Question 1

Which of the following statements is not true relating to a capitalized (capital)lease?

Accepted Answer

The statement that is not true is that "On the balance sheet, the capitalized asset amount will usually be higher than the capitalized liability amount." In a capitalized lease, the asset and related obligation are recorded at the present value of lease payments, so the initial amounts of the asset and liability will be equal. Over time, as payments are made and depreciation is taken, the asset and liability will be reduced by different amounts, leading to a difference between the two amounts. However, it is not always the case that the asset amount will be higher than the liability amount.

Question 2

Joseph and John,Inc. ,had the following balance sheet results for 2012:
$\begin{array}{lccc}
&\text { (in millions) }\
  \text {Current liabilities  } &\$12.6  \
 \text {Bonds payable  } &18.6\
 \text {  Lease obligations} &2.7\
 \text {Noncontrolling interest  } &1.4\
 \text {Common stock  } &8.6\
 \text {Retained earnings  } &\underline{22.9}\
&\underline{\$66.8}
\end{array}$

Compute the debt-equity ratio.

Accepted Answer

Debt-equity ratio = Total debt / Total equityTotal debt = Current liabilities + Bonds payable + Lease obligations = 12.6 + 18.6 + 2.7 = 33.9Total equity = Common stock + Retained earnings = 8.6 + 22.9 = 31.5Debt-equity ratio = 33.9 / 31.5 = 1.076 = 107.6%

Question 3

There are a number of assumptions about future events that must be made regarding a defined benefit plan.An assumption that does not need to be made is:

Accepted Answer

The assumption about how long the firm will continue is not typically a necessary assumption for a defined benefit plan. Defined benefit plans focus on factors like interest rates, employee turnover, mortality rates, and compensation levels to estimate the future liabilities and assets of the plan, rather than the longevity of the firm itself.

Question 4

Ingram Dog Kennels had the following financial statistics for 2012:
$\begin{array}{llcc}
  \text {Long-term debt (average rate of interest is $ 8 \% $ )   } &\$400,000  \
 \text { Interest expense } &35,000\
 \text { Net income } &48,000\
 \text { Income tax } &46,000\
 \text {Operating income  } &107,000\
\end{array}$

What is the times interest earned for 2012?

Accepted Answer

The answer of Ingram Dog Kennels had the following financial...

Question 5

The debt ratio indicates:

Accepted Answer

The debt ratio is calculated by dividing total liabilities by total assets, therefore it provides a comparison of liabilities with total assets. It does not indicate the firm's ability to pay current obligations, efficiency of asset use, or earnings magnification.

Question 6

Jordan Manufacturing reports the following capital structure:
$\begin{array}{llcc}
  \text { Current liabilities } & \$100,000 \
 \text { Long-term debt } &400,000\
 \text {Deferred income taxes  } &10,000\
 \text { Preferred stock } &80,000\
 \text {Common stock  } &100,000\
 \text { Premium on common stock } &180,000\
 \text { Retained earnings } &170,000\
\end{array}$

What is the debt ratio?

Accepted Answer

The debt ratio is calculated as total liabilities divided by total assets. Total liabilities are $100,000 (current liabilities) + $400,000 (long-term debt) + $10,000 (deferred income taxes) = $510,000. Total assets are the sum of liabilities and equity: $510,000 (total liabilities) + $80,000 (preferred stock) + $100,000 (common stock) + $180,000 (premium on common stock) + $170,000 (retained earnings) = $1,040,000. The debt ratio is $510,000 / $1,040,000 = 0.49.

Question 7

The following financial statement data are taken from Xeron Company's 2012 annual report:
$\begin{array}{lccc}
&\text { (in millions) }\
  \text {Current assets  } &  \$12.8\
 \text {Investments  } &9.4\
 \text { Intangibles } &6.8\
 \text {Property, plant, and equipment  } &58.1\
 \text { Current liabilities } &6.4\
 \text {  Long-term debt} &39.7\
 \text {Stockholders' equity  } &40.8
\end{array}$

Compute the debt ratio.

Accepted Answer

The debt ratio is calculated as total liabilities divided by total assets. Total liabilities = Current liabilities + Long-term debt = 6.4 + 39.7 = 46.1 million. Total assets = Current assets + Investments + Intangibles + Property, plant, and equipment = 12.8 + 9.4 + 6.8 + 58.1 = 87.1 million. Debt ratio = (46.1 / 87.1) * 100% = 52.9%, which rounds to 53.0%.

Question 8

Which of the following will not cause times interest earned to drop? Assume no other changes than those listed.

Accepted Answer

Times interest earned (TIE) is a measure of a company's ability to meet its debt obligations. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expense. An increase in bonds payable (A) without a change in operating income would cause TIE to drop. An increase in interest rates (B) would increase interest expense, causing TIE to drop. A rise in preferred stock dividends (C) would not impact interest expense or operating income, thus would not affect TIE. A rise in cost of goods sold (D) with no change in interest expense would decrease operating income and cause TIE to drop. A drop in sales with no change in interest expense (E) would decrease operating income and cause TIE to drop.

Question 9

Which of the following statements best compares long-term borrowing capacity ratios?

Accepted Answer

The debt to tangible net worth ratio compares total debt to tangible net worth, which is a more conservative measure than the debt/equity ratio. The debt/equity ratio compares total debt to total equity, which includes intangible assets like goodwill that may not be as reliable as tangible assets.

Question 10

Jones Company has long-term debt of $1,000,000,while Smith Company,Jones' competitor,has long-term debt of $200,000.Which of the following statements best represents an analysis of the long-term debt position of these two firms?

Accepted Answer

The amount of long-term debt alone does not provide enough information to accurately assess the financial health, interest coverage, or borrowing ability of Jones Company or Smith Company. Other financial metrics and context are needed for a comprehensive analysis.

Question 11

Under the Employee Retirement Income Security Act,a company can be liable for its pension plan up to:

Accepted Answer

Under the Employee Retirement Income Security Act (ERISA), a company can be liable for its pension plan up to 30 percent of its net worth. This provision is designed to ensure that companies maintain sufficient resources to meet their pension obligations.

Question 12

A times interest earned ratio indicates that:

Accepted Answer

The times interest earned ratio is a measure of a company's ability to meet its interest payments on outstanding debt, not directly related to preferred stock maturity, debt maturity, principal repayment ability, or refinancing options.

Question 13

The following financial statement data are taken from Xeron Company's 2012 annual report:
$\begin{array}{lccc}
&\text { (in millions) }\
  \text {Current assets  } &  \$12.8\
 \text {Investments  } &9.4\
 \text { Intangibles } &6.8\
 \text {Property, plant, and equipment  } &58.1\
 \text { Current liabilities } &6.4\
 \text {  Long-term debt} &39.7\
 \text {Stockholders' equity  } &40.8
\end{array}$

Compute the debt to tangible net worth ratio.

Accepted Answer

The answer of The following financial statement data are taken...

Question 14

A times interest earned ratio of 0.90 to 1 means:

Accepted Answer

A times interest earned ratio of 0.90 to 1 indicates that the firm is generating only 90 cents of operating income for every $1 of interest expense. This means that its net income is less than the interest expense, which raises concerns about its ability to service its debt obligations.

Question 15

Which of the following statements is not correct?

Accepted Answer

Statement D is not correct because the times interest earned ratio is typically evaluated over a period to understand trends rather than selecting the highest value in a period as the primary indication of interest coverage. This ratio is used to assess a firm's ability to meet its interest obligations, and analysts usually look at it across multiple periods to gauge consistency and financial health, rather than focusing on a single highest value.

Question 16

Which of these items represents a definite commitment to pay out funds in the future?

Accepted Answer

Bonds payable represent a definite commitment to pay out funds in the future, as they are a type of long-term debt that a company must repay with interest.

Question 17

In computing debt to tangible net worth,which of the following is not subtracted in the denominator?

Accepted Answer

Investments are not subtracted in the denominator when computing debt to tangible net worth. Tangible net worth includes only physical assets such as property, equipment, and inventory, minus any liabilities. Intangible assets such as copyrights, patents, trademarks, and goodwill are excluded from tangible net worth because they do not have a physical value that can be easily liquidated. Similarly, investments are not included in tangible net worth because they typically represent ownership in another company or entity, rather than a physical asset owned by the company itself.

Question 18

A fixed charge coverage:

Accepted Answer

A fixed charge coverage ratio is used to determine a company's ability to meet its fixed payment obligations such as interest, rent, and other fixed expenses based on its operating income. This is an income statement indication of debt carrying ability.

Question 19

If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in the financial statements,then:

Accepted Answer

Capital or financing leases should be capitalized on the balance sheet as a liability, which increases the firm's total debt. If these leases are not capitalized, then the debt ratio will be understated, as the firm's total debt is not being properly reflected on the financial statements. Therefore, choice C is the correct answer. Choices A and B are incorrect because the times interest earned and fixed charge ratios are based on the firm's earnings and cash flow, not its debt. Choice D is incorrect because working capital is calculated using current assets and current liabilities, and capital or financing leases are typically long-term liabilities that would not affect working capital.

Question 20

Included in the Employee Retirement Income Security Act are the following:

Accepted Answer

The Employee Retirement Income Security Act includes provisions requiring minimum funding of pension plans, minimum rights to employees upon termination of their employment, and the creation of the Pension Benefit Guaranty Corporation. Therefore, the best choice is E, as it includes all three provisions.

Quiz 7: Long-Term Debt-Paying Ability

Which of the following statements is not true relating to a capitalized (capital) lease?