103. Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a) Working capital is a measure of the amount of current assets a company would have left after paying its current liabilities.
_____ b) If a transaction causes a company's working capital to increase, the transaction caused the company to become less liquid.
_____ c) Interpretation of a company's working capital can be difficult because it is an absolute amount.
_____ d) The quick ratio is a less conservative variation of the current ratio.
_____ e) The quick ratio is usually calculated by using the following equation: cash + receivables + current marketable securities + prepaid expense/current liabilities
a) T b) F c) T d) F e) F
a) This is true. Working capital is current assets – current liabilities.
b) This is false. If working capital increases, the company would have more working capital which would increase liquidity.
c) This is true. Comparing only absolute amounts has drawbacks, however, because materiality levels differ from company to company or even from year to year for a given company.
d) This is false. The quick ratio is a more conservative variation of the current ratio. Only cash, receivables and current marketable securities are used in the calculation. Inventory and prepaid expenses are omitted.
e) This is false. Only cash, receivables and current marketable securities are used in the calculation. Inventory and prepaid expenses are omitted.
104. Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a) Net margin measures a company's immediate debt-paying ability.
_____ b) Accounts receivable turnover is a direct measure of a company's uncollectible accounts expense.
_____ c) Accounts receivable turnover is calculated by using the following formula: net credit sales/average accounts receivable.
_____ d) Net credit sales is sales on account less sales returns and discounts.
_____ e) The amount of average receivables can be calculated using the amount of receivables shown on balance sheets for the current year and previous year.
a) F b) F c) T d) T e) T
a) This is false. The quick ratio or acid test ratio is a measure of a company’s immediate debt-paying ability.
b) This is false. Accounts receivable turnover indicates the number of times that a company collects its average receivables. The higher the turnover, the faster the collections.
c) This is true. The formula for accounts receivable turnover is: net credit sales/average accounts receivable.
d) This is true. Net sales is: Sales – (returns & allowances & discounts)
e) This is true. Average receivables is a simple average of the current year and prior year ending accounts receivable.