Q: Which formula correctly calculates the Accounts Receivable Turnover (ART)?

$\text{Accounts Receivable Turnover} = \frac{\text{Sales Revenue}}{\text{Average Accounts Receivable}}$

Q: Which of the following is a correct formula for calculating the average collection period (ACP)?

$\text{Average Collection Period} = \frac{365}{\text{Accounts Receivable Turnover}}$

Q: A company has the following aging schedule for accounts receivable: $0-30$ days overdue: $100$, $31-60$ days: $50$, $61-90$ days: $30$, $>90$ days: $20$. If the allowance policy is $5\%$ for $31-60$ days, $20\%$ for $61-90$ days, and $100\%$ for $>90$ days, what is the total allowance?

$5 \% \times 50 + 20 \% \times 30 + 100 \% \times 20 = 2.5 + 6 + 20 = 28.5$

Question 1

Which of the following is an example of 'Capex Manipulation' as a method to artificially increase reported profits?

Accepted Answer

Recording operating expenses as capital expenditures

Question 2

A company offers its customers a 2/10 net 30 discount. What is the effective annual interest rate the customer receives if they pay on day 10 instead of day 30?

Accepted Answer

$36\%$

Question 3

Which formula correctly calculates the Accounts Receivable Turnover (ART)?

Accepted Answer

$	ext{Accounts Receivable Turnover} = \frac{	ext{Sales Revenue}}{	ext{Average Accounts Receivable}}$

Question 4

If a company has high cash balances relative to its non-current assets, what is the likely impact on its blended return?

Accepted Answer

Blended return decreases

Question 5

Which of the following is NOT a reason why net realizable value (NRV) might fall below cost?

Accepted Answer

A decrease in production costs

Question 6

A cheese company uses FIFO to value its inventory. If prices are rising, what is the effect on cost of goods sold (COGS) and ending inventory?

Accepted Answer

COGS is lower, ending inventory is higher

Question 7

Which of the following best describes 'income smoothing'?

Accepted Answer

Managers adjust earnings to reduce fluctuations and present a stable growth trend

Question 8

A company has the following data: Sales revenue = $1,000,000$, Average accounts receivable = $200,000$. What is the accounts receivable turnover?

Accepted Answer

$5$

Question 9

Which of the following is a correct formula for calculating the average collection period (ACP)?

Accepted Answer

$	ext{Average Collection Period} = \frac{365}{	ext{Accounts Receivable Turnover}}$

Question 10

Which scenario best illustrates the 'double burden of growth' for a rapidly expanding company?

Accepted Answer

The company needs cash for investments now and investor confidence for future funding

Question 11

If a company is experiencing rapid growth, which of the following is most likely to happen to its cash position?

Accepted Answer

Cash drains faster than it is created

Question 12

Which of the following is NOT considered a cost of goods sold (COGS) for a cheese manufacturer?

Accepted Answer

Cost of advertising

Question 13

A company has the following aging schedule for accounts receivable: $0-30$ days overdue: $100$, $31-60$ days: $50$, $61-90$ days: $30$, $>90$ days: $20$. If the allowance policy is $5\%$ for $31-60$ days, $20\%$ for $61-90$ days, and $100\%$ for $>90$ days, what is the total allowance?

Accepted Answer

$5 \% 	imes 50 + 20 \% 	imes 30 + 100 \% 	imes 20 = 2.5 + 6 + 20 = 28.5$

Question 14

Which of the following is a consequence of offering a 2/10 net 30 discount to customers?

Accepted Answer

It may result in a high effective interest cost for the company

Question 15

Which of the following is NOT a type of inventory obsolescence?

Accepted Answer

Legal obsolescence

Question 16

If the net realizable value (NRV) of inventory falls below its cost, what accounting action should be taken?

Accepted Answer

Inventory should be written down to NRV

Question 17

Which of the following is a classic example of a company involved in Capex Manipulation?

Accepted Answer

Worldcom

Question 18

Which inventory costing method is NOT allowed under IFRS but is often used for tax purposes?

Accepted Answer

LIFO (Last-in, First-out)

Question 19

A company is deciding between buying back shares and investing in future capacity. Which factor should influence their decision?

Accepted Answer

Confidence in future demand and access to capital

Question 20

Which of the following is a plausible effect of 'Big Bath' accounting?

Accepted Answer

Managers make higher provisions in a loss year to clean up the balance sheet

Cash and Inventory: Financial Accounting Study Notes

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