Chapter 2 Practice Question Answers
- 1. Answer: B. Current assets are assets that are likely to be converted into or exchanged for cash within one year. Accounts receivable (answer choice A) are current assets if payment is due within 12 months, which is the case here. Inventory is considered a current asset, and raw materials for manufacture are considered inventory; answer choice C is therefore also likely a current asset. Cash and cash equivalents are current assets as well. A cash equivalent is a highly liquid security with a predictable market value and a maturity date within three months; commercial paper generally falls into this category, so answer choice D is probably a current asset. The forklifts, however, are most likely fixed assets, which fall into the long-term rather than current asset category.
- 2. Answer: D. An income statement shows a company’s revenues and expenses over a specific period of time. Options A, B, and C all describe elements of revenue and expense that would be reflected on a balance sheet: amortization of a patent in the “Depreciation, amortization, and depletion” category, interest paid in the “interest income/expense” category, and gains on foreign exchange as “other revenues.” Retained earnings is the company’s total profits since inception, less any dividends paid. It is not a category of income or expense, and it shows up in the balance sheet.
- 3. Answer: A. SG&A is a subcategory of operating expenses that includes expenses directly or indirectly linked to the sale of goods and services. It also includes costs associated with managing the business. Management salaries B, warranty costs C, and legal expenses D all fall into this category. Office furniture, however, is a tangible asset with a relatively long lifespan and is thus depreciable; it would be accounted for under “depreciation.”
- 4. Answer: B. The quick ratio calculation is (current assets – inventories) / current l