question 6

What is the equation for operating income, or EBIT?

Answer 6

EBIT= Sales - Operating costs - depreciation