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

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 would not be classified as a current asset?

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

Alpha Company would like to estimate how long it will take to realize cash from its ending inventory.For this purpose the following data are submitted: Accounts Receivable, less allowance for doubtful accounts of \ 40,000 Ending Inventory Net Sales Cost of Goode Sold \6 60,000 750,00 5,650,000 4,250,000 $\text { Days' Sales in Inventory } = \frac { \text { Ending Inventory } } { \text { Cost of Goods Sold } / 365 }$ $\text { Days' Sales in Receivables } = \frac { \text { Gross Receivables } } { \text { Net Sales } / 365 }$ Required: Estimate how long it will take to realize cash from the ending inventory.

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

Because the cost of specific inventory items is not usually practical to determine,it is necessary for management to select a cost flow assumption.

The direct write-off method frequently results in the bad debt expense being recognized in the year subsequent to the sale,and thus results in a proper matching of expense with revenue.

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

Which of the following types of business would normally have the longest operating cycle?

A firm that has been on lifo for many years may have some inventory costs that go back ten years or more.

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.

Szabo Company computed the following data for 2012. Days' sales in receivables Accounts receivable turnover Accounts receivable turnover in days Days' sales in inventory Merchandise inventory turnover Inventory turnover in days 38.7 days 9.6 times 35.1 days 68.5 day 5.9 times 58.7 days The estimated operating cycle for 2012 is:

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

Jones Company presents the following data for 2012. Receivables, less allowance for losses and discounts of \ 12,196 \2 66,700 Net Sales 2,360,108 Cost of Gande Sold 1,580,360 The days' sales in receivables is

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.

When doing external analysis,many of the reasons why the days' sales in receivables is abnormally high or low cannot be determined without access to internal information.

The operating cycle is the time between the acquisition of inventory and the realization of cash from selling the inventory.

If a firm has pledged its receivables and its inventory,then the best indicator of its short-term liquidity may be indicated by:

Which of the following ratios would generally be used to evaluate a firm's overall liquidity position?

Hind Company presents the following data for 2012: Accounts Receivable, less allowance for doubtful accounts of \ 40,000 Ending Inventory, LIFO (estimated replacement cost \ 800,000 ) Net Sales Cost of Goods Sold (estimated replacement cost, \ 4,150,000 ) \7 80,000 500,000 4,750,000 3,550,000 Required: a.Compute the days' sales in receivables. b.Compute the days' sales in inventory,using the cost figure. c.Compute the days' sales in inventory,using the replacement cost for the inventory and the cost of goods sold. d.Explain which days' sales in inventory figure is probably more realistic,the one computed in (b)or (c).