Question 1

Which of the following would not be found listed as a liability on a company's balance sheet?
A) Operating lease obligations
B) Capital lease obligations
C) Bonds payable
D) Taxes payable

Accepted Answer

Operating lease obligations are not listed as liabilities on a company's balance sheet under the accounting standards. Instead, they are considered operational expenses and are recorded on the income statement. Capital lease obligations, bonds payable, and taxes payable, on the other hand, are recognized as liabilities.

Question 2

If a company leases equipment to other companies and records these leases as operating leases rather than capital leases, its:
I. recorded liabilities will be lower.
II. recorded assets will be higher.
III. total cash flows will be higher.
IV. leverage ratios will be higher.
A) I and III
B) II and IV
C) I only
D) II, III and IV

Accepted Answer

B

Question 3

Which of the following is not a criterion for defining a lease as a capital lease?
A) Ownership is transferred by the end of the lease agreement.
B) The lease contains an option to purchase the asset at a bargain price.
C) The present value of the lease payments at the beginning of the lease is 75% or more than the value of the asset.
D) The lease term is at least 75% of the economic life of the asset.

Accepted Answer

The correct criterion is that the present value of the lease payments is 90% or more of the fair value of the asset, not 75%.

Question 4

If a company engages in off-balance sheet financing, generally the effect is:
I. to cause assets to be understated.
II. to increase leverage ratios.
III. to increase cash flows.
IV. to cause liabilities to be understated.
A) I, II, III and IV
B) I, III and IV
C) I and IV
D) IV only

Accepted Answer

Off-balance sheet financing typically results in the understatement of both assets and liabilities, as these items are not recorded on the balance sheet.

Question 5

With respect to pension liabilities, which of the following statements are true?
I. The projected benefit obligation (PBO) is always greater than or equal to the accumulated benefit obligation (ABO).
II. The vested benefit obligation (VBO) is always as least as or as big as the accumulated benefit obligation (ABO).
III. If the PBO is greater than the plan assets, the plan is said to be overfunded.
IV. If the weighted-average assumed discount rate is increased, the PBO will decrease.
A) I, III and IV
B) I and III
C) II and IV
D) I and IV

Accepted Answer

I is true because PBO includes all future salary increases, while ABO only considers vested benefits and no future salary increases. Therefore, PBO is always larger than or equal to ABO. 
IV is also true because higher discount rates reduce the present value of future benefits and therefore result in lower PBO. Hence, If the weighted-average assumed discount rate is increased, the PBO will decrease. 
II and III are false. VBO is always less than or equal to ABO because VBO only includes benefits that are vested (i.e., fully earned), while ABO includes vested and non-vested benefits. If PBO exceeds plan assets, the plan is said to be underfunded, not overfunded.

Question 6

Which of the following would be found listed as a liability on a company's balance sheet?
A) Operating lease obligations
B) Projected benefit obligation
C) Purchase Commitment obligation
D) Postretirement benefits other than pension obligation

Accepted Answer

The answer of Which of the following would be found...

Question 7

If a company that leases equipment from another company records these leases as operating leases rather than capital leases, its:
I. recorded liabilities will be lower.
II. recorded assets will be higher.
III. total cash flows will be higher.
IV. leverage ratios will be higher.
A) I and III
B) II and IV
C) I only
D) II, III and IV

Accepted Answer

If a company records leases as operating leases, the recorded liabilities will be lower as they are not including the equipment as long-term debt. However, there will be no impact on the recorded assets. Total cash flows may be higher due to lower lease payments, but this is not always the case. Leverage ratios will not be impacted.

Question 8

A lessee must account for a lease as a capital lease if:
I. lease transfers ownership to lessee at the end of the lease.
II. lease contains option to purchase the asset at the end of the lease at a bargain price.
III. lease is longer than 20 years.
IV. present value of lease is greater than 10% of lessee's assets.
A) I and II
B) I, II and III
C) I, III and IV
D) I, II and IV

Accepted Answer

I and II are correct because a lease is classified as a capital (or finance) lease if it transfers ownership to the lessee by the end of the lease term or contains a bargain purchase option. The length of the lease (III) and the comparison of the present value of the lease payments to the lessee's assets (IV) are not criteria for classifying a lease as a capital lease under accounting standards.

Question 9

Which of the following is an example of off-balance sheet financing?
A) Operating leases
B) Capital leases
C) Issuance of convertible bonds
D) Issuance of common stock

Accepted Answer

Operating leases are an example of off-balance sheet financing. In an operating lease, the company does not record the leased asset or liability on its balance sheet, but instead, the lease payments are recorded as an expense in the income statement. This allows the company to keep the asset off its balance sheet, thus reducing its total assets and liabilities, and improving its financial ratios.

B) Capital leases are not an example of off-balance sheet financing. In a capital lease, the company records both the leased asset and the corresponding liability on its balance sheet, which increases the company's total assets and liabilities.

C) Issuance of convertible bonds is not an example of off-balance sheet financing. When a company issues convertible bonds, it records the corresponding liability on its balance sheet, which represents an obligation to repay the bondholders.

D) Issuance of common stock is not an example of off-balance sheet financing. When a company issues common stock, it records the corresponding proceeds as equity on its balance sheet, which represents ownership in the company.

Question 10

Dylan Corporation issues a zero-coupon bond with $100,000 face value, with a 5-year maturity, and the market rate is 7%. Interest on corporate bonds is normally paid semiannually. In the liability section of Dylan's balance sheet, the proceeds from selling the zero-coupon immediately after issuance will be closest to:
A) $70,892.
B) $71,299.
C) $70,000.
D) $100,000.

Accepted Answer

The price of the zero-coupon bond can be calculated using the present value formula:

PV = FV / (1 + r)^n

where PV is the present value, FV is the face value, r is the market rate, and n is the number of periods. For this zero-coupon bond, n is 10 (two periods per year for five years).

PV = 100,000 / (1 + 0.07/2)^10
PV = 70,892.40

Therefore, the closest answer is A) $70,892.

Question 11

The difference between the accumulated benefit obligation (ABO) and the projected benefit obligation (PBO) is:
A) the PBO considers non-vested obligations and the ABO does not.
B) the PBO takes into account the time value of money and the ABO does not.
C) the PBO takes into account future pay increases and the ABO does not.
D) the PBO takes into account mortality rates of employees and the ABO does not.

Accepted Answer

The key difference between the Projected Benefit Obligation (PBO) and the Accumulated Benefit Obligation (ABO) is that PBO includes assumptions about future compensation levels (e.g., pay increases), whereas ABO is based on current salary levels and does not account for future salary increases.

Question 12

When considering defined benefit pension plans, which of the following will not increase the projected benefit obligation (PBO)?
A) A decrease in the discount rate.
B) An increase in estimated compensation growth.
C) An increase in expected average length of lives of employees.
D) A decrease in the expected rate of return on plan assets.

Accepted Answer

A decrease in the expected rate of return on plan assets will decrease the projected benefit obligation (PBO) because it will reduce the amount of assets available to fund future pension payments. The other choices (A, B, and C) will all increase the PBO.

Question 13

Hert Corporation acquired a capital lease that is carried on its books at a present value of $100,000 (discounted at 12%). Its annual rental payment is $15,000. What is the amount of interest expense from this lease? $$\begin{array} { | c | c | c | } 
\hline & \text { First Year } & \text { Second Year } \
\hline \text { A) } & 12,000 & 10,200 \
\hline \text { B) } & 12,000 & 11,640 \
\hline \text { C) } & 12,000 & 12,350 \
\hline \text { D) } & 15,000 & 15,000 \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

The interest expense on a capital lease is calculated as the difference between the total lease payment and the reduction in the lease liability. In the first year, the total lease payment is $15,000 and the reduction in the lease liability is $12,000 ($100,000 × 0.12). Therefore, the interest expense is $3,000 ($15,000 − $12,000). In the second year, the total lease payment is still $15,000, but the reduction in the lease liability is now $11,640 ($100,000 × 0.12 × 0.9174). Therefore, the interest expense is $3,360 ($15,000 − $11,640). Option B is the only choice that matches these calculations.

Question 14

Which of the following is true concerning bond covenants?
A) Bond covenants are restrictions placed on bondholders to protect rights of equity holders.
B) Violation of a bond covenant requires that a company declares bankruptcy.
C) If a company violates a bond covenant, it means it has failed to make interest or principal repayments on debt in a timely manner.
D) Bond covenants are legal restrictions placed in order to minimize the risk of default on bonds.

Accepted Answer

Bond covenants are legal restrictions imposed by the bond issuer to minimize the risk of default on bonds. These covenants may include limitations on the company's ability to take certain actions, such as issuing more debt, paying dividends, or acquiring other companies. Violation of a bond covenant does not necessarily require bankruptcy, but may result in penalties, higher interest rates, or acceleration of the repayment schedule. Bond covenants protect the interests of bondholders, not equity holders.

Question 15

Which of the following might give rise to off-balance sheet financing?
I. Long-term operating leases
II. Sale of receivables without recourse
III. Through-put agreements
IV. Purchase commitments
A) I, II, III and IV
B) I, II and IV
C) II, III and IV
D) I, III and IV

Accepted Answer

Long-term operating leases, sale of receivables without recourse, and through-put agreements are all examples of off-balance sheet financing. Purchase commitments are not.

Question 16

Minority interest appears on the balance sheet of some companies. Minority interest:
A) is classified as a liability.
B) is classified as an equity.
C) arises when a company records investments using the equity method.
D) arises when a company owns controlling interest in another company, but less than 100%.

Accepted Answer

Minority interest arises when a company owns controlling interest in another company, but less than 100%. It is classified as an equity on the balance sheet.

Question 17

The majority of financing for most companies comes from which of the following sources?
A) Owners and customers
B) Creditors and customers
C) Owners and managers
D) Creditors and owners

Accepted Answer

The majority of financing for most companies comes from creditors and owners. Creditors provide loans, while owners provide equity investment. Customers may provide revenue, but this is not considered financing. Managers may also contribute to the company's operations, but they do not typically provide financing.

Question 18

Which one of the following statements is false?
A) Short-term obligations may be classified as long term if the company intends to refinance them on a long-term basis and can demonstrate the ability to do so.
B) Violation of a long-term debt covenant automatically means the company must reclassify the debt as current.
C) Current liabilities are recorded at their maturity value, and not their present value.
D) If a bond is issued at a discount the effective interest rate is greater than the coupon rate.

Accepted Answer

Violation of a long-term debt covenant does not automatically mean the company must reclassify the debt as current. The determination of whether the debt should be classified as current or long-term is based on the relevant facts and circumstances, including the frequency and magnitude of the covenant violation and the likelihood of cure or waiver.

Question 19

Recording a long-term lease as an operating lease, as opposed to a capital lease, for a lessee will cause the following ratios to be: $$\begin{array} { | l | c | c | } 
\hline & \text { Debt/Equity } & \text { Total Asset Turnover } \
\hline \text { A) } & \text { Higher } & \text { Lower } \
\hline \text { B) } & \text { Higher } & \text { Higher } \
\hline \text { C) } & \text { Lower } & \text { Higher } \
\hline \text { D) } & \text { Lower } & \text { Lower } \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

Recording a lease as an operating lease keeps liabilities off the balance sheet, reducing the debt/equity ratio. It also keeps assets lower, increasing total asset turnover.

Question 20

Which of the following statements about stock dividends is true?
A) Stock dividends increase the number of shares outstanding.
B) Stock dividends are more valuable than stock splits.
C) Stock dividends are recorded as a reduction in cash.
D) Stock dividends are dividends given in the form of stock from another company.

Accepted Answer

Stock dividends increase the total number of shares outstanding, as companies distribute additional shares to existing shareholders rather than cash payouts. This can dilute the value of each individual share.

Quiz 3: Analyzing Financing Activities

Which of the following would not be found listed as a liability on a company's balance sheet?

If a company leases equipment to other companies and records these leases as operating leases rather than capital leases, its: I. recorded liabilities will be lower. II. recorded assets will be higher. III. total cash flows will be higher. IV. leverage ratios will be higher.

Which of the following is not a criterion for defining a lease as a capital lease?

If a company engages in off-balance sheet financing, generally the effect is: I. to cause assets to be understated. II. to increase leverage ratios. III. to increase cash flows. IV. to cause liabilities to be understated.

Which of the following would be found listed as a liability on a company's balance sheet?

If a company that leases equipment from another company records these leases as operating leases rather than capital leases, its: I. recorded liabilities will be lower. II. recorded assets will be higher. III. total cash flows will be higher. IV. leverage ratios will be higher.

Which of the following is an example of off-balance sheet financing?

The difference between the accumulated benefit obligation (ABO) and the projected benefit obligation (PBO) is:

When considering defined benefit pension plans, which of the following will not increase the projected benefit obligation (PBO) ?

Which of the following is true concerning bond covenants?

Which of the following might give rise to off-balance sheet financing? I. Long-term operating leases II. Sale of receivables without recourse III. Through-put agreements IV. Purchase commitments

Minority interest appears on the balance sheet of some companies. Minority interest:

The majority of financing for most companies comes from which of the following sources?

Which one of the following statements is false?

Which of the following statements about stock dividends is true?