Practice for Final Exam*

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D (the cash payment is reported as a cash flow from operating activities)

A company prepared the following journal entry: Interest expense Premium on bonds payable Cash Which of the following statements incorrectly describes the effect of this journal entry on the financial statements? A. The bonds payable book value decreases by the amount of the debit to premium on bonds payable. B. Assets decrease by the amount of the credit to cash. C. Stockholders' equity decreases by the amount of the debit to interest expense. D. The cash payment is reported as a cash flow from financing activities.

C (net income = Assets - Liabilities - dividends)

A company reported the following asset and liability balances at the end of 2009 and 2010: Total Assets: 6,800,000 (2009) 7,600,000 (2010) Total Liabilities: 3,200,000 (2009) 3,600,000 (2010) During 2010, cash dividends of $50,000 were declared and paid, and common stock was issued for $100,000. How much was the 2010 net income? A. $400,000 B. $480,000 C. $350,000 D. $300,000

A (A loss on bond retirement ($50,000) occurs because the amount paid ($920,000) is greater than the book value of the bonds ($900,000 - $30,000).

A corporation retired $900,000 of bonds which have an unamortized discount of $30,000, by repurchasing them for $920,000. How much was the gain or loss on the retirement of the bonds? A. There was a $50,000 loss. B. There was a $10,000 loss. C. There was a $10,000 gain. D. There was a $20,000 loss.

A (the journal entry to record the cash payment of interest on the due date increases interest expense and decreases the premium on bonds payable account, an adjunct-liability account. Decreasing an adjunct-liability account decreases the book value of the bonds.)

Assuming no adjusting journal entries have been made during the year, the journal entry to record the cash interest payment on the due date for bonds issued at a premium results in which of the following? A. An increase in expenses and a decrease in liabilities. B. An increase in expenses and an increase in liabilities. C. A decrease in both liabilities and stockholders' equity. D. A decrease in both assets and liabilities.

B (when a bond sells for par value, the cash interest payments result in an increase in interest expense and a decrease in assets (cash).)

Assuming no adjusting journal entries have been made, the journal entry to record the cash interest payment on the due date for bonds issued at their par value results in which of the following? A. An increase in expenses and a decrease in liabilities. B. An increase in expenses and a decrease in assets. C. A decrease in both liabilities and stockholders' equity. D. A decrease in both assets and liabilities.

D (The decrease in the numerator (cash) and the increase in the denominator (accounts payable), each would cause the quick ratio to decrease.)

At year-end 2010, General Tech reported a quick ratio of 2.75 and at year-end 2009 it was 3.10. Which of the following is a potential cause of the decrease in this ratio? A. An increase in accounts payable and a decrease in inventories. B. A decrease in inventories and an increase in long-term notes payable. C. A decrease in short-term borrowings and an increase in cash. D. An increase in accounts payable and a decrease in cash.

D (Retained earnings and common stock are unaffected by stock splits. Stock splits ONLY reduce the par value per share and increase the number of common shares.)

Chicago Clock Corporation issued a 3-for-2 stock split of its common stock, which had a par value of $100 before the split. What dollar amount of retained earnings should be transferred to the common stock account? A. Par value of $100 per share. B. Market value per share on the issue date. C. Half of the previous total amount in the common stock account. D. Retained earnings aren't transferred to the common stock account.

D (net cash inflow from operating activities = net income - ACCOUNTS PAYABLE DECREASED - prepaid assets increased + depreciation expense + accounts receivable decrease + loss on sale of depreciable asset + WAGES PAYABLE INCREASE - unearned revenue decrease + patent amortization expense) (key word is PAYABLE means it's a liability)

DJ Company, a manufacturer, has provided the following information pertaining to its recent year of operation: • Cash flow from operating activities, $272,000; • Accounts payable decreased $21,000; • Prepaid assets increased $15,000; • Depreciation expense was $27,000; • Accounts receivable decreased $21,000; • Loss on sale of a depreciable asset was $16,000; • Wages payable increased $10,000; • Unearned revenue decreased $16,000; • Patent amortization expense was $10,000. How much was DJ's net income? A. $256,000 B. $210,000 C. $198,000 D. $240,000

D (the retained earnings decrease = the number of shares issued x market price per share ON the declaration date; 20,000 x .10 x $9 = 18,000)

DORA Company declared and distributed a 10% stock dividend on 20,000 shares of issued and outstanding $5 par value common stock. The market price per share on the declaration date was $9 and was $10 on the distribution date. Which of the following correctly describes the accounting for the declaration and distribution of the stock dividend? A. Retained earnings decreased $20,000. B. Capital in excess of par increased $10,000. C. Common stock increased $18,000. D. Retained earnings decreased $18,000.

C (having operating cash flows greater than net income tends to indicate good operations cash management.)

During 2010, Boogle reported net income of $785 million and net cash inflow from operations of $1,196 million. During 2009, their net income was $563 million and net cash inflow from operations was $1,237 million. Which of the following is INCORRECT about their quality of income ratios? A. In 2009 the ratio was 2.2 and in 2010 it was 1.5. B. Their ratio in 2009 was better than their ratio in 2010. C. Boogle's quality of income ratios indicates poor performance because net income is less than cash flow. D. The ratio in both years shows the company's ability to generate good cash flow from its operating activities.

C (times interest earned = (net income + interest expense + income tax expense)/Interest expense

During 2010, Patty's Pizza reported net income of $4,212 million, interest expense of $167 million and income tax expense of $1,372 million. During 2009, they reported net income of $3,568 million, interest expense of $163 million and income tax expense of $1,424 million. What was the times interest earned ratio for 2010 and 2009 respectively? A. 32.2 and 29.4 times B. 28.4 and 23.8 times C. 34.4 and 31.6 times D. 34.1 and 26.6 times

D (treasury stock is a contra-equity account, which therefore reduces stockholders' equity. Purchasing treasury stock reduces the number of shares outstanding, which increases earnings per share because number of shares outstanding id the denominator of earnings per share.)

During 2010, Thomas Corporation repurchased some shares of its own common stock. What effect did this transaction have on 2010 stockholders' equity and earnings per share, respectively? Stockholder's Equity Earnings per share A Decrease No effect B Increase No effect C Decrease Decrease D Decrease Increase A. Option A B. Option B C. Option C D. Option D

D (The adjusting entry increases interest payable and interest expense, which decreases both net income and stockholders' equity. Failure to make the entry causes both net income and stockholders' equity to be overstated, and liabilities to be understated.)

Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of the following? A. An understatement of both liabilities and stockholders' equity. B. Net income to be overstated and assets to be understated. C. Net income to be understated and liabilities to be understated. D. An overstatement of net income, an understatement of liabilities, and an overstatement of stockholders' equity.

A (net cash inflow from operating activities = net income - accounts payable decrease - prepaid assets increase + depreciation expense + accounts receivable decrease + loss on sale of depreciable asset + WAGES PAYABLE INCREASE + - UNEARNED REVENUE DECREASE + Patent amortization expense

GJ Company, a manufacturer, has provided the following information pertaining to its recent year of operation: • Net income, $500,000; • Accounts payable decreased $42,000; • Prepaid assets increased $31,000; • Depreciation expense was $53,000; • Accounts receivable decreased $41,000; • Loss on sale of a depreciable asset was $31,000; • Wages payable increased $19,000; • Unearned revenue decreased $31,000; • Patent amortization expense was $5,000. How much was GJ's net cash inflow from operating activities? A. $545,000 B. $607,000 C. $514,000 D. $463,000

A (A decreasing level of debt will decrease interest expense and therefore increase the times interest earned ratio)

Halverson's times interest earned ratio was 2.98 in 2010, 2.79 in 2009, and 2.31 in 2008. Which of the following statements about their ratio is possibly correct? A. Their increasing ratio indicates decreasing levels of debt on which interest is incurred. B. Their increasing ratio indicates their strategy of pursuing growth by investment in other companies which has increased debt but their profits have not yet increased from those investments. C. The increasing ratio implies increased long-term debt financing D. Their increasing ratio would be considered by creditors to be an indicator of higher risk.

C (A contingent liability that is reasonably possible but cannot reasonably be estimated is disclosed in the notes to the financial statements)

How should a a contingent liability that is "reasonably possible" but "cannot reasonable be estimated" be reported within the financial statements? A. It must be recorded and reported as a liability. B. It does not need not be recorded or reported as a liability. C. It must only be disclosed as a note to the financial statements. D. It must be reported as a liability, but not disclosed in a note.

C (Common stock is credited for stated value (100,000) and capital in excess of par is credited for the excess of the selling price above stated value (600,000).)

Irish Corporation issued (sold) 10,000 shares of its no par common stock for $70 per share. The bylaws established a stated value of $10 per share. The transaction would increase the common stock account on the balance sheet by how much? A. $0 B. $600,000 C. $100,000 D. $700,000

C (net cash inflow from operating activities = net income + accounts payable increase + prepaid asset decrease + depreciation expense - accounts receivable increase + loss on sale of depreciable asset - wages payable decrease - UNEARNED REVENUE DECREASE + patent amortization expense

KJ Company, a manufacturer, has provided the following information pertaining to its recent year of operation: • Cash flow from operating activities, $136,000; • Accounts payable increased $11,000; • Prepaid assets decreased $8,000; • Depreciation expense was $12,000; • Accounts receivable increased $23,000; • Loss on sale of a depreciable asset was $6,000; • Wages payable decreased $9,000; • Unearned revenue decreased $19,000; • Patent amortization expense was $3,000. How much was KJ's net income? A. $185,000 B. $135,000 C. $147,000 D. $131,000

B (Accounts Payable turnover = COGS / average accounts payable ((83M + 72M)/2))

Landseeker's Restaurants reported cost of goods sold of $322 million and accounts payable of $83 million for 2011. In 2010, the COGS was $258 million and accounts payable was $72 million. What was Landseeker's accounts payable turnover ration in 2011? A. 4.23 B. 4.15 C. 4.04 D. 3.91

A (The straight-line premium amortization ($236) = Premium on bonds payable ($102,360 - $100,000)/10 annual interest payments

Mayberry, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 2009, for $102,360 on April 1, 2009. The bonds pay interest annually on April 1. Straight-line amortization is used by the company. What entry is needed at April 1, 2010 for the first interest payment? A. Interest Expense 11,764 Premium on bonds payable 236 Credit: Cash 12,000 B. Interest Expense 12,236 Credit: Premium on bonds payable 236 Cash 12,000 C. Interest Expense 12,000 Premium on bonds payable 236 Credit: Cash 12,236 D. Interest Expense 12,000 Credit: Cash 12,000 A. Option A B. Option B C. Option C D. Option D

B (Interest expense (4000) = amount borrowed (100,000) x Interest Rate (6%) x number of months borrowed (8/12) The credit to cash (106,000) = amount borrowed (100,000) + interest for one year (6000))

Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6% interest-bearing not payable. Assuming no adjusting entries have been made during the year, the required adjusting journal entry at the end of the accounting period, August 31, 2011, would be which of the following? A. Debit interest expense 6000, Credit cas 6000 B. Debit interest expense 4000, debit interest payable 2000, debit notes payable 100,000, Credit cash 106,000 C. Debit notes payable 100,000, Debit interest expense 6000, credit cash 106,000. D. Debit interest payable 2000, debit notes payable 100,000, credit cash 102,000

A (Interest expense of 2000 = amount borrowed for (100,000) x interest rate (6%) x number of months borrowed relative to a year (4/12)

Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6% interest-bearing not payable. Assuming no adjusting entries have been made during the year, the required adjusting journal entry at the end of the accounting period, December 31, 2010, would be which of the following? A. Debit interest expense for 2000 and credit interest payable for 2000 B. Interest expense for 6000, Interest payable for 6000 C. Debit Notes Payable for 100,000, Debit Cash for 6000, Credit cash for 106,000 D. Debit Interest Payable for 2000, credit interest expense for 2000.

C (Non-cash investing and financing activities are reported as a supplement to the statement of cash flows)

Non-cash financing and investing activities A. must be reported in the notes to the financial statements. B. are not separately disclosed within the financial statements. C. are disclosed in a separate schedule as a supplement to the statement of cash flows. D. are reported as cash flows because of their significance.

C (Bond issued price ($4,435,00)= Present value of the bond maturity value ($5,000,000 x .322) + Present value of the bond interest payments ($5,000,000 x .10) x 5.650)

On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually. The following present value factors have been provided: Time Period Interest PV of $1 PV of a $1 Annuity 10 10% .386 6.145 10 8% .463 6.710 10 12% .322 5.650 Calculate the issuance price if the market rate of interest is 12%. A. $4,427,500 B. $4,477,500 C. $4,435,000 D. $5,000,000

B (Bond issue price ($5,670,000)= Present value of the bond maturity value ($5,000,000 x .463) + Present value of the bond interest payments ($5,000,000 x .10) x 6.710)

On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually. The following present value factors have been provided: Time Period Interest PV of $1 PV of a $1 Annuity 10 10% .386 6.145 10 8% .463 6.710 10 12% .322 5.650 What was the issuance price of the bonds if the market rate of interest was 8%? A. $5,000,000 B. $5,670,000 C. $5,387,500 D. $5,712,500

C ( semi-annual interest expense ($10,350) = semi-annual cash payment ($300,000 x .07 x 6/12) - Discount on bonds payable amortization ($150).

On July 1, 2010, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2010, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses the straight-line method of amortization. How much is the semi-annual interest expense? A. $14,000 B. $14,150 C. $10,350 D. $11,000

B (The straight-line discount amortization ($45) = discount on bonds payable ($30,000 - $29,100)/20 semi-annual interest payments.

On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2009, and interest is payable each November 1 and May 1. How much is the amount of straight-line discount amortization on each semi-annual interest date? A. $90 B. $45 C. $900 D. $450

C (The November 1, 2010 book value ($29,190) = The initial issue price ($29,100) + two periods of discount amortization (2 x $45).)

On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2009, and interest is payable each November 1 and May 1. How much is the book value of the bonds after the November 1, 2010 interest payment was recorded, assuming the straight-line method of amortization is utilized? A. $29,010 B. $29,100 C. $29,190 D. $29,280

C (Semi-annual interest expense ($1,095) = semi-annual cash payment ($30,000 x .07 x 6/12) + Discount on bonds payable amortization ($45).)

On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2009, and interest is payable each November 1 and May 1. How much is the semi-annual interest expense when the straight-line method is utilized? A. $2,010 B. $2,190 C. $1,095 D. $2,055

D

On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2009, and interest is payable each November 1 and May 1. Which of the following is incorrect assuming the straight-line method of amortization is utilized? A. The market rate of interest exceeded the stated rate of interest when the bonds were issued. B. The semi-annual interest expense is $1,095. C. The book value of the bonds increases $45 every six months. D. The semi-annual interest expense is less than the semi-annual cash interest payment.

A (2011 Interest Expense ($2,667)= Amount borrowed ($50,000) x interest rate (6%) x number of months borrowed relative to a year (8/12)

On September 1, 2010, Donna Equipment signed a one-year, 8% interest-bearing note payable for $50,000. Assuming that Donna Equipment maintains its books on a calendar year basis, how much interest expense that should be reported in the 2011 income statement? A. $2,667 B. $4,000 C. $1,333 D. $3,000

C (December 31, 2010 interest payable ($500) = amount borrowed ($25,000) x interest rate (8%) x number of months borrowed during 2010 relative to a year (3/12)

Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interest-bearing note payable with interest payable at maturity. Assuming that no adjusting entries have been made during the year, the amount of accrued interest payable to be reported on the December 31, 2010 balance sheet is which of the following? A. $250 B. $300 C. $500 D. $750

C (net cash inflow from operating activities = net income + accounts payable + prepaid rent decrease + depreciation expense - accounts receivable increase - gain on sale of building - wages payable decrease + unearned revenue increase)

RM Company, a manufacturer, has provided the following information pertaining to its recent year of operation: • Net income, $300,000; • Accounts payable increased $24,000; • Prepaid rent decreased $10,000; • Depreciation expense was $35,000; • Accounts receivable increased $34,000; • Gain on sale of a building was $11,000; • Wages payable decreased $21,000; • Unearned revenue increased $44,000. How much was RM's net cash inflow from operating activities? A. $259,000 B. $327,000 C. $347,000 D. $358,000

B (Net financing cash outflow (-$2,320,000) = note payable principal payment (-$2,300,000) + cash dividend payment (-$20,000)

Roberts Company sold equipment for $250,000, purchased a building for $6,500,000, sold short-term investments for $280,000, repaid principal on a note payable for $2,300,000 plus $230,000 of interest, and paid cash dividends of $20,000. How much was the net cash flow from financing activities? A. $2,300,000 outflow B. $2,320,000 outflow C. $2,530,000 outflow D. $2,550,000 outflow

D (Net investing cash outflow (-$5,970,000) Equipment sale ($250,000) + Building purchase (-$6,500,000) + short-term investment sale ($280,000)) (Building purchase is negative because outflow is a negative balance)

Roberts Company sold equipment for $250,000, purchased a building for $6,500,000, sold short-term investments for $280,000, repaid principal on a note payable for $2,300,000 plus $230,000 of interest, and paid cash dividends of $20,000. How much was the net cash flow from investing activities? A. $6,250,000 outflow B. $8,320,000 outflow C. $8,270,000 outflow D. $5,970,000 outflow

A (Earnings per share (2.50) = net income (500,000)/outstanding shares (225,000 - 25,000)).

Rye Company has provided the following information: • Number of issued common shares, 225,000; • Net income, $500,000; • Number of authorized common shares, 400,000; • Number of treasury shares, 25,000. What is Rye's earnings per share? A. $2.50 B. $1.25 C. $2.22 D. $1.33

C (the preferred stock annual dividend (3,500) = preferred stock par value (1000 x $50) x 7%. For 2010, multiple this number by all the years ACCUMULATIVE. So 2008, 2009, and 2010, is 3500 x 3 = 10,500.)

Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the preferred stockholders during 2010 assuming the preferred stock is cumulative? A. $3,500 B. $7,000 C. $10,500 D. $14,500

D (14,500 = 25,000 - (3,500 x 3 years accumulated).)

Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the common stockholders during 2010 assuming the preferred stock is cumulative? A. $3,500 B. $7,000 C. $22,500 D. $14,500

C (the 2010 dividend payment to the common stockholders ($21,500) = the 2010 common stock payment (25,000) - preferred stocks payment (3,500).)

Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the common stockholders during 2010 assuming the preferred stock is noncumulative? A. $3,500 B. $7,000 C. $21,500 D. $14,500

C (The cash payment decreases current assets and therefore working capital. The equipment is a long-term asset.)

Smith Corporation entered into the following transactions: - Purchased inventory on account - Collected an account receivable - Purchased equipment using cash. Which of the following statements is correct? A. The inventory purchase on account increased working capital. B. Collecting an account receivable increases working capital. C. The equipment purchase decreases working capital. D. The inventory purchase on account increased the quick ratio.

D. (The adjusting entry increases interest payable and interest expense, which decreases both net income and stockholders' equity. An accrual doesn't involve a cash flow and doesn't affect current assets.)

The adjusting entry to record accrued interest on a note payable would not result in which of the following? A. A decrease in net income B. A decrease in stockholders' equity C. An increase in liabilities D. A decrease in current assets.

D (Dividends are distributions of retained earnings and therefore decrease retained earnings. The cash payment reduces assets.)

The declaration and payment of a cash dividend A. reduces retained earnings and increases liabilities by the amount of the dividend. B. reduces retained earnings and increases contributed capital by the same amount. C. reduces assets and increases liabilities by the amount of the dividend. D. reduces both assets and retained earnings by the amount of the dividend.

B (Cash flow from operating activities = net income - decrease in accounts payable - INCREASE IN INVENTORY - increase in accounts receivable + loss on sale of depreciable asset + Depreciation expense - decrease in income taxes payable)

The following information has been provided to you by RKJ Company: Net income $300,000 Decrease in accounts payable $114,000 Increase in inventory $22,000 Increase in accounts receivable $24,000 Decrease in bonds payable $25,000 Loss on sale of a depreciable asset $19,000 Depreciation expense $40,000 Decrease in income taxes payable $12,000 What is the net cash flow from operating activities? A. $231,000 B. $187,000 C. $206,000 D. $168,000

A (Stockholders' equity increase (107,000) = common stock issue (50,00) - cash dividends declared (20,000) + Net income (70,000) + treasury stock sale (7,000).)

Wendell Company provided the following pertaining to its recent year of operation: • Common stock with a $10,000 par value was sold for $50,000 cash. • Cash dividends totaling $20,000 were declared, of which $15,000 were paid. • Net income was $70,000. • A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. • Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's total stockholders' equity increase during the recent year of operation? A. $107,000 B. $84,000 C. $80,000 D. $112,000

B (an accrued liability is recorded when an expense is incurred but not yet paid.)

Which of the following describes an accrued liability? A. It is an expense that has been both incurred and paid. B. It is an expense that has been incurred but not yet paid. C. It is an expense that has been prepaid but not yet consumed. D. It is a liability where the cash flow has taken place but the revenue has yet to be earned.

A

Which of the following entries would be recorded when a company reissues 1,000 shares of treasury stock for $50 per share when they were repurchased at a cost of $47 per share and have a $1 par value? A. Cash 50,000 Credit: treasury stock 47,000 Additional paid-in capital 3,000 B. Cash 50,000 Credit: treasury stock 47,000 Retained earnings 3,000 A. Cash 50,000 Credit: common stock 1,000 Additional paid-in capital 49,000 A. Cash 50,000 Credit: treasury stock 47,000 Gain on sale of treasury stock 3,000 A. Option A B. Option B C. Option C D. Option D

C (earnings per share = net income/average number of common shares outstanding)

Which of the following statements INCORRECTLY describes earnings per share? A. Earnings per share are per common share. B. An increase in the market price per common share does not result in a decrease in earnings per share. C. An increase in dividends per share results in an increase in earnings per share. D. The reissue of treasury stock decreases earnings per share.

C (receipt of cash dividends are reported as operating cash flows)

Which of the following statements about the statement of cash flows is correct? A. A company with a net loss on the income statement will always have a net cash outflow from operating activities. B. A purchase of equipment is classified as a cash inflow from investing activities. C. Cash dividends received on stock investments are classified as cash flows from operating activities. D. Cash dividends paid are classified as cash flows from operating activities.

C

Which of the following statements best describes callable bonds? A. They can be turned in for early retirement at the option of the bondholder. B. They can be converted into common stock at the option of the bondholder. C. They can be called for early retirement at the option of the issuer. D. They can be called for early retirement at the option of the lien holder.

B

Which of the following statements best describes convertible bonds? A. They can be turned in for early retirement at the option of the bondholder. B. They can be converted to common stock at the option of the bondholder. C. They can be called for early retirement at the option of the issuer. D. They can be converted to common stock at the option of the issuer.

C (Dividend yield = dividends per share/market price per share)

Which of the following statements correctly describes either the dividend yield or earnings per share? A. The dividend yield decreases when net income increases. B. Earnings per share are per share of both common and preferred stock. C. The dividend yield increases when the market price per share decreases. D. Earnings per share decreases when dividends per share decrease.

D (The payment of interest expense on the due date results in amortization of the discount on bonds payable account, which is a contra-liability account. Amortizing (reducing) a contra-liability account increases the book value of the bond liability.)

Which of the following statements correctly describes the accounting for bonds that were issued at a discount? A. The market rate of interest is less than the stated interest rate. B. The interest expense over the life of the bonds will be less than the cash interest payments. C. The present value of the bonds' future cash flows is greater than the bonds' maturity value. D. The book value of the bond liability increases when interest payments are made on the due dates.

D (the payment of interest expense on the due date results in a decrease in assets and an increase in interest expense)

Which of the following statements doesn't correctly describe the accounting for bonds that were issued at their maturity value? A. The market rate of interest equals the stated interest rate. B. The interest expense over the life of the bonds will equal the cash interest payments. C. The present value of the bond's future cash flows equals the bond's maturity value. D. The book value of the bond liability decreases when interest payments are made on the due dates.

B (cash dividends are financing activities cash outflows)

Which of the following statements is NOT correct? A. Issuance of common stock creates a financing activities cash inflow. B. Payment of a common stock cash dividend creates an operating activities cash outflow. C. Purchase of treasury stock creates a financing activities cash outflow. D. Issuance of preferred stock creates a financing activities cash inflow.

A

Which of the following statements is correct? A. A secured bond has specific assets pledged as collateral to secure it. B. An unsecured bond can be paid at the option of the issuer. C. A bond trustee is appointed to represent the issuing company. D. The bond indenture specifies the market rate of interest the investors will earn

C (expenses should be recognized when they are incurred)

Which of the following statements is correct? A. Social Security tax is employer paid only. B. The pay period always ends in conjunction with the company's fiscal year end. C. Many fringe benefits such as sick and vacation leave benefits should be recognized when employer earns the benefit not when they take the leave. D. Unemployment taxes are paid by the employee only

D (earning per share = net income/average number of shares outstanding) (Dividend yield = dividends per share/market price per share)

Which of the following statements is correct? A. The dividend yield and earnings per share both have the same denominator. B. The dividend yield and earnings per share both have the same numerator. C. Dividends per share are used in calculation of both earnings per share and dividend yield. D. Net income is used in the calculation of earnings per share but not in the calculation of dividend yield.

C (treasury stock transactions are financing activities.)

Which of the following statements is not correct? A. Cash flow from financing activities increases when treasury shares are reissued. B. Cash dividends decrease cash flow from financing activities. C. Cash flow from investing activities decreases when treasury shares are purchased. D. Issuance of a seasoned new issuance of stock increases cash flow from financing activities. E. AACSB Tag: Relative Thinking

D (The market rate of interest is used to determine the selling price of the bond, not the cash interest payments.)

Which of the following statements is not correct? A. The bond principal is the amount due at the maturity date of the bond. B. The stated interest rate is used to determine the cash interest payments. C. The bond principal is used to determine the cash interest payments. D. The market rate of interest is used to determine the cash interest payments.

B (a higher EPS is expected when the market price of a stock is relatively higher)

Which of the following statements regarding earnings per share (EPS) is correct? A. EPS can't be used to compare different size companies. B. Investors expect a higher EPS for companies with higher stock prices. C. It is calculated by dividing net income by the number of common shares issued. D. It increases when the number of shares of common stock outstanding increases.

D (the debt to equity ratio measures debt relative to equity and is an assessment of investor and creditor risk.)

Which of the following statements regarding the debt to equity ratio is correct? A. A high ratio means that the company is primarily financed through stockholder investments. B. A higher ratio is preferred. C. It is a measure of a company's ability to pay its debt. D. It is a measure of investor and creditor risk.

D

Which of the following statements regarding use of the direct and indirect methods of determining cash flows from operating activities is incorrect? A. The indirect method starts with net income. B. The direct method calculates cash collected from customers. C. The majority of U.S. companies use the indirect method. D. The FASB recommends use of the indirect method.

B (the declaration and distribution of a common stock dividend decreases retained earnings and increases additional paid-in capital by equal amounts.)

Which of the following transactions doesn't result in an increase in stockholders' equity? A. Sale of no par common stock for cash. B. Declaration and distribution of a common stock dividend. C. Sale of preferred stock for cash at par value. D. Sale of treasury stock for cash at a price less than its cost.

B (accounts payable turnover = COGS/average accounts payable; a return of inventory purchased by a customer decreases cost of goods sold)

Which of the following transactions will decrease the accounts payable turnover ratio? A. Using cash to pay an accounts payable balance. B. Selling inventory on account. C. Selling inventory for cash. D. A customer returning inventory purchased on account.

B (a note purchased nine years ago will not become a cash equivalent)

Which of the following would NOT be considered a cash equivalent? A. A 30-day certificate of deposit. B. A ten-year treasury note purchased over nine years ago, which matures in two months. C. A three-month Treasury bill. D. A ten-year Treasury note purchased two months before maturity.

B (Patent amortization expense is an operating activities charge and is therefore added to net income)

Which of the following would be added to net income when determining cash flows from operating activities under the indirect method? A. A decrease in accounts payable. B. Patent amortization expense. C. An increase in prepaid insurance. D. A gain on the sale of a depreciable asset.

D (a gain on the sale of a depreciable asset would be deducted from net income because the transaction is an investing activity)

Which of the following would be deducted from net income when determining cash flows from operating activities under the indirect method? A. An increase in accounts payable. B. Depreciation expense. C. A decrease in prepaid insurance. D. A gain on the sale of a depreciable asset.

D (collection of interest is an operations activity)

Which of the following would not be a cash flow from investing activities? A. Purchase of long-term investments. B. Sale of a patent. C. Collection of principal on a long-term note receivable. D. Collection of interest revenue on a long-term note receivable.

C (A contingent liability that is reasonably possible and can reasonably be estimated is disclosed in the notes of the financial statements.)

Young Company is involved in a lawsuit. In which of the following situations is only footnote disclosure of the contingent liability reported within the financial statements? A. When the loss is remote and the amount cannot be reasonably estimated. B. When the loss is probable and the amount can be reasonably estimated. C. When the loss is reasonably possible and the amount can be reasonably estimated. D. When the loss is remote and the amount can be reasonably estimated.

B (A contingent liability that is probable and can be reasonably estimated is reported as a liability on the balance sheet.)

Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance sheet? A. When the loss probability is remote and the amount can be reasonably estimated. B. When the loss is probable and the amount can be reasonably estimated. C. When the loss probability is reasonable possible and the amount can be reasonably estimated. D. When the loss is probable regardless of whether the loss can be reasonably estimated.

A (When a bond sells at par value, the cash proceeds and bond liability equals the par value of the bond.)

the journal entry to record the sale of bonds at their par value results in which of the following? A. An increase in assets and liabilities equal to the par value of the bonds. B. An increase in assets and liabilities equal to the par value of the bonds and their associated interest payments. C. An increase in assets equal to the par value of the bonds and an increase in liabilities equal to the bond's future cash flows. D. An increase in assets and liabilities equal to the bonds' future cash flows.


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