Which of the following is/are true about liquidity ratios, all else equal?
Answer(s): B
Receivables are not part of the cash ratio and hence, changes in receivables do not directly affect the cash ratio. The quick ratio does consider receivables in addition to cash and marketable securities but ignores all other current assets. Thus, it is more conservative than the current ratio.
Which of the following is/are true about stock dividends?
Answer(s): C
Stock dividends are given to move retained earnings into capital accounts and hence represent a permanent capitalization of earnings. In that sense, stock dividends do not have any economic significance but are an accounting bookkeeping device. The recapitalization does have legal implicationsfor future distributions since the retained earnings account is the primary source of cash dividends and other accounts are more difficult to dip into for distributions. If the stock dividend is less than 20-25%, the additional stocks are valued at fair market value on the declaration date and the resultant amount moved from retained earnings account to the "par-value" account and the "additional paid-in capital" account. Larger stock dividends are valued at par.
Which of the following items is deducted from net income to arrive at cash flow from operations when using the indirect method?
A decrease in accounts payable is an outflow.
The peaks and valleys of the business cycle tend to be smoothed out using which inventory method?
When prices are moving either upward or downward, the cost of goods sold (under LIFO) will show costs closer to the price level at the time the goods were sold. Therefore the LIFO method tends to show a smaller net income during inflationary times and a larger net income during deflationary times than other methods of inventory valuation.
Profit margin is a ratio that:
Answer(s): A
Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.
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