Deck 2: Review of Accounting

Question 1

The orientation of book value per share is __________,while the orientation of market value per share is ___________.

A) short term; long term
B) future; historical
C) historical; future
D) long term; short term

Answer 1

C

Question 2

A firm with earnings per share of $5 and a price-earnings ratio of 15 will have a share price of?

A) $20.00
B) $75.00
C) $3.00
D) The market assigns a stock price independent of EPS and the P/E ratio

Answer 2

B

Question 3

The major limitation of financial statements is:

A) in their complexity.
B) in their lack of comparability.
C) in their use of historical cost accounting.
D) in their lack of detail.

Answer 3

C

Question 4

Amortization is a source of cash inflow because:

A) it is a tax-deductible noncash expense.
B) it supplies cash for future asset purchases.
C) it is a tax-deductible cash expense.
D) it is a taxable expense.

Question 5

The residual income of the firm belongs to:

A) creditors.
B) preferred shareholders.
C) common shareholders.
D) bondholders.

Question 6

Which of the following would not be classified as a current asset?

A) Marketable securities
B) Long term Investments
C) Prepaid expenses
D) Inventory

Question 7

The best indication of the operational efficiency of management is:

A) net income.
B) earnings per share.
C) earnings before interest and taxes (EBIT).
D) gross profit.

Question 8

"Inventory profits" are most likely to occur in an inflationary economy under which of the following inventory cost assumptions?

A) Weighted average
B) Specific item
C) FIFO
D) Lower of cost or market

Question 9

Which of the following is not a primary source of capital to the firm?

A) Assets
B) Common stock
C) Preferred stock
D) Bonds

Question 10

A firm has $2,000,000 in its common stock account and $20,000,000 in its retained earnings account.The firm issued 500,000 shares of common stock.What are accumulated earnings per share?

A) $4 per share
B) $44 per share
C) $40 per share
D) $5 per share

Question 11

Inflation has its major impact on balance sheets in which of the following areas?

A) Inventory and accounts payable
B) Plant and equipment and long-term debt
C) Plant and equipment and inventory
D) Interest expense and earnings per share

Question 12

Assuming a tax rate of 30%,the after tax cost of interest expense of $200,000 is:

A) $60,000.
B) $140,000.
C) $200,000.
D) $120,000.

Question 13

Which of the following is an outflow of cash?

A) Profitable operations
B) The sale of equipment
C) The sale of the company's common stock
D) The payment of cash dividends

Question 14

An item that may be converted to cash within one year or one operating cycle of the firm is classified as a:

A) current liability.
B) long-term asset.
C) current asset.
D) long-term liability.

Question 15

A firm has $3,500,000 in its common stock account and $2,500,000 in its retained earnings account.The firm issued 100,000 shares of common stock.What was the original issue price if only one stock issue has ever been sold?

A) $35 per share
B) $25 per share
C) $60 per share
D) Not enough information to tell

Question 16

Which of the following is an inflow of cash?

A) Funds spent in normal business operations
B) The purchase of a new factory
C) The sale of the firm's bonds
D) The retirement of the firm's bonds

Question 17

Earnings per share is:

A) operating profit divided by number of shares outstanding.
B) net income divided by number of shares outstanding.
C) net income divided by shareholders' equity.
D) net income minus preferred dividends divided by number of shares outstanding.

Question 18

Which of the following is not one of the three basic financial statements required by Accounting Standards for Private Enterprises (ASPE)?

A) Income Statement
B) Statement of Retained Earnings
C) Statement of Cash Flows
D) Balance Sheet

Question 19

Assuming a tax rate of 35%,amortization expenses of $400,000 will:

A) reduce income by $140,000.
B) reduce taxes by $140,000.
C) reduce taxes by $400,000.
D) have no effect on income or taxes,since amortization is not a cash expense.

Question 20

Which account represents the cumulative earnings of the firm since its formation,minus dividends paid?

A) Share price
B) Common stock
C) Retained earnings
D) Accumulated amortization

Question 21

The statement of cash flows does not include which of the following sections?

A) Cash flows from operating activities
B) Cash flows from sales activities
C) Cash flows from investing activities
D) Cash flows from financing activities

Question 22

The Balance Sheet cannot show:

A) the current ratio.
B) the value of common stock outstanding.
C) the change in retained earnings.
D) the price earnings relationship.

Question 23

For private companies,asset accounts on the balance sheet are listed in the order of:

A) liquidity.
B) profitability.
C) size.
D) importance.

Question 24

A statement of cash flows allows a financial analyst to determine:

A) whether a cash dividend is affordable.
B) how increase in asset accounts have been financed.
C) whether long-term assets are being financed with long-term or short-term financing.
D) all of the choices are correct.

Question 25

Assuming a tax rate of 40%,the after tax cost of a $200,000 dividend payment is:

A) $200,000.
B) $70,000.
C) $130,000.
D) None of the choices are correct

Question 26

A firm's purchase of plant and equipment would be considered as a:

A) use of cash for financing activities.
B) use of cash for operating activities.
C) source of cash for investment activities.
D) use of cash for investment activities.

Question 27

Reinvested funds from retained earnings theoretically belong to:

A) bondholders.
B) common shareholders.
C) employees.
D) all of the choices are correct.

Question 28

The firm's price-earnings (P/E)ratio is not influenced by its:

A) capital structure.
B) earnings volatility.
C) sales,profit margins,and earnings.
D) Purchase of machinery.

Question 29

Well prepared accounting statements:

A) let management know if cash flow from internal operations is large enough to make necessary equipment replacements.
B) provide no new information to financial managers.
C) determine the market price of common stock.
D) eliminate the effects of inflation from decision making.

Question 30

Which of the following would represent a source of funds and,indirectly,an increase in cash balances?

A) A reduction in accounts receivable.
B) The repurchase of shares of the firm's stock.
C) A decrease in net income.
D) A reduction in notes payable.

Question 31

The Glorius VanderBuilt Denim Slacks Company has taxable income of $100,000.Assuming a 34% tax rate,what is the tax payable?

A) $34,000
B) $66,000
C) $100,000
D) $12,250

Question 32

A firm has current assets of $25,000,long term assets of $100,000,long term liabilities of $50,000,and $50,000 in shareholders' equity.What is its net working capital?

A) $0
B) $50,000
C) $100,000
D) $25,000

Question 33

Total shareholders' equity consists of:

A) preferred stock and common stock.
B) common stock and retained earnings.
C) common stock and contributed surplus.
D) preferred stock,common stock,contributed surplus,and retained earnings.

Question 34

The primary disadvantage of accrual accounting is that:

A) it does not match revenues and expenses in the period in which they are incurred.
B) it does not appropriately measure accounting profit.
C) it does not recognize the actual exchange of cash.
D) it does not adequately show the actual cash flow position of the firm.

Question 35

Which of the following is not true of current cost accounting?

A) The book value of equipment is near replacement value
B) The book value of the common stock equals market value
C) Dividends and income are adjusted for inflation
D) All of the choices are correct

Question 36

Which of the following would represent a use of funds and,indirectly,a reduction in cash balances?

A) An increase in inventories.
B) A decrease in marketable securities.
C) An increase in accounts payable.
D) The sale of new bonds by the firm.

Question 37

Book value of a firm:

A) is usually the same as the firm's market value.
B) is based on current asset costs.
C) is the same as net worth.
D) none of the choices are correct.

Question 38

Which of the following would not be included in the balance sheet investment account?

A) Shares of other corporations
B) Long term government bonds
C) Marketable securities
D) Investments in other corporations

Question 39

A firm has $200,000 in current assets,$400,000 in long-term assets,$80,000 in current liabilities,and $200,000 in long-term liabilities.What is its net working capital?

A) $120,000
B) $320,000
C) $520,000
D) None of the choices are correct

Question 40

Gross profit is equal to:

A) sales minus cost of goods sold.
B) sales minus (selling and administrative expenses).
C) sales minus (cost of goods sold and selling and administrative expenses).
D) sales minus (cost of goods sold and amortization expense).

Question 41

In the last decade,free cash flow has been associated with special financial activities such as:

A) leveraged buyouts.
B) Registered Retirement Savings Plan (RRSPs).
C) stock options.
D) golden parachutes.

Question 42

When a firm's earnings are falling more rapidly than its stock price,its P/E ratio will:

A) remain the same.
B) go up.
C) go down.
D) could go either up or down.

Question 43

A firm has $7,500,000 in its common stock account and $2,500,000 in its retained earnings account.The firm issued 100,000 shares of common stock.What was the original issue price if only one stock issue has ever been sold?

A) $75 per share
B) $25 per share
C) $100 per share
D) Not enough information to tell

Question 44

A balance sheet valuation measure is:

A) earnings per share.
B) the P/E ratio.
C) the dividend yield.
D) market value to book value.

Question 45

Which of the following is not subtracted to arrive at operating profit?

A) Interest expense
B) Cost of goods sold
C) Amortization
D) Selling and administration expense

Question 46

Net worth is equal to shareholders' equity:

A) plus dividends.
B) minus preferred stock.
C) plus preferred stock.
D) minus liabilities.

Question 47

Free cash flow is equal to cash flow from operating activities:

A) plus capital expenditures,minus dividends.
B) plus capital expenditures,plus dividends.
C) plus dividends,minus capital expenditures.
D) minus capital expenditures,minus dividends.

Question 48

Increasing interest expense will have what effect on EBIT?

A) Increase it
B) Decrease it
C) No effect
D) Not enough information to tell

Question 49

Net worth for an individual is the same as _____ for a corporation.

A) shareholders' equity
B) capital assets minus long-term debt
C) book value
D) current assets minus current debt

Question 50

Common stock dividends are __________ by preferred stock dividends.

A) increased
B) decreased
C) not effected
D) Not enough information to tell

Question 51

The P/E ratio is determined by:

A) net worth divided by earnings.
B) market capitalization divided by dividend.
C) net worth per share divided by earnings per share.
D) market value per share divided by earnings per share.

Question 52

Accrual based accounting results in income and cash flow being:

A) the same.
B) different.
C) equal except for amortization.
D) equal except for dividends.

Question 53

Assuming no conversion rights of bond holders or preferred shareholders,the retained earnings of the firm belongs to:

A) creditors.
B) preferred shareholders.
C) common shareholders.
D) Canada Revenue Agency.

Question 54

Assuming a tax rate of 35%,amortization expenses of $800,000 will:

A) reduce income by $280,000.
B) reduce taxes by $280,000.
C) reduce taxes by $800,000.
D) have no effect on income or taxes,since amortization is not a cash expense.

Question 55

An increase in investments in long-term securities will:

A) increase cash flow from investing activities.
B) decrease cash flow from investing activities.
C) increase cash flow from financing activities.
D) decrease cash flow from financing activities.

Question 56

Preferred share dividends ________ earnings available to common shareholders.

A) increase
B) decrease
C) due not effect
D) not enough information to tell

Question 57

All of the following would be included in Cash Flows from Investing,except:

A) investments in Plant.
B) merchandise Purchases.
C) purchases of Investments.
D) sale of Long-Term Investments.

Question 58

Amortization tends to:

A) increase cash flow and decrease income.
B) decrease cash flow and increase income.
C) affect only cash flow.
D) affect only income.

Question 59

Given the following what is free cash flow? $\begin{array}{llcc} \text { Cash flow from operations Capital } &\$175,000 \\ \text { Capital expenditures } &35,000\\ \text { Dividends } &25,000\\\end{array}$

A) $115,000
B) $235,000
C) $150,000
D) $140,000

Question 60

An item that must be paid within one year or one operating cycle of the firm is classified as a:

A) current liability.
B) long-term asset.
C) current asset.
D) None of the choices are correct.

Question 61

The income statement is the primary financial statement for measuring the profitability of a firm over a period of time.

Question 62

Amortization is an accounting entry and does not involve a cash expense.

Question 63

The change in accumulated amortization is usually equal to the amortization expense charged in the income statement.

Question 64

The income statement measures the increase in the assets of a firm over a period of time.

Question 65

Shareholders' equity is equal to liabilities plus assets.

Question 66

Accumulated amortization shows up in the income statement.

Question 67

An increase in an asset represents a source of funds.

Question 68

An advantage of the net working capital approach over the cash approach is that it looks at the changes of every account of the statement of cash flows.

Question 69

Accounting income is based on verifiably completed transactions.

Question 70

The statement of cash flows helps measure how the changes in a balance sheet are financed between two time periods.

Question 71

Book value per share is of greater concern to the financial manager than market value per share.

Question 72

Net working capital is the difference between current assets and current liabilities.

Question 73

Shareholders' equity minus preferred stock is the same thing as what is sometimes called net worth or book value.

Question 74

Equity is a measure of the monetary contributions that have been made directly or indirectly on behalf of the shareholders of the company.

Question 75

Book value per share and market value per share are usually the same dollar amount.

Question 76

Book value is equal to net worth.

Question 77

Shareholders' equity is equal to assets minus liabilities.

Question 78

Cash flow is equal to earnings before taxes minus amortization.

Question 79

For private companies,asset accounts are listed in order of their liquidity.

Question 80

Assuming a tax rate of 30%,the after tax cost of interest expense of $400,000 is:

A) $120,000.
B) $280,000.
C) $400,000.
D) $240,000.