Desktop Co

question 7

Multiple Choice

Desktop Co. presently has a current ratio of 1.2 and an acid-test ratio of 0.8. Prepaying next year's office rent of $50,000 will:

• A) have no effect on either the company's current ratio or its acid-test ratio.
• B) have no effect on the company's current ratio but will decrease its acid-test ratio.
• C) decrease the company's current ratio and decrease its acid-test ratio.
• D) increase the company's current ratio and increase its acid-test ratio.

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Definitions:

Straight Line Amortization

A method of writing off the cost of an intangible asset evenly over its useful life.

Equity Method

An accounting approach used to assess the investment in another company, where the investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of net assets and recorded earnings of the investee.

Impairment Test

An examination to determine if an asset's carrying amount exceeds its recoverable amount, and if so, to measure the amount of impairment loss.

Book Value

A financial measurement that calculates the value of a firm's equity as it appears on the balance sheet by subtracting liabilities from assets.