WORKING CAPITAL=CURRENT ASSETS-CURRENT LIABILITIES

Question 1

CURRENT RATIO FORMULA

Answer 1

CURRENT ASSETS/CURRENT LIABILITY

Question 2

QUICK RATIO FORMULA

Answer 2

CASH+MARKETABLE SECURITIES+RECEIVABLES/CURRENT LIABILITIES(INVENTORY AND PREPAIDS ARE EXCLUDED FROM CURRENT ASSETS)

Question 3

APR OF QUICK PAYMENT DISCOUNT(annual cost)

Answer 3

360/pay period-discount period*discount/100-discount%

Question 4

what is a spontaneous source of credit

Answer 4

ACCOUNTS PAYABLE(trade credit)

Question 5

current assest consists of

Answer 5

accounts receivable, cash, inventory, and prepaid expense

Question 6

current liabilities consists

Answer 6

Accounts payable, interest payable due in3 mon

Question 7

short term investments except

Answer 7

convertible bonds(maturity date is usually more than a year)

Question 8

decrease in current ratio

Answer 8

increase in short term debt,decrease in current assets or combination of both

Question 9

improving current ratio

Answer 9

long term borrowing to repay short term debt

Question 10

ACCOUNTS RECEIVABLE TURNOVER RATIO

Answer 10

NET SALES/AVERAGE ACCOUNTS RECEIVABLE

Question 11

RECEIVABLES COLLECTION PERIOD=DSO

Answer 11

DSO=365/AVERAGE ACCOUNTS RECEIVABLE TURNOVER

Question 12

working capital management and working capital policy involve

Answer 12

managing cash so that company can meet its short-term obligations ,and include all aspects of the administration of current assets and current liabilities.

Question 13

goal of working capital management

Answer 13

shareholder wealth maximization

Question 14

optimal mix of ca and cl

Answer 14

offsetting the benefit of ca and cl against the probability of technical insolvency

Question 15

AGGRESIVE WORKING CAPITAL POLICY

Answer 15

INCREASE THE RATIO CURRENT LIABILITIES TO NON CURRENT LIABILITIES (more current assets financed with current liabilities)

Question 16

conservative working capital policy

Answer 16

increase the ratio of current assets to non current assets(more current assets financed by noncurrent liabilities)

Question 17

if the ratio is less than 1,

Answer 17

paying off current liabilities with current assets results in equal decrease in numerator and denominator. the effect is to decrease the current ratio.

Question 18

if the ratio is greater than 1

Answer 18

paying off current liabilities with current assets results in equal decrease in numerator and denominator, the effect is to increase the current ratio

Question 19

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(increase quick ratio)

Answer 19

Selling obsolete inventory at a loss.
Answer (D) is correct.
The quick (acid-test) ratio equals the sum of (1) cash and cash equivalents, (2) marketable securities, and (3) net receivables, divided by current liabilities. Inventory is not included in the numerator of the quick ratio. Receiving cash from the sale of inventory, even at a loss, increases quick assets without affecting current liabilities. The effect is to increase the quick ratio.

Question 20

Depoole’s collection of a current accounts receivable of $29,000 will(firm is at profit)

Answer 20

Answer (B) is correct. no change in current ratio or in quick ratio.
Collecting current accounts receivable has no effect on either the current ratio or the quick ratio because assets (both current and quick) are reduced for the collection of receivables and increased by the same amount for the receipt of cash. Current liabilities are unchanged by the transaction.

Question 21

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

Answer 21

Increases and the current ratio increases.
Answer (D) is correct.
Net working capital is the excess of current assets over current liabilities. The current ratio equals current assets divided by current liabilities. Selling stock for cash increases current assets and stockholders’ equity, with no effect on current liabilities. The result is an increase in working capital and the current ratio.

Question 22

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

Answer 22

Increased

Decreased

Answer (B) is correct.
The current ratio (1.5) equals current assets (cash, net accounts receivable, current marketable securities, certain available-for-sale and held-to-maturity securities, inventory, prepaid expenses) divided by current liabilities (accounts payable, etc.). If a ratio is greater than 1.0, equal decreases in the numerator and denominator (debit accounts payable and credit cash for $200,000) increase the ratio. The quick ratio (.5) equals quick assets divided by current liabilities. If a ratio is less than 1.0, equal decreases in the numerator and denominator (debit accounts payable and credit cash for $200,000) decrease the ratio.

Question 23

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

Answer 23

D. Decrease in current ratio but not in quick ratio.
Answer (D) is correct.
The entry is to debit a loss and credit inventory, an asset that is included in the numerator of the current ratio but not the quick ratio. Hence, the write-off decreases the current ratio but not the quick ratio.

Question 24

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.

Question: 16 Depoole’s purchase of raw materials for $85,000 on open account

Answer 24

Decrease the current ratio.
Answer (D) is correct.
The purchase increases both the numerator and denominator of the current ratio by adding inventory to the numerator and payables to the denominator. Because the ratio before the purchase was greater than 1, the ratio is decrease.

Question 25

Fact Pattern: 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.

Question: 17 Obsolete inventory of $125,000 was written off by Depoole during the year. This transaction

Answer 25

Decreased the current ratio.
Answer (B) is correct.
Writing off obsolete inventory reduced current assets, but not quick assets (cash, receivables, and marketable securities). Thus, the current ratio was reduced and the quick ratio was unaffected.

Question 26

inventory management represents

Answer 26

most significant in businesses that involve the sale or manufacture of goods.
classified as supplies, raw materials, work-in- progress, and finished goods.

Question 27

factors influencing inventory levels

Answer 27

inventory depends on the accuracy of sale forecast. lack of inventory can result in lost sales , excessive inventory leads to carrying cost. carrying cost includes storage cost, insurance cost, opportunity cost, lost of inventory due to obsolescence or spoilage.

Question 28

purchase cost means

Answer 28

actual cost which is charged by the suppliers. this is also referred to investment in inventory.

Question 29

ordering cost

Answer 29

it is a fixed costs of placing an order with the vendor, independent no of orders required.

Question 30

stock out cost

Answer 30

missing a customer order.

Question 31

inventory replenishment factors

Answer 31

lead time is the time between the order placed with the suppliers and receipt of goods.

Question 32

safety stock

Answer 32

is an inventory buffer held as a hedge against contingencies

Question 33

factors determining safety stock

Answer 33

reliability of sales forecast, possibility of customer dissatisfaction resulting from back orders, cost of running out of inventory, lead time, seasonal demands on inventory.

Question 34

re order point

Answer 34

is the inventory level at which the company has to order or manufacture additional inventory to avoid stock out costs.

Question 35

reorder point formula

Answer 35

safety stock+(average daily demand*lead time in days)

Question 36

INVENTORY TURNOVER RATIO

Answer 36

COST OF GOODS SOLD/AVERAGE INVENTORY

Question 37

AVERAGE INVENTORY PERIOD IN DAYS

Answer 37

365/INVENTORY TURNOVER RATIO

Question 38

RE- ORDER POINT

Answer 38

SAFETY STOCK+(SALES DURING LEAD TIME*LEAD TIME)

Question 39

RETURN ON INVESTMENT ROI

Answer 39

OPERATING INCOME/AVERAGE AMOUNT INVESTED

Question 40

RESIDUAL INCOME

Answer 40

OPERATING INCOME-TARGET RETRUN ON INVESTED CAPITAL

Question 41

OPERATING INCOME INCLUDES

Answer 41

Operating Income = Gross Income - Operating Expenses - Depreciation & Amortization.Operating Income is typically a synonym for earnings before interest and taxes (EBIT) and is also commonly referred to as “operating profit” or “recurring profit.”. operating income=revenue-cost of goods sold-general administrative expenses.

Question 42

gross margin ratio

Answer 42

sales -cost of goods sold

Question 43

total asset turnover

Answer 43

net sales/average total assets