Question

• 18. A current ratio of 2.20 indicates that:
  • for each $1 in current assets, the company has $2.20 in current liabilities
  • for each $1 in current liabilities, the company has $2.20 in current assets
  • for each $1 in total assets, the company has $2.20 in total liabilities
  • for each $1 in total liabilities, the company has $2.20 in total assets
• 19. Why is the acid-test ratio considered to be a more conservative measure of liquidity than the current ratio?
  • because it considers assets available to pay long-term liabilities
  • Because it eliminates items like accounts receivable and current investments
  • because it only considers cash available to pay current liabilities
  • because it eliminates current assets such as inventories and prepaid expenses
• 20. Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy.
  • true
  • false
• 21. A debt to equity ratio of 58% indicates that:
  • for each $1 in liabilities, the company has $0.58 in stockholders equity
  • for each $1 in liabilities the company has $0.58 in retained earnings
  • for $1 in stockholders equity the company has $0.58 in assets
  • for each $1 in stockholders equity the company has $0.58 in liabilities

Answer 1

Question No.	Correct Option	Correct Answer	Reason
18	B	for each $1 in current liabilities, the company has $2.20 in current assets	Current Ratio = Current Assets/ Current liability ;hence it talks about only current assets and liabilities rather total assets and liabilities
19	C	because it only considers cash available to pay current liabilities	Acid test ration = (Current assets-Inventory)/Current liabilities
			Why Other Options are incorrect
			Option A	Acid test ratio talks about paying only current liabilities rather long term liabilities
			Option B	accounts receivable and current investments are not eliminated to calculate acid test ration
			Option D	prepaid expenses are not eliminated to calculate acid test ration
20	D	for each $1 in stockholders equity the company has $0.58 in liabilities	Debt To equity ratio = Total liabilities / Total Stockholder's Equity