Deck 2: Review of Accounting

Question 1

The P/E ratio provides no indication of investors' expectations about the future of a company.

Answer 1

False

Question 2

The income statement is the major device for measuring the profitability of a firm over a period of time.

Answer 2

True

Question 3

The investments account includes marketable securities.

Answer 3

False

Question 4

Sales minus cost of goods sold is equal to earnings before taxes.

Question 5

Accumulated depreciation shows up in the income statement.

Question 6

The real value of a firm is the same from an economic and accounting perspective.

Question 7

Operating profit is essentially a measure of how efficient management is in generating revenues and controlling expenses.

Question 8

Sales minus cost of goods sold is equal to gross profit.

Question 9

Marketable securities are temporary investments of excess cash and are valued at their original purchase price.

Question 10

Total assets of a firm are financed with liabilities and stockholders equity.

Question 11

The P/E ratio is strongly related to the past performance of the firm.

Question 12

Accounting income is based on verifiably completed transactions.

Question 13

When a firm has a sharp drop off in earnings, its P/E ratio may be artificially high.

Question 14

The investments account represents a commitment of funds of at least one year or more.

Question 15

It is not possible for a company with a high profit margin to have a low operating profit.

Question 16

A balance sheet represents the assets, liabilities, and owner's equity of a company at a given point in time.

Question 17

Dividing Operating Profit by Shares Outstanding produces Earnings per Share.

Question 18

Accumulated depreciation should always be equal to the depreciation expense charged in the income statement.

Question 19

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

Question 20

Asset accounts are listed in order of their liquidity.

Question 21

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

Question 22

An increase in accounts receivable represents a reduction in cash flows from operations.

Question 23

An increase in a liability account represents a source of funds on the cash flow statement.

Question 24

An increase in an asset represents a source of funds.

Question 25

Stockholders' equity is equal to liabilities plus assets.

Question 26

An increase in inventory represents a source of funds.

Question 27

Cash flow is equal to earnings before taxes minus depreciation.

Question 28

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

Question 29

Book value is equal to net worth.

Question 30

Cash flow consists of illiquid cash equivalents which are difficult to convert to cash within 90 days.

Question 31

Preferred stock is excluded from stockholders equity because it does not have full voting rights.

Question 32

An increase in accounts payable represents a reduction in cash flows from operations.

Question 33

Retained earnings represent the firm's cumulative earnings since inception, minus dividends and other adjustments.

Question 34

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

Question 35

Stockholders' equity is equal to assets minus liabilities.

Question 36

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

Question 37

Retained earnings shown on the balance sheet represents available cash on hand generated from prior year's earnings but not paid out in dividends.

Question 38

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

Question 39

Balance sheet items are usually adjusted for inflation.

Question 40

Assume that two companies both have Net Income of $100,000. The firm with the highest depreciation expense will have the highest cash flow, assuming all other adjustments are equal.

Question 41

A $125,000 credit sale could be a part of a firm's cash flow from operations if paid off within the firm's fiscal year.

Question 42

An increase in accounts receivable results in a cash inflow on the statement of cash flows.

Question 43

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

Question 44

An increase in accrued expenses results in a cash outflow on the statement of cash flows.

Question 45

A cash flow statement is correct if the net cash flow ties to the ending cash balance.

Question 46

Federal corporate tax rates have changed four times since 1980.

Question 47

Preferred stock dividends are paid out before income taxes.

Question 48

The sale of a firm's securities is a source of funds, whereas the payment of dividends is a use of funds.

Question 49

The sale of corporate bonds held by the firm as a long-term investment would increase cash flows from investing activities on the statement of cash flows.

Question 50

Interest expense is deductible before taxes and therefore has an after-tax cost equal to the interest paid times (1
tax rate).

Question 51

The purchase of a new factory would reduce the cash flows from investing activities on the statement of cash flows.

Question 52

Paying dividends to common shareholders will not affect cash flows from financing activities.

Question 53

A decrease in bonds payable results in a cash outflow on the statement of cash flows.

Question 54

Free cash flow is equal to cash flow from operating activities plus depreciation.

Question 55

Unlike sole proprietorships, corporations do not need to be concerned about individual tax rates in corporate decisions.

Question 56

Free cash flow is equal to cash flow from operating activities minus necessary capital expenditures and normal dividend payments.

Question 57

The use of depreciation is an attempt to allocate the past and future costs of an asset over its useful life.

Question 58

For corporations with low taxable income (less than $100,000), the effective tax rate can be as much as 40%.

Question 59

Book value per share is the most important measure of value for a stockholder.

Question 60

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

Question 61

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

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

Question 62

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 stockholders' equity.
D) net income minus preferred dividends divided by number of shares outstanding.

Question 63

Allen Lumber Company had earnings after taxes of $750,000 in the year 2009 with 300,000 shares outstanding on December 31, 2009. On January 1, 2010, the firm issued 50,000 new shares. Because of the proceeds from these new shares and other operating improvements, 2010 earnings after taxes were 25 percent higher than in 2009. Earnings per share for the year 2010 were

A) $2.14
B) $2.68
C) $3.13
D) None of these

Question 64

The residual income of the firm belongs to

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

Question 65

Which of the following is not one of the three basic financial statements?

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

Question 66

A firm has $1,500,000 in its common stock account and $1,000,000 in its paid-in capital 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) $15 per share
D) Not enough information to tell

Question 67

Consider the following information for Ball Corp. What is the Operating Profit for Ball Corp?

A) $71,450
B) $90,000
C) $130,000
D) None of these

Question 68

A firm with earnings per share of $3 and a price-earnings ratio of 20 will have a stock price of

A) $60.00
B) $15.00
C) $6.67
D) the market assigns a stock price independent of EPS and the P/E ratio.

Question 69

The firm's price-earnings (P/E) ratio is influenced by its

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

Question 70

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) go either up or down

Question 71

Which of the following factors do not influence the firm's P/E ratio?

A) Past earnings.
B) Shares outstanding.
C) Volatility in performance.
D) None of these.

Question 72

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 73

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 depreciation expense).

Question 74

Density Farms, Inc. had sales of $750,000, cost of goods sold of $200,000, selling and administrative expense of $70,000, and operating profit of $150,000. What was the value of depreciation expense?

A) $150,000
B) $230,000
C) $330,000
D) None of these

Question 75

An item which 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 76

Candy Company had sales of $320,000 and cost of goods sold of $112,000. What is the gross profit margin (ratio of gross profit to sales)?

A) 55%
B) 65%
C) 73.3%
D) None of these

Question 77

Elgin Battery Manufacturers had sales of $1,000,000 in 2009 and their cost of goods sold represented 70 percent of sales. Selling and administrative expenses were 10 percent of sales. Depreciation expense was $100,000 and interest expense for the year was $10,000. The firm's tax rate is 30 percent. What is the dollar amount of taxes paid?

A) $30,000
B) $117,800
C) $27,000
D) None of these

Question 78

Reinvested funds from retained earnings theoretically belong to:

A) bond holders.
B) common stockholders.
C) employees.
D) all of these.

Question 79

A firm has $4,000,000 in its common stock account and $10,000,000 in its paid-in capital account. The firm issued 1,000,000 shares of common stock. What is the par value of the common stock?

A) $40 per share
B) $10 per share
C) $4 per share
D) $14 per share

Question 80

Which of the following is not subtracted out in arriving at operating income?

A) Interest expense
B) Cost of goods sold
C) Depreciation
D) Selling and administrative expense