Which of the Following Statements About the Quality of Earnings

question 15

Multiple Choice

Which of the following statements about the quality of earnings ratio is true?

• A) When sales are growing, receivables and inventory normally increase faster than payables so the ratio increases.
• B) Seasonal variations in sales have no impact on the quality of earnings ratio.
• C) Failure to accrue appropriate expenses will inflate net earnings and reduce the quality of earnings ratio.
• D) Failure to accrue appropriate expenses will inflate net earnings and increase the quality of earnings ratio.

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Definitions:

Current Ratio

A financial metric that measures a company's ability to cover its short-term obligations with its short-term assets, indicating liquidity.

Stockholders' Equity

The portion of a company's assets that belongs to its shareholders after liabilities have been subtracted.

Current Assets

Current assets are short-term, liquid assets that a company owns and are expected to be converted into cash, sold, or consumed within one year or within a business's operating cycle, whichever is longer.

Acid-Test Ratio

A financial metric that measures a company's ability to pay its short-term liabilities with its quick assets (cash, marketable securities, and receivables).