22.3   Learning Objective 22-3

1) Liquidity ratios measure:

A) how effectively a company is using its equity.

B) how effectively a company is using its liabilities.

C) a company’s ability to pay shareholders.

D) a company’s ability to pay off short-term debts.

2) Debt management ratios measure:

A) how effectively a company is using its cash.

B) how well a company is using debt versus equity position.

C) a company’s ability to earn profit.

D) a company’s ability to meet payable obligations.

3) Profitability ratios measure:

A) a company’s ability to earn profits.

B) a company’s ability to meet short-term obligations.

C) how well a company is using debt versus equity.

D) how effectively a company is using its assets.

4) The current ratio is:

A) quick assets divided by current liabilities.

B) assets divided by liabilities.

C) current assets divided by current liabilities.

D) net sales divided by current liabilities.

5) The current ratio determines the ability of a company to:

A) pay off all payables.

B) pay off current payables.

C) manage its ability to earn profit.

D) use its equity.

6) The current ratio for a company with current assets of \$70,000, current liabilities of \$50,000, total assets of \$150,000, and net sales of \$80,000, would be:

A) 1.4.

B) 0.714.

C) 3.0.

D) 0.875.

7) Smith Company has the following account balances:

 Cash \$100,000 Accounts Receivable 30,000 Merchandise Inventory 250,000 Equipment 400,000 Accounts Payable 50,000 Bonds Payable 300,000

Calculate Smith Company’s current ratio.

A) 8.0:1

B) 7.6:1

C) 2.2:

D) 1.1:

8) Which statement below best describes the quick (acid test) ratio?

A) The acid test ratio considers only the most liquid assets: cash, accounts receivable, and temporary investments.

B) The current ratio includes only the assets most easily converted into cash.

C) The acid test adds merchandise inventory and prepaid expenses in the computation of current assets.

D) None of these answers are correct.

9) An acid test (quick) ratio of 0.75 to 1 would indicate:

A) a ratio that would not allow a company to pay off all current liabilities with quick assets.

B) for every \$1 of short-term debt there is \$0.75 of quick assets to meet short-term obligations.

C) for every \$1 of current assets there is \$0.75 of short-term debt.

D) Both A and B are correct.

10) A company has \$56,000 in cash, \$12,000 in accounts receivable, \$25,000 in temporary investments and \$100,000 in merchandise inventory. The company has \$60,000 in current liabilities. The company’s acid test (quick) ratio is:

A) 3.217.

B) 1.550.

C) 1.133.

D) 0.933.