Financial Statements 2 (Ch 5-8)

Companies that engage in long-term sales contracts such as construction projects often use the *cost-to-cost method to recognize revenue.* This means that revenue is recognized in proportion to the project's completion.

True

Contingent liabilities that are *'probable'* and can be reasonably estimated are recorded on the *balance sheet as a liability* and as an *expense in the income statement*.

True

Credit ratings are an *opinion* of a company's relative default risk.

True

If HJ Heinz loses its dominance in the ketchup market and eventually becomes bankrupt, its preferred *shareholders carry senior positions as claimants in bankruptcy* vis-à-vis common shareholders.

True

In 2006, Target paid $750 million of cash dividends. These dividends *reduced assets* and *reduced retained earnings*.

True

Next year, Chemical Corporation plans to build a laboratory dedicated to a special project. The company *will not use the laboratory after the project is finished. Under GAAP, this laboratory should be expensed.*

True

R&D expense is treated as an *operating expense, not a capital expenditure*, unless the R&D assets acquired have an alternative future use.

True

Revenues from discontinued operations of a company are reported separately from revenues from continuing operations in the income statement.

True

The market rate of interest is *equal* to the risk-free rate plus a risk premium.

True

When Kimberly-Clark recently repurchased its stock, this action "downsized" the company. This has the *opposite financial statement effects as stock issuance*.

True

When a *"large" stock dividend is paid out*, *retained earnings are reduced by the par value* of the stock.

True

When there is a purchase and *sale of stock*, or a payment of dividends, there is *never any gain or loss* recorded.

True

Which of the following corporate debt ratings are ordered in terms of *decreasing market* interest rate? A) AAA, A, BB, C B) A, AAA, BB, C C) BB, C, A, AAA D) C, BB, A, AAA E) None of the above

D) C, BB, A, AAA

Which of the following business factors does *not* play a role in determining a company's *credit* rating? A) Industry characteristics B) Capital structure C) Management D) Corporate marketing E) Profitability

D) Corporate marketing

*Market prices of bonds fluctuate* because the company's *obligation* (in the form of principal and interest payments) *remains fixed*.

True

According to GAAP revenue recognition criteria, in order for revenue to be recognized on the income statement, *it must be earned and realized* (realizable).

True

*Accrued liabilities* are obligations for which there is *no external transaction*.

True

R&D: Acquired or Multiple-Use

Capitalize + Depreciation

In May 2011, Cerner Corporation. announced a 2-for-1 stock split. On the split date, Cerner had about 83.25 million shares outstanding. After the split the number of shares outstanding was: A) 124.875 million B) 83.25 million C) 41.625 million D) 166.5 million E) None of the above

D) 166.5 million (83.25x2)

Which best describes par value for a stock? A) An arbitrary amount set by the company for each share of stock B) The value of the stock if it is not sold for a premium or discount C) The current market value of the stock D) The value at which stock shares were originally issued E) None of the above

A) An arbitrary amount set by the company for each share of stock

If a company issues 1,000 shares of common stock at a market price of $40 per share, which of the following is the *correct balance sheet effect?* A) Increase cash by $40,000 and increase contributed capital by $40,000 B) Increase cash by $40,000 and increase earned capital by $40,000 C) Increase stock revenues by $40,000 D) Stock issuances are not reported on the balance sheet E) None of the above

A) Increase cash by $40,000 and increase contributed capital by $40,000

Costco Wholesale Corporation collects *annual non-refundable membership fees* from customers. When should Costco *recognize revenue for these membership fees*? A) Immediately when cash is received because the fees are nonrefundable B) Evenly over the membership year C) Evenly over the current fiscal year D) At the end of the membership year when Costco has discharged its obligation to the customer E) Pro rata over the customer's actual purchasing pattern

B) Evenly over the membership year

Dow Chemical Corporation plans to build a laboratory dedicated to a special project. *The company will not use the laboratory after the project is finished. Under GAAP*, this laboratory should be: A) Capitalized and depreciated B) Expensed in the current year C) Depreciated and expensed D) Capitalized only E) None of the above

B) Expensed in the current year

Which one of the following items is *not* a component of contributed capital? A) Preferred stock B) Retained earnings C) Common stock D) Additional paid-in capital E) All of the above

B) Retained earnings

In general, how do credit analysts determine the *risk-free rate*? A) The average corporate yield B) The yield on U.S. Government borrowings C) The rate defined by the largest U.S. banks D) The weighted-average corporate yield based on the preceding four quarters E) None of the above

B) The yield on U.S. Government borrowings

Ticketmaster contracts with the producer of Blue Man Group to sell tickets online. Ticketmaster charges each customer a fee of $9 per ticket and receives $22 per ticket from the producer. Ticketmaster does not take control of the ticket inventory. Average ticket price for the event is $105. How much revenue should Ticketmaster recognize for each Blue Man Group ticket sold? A) $9 because the $22 from the producer is similar to a negative cost of goods sold B) $105 because the $83 is cost of goods sold paid to the Blue Man Group producer C) $31 because both the fee from the customer and the Blue Man Group producer are earned D) $114 because the $83 is cost of goods sold paid to the Blue Man Group producer E) None of the above

C) $31 because both the fee from the customer and the Blue Man Group producer are earned

Convertible preferred stock conveys what additional benefit over common stock? A) Convertible preferred stock has a fixed dividend yield. B) Unpaid dividends on convertible preferred stock are paid before common stock dividends. C) Convertible preferred stock has a senior claimant position in bankruptcy. D) Convertible stock can be converted into the company's debt security. E) All of the above

C) Convertible preferred stock has a senior claimant position in bankruptcy.

The 2012 financial statements of Fixx Corporation report that the company paid dividends of $17,350,000 to its *preferred shareholders before paying dividends to its common shareholders*. This practice is called: A) Liquidation preference B) Treasury preference C) Dividend preference D) Stock ownership preference E) None of the above

C) Dividend preference

*Credit analysis* concerns which of the following? A) The price of a company's stock B) The ability of a company to consistently pay dividends C) The probability a company will make timely payments D) An assessment of a company's credit-granting policies E) None of the above

C) The probability a company will make timely payments

Which of the following does *not* represent a *current liability*? A) Accrual of taxes payable B) Short-term loan C) Purchase of equipment on credit D) Bond issue E) None of the above

D) Bond issue

In times of *falling prices*, *choosing LIFO over FIFO* as an inventory cost method would affect the financial statements as follows: A) Cost of goods sold will be higher and ending inventory will be lower B) Cost of goods sold will be lower and ending inventory will be lower C) Cost of goods sold will be higher and ending inventory will be higher D) Cost of goods sold will be lower and ending inventory will be higher E) None of the above

D) Cost of goods sold will be lower and ending inventory will be higher

Which of the following does *not* affect the *current liabilities* section of the balance sheet? A) Purchase of inventory on credit B) Wages owning to employees but not yet paid C) Insurance bill to be paid next month D) Sale of goods on credit E) A probable legal obligation, due within 12 months

D) Sale of goods on credit

Which of the following estimates are *not always required when calculating depreciation* expense? Select all that apply. A) Depreciation rate B) Useful life C) Depreciation method D) Salvage value E) None of the above

D) Salvage value

Apple, Inc. reported research and development expense of $10,045 million on its 2016 income statement. This expense included many types of costs. Which of the following types of costs would *not* be included in the $10,045 million? A) Salaries and wages for R&D personnel B) Costs of applying for FDA approval C) Depreciation on equipment used in experiments D) Supplies and inventory related to R&D activities and new-product sales E) None of the above

D) Supplies and inventory related to R&D activities and new-product sales

Which of the following items creates *complications related to revenue recognition*? A) Bonuses tied to sales goals B) Long-term construction contracts C) Multiple element sales contracts D) Consignment goods E) All of the above

E) All of the above

Why might a company repurchase its own stock? A) It believes that the market undervalues its shares B) To offset dilutive effects of employee stock options granted C) To recognize an economic gain when the treasury shares are later sold for a profit D) To improve earnings per share by reducing the denominator E) All of the above

E) All of the above

One difference between *straight-line* and *double-declining-balance depreciation *methods is that: A) Straight-line method will fully depreciate the asset more quickly. B) Double-declining-balance method will fully depreciate the asset more quickly. C) Income taxes paid will be lower under the double-declining-balance method. D) Losses on disposal will be lower under the straight-line method. E) None of the above

E) None of the above

R&D: Internal or Single-Use

Expense

*Higher credit-rated* borrowers receive *lower interest rates* than lower credit-rated borrowers, but the differences are typically not significant.

False

*Retained earnings* and accumulated other comprehensive income (AOCI) *can be found in the contributed capital section of stockholders' equity*.

False

A bond selling for an amount *above face value* is said to be selling at a *discount*.

False

A company is *worse off by paying cash* dividends because it *must record a loss* for this transaction in its income statement.

False

A seller, acting as an agent for another company by *selling the company's goods on consignment*, recognizes the *gross amount of the sale as revenue.*

False

A stock split is a *monetary transaction*. Consequently, a company that splits its stock must make several financial statement adjustments.

False

Bed Bath and Beyond has a return policy which states that the customer "may return a purchase for a refund, merchandise credit, or exchange to any of our stores nationwide or to our returns processing center". The *company can report revenue on the full amount as soon as the merchandise is sold.*

False

If accrued liabilities are *overestimated* in the current period, the *reported income in a following period will be lower* than it should be.

False

Kimberly-Clark recently repurchased 5.6 million shares of common stock at a price of $43 per share. One plausible reason for this is that the company feels that its *stock is overvalued* at the current market price.

False

The effective rate of a bond *typically* equals the yield (market) rate.

False

*Accounts payable* are a *short-term* source of *non-interest-bearing* financing.

True