"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:

Financial Report: treasury stock

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.

View answer resolution

【Answer to question 1】C

【analysis】

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.

【Answer to question 2】A

【analysis】

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:

Financial Report: treasury stock

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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