Liquidity Ratios - Practice Questions
Liquidity Ratios - Practice Questions
Liquidity Ratios - Practice Questions
1. Excerpts from the statement of financial position for Landau Corporation as of September 30 of the current year are
presented as follows.
Cash $ 950,000
Accounts receivable (net) 1,675,000
Inventories 2,806,000
Total current assets $ 5,431,000
Accounts payable $ 1,004,000
Accrued liabilities 785,000
Total current liabilities $ 1,789,000
The board of directors of Landau Corporation met on October 4 of the current year and declared the regular quarterly cash
dividend amounting to $750,000 ($0.60 per share). The dividend is payable on October 25 of the current year to all
shareholders of record as of October 12 of the current year.
Assume that the only transactions to affect Landau Corporation during October of the current year are the dividend
transactions and that the closing entries have been made.
If the dividend declared by Landau Corporation had been a 10% stock dividend instead of a cash dividend, Landau's total
shareholders' equity would have been
a) Decreased by the dividend declaration and increased by the dividend distribution.
b) Unchanged by either the dividend declaration or the dividend distribution.
c) Unchanged by the dividend declaration and increased by the dividend distribution.
d) Increased by the dividend declaration and unchanged by the dividend distribution.
4. All of the following are affected when merchandise is purchased on credit except
a) total current assets.
b) total current liabilities.
c) net working capital.
d) current ratio.
7. Shown below are beginning and ending balances for certain of Grimaldi Inc.'s accounts.
January 1 December 31
Cash $ 48,000 $ 62,000
Marketable securities 42,000 35,000
Accounts receivable 68,000 47,000
Inventory 125,000 138,000
Plant & equipment 325,000 424,000
Accounts payable 32,000 84,000
Accrued liabilities 14,000 11,000
7% bonds payable 95,000 77,000
Grimaldi's acid test ratio or quick ratio at the end of the year is
a) 1.02.
b) 1.15.
c) 0.83.
d) 1.52.
8. Windham Company has current assets of $400,000 and current liabilities of $500,000. Windham Company's current ratio
would be increased by
a) The collection of $100,000 of accounts receivable.
b) The purchase of $100,000 of inventory on account.
c) The payment of $100,000 of accounts payable.
d) Refinancing a $100,000 long-term loan with short-term debt.
9. Norton, Inc. has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if
a) The company wrote off an uncollectible receivable.
b) The company purchased inventory on open account.
c) A previously declared stock dividend was distributed.
d) The company sold merchandise on open account that earned a normal gross margin.
12. Dedham Corporation has decided to include certain financial ratios in its year-end annual report to shareholders. Selected
information relating to its most recent fiscal year is provided below.
Cash $ 10,000
Accounts receivable 20,000
Prepaid expenses 8,000
Inventory 30,000
Available-for-sale securities classified as current assets
At cost 9,000
Fair value at year end 12,000
Accounts payable 15,000
Notes payable (due in 90 days) 25,000
Bonds payable (due in 10 years) 35,000
Dedham's quick (acid-test) ratio at year end is
a) 1.925 to 1.
b) 2.00 to 1.
c) 1.80 to 1.
d) 1.05 to 1.
13. Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes.
Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further
assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings
account.
Obsolete inventory of $125,000 was written off during the year. This transaction
a) Increased net working capital.
b) Decreased the current ratio.
c) Decreased the quick ratio.
d) Increased the quick ratio.
20. Below are selected data from Fortune Company’s most recent financial statements.
Marketable securities $10,000
Accounts receivable 60,000
Inventory 25,000
Supplies 5,000
Accounts payable 40,000
Short-term debt payable 10,000
Accruals 5,000
What is Fortune's net working capital?
a) $45,000
b) $80,000
c) $50,000
d) $35,000
22. All of the following are included when calculating the acid test ratio except
a) six-month treasury bills.
b) prepaid insurance.
c) accounts receivable.
d) 60-day certificates of deposit.
26. Garstka Auto Parts must increase its acid test ratio above the current 0.9 level in order to comply with the terms of a loan
agreement. Which one of the following actions is most likely to produce the desired results?
a) Expediting collection of accounts receivable.
b) Making a payment to trade accounts payable.
c) Selling auto parts on account.
d) Purchasing marketable securities for cash.
28. Given an acid test ratio of 2.0, current assets of $5,000, and inventory of $2,000, the value of current liabilities is
a) $3,500
b) $2,500
c) $6,000
d) $1,500
29. Selected financial data for Boyd Corporation are shown below.
January 1 December 31
Cash $48,000 $62,000
Accounts receivable (net) 68,000 47,000
Trading securities 42,000 35,000
Inventory 125,000 138,000
Plant & equipment (net) 325,000 424,000
Accounts payable 32,000 84,000
Accrued liabilities 14,000 11,000
Deferred taxes 15,000 9,000
Long-term bonds payable 95,000 77,000
Boyd's net income for the year was $96,000. Boyd's current ratio at the end of the year is
a) 1.56.
b) 1.71.
c) 2.71.
d) 2.97.
30. Markowitz Company increased its allowance for uncollectible accounts. This adjustment will
a) increase the acid test ratio.
b) reduce the current ratio.
c) reduce debt-to-asset ratio.
d) increase working capital.
31. If a company has a current ratio of 2.1 and pays off a portion of its accounts payable with cash, the current ratio will
a) decrease.
b) increase.
c) remain unchanged.
d) move closer to the quick ratio.
33. Davis Retail Inc. has total assets of $7,500,000 and a current ratio of 2.3 times before purchasing $750,000 of merchandise
on credit for resale. After this purchase, the current ratio will
a) be exactly 2.53 times.
b) be higher than 2.3 times.
c) be lower than 2.3 times.
d) remain at 2.3 times.
35. Which of the following financial ratios is used to assess the liquidity of a company?
a) Total Debt to Total Assets Ratio.
b) Profit Margin on Sales.
c) Days' Sales Outstanding.
d) Current Ratio.
36. The acid test ratio shows the ability of a company to pay its current liabilities without having to
a) liquidate its inventory.
b) reduce its cash balance.
c) borrow additional funds.
d) collect its receivables.
37. Both the current ratio and the quick ratio for Spartan Corporation have been slowly decreasing. For the past two years,
the current ratio has been 2.3 to 1 and 2.0 to 1. During the same time period, the quick ratio has decreased from 1.2 to 1
to 1.0 to 1. The disparity between the current and quick ratios can be explained by which one of the following?
a) The accounts receivable balance has decreased.
b) The inventory balance is unusually high.
c) The current portion of long-term debt has been steadily increasing.
d) The cash balance is unusually low.
39. A financial analyst has gathered the following select financial data on three companies.
Company A Company B Company C
Total current assets €500,000 €1,250,000 €870,000
Total current liabilities €445,000 €970,000 €620,000
On the basis of the information provided above, the financial analyst is able to conclude that
a) Company B has the highest liquidity.
b) Company B and Company C both have a higher liquidity than Company A.
c) Company A and Company B both have a higher liquidity than Company C.
d) Company A has the highest liquidity.
40. When reviewing a credit application, the credit manager should be most concerned with the applicant's
a) profit margin and return on assets.
b) working capital and current ratio.
c) price-earnings ratio and current ratio.
d) working capital and return on equity.
44. A firm's total assets are $3,000,000 and its total equity is $2,000,000. If current assets represent 50% of total assets and
current liabilities represent 30% of total liabilities, then what is the firm's current ratio?
a) 3.
b) 5.
c) 10.
d) 1.5.
45. Current asset information for Weston Industries is shown here. If Weston's total current liabilities are $100,000, what is
Weston's acid-test ratio?
a) 2.77:1
b) 2.47:1
c) 1.37:1
d) 0.73:1
46. A financial analyst has obtained the following data from Kryton Industries' financial statements.
In order to determine Kryton's ability to pay current obligation, the financial analyst would calculate Kryton's cash ratio as
a) 0.50.
b) 1.20.
c) 0.33.
d) 1.00.
47. What is the difference in information needed for calculating current cash debt coverage versus calculating cash debt
coverage?
a) For current cash debt coverage, you need total liabilities, whereas for cash debt coverage you need current liabilities.
b) For current cash debt coverage, you need current liabilities, whereas for cash debt coverage you need total liabilities.
c) For current cash debt coverage, you need dividends, whereas for cash debt coverage you need total liabilities.
d) For current cash debt coverage, you need current liabilities, whereas for cash debt coverage you need dividends.
48. The two financial statements that are most important for assessing a firm's liquidity are the:
a) balance sheet and retained earnings statement.
b) income statement and statement of cash flows.
c) income statement and balance sheet.
d) balance sheet and statement of cash flows.
50. The Downtown Company has current assets of $2,400,000. Of these, $750,000 is cash, $1,000,000 is accounts receivable,
and the remainder is inventory. Current liabilities are $1,250,000.
Determine the company's acid-test ratio, rounding to two decimal places.
a) 1.40
b) 1.92
c) 2.69
d) 1.32
51. Selected information from the comparative financial statements of Faure Company for the year ended December 31,
appears here:
Calculate working capital for each of the two years. In which year was there greater working capital?
a) Working capital is greater in 20x3 by $57,000.
b) Working capital is greater in 20x4 by $270,000.
c) Working capital is greater in 20x4 by $30,000.
d) Working capital is greater in 20x3 by $27,000.
52. The following companies have the current ratios and current assets listed below. Which company has the highest current
liabilities?
Current Ratio Current Assets
Company A 1.04:1 $315 million
Company B 1.21:1 $306 million
Company C 1.18:1 $322 million
Company D 1.11:1 $327 million
a) Company A
b) Company B
c) Company C
d) Company D
53. To calculate a firm's current ratio, you only need access to the firm's
a) balance sheet.
b) income statement.
c) statement of cash flows.
d) statement of retained earnings.
55. Ottoman Manufacturing Company reported net sales (all credit) of $120,000 and $140,000 for 20x3 and 20x4,
respectively, and net income of $24,000 and $32,000 for 20x3 and 20x4, respectively. Ottoman's 20x3 and 20x4 balance
sheets appear here:
Calculate the company's current ratio for 20x4, rounding to two decimal places.
a) 1.13
b) 1.46
c) 2.07
d) 3.31
56. GreenTree Organics is comparing itself to GoodEarth Produce. Their quick ratios are presented here.
57. JT Engineering's current asset information is shown here. If JT's current liabilities are $300,000, what is JT's current ratio
and what is its acid-test ratio? Round each ratio to the nearest hundredth.
a) The current ratio is 1.15 times and the acid-test ratio is 0.58 times.
b) The current ratio is 0.58 times and the acid-test ratio is 1.01 times.
c) The current ratio is 0.58 times and the acid-test ratio is 1.15 times.
d) The current ratio is 1.65 times and the acid-test ratio is 0.71 times.
King Products Corporation's quick (acid test) ratio at June 30, Year 2, was:
a) 1.12 to 1.
b) 2.00 to 1.
c) 1.82 to 1.
d) 0.59 to 1.
59. The Treehouse Company's financial position for December 31 in consecutive years is as follows:
20X5 20X4
Current assets $375,000 $195,000
Current liabilities 180,000 110,000
Total assets 775,000 750,000
Total liabilities 400,000 300,000
Stockholders’ equity 375,000 450,000
The company had 85,000 shares of common stock outstanding during 20x4 and 87,500 shares in 20x5 with a market price
of $18 per share at the end of 20x4 and $18.54 at the end of 20x5. Cost of goods sold was $970,000 in 20x5 and $850,000
in 20x4. Calculate working capital for each of the two years. In which year was there greater working capital?
a) Working capital is greater in 20x4 by $110,000.
b) Working capital is greater in 20x5 by $110,000.
c) Working capital is greater in 20x4 by $45,000.
d) Working capital is greater in 20x5 by $180,000.
61. RL Enterprises’ current asset information is shown here. If RL's current liabilities are $170,000, what is RL's current ratio
and what is its acid-test ratio? Round each ratio to the nearest hundredth.
a) The current ratio is 0.70 times and the acid-test ratio is 0.86 times.
b) The current ratio is 0.91 times and the acid-test ratio is 1.43 times.
c) The current ratio is 1.07 times and the acid-test ratio is 0.70 times.
d) The current ratio is 1.53 times and the acid-test ratio is 0.68 times.
62. Metal Works is comparing itself to one of its peers, Montana Industries. Their current ratios are presented here.
63. Four companies are calculating their liquidity. Based on their liquidity, which company will likely have the hardest time
obtaining financing from creditors?
a) A company with current assets of $6.8 million and current liabilities of $3.5 million
b) A company with current assets of $963 million and current liabilities of $454 million
c) A company with current assets of $91 million and current liabilities of $37 million
d) A company with current assets of $712 million and current liabilities of $474 million
64. Val-Tek has current assets of $1,700,000 and current liabilities of $900,000. If the company pays $100,000 owed to a
creditor, what will its new current ratio be?
a) 4:1
b) 2:1
c) 1:1
d) 1.5:1
65. Of Peterson Enterprises’ $1.4 billion in assets, $150 million of those assets are in cash or can be readily converted to cash.
Other companies in Peterson Enterprises' industry have cash as a percentage of total assets of around 20%. This is an
example of
a) high liquidity.
b) high solvency.
c) low liquidity.
d) low solvency.
67. Which one of the following transactions would increase the current ratio and decrease net profit?
a) A federal income tax payment due from the previous year is paid.
b) Vacant land is sold for less than the net book value.
c) A long-term bond is retired before maturity at a discount.
d) Uncollectible accounts receivable are written off against the allowance account.