1. A firm wants to strengthen its financial position. Which of the following act
ID: 2659197 • Letter: 1
Question
1. A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?
a. Issue new common stock and use the proceeds to acquire additional fixed assets.
b. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
If the firm sells its excess inventory and increase its accounts receivables then it will increase its quick ratio. Because accounts receivable is a current asset, increase in current assets will increase the quick ratio. To increase its quick ratio, it has to reduce its inventories. The higher the amount in inventory, the lower will be its quick ratio.
c. Issue new common stock and use the proceeds to increase inventories.
d. Speed up the collection of receivables and use the cash generated to increase inventories.
e. Use some of its cash to purchase additional inventories.
2. Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reducethe company's current ratio?
a. Use cash to reduce accounts payable.
b. Borrow using short-term notes payable and use the proceeds to reduce accruals.
Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
c. Use cash to reduce accruals.
d. Use cash to reduce short-term notes payable.
3. Which of the following statements is CORRECT?
a. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.
b. If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.
c. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase.
d. There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.
e. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
4. Which of the following statements is CORRECT?
a. If two firms differ only in their use of debt
Explanation / Answer
1.A firm wants to strengthen its financialposition. Which of the followingactions wouldincreaseits quick ratio?
b. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some ofits excess inventory and (2) lead to an increasein accounts receivable.
If the firm sells its excess inventory and increase its accounts receivables then it will increase its quick ratio. Because accounts receivable is a current asset, increase in current assets will increase the quick ratio. To increase its quick ratio, it has to reduce its inventories. The higher the amount in inventory, the lower will be its quick ratio.
2.Amram Company'scurrent ratio is 1.9. Considered alone, which of the followingactions would reducethe company's currentratio?
b.Borrow using short-term notes payable and use the proceedsto reduce accruals.
Borrow usingshort-term notes payableand use the proceedsto reduce long-term debt.
3.Which of the followingstatements is CORRECT?
a.If a firm increases its sales while holding its accountsreceivable constant, then, other thingsheld constant, itsdays' sales outstanding will decline.
4.Which of the followingstatements is CORRECT?
a.If two firms differ only in their use of debt
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