QUESTION: 1653

Which of the following will most affect the valuation of a firm's receivables?

The rate of sales growth
None of these answers
The type of business that a firm is engaged in
The allowance for uncollectible accounts
The seasonality of a company's products

Answer(s): D

Explanation:

The most important factor that will affect the valuation of receivables, of the choices given, is the allowance for uncollectible accounts. This is so, because receivables are reported on the balance sheet as "net realizable value;" i.e., total amount of receivables, less an allowance for uncollectible accounts. If management understates this allowance, the realizable value of accounts receivable will be overstated and the firm's liquidity position will not be as strong as it would appear.

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QUESTION: 1654

Bay Co. purchased a 3-month U.S. Treasury bill. In preparing Bay's statement of cash flows, this purchase would

have no effect.
be treated as an outflow from lending activities.
be treated as an outflow from financing activities.
be treated as an outflow from operating activities.
be treated as an outflow from investing activities.

Answer(s): A

Explanation:

The T-bill is a cash equivalent and has no effect on the statement of cash flows. Cash equivalents are short- term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturities that they present insignificant risk of changes in value because of the changes in interest rates. They only include investments with original maturities to the holder of 3 months or less.

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QUESTION: 1655

The following data have been extracted from the financial statements of a firm for two years, 1985 and 1986:

1985 1986
Assets 4,376 5,214
Sales 8,312 7,845
Receivables 985 756
Inventory 1,108 1,243
COGS 5,494 4,971

The inventory turnover ratio and the average inventory processing period for 1986 equal ________.

4.23 86.31 days
5.19 70.33 days
4.87 74.95 days
5.62 64.95 days

Answer(s): A

Explanation:

One of the properties of the inventory that is of interest is the rate at which it turns over i.e. the average processing time it takes for a given inventory item to be sold. This can be estimated using either net sales (as is the case with receivables) or the cost-of-goods-sold. COGS is preferable since it does not include the profit margins involved in net sales. Therefore, two relevant ratios are: a. Inventory turnover ratio = COGS/average inventory. b. Average inventory processing period = 365/inventory turnover. For 1986, the average inventory equals (1243+1108)/2 = 1,176. Inventory turnover ratio = 4,971/1,176 = 4.23. Average inventory processing period = 365/4.23 = 86.31 days.

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QUESTION: 1656

If a company converted a short-term note payable into a long-term note payable, this transaction would

none of these answers.
increase working capital.
decrease working capital and the current ratio.
increase both working capital and the current ratio.
decrease only working capital.

Answer(s): D

Explanation:

This transaction reduces current liabilities, but does not change current assets and, therefore, increases working capital and increases the current ratio.

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