Question 1

The Coda Corp. in 2016 had an operating leverage effect = 3, and a financial leverage effect = 1.333. The total leverage effect is
A) 1.667
B) 4
C) 4.333
D) Cannot be determined

Accepted Answer

Total Leverage Effect = Operating Leverage Effect x Financial Leverage Effect
= 3 x 1.333
= 4

Question 2

_____ A company now has a profit margin for ROCE of 6%. Its asset turnover is 1.5. Its capital structure leverage ratio is 2. Compute the Return on common equity.

Accepted Answer

The answer of _____ A company now has a profit...

Question 3

Assume a company now has a current ratio of 3. Just before year end, it decides to pay back some of its current liabilities, using its cash. Which of the following statements is correct regarding the effect of this decision?
A) The current ratio will decrease.
B) Its interest coverage ratio will increase.
C) Its capital structure leverage ratio will decrease.
D) Its return on assets will decrease.

Accepted Answer

The answer of Assume a company now has a current...

Question 4

The FASB says that financial statements should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to business enterprises.

Accepted Answer

This statement is true as per the FASB's Conceptual Framework for Financial Reporting, which states that financial statements should provide information that aids users in assessing the entity's ability to generate cash flows in the future.

Question 5

On a statement of cash flows prepared using the indirect method, an increase in accounts payable will be shown as something that increases operating cash flows.

Accepted Answer

The answer of On a statement of cash flows prepared...

Question 6

On a statement of cash flows prepared using the indirect method, an increase in prepaid expenses will be shown as something that increases operating cash flows.

Accepted Answer

An increase in prepaid expenses means that the company has paid for expenses in advance, which reduces its cash balance. However, on a statement of cash flows prepared using the indirect method, this reduction in cash is added back to operating cash flows, as it is considered a non-cash expense.

Question 7

On a statement of cash flows prepared using the indirect method, an decrease in income taxes payable will be shown as something that increases operating cash flows.

Accepted Answer

An decrease in income taxes payable would be adjusted by subtracting it from net income in the operating activities section, as it implies that less cash was paid for taxes than the expense recognized, thus decreasing operating cash flows.

Question 8

On a statement of cash flows prepared using the indirect method, decreases in current assets are typically shown as additions to operating cash flows.

Accepted Answer

Decreases in current assets are typically shown as deductions from operating cash flows on the statement of cash flows prepared using the indirect method.

Question 9

The appropriate section of a cash flow statement to show the money spent by a company to buy back its own stock is the financing section.

Accepted Answer

The financing section of a cash flow statement shows the inflows and outflows of cash related to financing activities, such as issuing or buying back stocks, paying dividends, and taking out or repaying loans. Therefore, the money spent by a company to buy back its own stock would be shown in the financing section.

Question 10

The appropriate section of a cash flow statement to show the money spent by a company to buy a new factory is the financing section.

Accepted Answer

The answer of The appropriate section of a cash flow...

Question 11

One ratio used to assess company profitability is "return on assets."

Accepted Answer

The answer of One ratio used to assess company profitability...

Question 12

The "return on common equity" ratio is primarily used to judge company solvency.

Accepted Answer

The answer of The "return on common equity" ratio is...

Question 13

Common size balance sheets present all of a company's asset, liabilities, and equity accounts expressed as a percentage of total net income for the year.

Accepted Answer

The answer of Common size balance sheets present all of...

Question 14

Goodwill is an intangible asset that is generally recorded when one company buys another.

Accepted Answer

The answer of Goodwill is an intangible asset that is...

Question 15

Academic research shows that the major reason for movements in stock prices are the release of financial statements by companies.

Accepted Answer

While the release of financial statements by companies can influence stock prices, academic research shows that stock prices are affected by a wide range of factors including economic indicators, market sentiment, geopolitical events, and changes in interest rates, among others.

Question 16

Most American businesses are publicly traded.

Accepted Answer

Most American businesses are actually privately owned and not publicly traded. Publicly traded companies are only the largest and most well-known corporations.

Question 17

An important role of financial reports is to confirm that prior reports were correct.

Accepted Answer

Financial reports primarily provide information about a company's financial performance and position for a specific period, rather than confirming the accuracy of prior reports.

Question 18

The FASB's Conceptual Framework says that, to be relevant, information must have predictive value, and that information that only has confirmatory value is never relevant.

Accepted Answer

The FASB's Conceptual Framework states that information is relevant if it has predictive value or confirmatory value.

Question 19

The method of comparing financial statement information that involves comparing the same accounts, across two or more time periods, is called "horizontal analysis."

Accepted Answer

The answer of The method of comparing financial statement information...

Question 20

The method of comparing financial statement information that involves comparing figures for different accounts, in a single time period, is called "horizontal analysis."

Accepted Answer

Horizontal analysis involves comparing figures for different accounts in a single time period, while vertical analysis involves comparing figures for the same account across different time periods.

Quiz 4: Managing Your Accounts

The Coda Corp. in 2016 had an operating leverage effect = 3, and a financial leverage effect = 1.333. The total leverage effect is