# Working Capital and Liquidity (Practice Quiz)

Author:
Harold Averkamp, CPA, MBA

For multiple-choice and true/false questions, simply press or click on what you think is the correct answer. For fill-in-the-blank questions, press or click on the blank space provided.

1.
Working capital is __________ net working capital.

The Same As

Right!

Different From

Wrong.
2.
The amounts needed to compute a company's working capital come from which of the following financial statements?

Balance Sheet

Right!
The amounts needed (total current assets and total current liabilities) are reported on the balance sheet.

Cash Flow Statement

Wrong.

Income Statement

Wrong.

More Than One Will Be Needed

Wrong.
3.
The operating cycle for most companies will be __________ than one year.

Longer

Wrong.

Shorter

Right!
It is common for companies to have operating cycles of perhaps 3-5 months.
4.
In what order will a company's current assets appear on a classified balance sheet?

Alphabetical Order

Wrong.

Company's Choice

Wrong.

Descending Order (Largest To Smallest)

Wrong.

Order Of Liquidity

Right!
Current assets appear in the order in which they are expected to be converted to cash. This is referred to as the order of liquidity.
5.
Is it true or false that current liabilities are listed on a company's balance sheet in the order in which they need to be paid?

True

Wrong.

False

Right!
Notes payable due within one year and accounts payable (or vice versa) are usually reported as the first two current liabilities.
6.
If a company has current assets of \$230,000 and current liabilities of \$100,000 the amount of its working capital is __________ \$130,000
Working capital = current assets – current liabilities = \$230,000 – \$100,000 = \$130,000
.
7.
If a company has current assets of \$230,000 and current liabilities of \$100,000 the company's current ratio is __________ 2.3
Current ratio = current assets / current liabilities = \$230,000 / \$100,000 = 2.3
: 1.
8.
How will the total amount of a company's working capital change when a \$10,000 account receivable is collected?

The Total Decreases By \$10,000

Wrong.

The Total Increases By \$10,000

Wrong.

The Total Remains The Same

Right!
Cash increased by \$10,000 and Accounts Receivable decreased by \$10,000. Since both of these are current assets there is no change in the total amount of current assets and no change in the total amount of working capital.
9.
How will the total amount of a company's working capital change when the company pays \$8,000 of its accounts payable?

The Total Decreases By \$8,000

Wrong.

The Total Increases By \$8,000

Wrong.

The Total Remains The Same

Right!
Cash decreases by \$8,000 and Accounts Payable decreases by \$8,000. Since both the current assets and the current liabilities will be decreasing by the same amount, there is no change in the total amount of working capital.
10.
How will a company's liquidity change when some of its products are sold from inventory?

Its Liquidity Decreases

Wrong.

Its Liquidity Increases

Right!

Its Liquidity Is Unchanged

Wrong.
11.
Which of the following amounts will be used in both the calculation of the current ratio and the quick ratio?

The Total Amount Of Current Assets

Wrong.

The Total Amount Of Current Liabilities

Right!

The Total Amount Of Assets

Wrong.

The Total Amount Of Liabilities

Wrong.
12.
Which of the following is another name for the quick ratio?

Acid Test Ratio

Right!

Current Ratio

Wrong.

Working Capital Ratio

Wrong.
13.
A company has current assets of Cash of \$40,000; Accounts Receivable of \$80,000; and Inventory of \$60,000. The total of its current liabilities is \$120,000 and the total amount of its liabilities is \$290,000. Given this information, the company’s quick ratio is __________ 1
The quick ratio (or acid test ratio) = (Cash of \$40,000 + Accounts Receivable of \$80,000) / current liabilities of \$120,000 = \$120,000 / \$120,000 = 1 or 1:1 or 1 to 1.
: 1.
14.
During a recent year, a company's accounts receivable had an average balance of \$60,000 and its sales on credit were \$540,000. The company’s receivable turnover ratio for the year was __________ 9
The receivables turnover ratio (or accounts receivable turnover ratio) = credit sales for the year of \$540,000 divided by average accounts receivable balances during the year of \$60,000 = 9 times.
times.
15.
During a recent year, a company's accounts receivable turnover ratio was 13. The company's average collection period for the year was __________ 28
Days' sales in receivables = 360 or 365 / accounts receivable turnover ratio = 360 / 13 = 27.69 = 28 days when rounded, or 365 / 13 = 28.08 = 28 days when rounded.
days. (Rounded to the nearest whole day.)
16.
During a recent year, a company's inventory balance averaged \$100,000; its sales were \$500,000; and its cost of goods sold was \$400,000. The company’s inventory turnover ratio for that year was __________ 4
Inventory turnover ratio = cost of goods sold / average inventory = \$400,000 / \$100,000 = 4 times.
times.
17.
During a recent year, a company had an average inventory balance of \$100,000; its sales were \$500,000; and its cost of goods sold was \$400,000. Using a 360-day year, the days’ sales in inventory for the year averaged __________ 90
Days' sales in inventory = 360 days / inventory turnover = 360 / 4 = 90 days.
days.
18.
Which is a better indicator of a company's liquidity?

Current Ratio

Wrong.

Quick Ratio

Right!
19.
Which of the following will indicate the specific accounts receivable that have not been collected?

Aging Of Accounts Receivable

Right!

Current Ratio

Wrong.

Sales Journal

Wrong.

Trial Balance

Wrong.
20.
Which of the following uses amounts from more than one financial statement?

Current Ratio

Wrong.

Inventory Turnover Ratio

Right!

Quick Ratio

Wrong.

Working Capital

Wrong.
21.
A company received a \$5,000 invoice for consulting services it had received. The company chooses to use its business credit card instead of paying cash. Under the accrual method of accounting, will the use of the credit card result in the company having more working capital?

Yes

Wrong.

No

Right!
The use of the credit card will result in a \$5,000 increase in a current liability such as accrued expenses payable instead of a \$5,000 decrease in the current asset cash.

Either way, working capital will decrease by \$5,000. The advantage of using the credit card is the company will keep its cash for an additional 27 to 57 days, which is a temporary benefit in its liquidity.
22.
The section of the statement of cash flows that shows the adjustments to most of a company's working capital accounts is the cash flows from __________ activities.

Financing

Wrong.

Investing

Wrong.

Operating

Right!
23.
Does an amount in parentheses on the statement of cash flows (SCF) indicate that the amount described was favorable or unfavorable for the company’s cash balance and/or liquidity?

Favorable

Wrong.

Unfavorable

Right!
In addition to unfavorable, an amount in parentheses on the SCF could also mean:
• it is not good for a company's liquidity
• it is a cash outflow
• it had a negative effect on the company's cash
• the change was not good for the company's cash balance
• cash was used or spent
• not all of the revenues on the income statement had turned to cash in the accounting period
• more cash was paid out than the amount of the expenses reported on the income statement
24.
If a company's accounts receivable increased by \$23,000 during the year, will the \$23,000 appear as a positive or negative amount on the statement of cash flows?

Positive

Wrong.

Negative

Right!
Since accounts receivable increased, the company did not collect all of the sales or service revenues that were included in the company's net income. Therefore, there must be a subtraction from net income in the operating activities section of the SCF.
25.
If a company's accounts payable decreased \$16,000 during the year, will the \$16,000 appear as a positive or negative amount on the statement of cash flows?

Positive

Wrong.

Negative

Right!
Since accounts payable decreased, the company paid out more cash to its suppliers and vendors than the amount of the expenses included in the company’s net income. Since paying out cash is not good for a company’s cash balance, the decrease in accounts payable will appear in parentheses in the operating activities section of the SCF. The parentheses will mean that the decrease in accounts payable is being subtracted from the company's net income to arrive at the cash amount.

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For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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