Question

6. Thorton Co. reported the following data at year end. Sales, $500 000; beginning inventory,$40 000; ending inventory, $45 000; cost of goods sold, $350 000; and gross margin, $150 000. What was the amount of merchandise purchased during the year?

   1. $370 000

   2. $355 000

   3. $348 000

   4. $341 000

   5. None of the above

7. If a current ratio has been increasing over the past several years, which of these would cause the ratio to rise?

   1. A decrease in accounts payable

   2. An increase in inventories

   3. An increase in short term borrowings

   4. Both a and b cause the ratio to rise

   5. All of the above would cause the ratio to rise

8. Young company is involved in a lawsuit. The liability which could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is

   1. Remote and the amount can be reasonably estimated

   2. Probable and the amount can be reasonably estimated

   3. Reasonably possible and the amount can be reasonably estimated

   4. Probable and the amount cannot be reasonably estimated

   5. None of the above is correct

9. Which of the following is true?

   1. Working capital is current assets divided by current liabilities

   2. Working capital will increase if current assets increase faster than current liabilities

   3. Working capital will decrease when we use cash to pay an accounts payable

   4. All of the above are true

   5. None of the above is true

Answer 1

1. Amount of merchandise purchased : (b) $355,000

Explanation:

Cost of goods sold = Opening Inventory + Purchases - Closing Inventory

Purchases = Cost of goods sold + Closing Inventory - Opening Inventory

= $350,000 + $45,000 - $40,000

= $355,000

2. (d) Both a and b cause the ratio to rise

Explanation:

Current ratio = Current Assets / Current Liabilities

The current ratio will rise because one of the following reason

(i) Increase in Current Assets

(ii) Decrease in Current Liabilities

3. (b) Probable and the amount can be reasonably estimated

Explanation: A contingent liability will be recorded in books of accounts if the liability is probable and can be reasonable estimated.

4. (b) Working capital will increase if current assets increase faster than current liabilities

Explanation:

Working Capital = Current Assets - Current Liabilities

Hence, Working capital will increase when the current assets will increase faster than current liabilities