Chapter 1 Practice Question Answers
- 1. Answer: D. Current assets are anything that could be converted into cash within a year. Current assets include cash and cash equivalents, inventory, accounts receivable, and prepaid expenses. Property, plants, equipment, and intangible assets, such as trademarks, are not considered current assets.
- 2. Answer: C. A company’s balance sheet contains a breakdown of its assets (what it owns) and its liabilities and debts (what it owes). The prospectus was the document issued when the security was offered for sale for the first time, and any financial information is likely outdated. Form 144 is used by company management and insiders to disclose transactions in securities owned by them personally. The income statement shows the cash inflows and outflows of a company, but does not contain a comprehensive listing of its assets and debts.
- 3. Answer: A. When calculating the quick ratio, add the cash and accounts receivable together, then divide by the amount of the company’s current liabilities. This gives a picture of a company’s ability to meet its current obligations without having to liquidate its inventory. The current ratio includes inventory as part of this calculation.
- 4. Answer: B. Financial and business highlights from the previous year are included in a company’s annual statement. Annual reports contain a letter from independent auditors (accounting firms) attesting to the financial numbers contained in the annual report, not regulators. Regulators are very clear that they do not approve or recommend investments in any way. Company prospectuses are issued prior to a company’s securities being issued.
- 5. Answer: A. The Form 10-K contains an annual summary of a company’s financial activities, similar to an annual report. Form 10-Q is very similar to a 10-K, but filed quarterly instead of annually. Schedule 13D is filed when large changes in a company’s ownership (greater that 5%) occur.