"Financial Report": treasury stock
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Questions 1:
If a company repurchases its own shares and can reissue them at a later time, these shares are best described as:
A 、preferred stock.
B、 marketable securities.
C、 treasury stock.
Questions 2:
Last year, a company’s current ratio was 0.96. Partial information is provided from the company’s balance sheet for the current year:
No other current assets or current liabilities were reported.Comparing the company’s current ratio this year with the prior year most likely indicates that the company’s ability to meet short-term obligations has:
A、 increased.
B 、decreased.
C 、not changed.
C is correct. When a company repurchases its own shares and does not cancel them, they are referred to as treasury shares (or treasury stock). A is incorrect. Preferred shares (or preferred stock), a component of equity, are a type of equity interest, that ranks above common shares with respect to payment of dividends and the distribution of net assets upon liquidation. B is incorrect. Marketable securities are financial assets and include investments in debt or equity securities that are traded in a public market.
A is correct. First identify the current assets: cash and equivalents, inventory, and accounts receivable. Then calculate the current ratio (Current assets/Current liabilities) as follows:
An increase in the current ratio (from 0.96 to 1.11) most likely indicates a higher level of liquidity and, therefore, an increased ability to meet short-term obligations.
B is incorrect. It excludes the inventory (confusing current ratio with quick ratio) and appears to have decreased: (1950 + 2,540)/4920 = 0.91.
C is incorrect. It incorrectly double counts the current portion of the long-term debt, which is already included in total current liabilities, so it appears to be unchanged: (5,440/ (4,920 + 720) = 0.964.
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