Fin534 Hmework Chap3

Question number 1

Correct answer:

b. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.

How did I reach the answer?

Quick ratio = Current assets−Inventories

Current liabilities

Based on above formula if we increase the fixed affect it is not going to affect out quick ratio. Inventories are typically the least liquid of a firm’s current assets; hence they are the current assets on which losses are most likely to occur in a bankruptcy. Therefore, a measure of the firm’s ability to pay off short-term obligations without relying on the sale of inventories is important. To increase the quick ratio we need to decrease the amount of inventories, therefore any choices that result in more inventories (c, d, e) weren’t considered as correct answer.

Question number 2

Correct Answer:

c. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

How did I reach the answer?

How did I reach the answer?

Current ratio = Current assets

Current liabilities

In order to reduce current ration we need to decrease current asset or increase current liability. Choice ‘c’ increase current liability by adding short-term notes payable, and reducing long-term debt doesn’t have any effect on current liability, so current ratio will decrease.

Question number 3:

Correct Answer:

a. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.

How did I reach the answer?

DSO (Days sales outstanding) = Receivables

Average sales per day

Days sales outstanding (DSO), also called the “average collection period” (ACP), is used to appraise accounts receivable, and it is calculated by dividing accounts receivable by average daily...