Question

Part A:

A high quality of earnings is indicated by:

Declaration of both cash and stock dividends

A history of increasing earnings and conservative accounting methods

Earnings derived largely from newly introduced products

Use of FIFO method of inventory during sustained inflation.

Part B:

The Horseshoe Company has cash of $50,000 accounts receivable of $100,000; inventory of $250,000, prepaid insurance of $200,000 and current liabilities of $300,000. What is their working capital?

	$600,000
	$300,000
	2.0
	1.33

Part C:

In evaluating the quality of a company's earnings, which of the following factors is LEAST important?

	the accounting methods used by management
	the trend of the company's earnings over a period of years
	the dollar amount of earnings per share
	the stability and sources of the company's earnings

Answer 1

Answer Part A:

Correct answer is:

A history of increasing earnings and conservative accounting methods

Explanation:

Company's accounting method and past record of consistently increasing earnings is an indicator of high quality earning.

Declaration of both cash and stock dividends which are not consistent, earnings derived largely from newly introduced products indicates earnings but if these are not consistent , may not indicate high quality earning.  Use of FIFO method of inventory during sustained inflation is hardly an indicator of high quality earning.

Option 2 is correct and other options 1, 3 and 4 are incorrect.

Answer Part B:

Correct answer is:

$300,000

Explanation

Working capital = Current assets - current liabilities = (50000 + 100000 + 250000 + 200000) - 300000 = $300,000

Option 2 is correct and other options 1, 3 and 4 are incorrect.

Answer Part C:

Correct answer is:

the dollar amount of earnings per share

Explanation:

In evaluating the quality of a company's earnings factors which indicates long term sustainability of earnings and the accounting methods used by management are important parameters. One time EPS dollar amount may not help in evaluating the quality of a company's earnings.

Option 3 is correct and other options 1, 2 and 4 are incorrect.