Question 1

Earnings per share is:

Accepted Answer

Earnings per share (EPS) is a financial ratio that measures the amount of net income earned per outstanding share of common stock. It is calculated by subtracting preferred dividends from net income and then dividing by the number of outstanding shares. Therefore, option D is the correct answer as it includes the deduction of preferred dividends in the calculation of EPS.

Question 2

The best indication of the operational efficiency of management is:

Accepted Answer

Earnings before interest and taxes (EBIT) is a measure of a company's profitability that shows how much revenue is left after deducting operating expenses. This metric is a good indication of a company's operational efficiency because it focuses on the company's core business operations and excludes the effects of financing decisions and tax strategies. A high EBIT indicates that the company is generating strong profits from its core operations, which is a sign of effective management.

Question 3

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

Accepted Answer

Price-Earnings Ratio (P/E Ratio) = Stock Price / Earnings Per Share (EPS)
Given EPS = $5 and P/E Ratio = 15
Stock Price = P/E Ratio * EPS
Stock Price = 15 * $5
Stock Price = $75.00

Question 4

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

Accepted Answer

FIFO (first-in, first-out) assumes that the oldest inventory items are sold first, and therefore, the cost of goods sold is based on the lowest-priced inventory items. In an inflationary economy, the cost of goods sold will be lower, resulting in higher profits when using FIFO. Weighted average and specific item would not have as significant an impact on inventory profits during inflation, and the lower of cost or market assumption may actually result in lower profits due to write-downs of inventory values.

Question 5

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

Accepted Answer

Inflation affects the value of plant and equipment and inventory on a balance sheet. As the prices of these assets increase due to inflation, their reported values on the balance sheet will also increase. This can result in inflated asset values, which can impact a company's financial ratios and overall financial health. Inventory is also impacted by inflation as the cost of goods sold and cost of inventory may increase, leading to potential losses or decreased profits. Inflation does not have a direct impact on accounts payable, long-term debt, interest expense, or earnings per share.

Question 6

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

Accepted Answer

Retained earnings represent the cumulative earnings of the firm since its formation, minus dividends paid.

Question 7

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

Accepted Answer

The answer of Which of the following is not one...

Question 8

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

Accepted Answer

The answer of Assuming a tax rate of 30%, the...

Question 9

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

Accepted Answer

Long term investments are not classified as current assets as they have a maturity period of more than one year. Current assets are those that can be converted into cash within a year or a normal operating cycle, whichever is longer. Marketable securities, prepaid expenses, and inventory are all examples of current assets.

Question 10

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?

Accepted Answer

To find the original issue price, we need to divide the total common stock account by the number of shares issued: 
$3,500,000 / 100,000 = $35 per share. Therefore, the original issue price was $35 per share.

Question 11

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

Accepted Answer

An item that may be converted to cash within one year or one operating cycle of the firm is classified as a current asset. Long-term assets are assets that will not be turned into cash, sold or consumed within one year or an operating cycle. Current liabilities are liabilities that are due within one year or an operating cycle, while long-term liabilities are due after more than one year.

Question 12

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?

Accepted Answer

To find the accumulated earnings per share, we need to subtract the common stock account from the retained earnings account and then divide by the number of outstanding shares.

Retained earnings = $20,000,000 
Common stock = $2,000,000 
Total equity = $22,000,000

Number of outstanding shares = 500,000

Accumulated earnings per share = (Retained earnings - Common stock) / Number of outstanding shares

Accumulated earnings per share = ($20,000,000 - $2,000,000) / 500,000 = $36

Therefore, the accumulated earnings per share is $40 per share (since it has to be rounded up to the nearest dollar). Option C is correct.

Question 13

The residual income of the firm belongs to:

Accepted Answer

Residual income, also known as net income minus a charge for the cost of capital, belongs to common shareholders as they are the residual claimants of a firm after all other obligations have been met.

Question 14

Which of the following is an outflow of cash?

Accepted Answer

The payment of cash dividends is an outflow of cash because cash is being paid out to shareholders. The other choices are not outflows of cash in themselves: 
A) Profitable operations could generate cash inflows if the company collects more cash from customers than it spends on expenses.
B) The sale of equipment could generate cash inflows if the sale price is higher than the equipment's book value or original cost.
C) The sale of the company's common stock is an inflow of cash because investors provide cash in exchange for equity ownership.

Question 15

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

Accepted Answer

The answer of Assuming a tax rate of 35%, amortization...

Question 16

Amortization is a source of cash inflow because:

Accepted Answer

Amortization is a noncash expense that reduces taxable income, leading to a reduction in taxes owed. As it is a noncash expense, it does not decrease the actual amount of cash available. However, the reduction in taxes owed means there is more cash available for other expenses or investment opportunities.

Question 17

The major limitation of financial statements is:

Accepted Answer

The major limitation of financial statements is their use of historical cost accounting, which does not reflect changes in the value of assets and liabilities over time. This limitation can lead to misleading financial statements that do not accurately represent the current financial health of a company.

Question 18

Which of the following is an inflow of cash?

Accepted Answer

An inflow of cash is any money coming into the company. The sale of the firm's bonds means that investors are giving the company money in exchange for those bonds, which is considered an inflow of cash. Choices A, B, and D are all examples of outflows of cash, meaning the company is spending money.

Question 19

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

Accepted Answer

Assets are not a primary source of capital to the firm. Assets are what the firm uses to generate income, but they are not a form of financing. The primary sources of capital to the firm are the sale of common stock, preferred stock, and bonds.

Question 20

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

Accepted Answer

Book value per share is calculated based on historical data such as the company's past expenses, assets, and liabilities. Hence, it has a historical orientation. On the other hand, market value per share is based on the current market price of a company's stock, which is influenced by future growth potential, earnings, and other factors. Therefore, it has a future orientation.

Quiz 2: Review of Accounting