Question 1

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

Accepted Answer

Investments would typically be classified as a long-term asset, not a current asset, as they are not intended to be converted into cash or used up within the current operating cycle. The other options (Marketable securities, Prepaid expenses, and Inventory) are all examples of current assets.

Question 2

The residual income of the firm belongs to

Accepted Answer

Residual income, also known as residual earnings or economic value added, is the amount of profit left over after meeting all financial obligations to creditors, bondholders, and preferred shareholders. Therefore, the residual income belongs to the common shareholders, who are the owners of the company and have the ultimate claim on the residual earnings.

Question 3

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

Accepted Answer

Inflation can lead to inventory valuations increasing, which affects the balance sheet. Similarly, plant and equipment can also reflect higher valuations due to inflation. Therefore, option C (Plant and equipment and inventory) is the best choice. Inflation does not have a direct impact on accounts payable or long-term debt, so options A and B are not relevant. Option D is also not relevant as inflation does not have a direct impact on interest expense or earnings per share.

Question 4

An increase in inventory represents a source of funds.

Accepted Answer

An increase in inventory represents an increase in expenses and a decrease in cash, as cash is tied up in the inventory. Therefore, it is a use of funds, not a source of funds.

Question 5

Which of the following is an inflow of cash?

Accepted Answer

The sale of the firm's bonds results in an inflow of cash to the company.

Question 6

Which of the following is not one of the three basic financial statements required by Generally Accepted Accounting Principles (GAAP)?

Accepted Answer

The three basic financial statements required by GAAP are the Income Statement, Statement of Cash Flows, and Balance Sheet. The Statement of Retained Earnings is an optional fourth financial statement that may be included in financial reporting.

Question 7

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 8

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 calculate accumulated earnings per share, we need to divide the total retained earnings by the number of shares outstanding.

Total Retained Earnings= Common Stock Account + Retained Earnings Account = $2,000,000 + $20,000,000 = $22,000,000

So, accumulated earnings per share would be:

Accumulated Earnings Per Share = Total Retained Earnings / Number of Shares Outstanding 
Accumulated Earnings Per Share = $22,000,000 / 500,000 Shares 
Accumulated Earnings Per Share = $44 per share

Therefore, the answer is option C.

Question 9

"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 first inventory item purchased or produced is the first one sold, which means that the cost of goods sold reflects the cost of the oldest (and likely lower-priced) inventory items. In an inflationary economy, the cost of inventory is likely to rise, so FIFO will result in a lower cost of goods sold, which will increase the reported profits. This is known as "inventory profits." The other inventory cost assumptions (weighted average, LIFO, and lower of cost or market) may also result in profits, but not as consistently or significantly as FIFO in an inflationary environment.

Question 10

Which of the following is an outflow of cash?

Accepted Answer

The payment of cash dividends is an outflow of cash, as it involves giving money out to shareholders. A is not an outflow of cash, as profitable operations may increase the company's cash balance. B is not necessarily an outflow of cash, as the sale of equipment may result in either an inflow or outflow depending on whether the equipment was sold for more or less than its book value. C is not an outflow of cash, as the sale of common stock involves receiving cash from investors.

Question 11

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

Accepted Answer

The formula to calculate the stock price is P/E ratio x EPS. Therefore, P/E ratio of 15 x EPS of $5 will result in a stock price of $75. Answer choice B is the only option that matches this calculation. Therefore, the correct answer is B.

Question 12

The major limitation of financial statements is

Accepted Answer

The major limitation of financial statements is in their use of historical cost accounting, which means that assets and liabilities are recorded at their original cost and not adjusted for changes in market value over time. This can lead to a distortion of the true value of the company's assets and liabilities, and can also make it difficult to compare financial statements across different time periods.

Question 13

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

Accepted Answer

Retained earnings represents the cumulative earnings of the firm since its formation, minus any dividends paid out to shareholders. This account is found in the equity section of the balance sheet. The balance of retained earnings changes with the profitability of the firm over time.

Question 14

Amortization is a source of cash inflow because

Accepted Answer

Amortization is a noncash expense, which means it does not involve the outflow of actual cash. However, it is tax-deductible, which means it reduces the amount of taxable income, resulting in a lower tax liability. Therefore, it indirectly increases cash inflow by reducing the amount of taxes owed.

Question 15

The best indication of the operational efficiency of management is

Accepted Answer

EBIT (Earnings Before Interest and Taxes) is the best indicator of the operational efficiency of management because it focuses on the core operations of the business by excluding the effects of interest and taxes, which are not directly controlled by management's operational decisions.

Question 16

Earnings per share is

Accepted Answer

Earnings per share (EPS) is calculated by taking the net income of a company, subtracting out any preferred dividends, and dividing that number by the total number of shares outstanding. Therefore, option D, which calculates EPS as net income minus preferred dividends divided by number of shares outstanding, is the correct choice. Options A, B, and C are not accurate descriptions of EPS.

Question 17

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

Accepted Answer

Book value per share is a historical measure of a company's assets and liabilities, which provides an idea of what shareholders might receive if the company was liquidated. Hence, it has a historical orientation. On the other hand, market value per share is the price that investors are willing to pay for each share of a company's stock, and it reflects investors' expectations for the company's future earnings potential. Thus, it has a future orientation.

Question 18

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

The total common stock account is $3,500,000, which means each share of common stock represents $35 ($3,500,000 ÷ 100,000) of the account. Therefore, the original issue price must have been $35 per share.

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. While assets can be sold to generate cash, the sale of assets is not a sustainable or reliable source of funding for a firm's operations or investments. The primary sources of capital to the firm are typically equity (such as common and preferred stock) and debt (such as bonds and loans).

Question 20

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

Accepted Answer

A current asset is an item that is expected to be converted to cash within one year or one operating cycle of the firm. This includes items such as cash, accounts receivable, and inventory. Current liabilities, on the other hand, are debts or obligations that are due within one year or one operating cycle, while long-term assets and liabilities have a longer time horizon. Therefore, the best choice is C.

Quiz 2: Review of Accounting