Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of inventory with cash affect each ratio?

A) Increase the current ratio and increase the acid-test ratio.

B) No change to the current ratio and decrease the acid-test ratio.

C) Decrease the current ratio and decrease the acid-test ratio.

D) Decrease the current ratio and increase the acid-test ratio.

Answer: B

Which of the following measures of liquidity does not control for the relative size of the company?

A) Working capital.

B) Current ratio.

C) Acid-test ratio.

D) They all control for the relative size of the company.

Answer: A

The acid-test ratio is

A) Current assets divided by current liabilities.

B) Cash and short-term investments divided by current liabilities.

C) Cash, short-term investments, and accounts receivable divided by current liabilities.

D) Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

Answer: C

Which financial ratio relates most closely to a company's ability to pay its short-term debts?

A) Receivables turnover

B) Debt to equity ratio

C) Return on assets

D) Current ratio

Answer: D

The current ratio is

A) Current assets divided by current liabilities.

B) Cash and short-term investments divided by current liabilities.

C) Cash, short-term investments, and accounts receivable divided by current liabilities.

D) Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

Answer: A

Working capital is

A) Current assets divided by current liabilities.

B) Current assets minus current liabilities.

C) Cash, short-term investments, and accounts receivable divided by current liabilities.

D) Cash, short-term investments, and accounts receivable minus current liabilities.

Answer: B

Discount Travel has the following current assets: cash, $102 million receivables, $94 million inventory

Discount Travel has the following current assets: cash, $102 million receivables, $94 million inventory, $182 million and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million current portion of long-term debt, $35 million and long-term debt, $23 million. Based on these amounts, what is the acid-test ratio?

A) 1.47.

B) 2.00.

C) 2.84.

D) 3.86.

Answer: A

Discount Travel has the following current assets: cash, $102 million receivables, $94 million inventory, $182 million and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million current portion of long-term debt, $35 million and long-term debt, $23 million. Based on these amounts, what is the current ratio?

A) 2.54.

B) 2.98.

C) 4.04.

D) 2.84.

Answer: B

Which of the following statements regarding liquidity ratios is false?

A) A high current ratio generally indicates the ability to pay current liabilities on a timely basis.

B) A high acid-test ratio generally indicates the ability to pay current liabilities on a timely basis.

C) All current assets are due within one year and therefore have essentially equal liquidity.

D) As a rule of thumb, a current ratio of 1 or higher often reflects an acceptable level of liquidity.

Answer: C

Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is reasonably possible that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit?

A) Unified does not record any loss Northeast records a $5,000,000 gain.

B) Neither company records a loss or gain.

C) Unified records a $5,000,000 loss Northeast records a $5,000,000 gain.

D) Unified records a $5,000,000 loss Northeast does not record any gain.

Answer: B

Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is probable that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit?

A) Unified does not record any loss Northeast records a $5,000,000 gain.

B) Unified records a $5,000,000 loss Northeast does not record any gain.

C) Unified records a $5,000,000 loss Northeast records a $5,000,000 gain.

D) Neither company records a loss or gain.

Answer: B

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt.

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

A) When the equipment is sold.

B) When the repairs are performed.

C) When payments are made to the service firm.

D) Evenly over the life of the warranty.

Answer: A

A contingent liability should be disclosed in a note to the financial statements rather than being recorded if:

A) The likelihood of a loss is remote.

B) The likelihood of a loss is reasonably possible.

C) The likelihood of a loss is probable.

D) The likelihood of a loss is eighty percent.

Answer: B

Which of the following is a contingency that should be recorded?

A) The company is being sued and a loss is reasonably possible and reasonably estimable.

B) The company deducts life insurance premiums from employees' paychecks.

C) The company offers a two-year warranty and the expenses can be reasonably estimated.

D) It is probable that the company will receive $100,000 in settlement of a lawsuit.

Answer: C

A contingent liability should be recorded in a company's financial statements only if the likelihood of a loss occurring is:

A) At least remotely possible and the amount of the loss is known.

B) At least reasonably possible and the amount of the loss is known.

C) At least reasonably possible and the amount of the loss is reasonably estimable.

D) Probable and the amount of the loss can be reasonably estimated.

Answer: D

When a gain contingency is probable and the amount of gain is reasonably estimable, the gain should be:

A) Reported in the income statement and disclosed.

B) Offset against stockholders' equity.

C) Disclosed, but not recognized in the income statement.

D) Reported in the income statement, but not disclosed.

Answer: C

Gain contingencies usually are recognized in a company's income statement when:

A) The gain is certain.

B) The amount is reasonably estimable.

C) The gain is reasonably possible and the amount is reasonably estimable.

D) The gain is probable and the amount is reasonably estimable.

Answer: A

Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000

Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000. What was the balance in the Warranty Liability account at the end of the year?

A) $44,000.

B) $80,000.

C) $36,000.

D) $480,000.

Answer: C

Which of the following is true regarding the relationship between the current ratio and the acid-test ratio?

A) The current ratio will always be equal to or larger than the acid-test ratio for a specific company.

B) The acid-test ratio will always be equal to or larger than the current ratio for a specific company.

C) Either the current ratio or the acid-test ratio could be larger for a specific company.

D) One ratio will always exceed 1.0, while the other will always be less than 1.0.

Answer: A

Note disclosure is required for material potential losses when the loss is at least reasonably possible:

A) Only if the amount is known.

B) Only if the amount is known or reasonably estimable.

C) Unless the amount is not reasonably estimable.

D) Even if the amount is not reasonably estimable.

Answer: D