Accounting Chapter 9/10 study guide
Which of the following financial ratios provides information about the income generated per dollar of assets?
Return on assets
Which of the following ratios measures the ability of company management to generate earnings from the resources owners provide?
Return on equity
The _______rate of interest is used to compute the cash interest paid to bondholders
Stated
Evaluation of the company's profitability requires consideration of the amount of a company's earnings in relation to the size of the
investment.
Similar to a stock split, a stock ____ also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders.
dividend
The rate of interest printed on the face of a bond is referred to as the
stated interest rate
Squid Roe Inc.'s P/E ratio is 12. Which of the following statements is true?
Investors are willing to pay 12 times the current year's earnings per share of stock.
equity financing
money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital)
Retained earnings of $100,000 represent a corporation's cumulative earnings ______ and is shown on the ______.
not paid out by dividends; balance sheet and statement of retained earnings
Preferred stock is "preferred" over common stock by providing preferred stock holders with these rights
preference in distribution of assets during dissolution of corporation first right to specified amount of dividends
Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n
private placement
he return on assets measures the amount of_____ generated for each dollar of assets.
profit
Special contractually granted features can make preferred stock
redeemable cumulative convertible
Which of the following are common characteristics or provisions of bonds?
term or serial secured or unsecured convertible
The price of a bond includes
the present value of the face amount plus the present value of the periodic interest payments
Preferred stockholders have the right
to receive dividends only in the years the board of directors declares dividends.
The debt to equity ratio is calculated as
total liabilities divided by total stockholders' equity.
Which of the following are correct regarding bonds?
They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount.
Werner issues bonds at a discount. The related Discount account should be classified as a(n)
contra liability
Retained earnings are:
all of the company's earnings not distributed to stockholders. sometimes called earned capital. increased by net income. decreased by dividends.
Callable bonds can be redeemed at the choice of
bond issuer
Preferred stock tends to have attributes of
both bonds and common stock.
Charatcteristics of Preferred stock:
has preference as to dividends. is useful for raising capital without reducing common stockholders' control. generally does not have voting rights.
The journal entry to record the declaration of a dividend includes ______.
a debit to Dividends a credit to Dividends payable
Preferred stock generally (has/does not have) ______ voting rights and (has/does not have) ______ preference as to dividends.
does not have has
The ______ rate of interest on a bond is the interest rate printed on the bond, whereas the _____rate of interest is the current rate of interest being paid on investments with similar characteristics.
Stated Market
At the beginning of a lease period, the lessee records
a lease asset and lease payable for the present value of the lease payments. a lease asset and lease payable for the market value of the leas
In a private placement of bonds, bonds may be sold to
a single large investor.
Which of the following is typically presented first in the equity section of the balance sheet?
preferred stock
On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:
$13,000
Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a discount. At the end of the current fiscal period, unamortized bond discount is $4,500. The total bond-related liability reported on Omar's balance sheet should be:
195,500
Which of the following transactions are classified as a stock dividend?
A distribution of additional shares of a corporation's stock to current shareholders of the corporation.
Identify the characteristics of an annuity.
Equal time periods between payment dates A series of amounts that are equal
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of
Financial risk
Loans requiring periodic payments of interest and principle are referred to as
Installment Notes
The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by
Interest Expense
is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time
Lease
ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price? Multiple choice question.
The issue price will be above the bond's face value.
Identify two ratios commonly used to assess a company's financial risk.
Times interest earned ratio Debt to equity ratio
Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:
a lease asset a lease payable
Periodic payments on installment notes typically include
a portion that reduces the outstanding loan balance. a portion that reflects interest.
Preferred stock has a mixture of attributes of both equity and
debt
The two types of financing are
debt financing and equity financing
Dividends payable is recorded as a credit on the
declaration date
Stock dividends have the following effects on stockholders' equity
decrease in retained earnings increase in common stock no change to total stockholders' equity
The amount of dividends paid out relative to the share price is referred to as
dividend yield
The dividend yield is calculated by dividing:
dividends per share by the stock price per share
True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.
false, it needs to split in current and long term
debt financing
funds provided by lenders (creditors)
Preferred stock is advantageous in that it:
has priority over common stock at liquidation has priority over common stock when dividends are declared
The effect on the accounting equation of declaring a dividend that will be paid at a later date includes a(n):
increase in liabilities. decrease in stockholders' equity.
On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to
interest expense for $4,000. notes payable for $1,120.
Treasury stock:
is shares of stock no longer outstanding. reduces stockholders' equity. is a contra-equity account.
A bond will be issued at a premium when the market rate of interest is
less than the stated rate
A company borrows funds for a project. If the interest rate charged for the borrowed funds is less than the rate of return on the project, this is referred to as financial
leverage
Financing with_______ requires borrowing, financing with _________ requires issuing shares of stock
liabilities, equity
In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:
long term debt
A common reason for redeeming a bond prior to its maturity date is that
market interest rates decreased.
Earnings per share measures the ______ earned per share of common stock
net income
Stock splits have the following effects on stockholders' equity
no change to total stockholders' equity
Earnings per share measures the net income earned
per share of common stock
Green Company declares and issues a 20% stock dividend. The stock dividend will cause total stockholders' equity to
remain the same
A company's past profits that are not paid out in dividends are ______
retained earnings
When a corporation repurchases its bonds from the bondholders, the corporation
retired the bonds
bonds are supported by a specific asset the issuer pledges as collateral.
secured