Deck 2: Review of Accounting

Question 1

The income statement shows the amount of profits earned based on any one given day.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

The investments account includes marketable securities.

Answer 3

False

Question 4

Asset accounts are listed in order of their liquidity.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

A balance sheet represents what the firm owns, owes, and ownership of a company at a given date.

Question 13

Accounting income is based on verifiably completed transactions.

Question 14

Dividing earnings after taxes (which includes all profits distributed to both preferred stockholders and common stockholders) by common shares outstanding produces earnings per share.

Question 15

Liquidity means that the items that can convert to cash show up as cash on the balance sheet.

Question 16

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

Question 17

Gross profit margin is a measurement of how much gross profit a company generated from the amount of sales it earned.

Question 18

Another way of writing net income after tax is earnings after taxes (EAT).

Question 19

The price-earnings (P/E) ratio is strongly related to the past performance of the firm.

Question 20

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

Question 21

Assume that two companies both have a 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 22

Total assets of a firm are paid for with liabilities and stockholders' equity.

Question 23

Cash and cash equivalents are considered anything that can convert to cash within one year.

Question 24

The Statement of Cash Flows has three parts: operating, investing, and financing under both the indirect and direct method.

Question 25

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

Question 26

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

Question 27

The indirect method of preparing the Cash Flow Statement basically adjusts the net income to reflect what the financials would have looked like if cash basis was used instead of accrual basis.

Question 28

Cash flow from operations is equal to earnings before taxes minus depreciation.

Question 29

Retained earnings shown on the balance sheet represents profits generated from prior year's earnings less any prior dividends.

Question 30

Marketable securities are short term investments and are valued on the balance sheet at their original purchase price.

Question 31

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

Question 32

Balance sheet items consider inflation and market value when assigning the amount to assets, liabilities, and equity accounts.

Question 33

Stockholders equity is equal to assets minus liabilities.

Question 34

Stockholders equity is equal to liabilities plus assets.

Question 35

An increase in assets represents a positive source of funds.

Question 36

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

Question 37

Balance sheet items should be adjusted for inflation when valuing a company.

Question 38

Accumulated depreciation shows up in the income statement, while depreciation expense shows up on the balance sheet.

Question 39

Book value of a company is equal to net worth of a company, which is not always equal to the market value of the company.

Question 40

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

Question 41

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

Question 42

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

Question 43

For corporations with low taxable income (less than $50,000), the effective tax rate can be as much as 40%.

Question 44

Depreciation is an accrual accounting entry that does not affect the cash account so it needs to be adjusted for when using the indirect method of the Cash Flow Statement.

Question 45

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

Question 46

Beginning in 2018, one of the major changes regarding the corporate tax rate was its reduction from 35% to a flat rate of 21%.

Question 47

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

Question 48

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

Question 49

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

Question 50

The corporate tax rate change of 2018 means that corporations are no longer responsible to pay state and foreign taxes.

Question 51

Preferred stock dividends are tax deductible.

Question 52

Federal corporate tax rates have changed several times since 1980.

Question 53

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

Question 54

Paying cash dividends to common shareholders will not affect the Cash Flow Statement.

Question 55

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

Question 56

A cash flow statement is considered correct if the change in cash flow plus the beginning balance ties to the ending cash balance.

Question 57

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

Question 58

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

Question 59

The corporate tax rate reduction to a flat rate of 21% in 2018 was done to make the U.S. corporate tax rate more competitive with rates imposed by other countries and to encourage economic activity in the U.S.

Question 60

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

Question 61

A firm with earnings per share of $3 and a price-earnings (P/E) ratio of 24 will have a stock market price of

A) $72.00.
B) $15.00.
C) $6.67.
D) $3.00.

Question 62

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

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

Question 63

Increasing interest expense will have what effect on Earnings Before Interest and Taxes (EBIT)?

A) Increase it.
B) Decrease it.
C) It will have no effect.
D) There is not enough information to tell.

Question 64

Price-earnings (P/E) ratio is influenced by all of the following BUT

A) the business risk the firm takes on.
B) earnings per share.
C) quality of management.
D) All of the options are true.

Question 65

Consider the following information for Ball Corp.
$\begin{array}{lr}\text { Selling and administrative expense } & \$ 40,000 \\\text { Depreciation expense } & 70,000 \\\text { Sales } & 350,000 \\\text { Interest expense } & 30,000 \\\text { Cost of goods sold } & 110,000 \\\text { Taxes } & 17,500\end{array}$
What is the operating profit for Ball Corp.?

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

Question 66

A firm has $1,500,000 in its common stock account and $1,000,000 in its capital paid in excess of par account. The firm issued 100,000 shares of common stock. What was the issue price (market value) if only one stock issuance has occurred?

A) $35 per share
B) $25 per share
C) $15 per share
D) Not enough information to determine

Question 67

Asset accounts on the balance sheet are listed in order of

A) liquidity.
B) profitability.
C) dollar amount.
D) importance.

Question 68

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) either go up or down.

Question 69

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) 35%
D) 73.3%

Question 70

Allen Lumber Company had earnings after taxes of $750,000 in the year 2015 with 300,000 shares outstanding on December 31, 2015. On January 1, 2016, the firm issued 50,000 new shares. The company took the proceeds from these new shares as well as other operating improvements and earned $937,500 earnings after taxes in 2016. Earnings per share for the year 2016 were

A) $2.14.
B) $2.68.
C) $3.13.
D) None of the options.

Question 71

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 72

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

A) Past earnings
B) Shares outstanding
C) Volatility in business performance
D) All of the options influence the firm's P/E ratio.

Question 73

Elgin Battery Manufacturers had sales of $1,000,000 in 2015 and their cost of goods sold is $700,000. Selling and administrative expenses were $100,000. Depreciation expense was $80,000 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 in 2015?

A) $36,000
B) $117,800
C) $33,000
D) $300,000

Question 74

Although depreciation does not provide cash to the firm directly, the fact that it is tax-deductible can provide cash inflow to the company.

Question 75

Reinvested funds into retained earnings theoretically belong to

A) bond holders.
B) common stockholders.
C) employees.
D) All of the options

Question 76

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 77

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) $0

Question 78

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 79

A firm has $4,000 in its common stock account and $10,000 in its paid-in capital account. The firm issued 1,000 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 would not be classified as a current asset?

A) Marketable securities
B) Plant property and equipment
C) Prepaid expenses
D) Inventory