A company’s current ratio and acid-test ratios are both greater than 1.0 to 1.

If obsolete inventory is
written off, this would
A) decrease the acid-test ratio.
B) increase the acid-test ratio.
C) increase net working capital.
D) decrease the current ratio.
ANSWER: D

If a company converts a short-term note payable into a long-term note payable, this transaction would
A) decrease working capital and increase the current ratio.
B) decrease working capital and decrease the current ratio.
C) decrease the current ratio and decrease the acid-test ratio.
D) increase working capital and increase the current ratio.
ANSWER: D

Which one of the following would increase the working capital of a company?
A) Cash payment of payroll taxes payable.
B) Refinancing a short-term note payable with a two year note payable.
C) Cash collection of accounts receivable.
D) Payment of a 20-year mortgage payable with cash.
ANSWER: B

If a firm has a high current ratio but a low acid-test ratio, one can conclude that
A) the firm has a large outstanding accounts receivable balance.
B) the firm has a large investment in inventory.
C) the firm has a large amount of current liabilities.
D) the firm's financial leverage is very high.

ANSWER: B

Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1. Prepaying next
year's office rent of P 50,000 will
A) have no effect on either the company's current ratio or its acid-test ratio.
B) have no effect on the company's current ratio but will decrease its acid-test ratio.
C) decrease the company's current ratio and decrease its acid-test ratio.
D) increase the company's current ratio and increase its acid-test ratio.

ANSWER: B

Rahner Company has a current ratio of 1.75 to 1. This ratio will decrease if Rahner Company
A) borrows cash using a six-month note.
B) pays the taxes payable which have been a current liability.
C) pays the following month's rent on the last day of the year.
D) sells inventory for more than their cost.

ANSWER: A

Selected data from Sheridan Corporation’s year-end financial statements are presented below. The
difference between average and ending inventory is immaterial.
Current ratio - 2.0; Acid-test ratio - 1.5 Current liabilities - P 120,000; Inventory turnover - 8 times
Gross profit margin - 40%

Sheridan's sales for the year was

A) 800,000.
B) 480,000.
C) 1,200,000.
D) 240,000.
ANSWER: A

Brachlan Company's net income last year was P 80,000 and its interest expense was P 20,000. Total
assets at the beginning of the year were P 660,000 and total assets at the end of the year were P
620,000. The company's income tax rate was 30%. The company's return on total assets for the year
was closest to
A) 12.5%.
B) 13.4%.
C) 15.6%.
D) 14.7%.
ANSWER: D

Dratif Company's working capital is P 33,000 and its current liabilities are P 80,000. The company's
current ratio is closest to
A) 1.41 to 1.
B) 0.59 to 1.
C) 3.42 to 1.
D) 0.41 to 1.
ANSWER: A

At the end of the year just completed, Orem Company's current liabilities totaled P 75,000, and its long-
term liabilities totaled P 225,000. Working capital at year-end was P 100,000. If the company's debt-to-
equity ratio is 0.30 to 1, total long-term assets must equal
A) P 1,000,000.
B) P 1,300,000.
C) P 1,125,000.
D) P 1,225,000.
ANSWER: B