Which of the following transactions would result in an increase in the current ratio?

1. Cash is essential for a business to meet its obligations but it is not very valuable to the business because of the following:

A.  Cash is extremely liquid and easily transferred to others.

B.  Cash does not generate very good returns for shareholders.

C.  Cash is not liquid and thus could generate losses when it is used in exchange.

D. Cash is mostly electronic in form and thus is never where you need it.

2.  What internal controls might a company put in place to help speed up the collection of accounts receivable?

A.  Check prices and shipping information to make sure that customers are billed only for what they received at the agreed upon price.

B.  Check the credit history of new customers to see what their track record is for paying their bills.

C.  Send reminders to customers about the due dates of their accounts receivable.

D.  All of the above could be effective internal controls to help speed up collections.

3. The RST Company reports on their balance sheet Accounts Receivable of $466 million net of an allowance of $23 million.  What percentage of the total amount owed by customers does RST estimate they will not collect?

A.  4.9%

B. 4.7%

C. 4.3%

D. 5.2%

4. The RST Company reports on their balance sheet Accounts Receivable of $466 million net of an allowance of $23 million.  If an analysis of the entire list of customers included in accounts receivable showed that the allowance for uncollectible accounts should be 7% of the total owed by customers, the RST would need to do which of the following on the accounting equation?

A.  Decrease revenues.

B.  Increase current liabilities

C.  Increase expenses

D.  Increase current assets

5.  Which of the following would not be included when calculating the quick ratio but would be when calculating the current ratio?

A.  Cash

B.  Current Liabilities

C. Marketable Securities

D. Inventory

6. Which of the following transactions would always result in a decrease in the current ratio?

A.  Borrowing money from the bank to be paid off in 10 years and using that money to pay accounts payable this month.

B.  Selling inventory for $100 that cost the company $70.

C.  Recording a utility bill for costs this accounting period that will be paid next accounting period.

D.  Collection of cash from customers that had owed us accounts receivable from sales last accounting period.

7.  Which of the following could be a good reason why inventory turnover could be too high?

A.  Inventory that is too low could indicate shortages and the inability to satisfy customers.

B.  Companies do not want to move around the inventory in their warehouses too many times.

C.  Inventory that sits too long may need to be sold at a discount to customers.

D.  Obsolete inventory can take place when inventory is held in warehouses for too long.

8.  The average days in receivables for ABC, Inc. went from 64 in 2019 to 59 in 2020.  Which of the following would be a valid explanation for this change?

A.  Inventory is selling more quickly for ABC.

B.  Accounts receivable turnover increased between 2019 and 2020.

C.  ABC, Inc. became less liquid in 2020 that they were in 2019.

D.  ABC should look at how to be more efficient in their collections of A/R so they can turn this around in 2021.

9.  When considering how efficient a company is at using their assets to generate revenues and profits, the best measure is:

A.  Gross profit margin ratio

B.  Quick ratio

C.  Return on investment/assets

D.  Net profit margin ratio

10.  Gross profit margin and net profit margin both use amounts reported only on which financial statement?

A.  Income statement

B.  Balance sheet

C.  Statement of equity

D.  Cash flows statement

1.  If Puddle Incorporated had total Accounts Receivable at the end of 2021 of $630 million and an allowance for uncollectible accounts of $17 million show the effect of the following in the accounting equation worksheet for 2022:
   • Sales on credit of $4,315 million during the year
   • Collection of accounts receivable of $4,190 million during the year
   • Write off of uncollectible accounts of $14 million during the year
   • An increase in the allowance for uncollectible accounts to 3% of total accounts receivable from customers

Required:

a.  Calculate how much customers actually owe to Puddle at the end of 2022.

b.  Calculate how much is estimated will not be collected by Puddle at the end of 2022.

c.  State how much expenses increased due to the estimate of uncollectible accounts.

d.  How much would Puddle show as the amount they actually plan to collect (Accounts Receivable, Net)

2.  If ZZBest Corp. has current assets of $24 million and current liabilities of $15 million what is the impact on the current ratio of the following transactions?  Each situation is independent.

a.  Purchase of inventory costing $2 million on credit.

b.  Sell inventory costing $2 million for a sales price of $3 on credit.

c.  Borrowing $10 million in cash from bank that will be repaid in 5 years.

d.  Pay cash for a prepaid insurance policy costing $1 million and covering one year.

e.  Pay cash for rent expense of $1 million.

Required:  For each transaction indicate whether the current ratio went up or down or stayed the same and why (i.e. change in current assets, liabilities, etc.)

3.  The following information was reported for Pepsi for 2022 – Sales $67.1 billion and Accounts Receivable of $7.8 billion – for 2021 Accounts Receivable was $7.1 billion.  For Coca Cola for 2022 – Sales $37.3 billion and Accounts Receivable of $4.0 – for 2021 Accounts Receivable was $3.6 billion.  With this information calculate the accounts receivable turnover and days sales in receivables for 2022 for both of these competitors.

Required:

a.  Based on your calculations, which company is doing a more efficient job of collecting from customers.  Explain.

b.  Based on your answers which company is the most liquid?  Why?

c.  How much would Pepsi have to increase sales while keeping accounts receivable the same to get days sales in receivable to be 30 days?

4.  For Coca Cola, 2022 COGS was $13.1 billion and 2021 COGS was $14.6 billion.  Their inventory at the end of 2022 was $3.4 billion and at the end of 2021 it was $3.1 billion and at the end of 2020 it was $2.9 billion.  With this information calculate the inventory turnover and days in inventory for 2022 and 2021.

Required:

a.  Based on your calculations, in which year did Coca Cola do a more efficient job of selling inventory?  Explain.

b.  Based on your answers did liquidity for Coca Cola get higher or lower?  Explain.

c.  How much would Coca Cola have had to reduce their inventory at the end of 2022 to increase the number for inventory turnover to 5 times a year?

5. During 2020, Twitter, Inc. (NYSE: TWTR) will be issuing (approximately) $600 million of unsecured notes that will be due in 2027. Assume that on the day immediately before the note issuance, Twitter has current assets of $4,500 million and current liabilities of $2,370 million.

Required:

1. Will the notes be classified as assets or liabilities on Twitter’s balance sheet? Will these notes be Notes Receivable or Notes Payable?
2. When Twitter issues these notes in 2020, will the notes be classified as current or long-term??
3. On the day that these notes are issued, will Twitter’s current ratio be impacted? If so, will it increase or decrease?
4. Assuming no change in net income before taxes, what would the impact be on return on investment/assets?  Would it increase or decrease?

6.  For fiscal year ending September, 2019, Apple, Inc. had a gross profit margin ratio of 39.3%, a net profit margin ratio of 27.4% and return on investment/assets of 20.7% and the total assets as of the end of the year was $ 338 billion.  For the year ending September 2020, Apple reported the following amounts:

Sales  $275 billion

Cost of Sales $170 billion

Expenses not including taxes $39 billion

Total Assets at the end of the year $324 billion

Required:

1.  Calculate the three profitability ratios for Apple for year ending September 2020.
2.  Using those ratios describe the change in profitability for Apple between 2019 and 2020.
3. Indicate how each of the profitability ratios calculated in 2 will be affected by the following independent transactions/changes if they happened during fiscal 2021:

Group Research

Identify the financial statements for a publicly traded company.  The group will probably need the most recent year and the previous year annual report.  Each member of the group choose one of the following ratios and calculate them for the most recent year and the year previous.  Write a paragraph that indicates what the comparison shows about the liquidity, efficiency or profitability of company:

Current ratio and quick ratio

Accounts Receivable Turnover and Days Sales in Receivables

Inventory Turnover and Days in Inventory

Gross Profit Margin Percent, Net Profit Ratio and Return on Investment/Assets

Bankrupcy Research

Since J. Crew has filed for bankruptcy in May, 2020, find their financial statements at J Crew Quarterly Financial Statements

Using this last quarterly financial statement filing calculate the following:

Quick Ratio and Current Ratio as of November 2, 2019

Gross Profit Margin Ratio and Net Profit Margin ratio for 13 weeks ending November 2, 2019

Do these calculations indicate that J. Crew was having problems prior to the pandemic that forced them to close stores across the country in early 2020?  Why would you think J. Crew would want to go to court to get protection from their creditors in 2020?  What do you think needs to happen if J. Crew is going to continue to operate?

What would cause the current ratio to increase?

Which of the following transaction would result in a decrease in the current ratio?

What causes current ratio to increase or decrease?

Which one of the following is most likely to increase the company's current ratio?