Acct 5000 Exam 2

Addison, Inc. reports: Cash provided by operating activities $2,300,000 Cash used by investing activities 640,000 Cash used by financing activities 220,000 Beginning cash balance 340,000 What is Addison's ending cash balance? Cash provided by operating activities, $2,300,000 less Cash used by investing activities, $640,000 less Cash used by financing activities, $220,000 = Net increase in Cash, $1,440,000. Then add: Net increase in Cash, $1,440,000 + Beginning cash balance, $340,000 = Addison's ending cash balance, $1,780,000.

$1,780,000.

On December 31, 2017, Swan Company sold for $150,000 an old machine having an original cost of $170,000 and a book value of $120,000. The terms of the sale were as follows: $30,000 down payment$60,000 payable on December 31 each of the next two years The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2017 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.) In instances where no interest rate is stated, the company measures the present value of the note. The present value of the annuity is ($60,000 × 1.75911) or $105,546.

$105,546.

Avery Tag makes an investment today (January 1, 2017). Avery will receive $40,000 every December 31st for the next six years (2017 - 2022). If Avery wants to earn 12% on her investment, what is the most she should invest on January 1, 2017?

$164,456.

Joan's uncle has promised her $20,000 when she graduates college 4 years from now. What is the equivalent amount stated in today's dollars? Given below are the present value factors for 1 at 8% for one to three periods with interest compounded annually.

$20,000 ÷ 1.080 × .79383

On January 1, 2017, Simmons Company sold to Flay Corporation $400,000 of its 10% bonds for $354,118 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Simmons report as interest expense for the six months ended June 30, 2017? (The effective-interest method of amortization is being used.) The interest expense for the first 6-month period is computed as carrying value x rate of interest x number of periods = $354,118 X 12% X (6/12) equals $21,247. Cash interest paid is computed as principal x stated interest rate x number of periods (in terms of one year) = $400,000 x 10% x 6/12 = $20,000.

$21,247

Alexa Smith has saved $250,000 for her retirement. It is invested in an annuity that pays 12%. Alexa wishes to make equal semi-annual withdrawals over the next 10 years, beginning 6 months from now. How much can she withdraw each period without exhausting her initial investment? Using the present value of an ordinary annuity, 6% for 20 periods (10 years x 2 compounding periods per year) factor of 11.46992, and dividing it into the $250,000 amount saved, the amount she can withdraw is computed as $21,796 each period.

$21,796.

Jamie wants to set aside enough money now to go on vacation in two years. She has developed the following estimates: Estimated Cash Outflows Probability Assessment $2,70030% $3,30050% $4,50020 % Time periods Factor PV of 12.90703 PV Annuity of 121.85941 FV of 121.10250 FV Ordinary annuity 22.05 How much should she deposit today in an account earning 5%, compounded annually, to have sufficient cash on hand to pay for the vacation? Expected cash outflow is [($2,700 X 30%) + ($3,300 X 50%) + ($4,500 X 20%)] = $3,360; the present value of $3,360 is ($3,360 X .90703) $3,048.

$3,048

The required balance in Wheeler's Allowance for Doubtful Accounts is $36,750, based on an aging of its accounts receivable. The Allowance for Doubtful Accounts currently has a debit balance of $4,200. Wheeler's bad debt expense for the period is The existing balance in Allowance for Doubtful Accounts is considered under the percentage-of-receivables method. Therefore, bad debt expense is $40,950 (Required Allowance for Doubtful Accounts Balance, $36,750 + Allowance for Doubtful Accounts current debit balance, $4,200).

$40,950.

Peterson Enterprises reports the following information: Net income $5,000,000 Depreciation expense 680,000 Loss on the sale of investments 154,000 Increase in accounts receivable320,000 Peterson should report cash provided by operating activities of Net Income, $5,000,000 plus Depreciation Expense, $680,000 plus Loss on the sale of investments, $154,000 less Increase in accounts receivable, $320,000 equals $5,514,000, the cash provided by operating activities.

$5,514,000.

Sally Tucker wants to invest a certain sum of money at the end of each year for six years. The investment will earn 6% compounded annually. At the end of six years, she will need a total of $500,000 accumulated. How should she compute her required annual investment?

$500,000 divided by the future value of a 6-year, 6% ordinary annuity of 1 factor.

Wendy Brown invests $50,000 at 10% annual interest. How much money has accumulated after five years, assuming simple interest? Simple interest is computed as principal x rate of interest x number of periods = ($50,000 x .10 x 5) = $25,000. Adding the interest accumulated, $25,000 to the original investment, $50,000 = $75,000 money accumulated after 5 years.

$75,000.

Trent Co. reports the following information: Net cash provided by operating activities$430,000Average current liabilities300,000Average long-term liabilities200,000Dividends paid120,000Capital expenditures220,000Purchase of treasury stock22,000Payments of debt70,000 Trent's free cash flow is Net cash provided by operating activities, $430,000, less capital expenditures, $220,000, less dividends paid, $120,000 equals a free cash flow of $90,000.

$90,000.

During the year, Trout Enterprises made an entry to write off an $8,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $100,000 and the balance in the allowance account was $9,000. The net realizable value of accounts receivable before and after the write-off entry was Accounts Receivable, $100,000 - Allowance Account, $9,000 = $91,000. After: (Accounts Receivable, $100,000 - $8,000) - (Allowance Account, $9,000 - $8,000) = $91,000.

$91,000.

A cash discount of 1/10, n/30 means the customer gets a: The discount is 1% and the discount period is 10 days.

1% discount if they pay within 10 days.

If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)? 1% ÷ [(30 days - 10 days)/360 days)] = 18% effective annual rate of interest.

18%

For an investment that earns 1% compounded monthly for two years, how many compounding periods are there? The total number of compounding periods is equal to the number of compounding periods per year times the number of years (12 x 2 = 24).

24

Mayer Company received a seven-year zero-interest-bearing note on February 22, 2016, in exchange for property it sold to Reardon Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22, 2016, 7.5% on December 31, 2016, 7.7% on February 22, 2017, and 8% on December 31, 2017. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2016 and 2017, respectively? Since the interest rate was 7% on February 22, 2016, that is the rate that should be used.

7% and 7%

Which of the following balance sheet formats lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side? The account form lists assets on the left and liabilities and stockholders' equity on the right.

Account form.

Which of the following is not one of the classifications in owners' equity? Classifications included in owners' equity include capital stock, retained earnings, additional paid-in capital (not accumulated capital), and noncontrolling interest (minority interest).

Accumulated capital

Which of the following ratios measures how effectively the company uses its assets? Activity ratios measure how effectively the company uses its assets.

Activity ratios.

Which of the following has an impact on the dollar amount of the interest related to any financing transaction? Principal, Interest rate, and time impact interest.

All of these answer choices are correct.

Which of the following methods of determining annual bad debt expense violates the expense recognition concept? The direct write-off method usually fails to record expenses in the same period as the associated revenue and therefore violates the expense recognition concept. Percentage of sales and percentage of receivables both estimate bad debt expense and report in the same period as the related sales.

Direct write-off

Aging accounts receivable is a variation of the percentage-of-sales approach to recognizing bad debt expense. Aging is an estimation method used with the percentage-of-accounts receivable approach.

False

An annuity due requires that the time intervals between rents vary in length. An ordinary annuity and an annuity due both require that the time intervals between rents remain the same length.

False

An interest compounding period may be greater than a year.

False

Borrowing money from creditors is considered an investing activity on the statement of cash flows. Financing, not investing, activities include obtaining resources from owners and providing them with a return on their investment, and borrowing money from creditors and repaying the amounts borrowed.

False

The balance sheet is sometimes referred to as the Statement of Net Resources. A balance sheet reports on the financial position of a business enterprise and is sometimes referred to as the Statement of Financial Position, not the Statement of Net Resources.

False

When comparing the account form and the report form of the balance sheet, the dollar amount of current assets will be higher under the report form, but total assets will be equal under both forms The only difference in balance sheets prepared using the report form or account form is the layout of the balance sheet. The account form lists assets on the left and liabilities and stockholders' equity on the right. The report form list the sections one above the other. Current assets and total assets will be the same in both formats.

False

When the compounding frequency is greater than once a year, the effective-interest rate will always be less than the stated rate.

False

Young Enterprises has an overdraft at one of its banks, Bank of Cleveland. Young has no other accounts at Bank of Cleveland. Young should report the bank overdraft as an offset against cash held at other banks. Bank overdrafts are generally not offset against the cash account. A major exception is when available cash is present in another account in the same bank on which the overdraft occurred.

False

Payment of dividends would come under which activity on the statement of cash flows? Financing activities include obtaining resources from owners and providing them with a return on their investment (payment of dividends), and borrowing money from creditors and repaying the amounts borrowed.

Financing.

Which table would you use to determine how much you will have five years from now if you deposit $10,000 today at 8% compounded annually? You would use the future value of 1 or present value of 1.

Future value of 1 or present value of 1

Which of the following is not included in the summary of significant accounting policies? A company discloses its accounting policies including depreciation methods used, inventory cost flow assumption used, and the basis for valuing investments. A company does not disclose the length of its operating cycle.

Length of operating cycle.

Which of the following is not a fundamental variable to all compound interest problems? Fundamental variables to all compound interest problems are the rate of interest, the number of time periods, the future value, and the present value. Market value is not a fundamental variable to all compound interest problems.

Market value.

Which of the following is included in an owners' equity section reported in the balance sheet? Classifications included in owners' equity include capital stock, retained earnings, additional paid-in capital (not accumulated capital), and noncontrolling interest (minority interest).

Noncontrolling interest.

Which of the following is not a fundamental variable that is a part of all compound interest problems? Past value is not a variable that is part of every compound interest problem. The fundamental variables to all compound interest problems are rate of interest, number of time periods, future value, and present value.

Past value.

Cash dividends divided by Net income describes which of the following ratios? The payout ratio is computed as Cash dividends divided by Net income.

Payout ratio.

The factor of 0.94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. From what interest table is this figure taken?

Present value of 1

The balance sheet is useful for analyzing all of the following except. The balance sheet is not used in analyzing profitability.

Profitability.

Which of the following pairings of an item and a basis of valuation is incorrect? Receivables are valued at estimated amount collectible (not lower-of-cost-or-market), and inventories are valued at lower-of-cost-or-market. The other pairings are all correct.

Receivables - Lower-of-cost-or-market.

Which of the following is true?

Rents occur at the beginning of each period in an annuity due.

Which of the following are acceptable balance sheet formats? The acceptable formats for the balance sheet are the account form and the report form.

Report form and account form.

Typical loss contingencies include all of the following except Typical loss contingencies include possible tax assessments, government investigations, environmental issues, and litigation. Examples of gain contingencies include tax operating-loss carryforwards.

Tax operating-loss carryforwards.

Which of the following is false?

The future value of a deferred annuity is computed using 1 more compounding period than the future value of an annuity not deferred.

Which of the following statements regarding a deferred annuity is correct? Because there is no accumulation or investment on which interest may accrue, the future value of a deferred annuity is the same as the future value of an annuity not deferred.

The future value of a deferred annuity is the same as the future value of an annuity not deferred.

Which of the following statements related to an annuity is correct? An annuity must have equal periodic payments and equal intervals between payments. An annuity can be classified as an ordinary annuity or an annuity due, not as an unordinary annuity. Compounding can be annually or for periods less than a year.

The periodic payments must always be the same amount.

Which of the following is a primary characteristic of an annuity?

The periodic rents are always equal.

When using the expected cash flow approach, which of the following interest rates is used to discount the cash flows? The FASB takes the position that after computing the expected cash flows, a company should discount those cash flows by the risk-free rate of return.

The risk-free rate of return.

Other assets include all of the following except: Other assets include restricted cash, property held for sale, and assets in special funds. Timberlands are reported as part of property, plant, and equipment.

Timberlands

Which of the following investments should always be reported as current assets? Trading securities should always be reported as current assets. Available-for-sale securities and held-to-maturity securities would be classified as current or noncurrent depending on the circumstances and long-term investments would be classified as noncurrent.

Trading securities.

A liability that is payable within the next year is sometimes included in long-term debt. A liability that is payable within the next year is sometimes included in long-term debt if the company expects to refinance the debt through another long-term issue or to retire the debt out of non-current assets.

True

All things being equal, if a company borrows money it prefers to pay simple interest. Borrowers would prefer to pay simple interest since interest is computed on the principal amount only.

True

All things being equal, if a company lends money it prefers to receive compound interest. Lenders prefer to receive compound interest because interest is computed on principal and any interest earned but not withdrawn or paid out.

True

Cash can be classified as a current or long-term asset. Companies classify restricted cash either in the current assets or in the long-term assets section, depending on the date of availability or disbursement. Cash classified in the long-term section is frequently set aside for plant expansion or retirement of long-term debt.

True

Companies frequently use judgments and estimates in valuing items on the balance sheet. Companies use judgments and estimates to determine many of the items reported on the balance sheet.

True

Environmental liabilities are valued using present value-based measurements. Present value is used to determine the fair value of environmental liabilities related to future obligations for asset retirements.

True

Indicators of poor financial flexibility include a low debt coverage ratio and negative free cash flow.

True

Liquidity refers to the amount of time that is expected to elapse until a liability has to be paid. Liquidity describes the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid.

True

The cash debt coverage ratio is equal to net cash provided by operating activities divided by average total liabilities.

True

The excess of current assets over current liabilities is referred to a net working capital. Net working capital is the excess of total current assets over total current liabilities.

True

The larger the amount of principal, the larger the dollar amount of interest. A larger dollar amount of interest results from larger amount of principal, a higher interest rate, and/or a longer time period.

True

The operating section is the first section of the statement of cash flows. .

True

The percentage-of-sales approach of estimating bad debts does a better job of matching revenues (sales) and expenses (bad debt expense) on the income statement. The percentage-of-sales approach of estimating bad debts does a better job of matching revenues (sales) and expenses (bad debt expense) on the income statement. The percentage-of-receivables approach does the best job of presenting accounts receivable at their net realizable value.

True

The present value is always a smaller amount that the known future value.

True

To convert an annual interest rate into the "compounding period interest rate", a company divides that annual interest by the number of compounding periods per year.

True

Under the direct write-off method, bad debts are only recognized when an account is determined to be uncollectible. Bad debt expense is only recognized when an account is written off under the direct write-off method.

True

Which of the following is not a major disclosure technique for the balance sheet? Worksheets are not a major disclosure technique for the balance sheet.

Worksheets.

A company with a _________________ is better able to survive bad times, to recover from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities. A company with a high degree of financial flexibility is better able to survive bad times, to recover from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities.

a high degree of financial flexibility

If, as anticipated, the FASB eliminates the cash equivalent classification, a treasury bill will be classified as: Treasury bills will be classified as temporary investments if FASB eliminates the cash equivalent classification.

a temporary investment.

Notes receivable can be classified as Notes receivable can be classified as current or noncurrent, and as either a trade or nontrade receivable.

all of these answer choices are correct.

Future value is The future value is always greater than the present value due to the interest that accumulates over time. The value now of a future amount refers to the present value; and, the amount that must be invested now to produce a known future value also refers to the present value.

always greater than the present value.

If a company cannot determine the fair value of the goods exchanged for a note, and if the note has no ready market, If a company cannot determine the fair value of the goods exchanged for a note, and if the note has no ready market, the company must approximate an applicable interest rate that may differ from the stated interest rate. The resulting interest rate is called an imputed interest rate.

an imputed interest rate is used to value the note.

Ostriker Company uses IFRS and has property and equipment on an historical cost basis of $3,600,000. At the end of the year, Ostriker appraises its property and equipment and determines it had a revaluation increase of $67,000. Ostriker records this revaluation under IFRS with Ostriker records this revaluation under IFRS with an increase to property and equipment as well as a valuation reserve in equity.

an increase to property and equipment and an increase to a valuation reserve in equity.

If a company employs the net method of recording accounts receivable from customers, then sales discounts forfeited (not taken) should be reported as If using the net method, a company considers Sales Discounts Forfeited as "Other revenues and gains" item in the income statement.

an item of "other revenues and gains" in the income statement.

Which of the following classifications is likely to be eliminated by the FASB? FASB has studied whether to eliminate cash equivalents classification.

cash equivalents

Short-term paper with maturities of less than 3 months should be classified as

cash equivalents.

The correct order to present current assets is The correct order to present current assets is cash, accounts receivable, inventories, and prepaid items.

cash, accounts receivable, inventories, prepaid items

The minimum cash amounts that banks often require customers to whom they lend money to maintain in checking accounts is called: ompensating balances are the minimum cash amounts required by banks to be maintained by their customers.

compensating balances.

Companies use a ____________ to show a direct relationship between an asset and a liability on the balance sheet? Companies use a "cross-reference" to show a direct relationship between an asset and a liability on the balance sheet.

cross-reference

The current cash debt coverage ratio is computed by dividing net cash provided by operating activities by average The current cash debt coverage ratio is computed by dividing net cash provided by operating activities by average current liabilities.

current liabilities.

Which of the following is an intangible asset? Intangible assets include patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists.

customer lists

Accounting topics where present value-based accounting measurements are relevant include: Present value concepts are applied to a wide variety of accounting measurements including environmental liabilities. However, taxes and inventory do not require the use of present value concepts.

environmental liabilities.

The process of accumulation involves determining: Accumulation involves determining the future value of amounts.

future value

The interest rate that equates the cash paid with the amount received in the future on a zero-interest-bearing note is the: The implicit rate can be computed based on the present value and the future values involved.

implicit rate.

Activities that involve the cash effects of making and collecting loans and acquiring and disposing of property, plant, and equipment are classified as: Investing activities include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment.

investing activities.

The future value of an ordinary annuity will always be:

less than the future value of an annuity due.

All of the following are properly classified as temporary investments except: Items appropriately classified as temporary investments include money market funds, money market savings certificates, and certificates of deposit (CDs). Money orders are viewed as cash.

money orders

Return on assets is computed as:

net income divided by Average total assets.

Assets include all of the following subclassifications except. Assets include 5 subclassifications: current, long-term investments, property, plant & equipment, intangibles, and other. Noncontrolling interest is a section in the stockholders' equity section of the balance sheet.

noncontrolling interest.

Major limitations of the balance sheet include all of the following except: All of the options are major limitations of the balance sheet except only amounts known with absolute certainty are reported.

only amounts known with absolute certainty are reported.

Receipt of interest from a Note Receivable would be reported as a cash inflow in which of the following sections: Operating activities involve the cash effects of transactions that enter into the determination of net income, including the cash effects of interest revenue.

operating activities.

Non-trade receivables include all of the following except Accounts Receivable (oral promises of the purchaser to pay for goods and services sold) is a trade receivable. Claims against defendants under suit, dividends receivable, and deposits paid to cover potential losses are non-trade receivables.

oral promises of the purchaser to pay for goods and services sold.

When an annuity is received at the end of each period, it is called a (n):

ordinary annuity.

The table that would show the smallest value for 7 periods at 5% is the: The present value of 1 table shows the smallest value for all periods and interest rates.

present value of 1 table.

The amounts that must be deposited now at 6% interest to permit withdrawals of $10,000 at the end of each period for a specified number of periods are contained in the:

present value of an ordinary annuity of 1 table.

Cash consists of all of the following except: All of the options are considered cash except short-term paper with a maturity of 6 months, which is classified as a temporary investment.

short-term paper with a maturity of 6 months.

The financial statement which summarizes the operating, investing, and financing activities of an entity for a period of time is the The statement of cash flows summarizes the operating, investing, and financing activities of an entity.

statement of cash flows.

Which of the following statements shows the amount of cash used to pay dividends or purchase treasury stock? Which of the following statements shows the amount of cash used to pay dividends or purchase treasury stock?

statement of stockholders' equity.

Companies are not required to disclose information about: Companies are required to disclose information about all of the options except the identity of all stockholders.

the identity of all stockholders.

Which of the following is a coverage ratio? Coverage ratios include debt to total assets, times interest earned, cash debt coverage ratio, book value per share, and free cash flow.

times interest earned