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the document issued when the security was offered for sale for the first time, and any financial information is likely outdated.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: C. Future value can be used to determine the value of an asset already held by a company or investor, not one that will be received in the future. An investor that is interested in determining the investment merit of a future payment of stream of payments might use a present value, net present value, or internal rate of return calculation.
- 5. Answer: B. The correct formula for future value of this bond is $1,000 x (1 + 0.08)3.
- 6. Answer: B. Current assets less inventory, divided by current liabilities equals a company’s quick ratio. The quick ratio measures how much of the company’s debt can be paid off immediately without selling inventory. The quick ratio is also known as the acid-test ratio.
- 7. Answer