The portion of the insurance premiums that has expired during the fiscal period is classified as:
Answer(s): A
In accordance with the matching rule, the amount of an insurance policy that has expired during the accounting period must be recorded and classified as an expense for the period.
Which of the following is/are true about the cash conversion cycle?
Answer(s): D
The cash conversion cycle is a measure of how long the cash is tied up in short term loans and credits. These short-term financing items include receivables, inventory and accounts payable. Therefore cash conversion cycle is defined as: CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period). Now, an increase in inventory ratio decreases inventory processing time, lowering the CCC. Also, an increase in the payables payment period decreases the CCC. However, CCC is independent of the cash ratio.
When a firm experiences LIFO liquidation under rising prices, it recognizes:
In LIFO liquidation under rising prices, the quantity of goods purchased during a period is less than the quantity sold. This leads to a sale of goods purchased in prior periods at lower prices (since prices are rising). This understates the cost-of-goods-sold (COGS), thus overstating the income and causing higher taxes than in the absence of the LIFO liquidation. The higher taxes cause a higher cash outflow. (This is an extremely important topic with which you should be completely familiar.)
An analysis of a firm's financial statements indicates that the average age of its assets is declining. This could be due to which of the following?
Answer(s): B
Note that the firm is likely not in a maturity or declining phase but in a growth phase, which is characterized by increasing capital investments.
A cash flow statement using the indirect method
Because of the indirect format, it is not possible to compare operating cash inflows and outflows by function with the revenue and expense activities that generated them.
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