Tod Corp. wrote off $100,000 of obsolete inventory on December 31, 2005.

The effect of
this write-off was to decrease
A. Both the current and acid-test ratios.

B. Only the current ratio.

Inventory is a current asset but not a quick asset (assets that are readily converted to
cash). The current ratio is current assets/current liabilities. Thus, the current ratio is
reduced.

The quick ratio is quick assets/current liabilities. Thus, the quick ratio is unaffected.
C. Only the acid-test ratio.

D. Neither the current nor the acid-test ratios.

Question #2 (AICPA.910538FAR-TH-FA)
On December 30, 2004, Solomon Co. had a current ratio greater than 1:1 and a quick ratio
less than 1:1.
On December 31, 2004, all cash was used to reduce accounts payable. How did these cash
payments affect the ratios?
Current ratio Quick ratio
Decreased Decreased

Incorrect for current ratio. Cash is both a current and a quick asset (an asset
immediately available to pay debts). Accounts payable is a current liability. Thus, the
numerator and denominator of both ratios have decreased.
The current ratio was greater than 1.0 before the transaction. Therefore, the
denominator decreased a greater percentage than the numerator; thereby causing the
ratio to increase.
Decreased Increased

Increased Decreased

Cash is both a current and a quick asset (an asset immediately available to pay debts).
Accounts payable is a current liability. Thus, the numerator and denominator of both
ratios have decreased.
The current ratio was greater than 1.0 before the transaction. Therefore, the
denominator decreased a greater percentage than the numerator causing the ratio to
increase.
The quick ratio was less than 1.0 before the transaction. Therefore, the numerator
decreased a greater percentage than the denominator causing the ratio to decrease.
Increased Increased

Question #3 (AICPA.901157FAR-P1-FA)
During 2005, Rand Co. purchased $960,000 of inventory. The cost of goods sold for 2005
was $900,000, and the ending inventory on December 31, 2005 was $180,000.

What was the inventory turnover for 2005?

A. 6.4

B. 6.0

Inventory turnover = cost of goods sold/average inventory. Average inventory is the

sum of beginning inventory and ending inventory divided by 2.
 To find beginning inventory and average inventory, the basic inventory equation is
used:

Beginning inventory + Purchases = Ending inventory + Cost of goods sold

Beginning inventory + $960,000 = $180,000 $900,000
Beginning inventory = $120,000
Average inventory = ($180,000 + $120,000)/2 = $150,000
Inventory turnover = cost of goods sold/average inventory
= $900,000/$150,000 = 6
C. 5.3

D. 5.0

Question #4 (AICPA.900555FAR-P2-FA)
The following data pertain to Ruhl Corp.'s operations for the year ended December 31,
2005:
Operating income $800,000
Interest expense 100,000
Income before income tax 700,000
Income tax expense 210,000
Net income $490,000
The times interest earned ratio is
A. 8.0 to 1.

The times interest earned ratio is: (income before interest expense and income
tax/interest expense).
For Ruhl, this ratio is: $800,000/$100,000 = 8. This means that the firm has earnings
that would support interest eight times the current level. In other words, the firm
could pay its current level of interest eight times.
If interest expense were $800,000, net income would be zero and no tax would be
due. $800,000 of interest could be paid from resources earned in the current period.
B. 7.0 to 1.

C. 5.6 to 1.

D. 4.9 to 1.

Question #5 (AICPA.900538FAR-TH-FA)
How is the average inventory used in the calculation of each of the following?
Acid test (quick ratio) Inventory turnover rate
Numerator Numerator

Numerator Denominator

Not used Denominator

The acid test or quick ratio does not involve inventory at all. Rather, it is the ratio of
those current assets that are readily converted to cash including cash, accounts
receivable, and certain investments, to total current liabilities. The inventory turnover
rate is the ratio of cost of goods sold to average inventory for the period.
Not used Numerator

Question #6 (AICPA.070799FAR)
The controller of Peabody, Inc. has been asked to present an analysis of accounts
receivable collections at the upcoming staff meeting. The following information is used:
12/31, Year 2 12/31, Year 1
Accounts receivable $100,000 $130,000
Allowance, doubtful accounts (20,000) (40,000)
Sales 400,000 200,000
Cost of goods sold 350,000 170,000
What is the receivables turnover ratio as of December 31, Year 2?
A. 5.0

B. 4.7

The receivables turnover ratio = net sales/average net accounts receivables. This
would be: 400,000/85,000. The denominator is calculated as: (100,000 - 20,000 +
130,000 - 40,000)/2
C. 3.5

This was calculated as net sales divided by average gross accounts receivables, not
average net accounts receivable.
D. 0.6

Question #7 (AICPA.020503FAR-FA)
Kline Co. had the following sales and accounts receivable balances at the end of the current
year:
Cash sales $1,000,000
Net credit sales 3,000,000
Net accounts receivable, 1/1 100,000
Net accounts receivable, 12/31 400,000
What is Kline's average collection period for its accounts receivable?
A. 48.0 days.

B. 30.0 days.

The average collection period for accounts receivable (i.e., the average number of
days it takes to collect accounts receivable) is calculated by dividing the number of
days in the year by the number of times accounts receivable turn over during the year.
360 (or 365) days
Average Collection Period = Accounts receivable turnover
Accounts receivable turnover is computed as:
Net credit sales
Average net accounts receivable
For Kline, the accounts receivable turnover is:
$3,000,000 = $3,000,000 = 12 times
($100,000 + $400,000)/2 $250,000
Therefore, Kline's average collection period is:
360 days = 30 days
12 times
C. 22.5 days.

D. 12.0 days.

Question #8 (AICPA.990504FAR-FA)
North Bank is analyzing Belle Corp.'s financial statements for a possible extension of credit.
Belle's quick ratio is significantly better than the industry average.

Which of the following factors should North consider as a possible limitation of using this
ratio when evaluating Belle's creditworthiness?

A. Fluctuating market prices of short-term investments may adversely affect the ratio.

The quick ratio (also called the acid-test ratio) is computed by dividing assets that can
be converted quickly to cash by the total of current liabilities.
Thus, the formula is:

Quick ratio = Cash + Cash Equivalents/ Marketable Securities + Net Accounts Receivable
Current Liabilities

Since the quick ratio includes short-term investments (marketable securities) in the
numerator and since short-term investments are reported at fair market value,
fluctuating market prices may adversely affect the ratio (if the market price
decreases).
B. Increasing market prices for Belle's inventory may adversely affect the ratio.

C. Belle may need to sell its available-for-sale investments to meet its current obligations.

D. Belle may need to liquidate its inventory to meet its long-term obligations.

Question #9 (AICPA.110567FAR)

Assuming constant inventory quantities, which of the following inventory-costing methods

will produce a lower inventory turnover ratio in an inflationary economy?

A. FIFO (first in, first out).

Inventory turnover ratio is Cost of Goods Sold/Average Inventory. Therefore, to

produce the lowest inventory turnover ratio, we need the highest value of ending
inventory. The method that produces the highest value of ending inventory in an
inflationary economy (prices are rising) is FIFO.
B. LIFO (last in, first out).

C. Moving average.

D. Weighted average.

Question #10 (AICPA.951158FAR-FA)

What effect would the sale of a company's trading securities at their carrying amounts for
cash have on each of the following ratios?
Current ratio Quick ratio
No effect No effect

The current ratio equals current assets divided by current liabilities. The quick ratio
equals quick assets divided by current liabilities. Quick assets include cash, cash
equivalents, trading securities, accounts receivable and other current assets readily
convertible to cash. Quick assets exclude inventories and prepaids.

Trading securities are included in both current assets and quick assets because they
are, by definition, immediately marketable. The sale of trading securities at book value
has no effect on current assets or quick assets because the cash received equals the
 reduction in the trading securities account. Thus, neither ratio is affected by such a
sale.
Increase Increase

No effect Increase

Increase No effect

Question #11 (AICPA.950558FAR-FA)

Selected data pertaining to Lore Co. for the calendar year 2005 is as follows:
Net cash sales $ 3,000

Cost of goods sold 18,000

Inventory at beginning of year 6,000

Purchases 24,000

Accounts receivable at the beginning of the year 20,000

Accounts receivable at the end of the year 22,000

The accounts receivable turnover for 2005 was 5.0 times. What were Lore's 2005 net credit
sales?

A. $105,000

The net cash sales are not involved in the accounts receivable turnover ratio, nor are
inventory or purchases. Working backwards from accounts receivable, net credit sales
is found as:

Accounts receivable turnover = net credit sales/average accounts receivable.

5 = net credit sales/[($20,000 + $22,000)/2]

5($21,000) = net credit sales = $105,000
B. $107,000

C. $110,000

D. $210,000

Question #12 (AICPA.930516FAR-P2-FA)

On December 31, 2004, Curry Co. had the following balances in selected asset accounts:

2004 Increase over 2003

Cash $300 $100

Accounts receivable, net 1,200 400

Inventory 500 200

Prepaid expenses 100 40

Other assets 400 150

Total assets $2,500 $890

 ====== ======

Curry had current liabilities of $1,000 on December 31, 2004 and net credit sales of $7,200
for the year ended.

What was the average number of days to collect Curry's accounts receivable during 2004?

A. 30.4

B. 40.6

C. 50.7

Average days to collect accounts receivable = 365/AR turnover. AR turnover = credit

sales/average accounts receivable = $7,200/[.5($800 + $1,200)] = 7.2
(Beginning 2004 AR is $800 because ending AR of $1,200 is $400 higher than
beginning AR.)
Average days to collect accounts receivable = 365/7.2 = 50.7
D. 60.8

Question #13 (AICPA.920548FAR-TH-FA)

On December 31, 2005, Northpark Co. collected a receivable due from a major customer.
Which of the following ratios would be increased by this transaction?
A. Inventory turnover ratio.

B. Receivable turnover ratio.

Accounts receivable turnover = credit sales/average accounts receivable.

Collection of a receivable reduces the denominator and thus increases the ratio.
C. Current ratio.

D. Quick ratio.

Question #14 (AICPA.940560FAR-FA)

On December 30, 2005, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick
ratio of .5:1. On December 31, 2005, all cash was used to reduce accounts payable.

How did these cash payments affect the ratios?

Current ratio Quick ratio

Increased Decreased

The numerator and denominator of both ratios are reduced by $200,000 as a result of
the transaction. Cash is included in both current and quick assets (current assets that
are highly liquid), the numerators of the two ratios. Accounts payable is a part of
current liabilities, which is the denominator of both ratios.

The current ratio exceeds 1.00 before the transaction. Reducing the numerator and
denominator the same amount causes the denominator to fall a greater percentage
than the numerator. Thus, the ratio increases. Example: if the ratio were
$900,000/$600,000 before the transaction; after the transaction, the ratio is
$700,000/$400,000, a higher ratio. The quick ratio is less than 1.00 before the
transaction. Thus, the ratio decreases. Example: if the ratio were $300,000/$600,000
before the transaction, after the transaction the ratio is $100,000/$400,000, a lower
ratio.
 Increased No effect

Decreased Increased

Decreased No effect

Incorrect on both counts. The current ratio exceeds 1.00 before the transaction.
Reducing the numerator and denominator the same amount causes the denominator to
fall a greater percentage than the numerator. Thus, the ratio increases.

Example: if the ratio were $900,000/$600,000 before the transaction, after the
transaction the ratio is $700,000/$400,000, a higher ratio. The quick ratio does not
remain the same because both the numerator and denominator are affected the same
amount, and the ratio is not 1.00 before the transaction.
Question #15 (AICPA.950560FAR-FA)
Selected data pertaining to Lore Co. for the calendar year 2005 is as follows:
Net cash sales $ 3,000

Cost of goods sold 18,000

Inventory at the beginning of the year 6,000

Purchases 24,000

Accounts receivable at the beginning of the year 20,000

Accounts receivable at the end of the year 22,000

Lore would use which of the following to determine the average days' sales in inventory?

Numerator Denominator
365 Average inventory

365 Inventory turnover

The ratio of 365 (days) to the inventory turnover is the average days sales in
inventory. The inventory turnover ratio is the cost of sales divided by average
inventory; it indicates the number of times inventory is "turned over" or sold during
the year.

For example, if cost of sales is $100,000, and average inventory is $20,000, then, on
average, the inventory on hand is sold (or is turned over) five times during the year.
Now 365/5 = 73; this means that there are 73 days' of sales in inventory, before
replenishment of stocks is necessary.
Average inventory Sales divided by 365

Sales divided by 365 Inventory turnover

This answer is close but the numerator is incorrect. Sales is not involved in this ratio
even though the ratio is called 'average days' sales in inventory.' The correct
numerator is simply 365 days.
Question #16 (AICPA.950559FAR-FA)
Selected data pertaining to Lore Co. for the calendar year 2005 is as follows:
Net cash sales $3,000

Cost of goods sold 18,000

 Inventory at beginning of year 6,000

Purchases 24,000

Accounts receivable at beginning of year 20,000

Accounts receivable at end of year 22,000

What was the inventory turnover for 2005?

A. 1.2 times.

Refer to the correct answer for the complete explanation.

B. 1.5 times.

C. 2.0 times.

The ending inventory must be computed and the accounts receivable information is
not relevant. The ratio is computed:

Inventory turnover = cost of goods sold/average inventory.

Ending inventory = Beginning inventory + Purchases - Cost of goods sold

$12,000 = $6,000 + $24,000 - $18,000

For 2005, the ratio = $18,000/[($6,000 + $12,000)/2] = 2.0 times

D. 3.0 times.

Question #17 (AICPA.930515FAR-P2-FA)

On December 31, 2004, Curry Co. had the following balances in selected asset accounts:

2004 Increase over 2003

Cash $300 $100
Accounts receivable, net 1,200 400
Inventory 500 200
Prepaid expenses 100 40
Other assets 400 150
Total assets $2,500 $890

Curry also had current liabilities of $1,000 on December 31, 2004, and net credit sales of
$7,200 for the year then ended.

What is Curry's acid-test ratio on December 31, 2004?

A. 1.5
 The acid test ratio = liquid current assets/current liabilities
= (cash + net AR)/current liabilities = ($300 + $1,200)/$1,000 = 1.5.

The acid test ratio is a more stringent test of the ability to pay current debt because it
excludes inventories and prepaids, assets which may not be immediately liquid.
B. 1.6

C. 2.0

D. 2.1

Question #18 (AICPA.082121FAR-I.C)

A company's year-end balance sheet is shown below:
Assets Liabilities and shareholder equity
Cash $ 300,000 Current liabilities $ 700,000
Accounts receivable 350,000 Long-term liabilities 600,000
Inventory 600,000 Common stock 800,000
Property, plant, and equipment (net) 2,000,000 Retained earnings 1,150,000
$3,250,000 $3,250,000

What is the current ratio as of December 31?

A. 1.79

The current ratio is the ratio of current assets to current liabilities. Current assets for
this firm include the first three items listed under assets: $300,000 + $350,000 +
$600,000 = $1,250,000. Current liabilities are listed as $700,000. Their ratio is
$1,250,000/$700,000 = 1.79.
B. 0.93

C. 0.67

D. 0.43

Question #19 (AICPA.082119FAR-I.C)

The following information was taken from Baxter Department Store's financial statements:
Inventory on January 1 $ 100,000
Inventory on December 31 300,000
Net sales 2,000,000
Net purchases 700,000

What was Baxter's inventory turnover for the year ending December 31?

A. 2.5

Inventory turnover is the ratio of cost of goods (CGS) sold to average inventory. First,
calculate CGS = beginning inventory $100,000 + purchases $700,000 - ending
inventory $300,000 = $500,000. Then, average inventory = (beginning inventory +
ending inventory)/2 = ($100,000 + $300,000)/2 = $200,000. Turnover =
$500,000/$200,000 = 2.5.
B. 3.5

C. 5
 D. 10

This value is the ratio of net sales to average inventory. The numerator of inventory
turnover is the cost of goods sold - sales measured at cost.
Question #20 (AICPA.082118FAR-I.C)
Redwood Co.'s financial statements had the following information at year end:
Cash $ 60,000
Accounts receivable 180,000
Allowance for uncollectible accounts 8,000
Inventory 240,000
Short-term marketable securities 90,000
Prepaid rent 18,000
Current liabilities 400,000
Long-term debt 220,000

What was Redwood's quick ratio?

A. 0.81 to 1

The quick ratio is the quotient of very liquid current assets to total current liabilities.
Inventories and prepaids are not included in the numerator because they are not
considered sufficiently liquid. As such, it is a more stringent test of liquidity than the
current ratio. In this case, the quick ratio consists of: cash + net AR + marketable
securities divided by current liabilities: ($60,000 + $180,000 - $8,000 +
$90,000)/$400,000) = .805. The closest answer is 0.81 to 1.
B. 0.83 to 1

This answer is close but it fails to deduct the allowance for uncollectible accounts. Net
accounts receivable (gross AR less the allowance) is the amount to include in the
numerator because that is the amount expected to be collected.
C. 0.94 to 1

D. 1.46 to 1

Question #21 (AICPA.920518FAR-P2-FA)

Zenk Co. wrote off obsolete inventory of $100,000 during 2005. What was the effect of this
write-off on Zenk's ratio analysis?
A. Decrease in current ratio but not in quick ratio.

The write-off of inventory reduces current assets but not quick assets.

Quick assets are those current assets, which are considered very liquid and which can
be turned into cash relatively quickly. Inventory is not a quick asset. The denominator
of the current and quick ratios is the same: current liabilities. The denominator of
neither ratio is affected by this write-off. Only current assets decrease; thus the
current ratio decreases but the quick ratio is unaffected.
B. Decrease in quick ratio but not in current ratio.

C. Increase in current ratio but not in quick ratio.

D. Increase in quick ratio but not in current ratio.

Question #22 (AICPA.920516FAR-P2-FA)

The following computations were made from Clay Co.'s 2005 books:
 Number of days' sales in inventory 61

Number of days' sales in trade accounts receivable 33

What was the number of days in Clay's 2005 operating cycle?

A. 33

B. 47

C. 61

D. 94

The operating cycle is the total period of time from the purchase of inventory, to sale,
and then finally to the collection of cash from receivables.

The operating cycle thus can be approximated by the sum of the number of days' sales
in inventory, which is the average number of days before an item of inventory is sold,
plus the number of days' sales in receivables, which is the average number of days to
collect a receivable. This sum is 94 (61 + 33) days.
Question #23 (AICPA.082117FAR-I.C)
TGR Enterprises provided the following information from its statement of financial position
for the year ended December 31, Year 1:
January 1 December 31
Cash $ 10,000 $ 50,000
Accounts receivable 120,000 100,000
Inventories 200,000 160,000
Prepaid expenses 20,000 10,000
Accounts payable 175,000 120,000
Accrued liabilities 25,000 30,000

TGR's sales and cost of sales for Year 1 were $1,400,000 and $840,000, respectively. What
is the accounts receivable turnover, in days?

A. 26.1

B. 28.7

AR turnover is the ratio of sales to average AR or $1,400,000/[($120,000 +

$100,000)/2] = $1,400,000/$110,000 = 12.73. Thus AR "turns over" 12.73 times per
year. In days, AR turns over every 28.7 days = 365/12.73. If the year is divided into
12.73 parts, each part is 28.7 days long.
C. 31.3

D. 41.7