Which of the following statements is correct? (x) Suppose a firm has a current r

Question

Which of the following statements is correct? (x) Suppose a firm has a current ratio of 1.2 and a quick ratio of 0.85. If the firm does not have any other source of cash, the firm can meet all of its obligations regarding current liabilities if it sells enough of its inventory but it could not satisfy those obligations if it does not sell inventory. (y) If a firm undertakes a short-term bank loan for $125,000 and uses $118,500 to purchase equipment, then the firm's current ratio necessarily increases. If a firm reduces inventory (at full value) by selling to customers for cash, the current ratio remains the same but the quick ratio and cash ratio increase. (x), (y) and (z) (x) and (y) only (x) and (z) only (y) and (z) only (x) only (z) A. B. C. D. E. Which of the following statements is correct? (x) Suppose a firm has sales of $625,000, net income of $145,000, cash equals $36,000, current assets of $198,000, and accounts receivable of 75,000. As a result, the firm's accounts receivable turnover is more than 8.25 times. (y) Suppose a firm has accounts receivable of $62,500. During the year, total sales are $600,000, of which $425,000 are cash sales. The average collection period for this firm is less than 125 days. Suppose a firm has current assets of $350,000, current liabilities of $264,600, cash of $65,140, fixed assets of $685,000, cost of goods sold of $452,300, and inventory of $84,225. As a result, the firm's inventory turnover is more than 4.75 times but less than 5.25 times. (x), (y) and (z) (x) and (y) only (x) and (z) only (y) and (z) only (x) only (z) A. B. C. D. E.

Explanation / Answer

Question - 1 ............... C (X) and (Z) only

X. is a true statement. Quick ratio less than 1 implies, current liabilities cannot be paid in full with quick assets.

Y. is a false statement. Here current ratio decreases due to increase in current liability ( short term bank loan) with out increase in current assets.

Z ....... is a true statement. Current ratio remains same because cash replaces the inventory value. But Quick assets increases, cash ratio increases.

Question - 2

E. (X) only

X .............. is true statement. Accounts receivables = 625000 / 75000 = 8.33 times is more than 8.25

Y ......... is False statement. Average collection period = Accounts receivables / Credit sales * 365

= 62500 / 175000 * 365 = 130 days is more than 125 days.

Z. .......... is False statement. Inventory turn over ratio = 452300 / 84225 = 5.37 times is more than 5.25 times.

Kindly rate the answer ............ wish you all the best

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