Exam 6: Liquidity of Short-Term Assets; Related Debt-Paying Ability

Current assets are assets that (1) are in the form of cash, (2) will be realized in cash, or (3) conserve the use of cash within the operating cycle of a business or for one year, whichever is shorter.

Significant weight is seldom given to the cash ratio unless the firm is in financial trouble.

Which of the following current assets will not generate cash in the future?

Using the direct write-off method, the bad debt expense is recorded when a specific customer's account is determined to be noncollectible.

By reporting marketable equity securities under current assets, management picks up a liquidity advantage.

In order to classify cash as a current asset, it must be free from any restrictions that would prevent its deposit or use to pay creditors classified as long-term.

The receivables of a company with installment receivables would normally be considered to be of higher quality than the receivables of a company that did not have installment receivables.

Which of the following would best indicate that the firm is carrying excess inventory?

Days' sales in receivables may be abnormally high if a material amount of sales are on a cash basis.

Working capital of a business is the excess of current assets over current liabilities.

The ability of an entity to maintain its short-term, debt-paying ability is important to all users of financial statements.

The cash ratio is usually a good indication of the liquidity of the firm.

An approximation of the operating cycle can be determined from the receivable liquidity figures and the inventory liquidity figures.

The lifo inventory costing method results in the acid-test ratio being overstated.

Inventory is particularly sensitive to changes in business activity.Therefore, management should keep inventory at a minimum.

The election to use lifo for taxes governs the firm's financial reporting.

A low sales to working capital ratio tentatively indicates an unprofitable use of working capital.

In terms of liquidity, it is to management's advantage to show investments under investments instead of marketable securities.

The use of the allowance for doubtful accounts results in the bad debt expense being charged to the period of sale.

Which of the following accounts would not be classified as a current asset?