Accounting Exam 3 SmartBooks + Lecture Guides
liabilities
Assets are financed with _____________ and stockholders' equity.
liabilities or debt or credit or creditor's debit
Assets are financed with _________________ and stockholders' equity.
issued minus the number of shares in treasury
the number of shares outstanding equals the number of shares __________________________________________________________
effective-interest
Which method of bond amortization amortizes the premiums/discounts accurately and is considered a conceptually superior method?
not generating enough income to cover its interest expense (Times interest earned ratio = (net income + interest expense + income tax expense)/interest expense. If the ratio is less than 1.0, it means there is not enough income (the numerator) to cover its interest expense (the denominator).)
When the times interest earned ratio is less than 1.0, a company is ______.
Additional Paid-in Capital (Reason: Retained Earnings and Common Stock are used for both small and large, and Cash is used for neither. Because a small stock dividend is recorded at market value, Additional Paid-in Capital is used for a small stock dividend; large stock dividends are recorded at par, so there is no Additional Paid-in Capital to record.)
Which of the following accounts is used to record a small stock dividend on common stock but is not used to record a large stock dividend on common stock?
Accounts Payable Salaries and Wages Payable Note Payable due in 3 months
Which of the following are current liabilities?
Accounts Payable Salaries and Wages Payable Note Payable due in 3 months
Which of the following are current liabilities? (Check all that apply.
Federal unemployment tax (FUTA) Charitable contributions State unemployment tax (SUTA)
Which of the following are not required payroll deductions from an employees' gross earnings? (Check all that apply.)
Federal unemployment tax (FUTA) State unemployment tax (SUTA) Charitable contributions
Which of the following are not required payroll deductions from an employees' gross earnings? (Check all that apply.)
Treasury Stock Additional Paid-in Capital Common Stock
Which of the following line items would be found on a statement of stockholders' equity that would not be on the statement of retained earnings?
Stock Issuances Treasury Stock Dividends Net Income Additional Paid-in Capital
Which of the following would be found on a statement of stockholders' equity?
Probable contingent liability that can be estimated
Which type of contingent liability would most likely be found on a balance sheet prepared under US GAAP?
Installment notes
Which type of note requires the borrower to pay interest and principal to the lender over the note's life to maturity with no balloon payment at maturity?
Because small stock dividends are recorded at market value. (Reason: Because a small stock dividend is recorded at market value, Additional Paid-in Capital is used to report the amount by which the market value of the stock exceeds its par value.)
Why is Additional Paid-in Capital recorded for a small stock dividend?
retained earnings
_____________ ___________________ reports the cumulative amount of net income earned by the company less the cumulative amount of dividends since the corporation was first organized. Represents earned capital
preferred stockholders
________________ _____________________ has preference to dividends and is useful for raising capital without reducing common stockholders control
contributed
________________ capital, also called paid-in capital, reports the amount of capital the company received from investors
face value of the bonds are paid
A bond's maturity date is the date on which the ______.
used to calculate interest payments always expressed as an annual interest rate
A bond's stated interest rate is ______. (Check all that apply.)
Treasury Stock
A corporation's own stock that has been reacquired by the corporation and is being held for future use.
dues are paid purchases are made on credit
Accounts (or trade) Payable is debited when ________________ and credited when ___________________
is shown in parentheses on the balance sheet means that Retained earnings has a debit balance indicates accumulated net losses
Accumulated Deficit ______.
$100,000 ( interest only arrises as time passes, it is initially recorded as the initial amount )
Ace Electronics signed a 10-year, $100,000, 4% note payable on January 1. When the note is signed, Ace should record a liability of ______.
accumulated more net losses than net income
An accumulated deficit means a company has ______.
pay equal amounts over the note's life to maturity with each payment consisting of interest and principal
An installment note differs from an interest-only note in that it requires the borrower to ______.
0.6 or 60%. (Reason: Beginning liabilities equal $60,000 or $120,000 x 0.5. Ending liabilities equal $96,000 or $60,000+$36,000. Debt-to-assets equals 0.6 or $96,000/($120,000+$40,000).)
At the beginning of the year, a firm had $120,000 in total assets and a debt-to-assets ratio of 0.5 or 50%. During the year, the firm's assets increased by $40,000, and its liabilities increased by $36,000. What is the debt-to-assets ratio at the end of the year?
Additional Paid-in Capital Common Stock Retained Earnings
Daffy Duct Inc. declared a small stock dividend and issued 1,000 shares of $1 par value common stock when the price of the stock was $4 each. Identify all appropriate account titles that may be used to record this issuance of stock.
Retained Earnings Common Stock Additional Paid-in Capital
Daffy Duct Inc. declared a small stock dividend and issued 1,000 shares of $1 par value common stock when the price of the stock was $4 each. Identify all appropriate account titles that may be used to record this issuance of stock. (Check all that apply.)
equity financing (this does not have to be repaid and the company is already in debt)
Dew Drop Inc has a current ratio of 0.9 to 1.0 and $4 of debt for every 41 of equity. If Dew Drop Inn needs additional financing it would best improve its financial situation with _________________________
20.00
During the year, Lox, Stock and Bagel Inc.'s net income was $60,000. Its average stockholders' equity was $240,000, and it had 120,000 shares outstanding the entire year. Its stock was selling for $10 per share. Its P/E ratio equals ______. The company has no preferred stock. Multiple choice question.
$0 (Reason: No liability should be recorded because the loss is "not likely" to occur (and, therefore, is not probable).)
During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet? Multiple choice question.
Net Income
Earnings per share (EPS) equals ______ divided by the average shares of common stock outstanding.
dividing net income less preferred dividends by the average common shares outstanding dividing the stock price by the P/E ratio
Earnings per share (EPS) may be determined by ______.
Federal and state income tax FICA tax Payroll taxes
Employees' gross earnings differ from their net pay because of
federal and state income taxes payroll deductions FICA taxes
Employees' gross earnings differ from their net pay because of ______. (Select all that apply.)
Moody's Standard & Poor's
For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are ______. (Check all that apply.)
Credit rating agencies
For investors, the _____________ ______________ _________________provide independent, easy-to-use measurements of relative credit risk.
Asset investment
From the issuing company's perspective, a bond is a liability. From a bondholder's perspective, the bond is a(n)
do not include a single "balloon" payment since a portion of the principal is paid each period
How are installment notes different from interest-only notes? Installment notes ______.
current stock price earnings per share
Identify what is needed to calculate the P/E ratio
stockholders equity on the balance sheet increases; the financing activities section of the statement of cash flows increases
Ima Rich purchased 100 shares of Stockits, Inc's $1 par value value common stock from Stockits' for $5 per share. Which statements are true regarding the effect of this transaction on Stockits' financial statements?
Contingent
Liabilities are potential liabilities that arise as a result of past transactions or events and are reported on the balance sheet if the loss will probably occur and can be reasonably estimated.
45,000 (we only count the shares issued, and do not count the treasury shares)
Lox, Stock, and Bagel Inc issued 50,000 shares of 100,000 authorized. It has since repurchased 5,000 of its shares. The number of shares outstanding equals ___________________ shares
are amounts subtracted from employees' gross earnings to determine their net pay decrease the amount of cash an employee receives
Payroll deductions ______. (Check all that apply.) Multiple select question.
kept; balance sheet and statement of retained earnings
Retained Earnings of $100,000 represent a corporation's cumulative earnings ______ and is shown on the ______.
profits retained net income kept
Retained Earnings represents cumulative ______ by the business. (Check all that apply.)
dividend
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.
False
T/F When a corporation declares a dividend its Net Income on the income statement is reduced
stated
The __________ rate on a bond is the rate used to determine the interest payments.
the percentage of assets financed by debt a higher ratio means greater financing risk
The debt-to-asset ratio indicates _____. (Check all that apply.)
Assets
The debt-to-asset ratio is calculated by dividing total liabilities by total
What is the percentage of assets financed by debt?
The debt-to-assets ratio best answers which financial question?
Cash for $1,000,000 and credit Common Stock for $10,000 and Additional Paid-in Capital for $990,000
The entry to record the issuance of 100,000 shares of $0.10 par value common stock for $10 per share is debit ______.
debit accounts payable, credit cash
The entry to record the payment of previous purchases made on account includes a ______. (Select all that apply.)
Contributed Capital
The money a corporation receives from investors by issuing stock is called
contributed capital
The money a corportation receives from investors by issuing stock is called_____________
interest payment
The stated rate is the rate used to determine the ______.
interest payments
The stated rate is the rate used to determine the ______.
retained earnings
Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating
Balance Sheet
Transactions between a company and its stockholders affect the company's _____ accounts only.
false (Installment notes require periodic payments that include interest and repayment of a portion of the principal. Interest-only notes require periodic interest payments and a single "balloon" payment of the principal at maturity.)
True or false: Both installment notes and interest-only notes require periodic payments of interest and repayment of a portion of the principal.
It will decrease.
What effect will issuing more bonds have on the times interest earned ratio over time?
Current Liabilities
__________________ __________________ on a classified balance sheet report the obligations that will be paid or met within the company's operating cycle or within 1 year, whichever is longer. (Enter one word per blank.)
outstanding; issued
_____________________ shares equals the number of shares ____________________ minus the number of shares repurchased by the company
preferred
______________________ stock carries priority over common stock with regard to dividends
True
an advantage of equity over debt financing is corporations are not required to pay dividends or repay stockholders
stock splits
an increase in the number of shares and a corresponding decrease in par value per share
Bonds
are financial instruments, traded on established exchanges, that specify future payments a company promises to make in exchange for receiving a sum of money now. (Enter one word per blank.)
benefits of preferred stock
different voting rights usually has a fixed dividend rate priority over common stock
Sole Proprietorship and general partnership
if a business cannot pay its debts, creditors can expect the owners to pay the debts with their personal assets if the business is a ________________________
only stand to lose what you paid to buy the stock
if you own a stock and the company goes bankrupt, you __________________
accumulated other comprehensive income (loss)
reports unrealized gains and losses, which are the temporary changes in the value of certain assets and liabilities the company holds. they can relate to pensions, foreign currencies and financial investments, such as national beverages contacts to stabilize the cost of its aluminum cans
Dividends
similar to a stock split, a stock ___________________ dividend also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders
face value
the ____________ ___________ is the payment made when a bond matures
Balance Sheet
transactions between a company and its stockholders affect the company's ___________________ _____________________ accounts only
True
two sources of financing for a corporation are debt and equity
excludes
A liability is first recorded at the amount of cash a creditor would accept to immediately settle the liability, which ______ interest.
causes retained earnings to decrease. distributes additional shares of stock to existing stockholders on a pro rata basis.
A stock dividend ______.
causes retained earnings to decrease.; distributes additional shares of stock to existing stockholders on a pro rata basis.
A stock dividend ______.
installment
A(n) note requires the borrower to pay equal payments over the note's life to maturity with each payment consisting of interest and principal. (Enter one word per blank.)
promises
Bonds are financial ______________ outline the future payments a company promises to make in exchange for receiving a sum of money now. (Enter one word per blank.)
not be reported if the loss is remote and unable to be estimated be reported on the balance sheet if the loss will probably occur and can be reasonably estimated be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated
Under US GAAP, a contingent liability should ______. (Enter one word per blank.)
subtracting the preferred stock balance from total stockholders' equity subtracting preferred stock dividends from net income
When a company has both common and preferred stock, its ROE must be adjusted by ______.
increases
When using the effective-interest method of bond amortization, Interest Expense ______ each payment if the bonds were issued at a discount.
