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

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

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