1. The concept of conservatism is best illustrated by:

a. Enron implementing mark-to-market accounting

b. using the most aggressive revenue recognition policies possible

c. a company using the cash basis instead of the accrual basis

d. when the value of inventory decreases, the inventory account is reduced; when the value of inventory increases, the inventory account is not affected

2. Green Company has current assets of $850,000 and current liabilities of $500,000. Green purchases some land and pays $200,000 in cash. After the purchase of the land, the current ratio is:

a. 1.7

b. 1.5

c. 2.1

d. 1.3

3. In November, Pink Company purchased $600,000 of inventory and paid for 80% of this with cash. The remaining balance was put on accounts payable. The cost of the inventory sold in September was $395,000. How will the accrual basis income statement and the cash basis statement be affected? (Both responses have to be correct).

Accrual Basis Cash Basis

a. subtract $480,000 subtract $480,000

b. subtract $395,000 subtract $480,000

c. subtract $395,000 subtract $600,000

d. subtract $480,000 subtract $395,000