1. To study trends in a firm’s cost of goods sold (COGS), the analyst should standardize the cost of goods sold numbers to a common-sized basis by dividing COGS by:
A. assets.
B. sales.
C. net income.
Answer: B
With a vertical common-size income statement, all income statement accounts are divided by sales.
2. RGB, Inc.’s purchases during the year were $100,000. The balance sheet shows an average accounts payable balance of $12,000. RGB’s payables payment period is closest to:
A. 37 days.
B. 44 days.
C. 52 days.
Answer: B
payables turnover = (purchases / avg. AP) = 100 / 12 = 8.33
3. A company’s quick ratio is 1.2. If inventory were purchased for cash, the:
A. numerator would decrease more than the denominator, resulting in a lower quick ratio.
B. denominator would decrease more than the numerator, resulting in a higher current ratio.
C. numerator and denominator would decrease proportionally, leaving the current ratio unchanged.
Answer: A
Quick ratio = (cash + marketable securities + AR) / current liabilities. If cash decreases, the quick ratio will also decrease. The denominator is unchanged.
4. RGB, Inc.’s receivable turnover is ten times, the inventory turnover is five times, and the payables turnover is nine times. RGB’s cash conversion cycle is closest to:
A. 69 days.
B. 104 days.
C. 150 days.
Answer: A
(365 / 10 + 365 / 5–365 / 9) = 69 days
