Question 1

A balance sheet valuation measure is:

Accepted Answer

Market value to book value compares a company's market value (share price times outstanding shares) to its book value (total assets minus total liabilities). This gives an indication of how much the market is willing to pay for each dollar of assets the company owns. A higher ratio indicates that the market values the company's assets more than what is reflected on the balance sheet, while a lower ratio suggests the opposite.

Question 2

Net worth is equal to shareholders' equity:

Accepted Answer

The answer of Net worth is equal to shareholders' equity:
...

Question 3

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

Accepted Answer

Cash Flows from Investing includes investments in Plant (A), purchases of Investments (C) and sale of Long-Term Investments (D), but not merchandise purchases (B).

Question 4

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

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

Question 5

Increasing interest expense will have what effect on EBIT?

Accepted Answer

The answer of Increasing interest expense will have what effect...

Question 6

Amortization tends to:

Accepted Answer

Amortization refers to the process of spreading the cost of an asset over its useful life. This means that instead of recognizing the full cost of the asset in the year it was acquired, the cost is spread out over several years. This has the effect of reducing income in the short term because the full cost of the asset is not recognized in the year it was acquired. However, this also has the effect of increasing cash flow in the short term because the cost is spread out over several years, which means that less money is required upfront. Therefore, Amortization tends to increase cash flow and decrease income.

Question 7

The P/E ratio is determined by:

Accepted Answer

The P/E ratio (price-to-earnings ratio) is calculated by dividing the market value per share by the earnings per share. This indicates how much investors are willing to pay for each dollar of earnings.

Question 8

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?

Accepted Answer

The answer of A firm has $7,500,000 in its common...

Question 9

Preferred share dividends ________ earnings available to common shareholders.

Accepted Answer

Preferred share dividends are paid out before earnings are available to common shareholders. Therefore, paying out preferred share dividends decreases earnings available to common shareholders.

Question 10

Given the following what is free cash flow?

Accepted Answer

The answer of Given the following what is free cash...

Question 11

Common stock dividends are __________ by preferred stock dividends.

Accepted Answer

Preferred stockholders are entitled to receive their dividends before common stockholders. Therefore, when a company has to pay dividends to both preferred and common stockholders, the common stock dividend will be decreased due to the preferred stock dividend being paid first.

Question 12

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

Accepted Answer

Free cash flow can be used in leveraged buyouts, where a company borrows a large amount of money to acquire another company. This can be a risky financial activity, but can increase shareholder value if successful. RRSPs (B) are a type of retirement savings plan in Canada and are not directly related to free cash flow. Stock options (C) are a form of employee compensation where an employee is given the option to buy company stock at a certain price at a later date, and do not directly involve free cash flow. Golden parachutes (D) are agreements where executives receive large payouts if the company is sold or undergoes a change in management, and are not directly related to free cash flow.

Question 13

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

Accepted Answer

The answer of When a firm's earnings are falling more...

Question 14

Accrual based accounting results in income and cash flow being:

Accepted Answer

Accrual based accounting recognizes revenue and expenses when they are earned or incurred, regardless of when the cash is received or paid. This means that income and cash flow can be different as income may be recognized before or after the corresponding cash is received, and expenses may be recognized before or after the corresponding cash is paid.

Question 15

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

Accepted Answer

Retained earnings belong to the common shareholders, as they represent profits that have not been paid out as dividends and are considered part of the equity of the company. Creditors have a claim on the company's assets in the event of liquidation, but do not have ownership rights to the retained earnings. Preferred shareholders may have a claim on dividends before common shareholders, but retained earnings are still considered part of the equity of the company and therefore belong to the common shareholders. The Canada Revenue Agency is a government entity and does not have any ownership or claim to the retained earnings of a private company.

Question 16

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

Accepted Answer

The answer of Net worth for an individual is the...

Question 17

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

Accepted Answer

A liability that must be paid within one year or one operating cycle of the firm is considered a current liability. Current liabilities are obligations that a company expects to settle within the current operating cycle or within one year, whichever is longer. Examples of current liabilities include accounts payable, short-term notes payable, and accrued expenses.

Question 18

An increase in investments in long-term securities will:

Accepted Answer

When investment in long-term securities increases, it implies that more cash is going out for investing activities. Therefore, cash flow from investing activities decreases.

Question 19

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

Accepted Answer

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

Question 20

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

Accepted Answer

The answer of Free cash flow is equal to cash...

Quiz 2: Review of Accounting