Question

If all else is held equal, a decrease in the current ratio of a company is generally considered to be:

	1) an indication that current liabilities have decreased
	2) an indication that the company will have increased difficulty meeting short-term obligations
	3) an indication that current assets have increased
	4) an indication that the company will be better able to meet short-term debt obligations

Low inventory turnover would indicate that

	1) the company manages inventory effectively.
	2) sales have exceeded expectations.
	3) the company may have excessive carrying costs or obsolete inventory.
	4) the company does not stock enough inventory.

When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is added to net income to compute cash provided by/used by operating activities?

	1) All of these are added to net income to arrive at cash flow from operating activities.
	2) Increase in accounts receivable.
	3) Gain on sale of land.
	4) Depreciation of equipment.

Answer 1

2) an indication that the company will have increased difficulty in meeting short term obligations.

Reason:

A decrease in Current Ratio indicated the following:

• an indication that the current liabilities have increased
• an indication that the company will have increased difficulty in meeting short term obligations
• an indication that current assets have decreased
• an indication that the company will have difficulties in meeting short term debt obligations

Hence Option 2.

3) the company may have excessive carrying costs or obsolete inventory.

Reason:

A low inventory turnover ratio indicates the following:

• the inventory is not managed effectively
• sales have not met expectations
• the company has high storage costs
• the company overstocks inventory

Hence, Option 3.

1) All of these are added to net income to arrive at cash flow from operating activities.

Reason:

When using indirect method the following are added to Net Income to arrive at cash flow from operating activities:

• Increase in Current Assets
• Gain on Sale of Fixed Assets
• Depreciation on Fixed Assets

Hence, Option 1.