Accounting Final Multiple Choice section
Contractual provisions
These give preferred stock priority over common stock
Investing activities
include (a) cash transactions that involve the purchase or disposal of investments and property, plant, and equipment, and (b) lending money and collecting the loans. (Changes in investments and long term assets)
Operating activities
include the cash effects of transactions that create revenues and expenses. They thus enter into the determination of net income. (Income statement items)
Return on stockholders' equity
(Net income - preferred stock dividends)/ Average common stockholders' equity
Statement of cash flows
-Reconciles beginning and ending cash balance -Allows people to assess: Ability to generate future cash flows, Entities ability to pay dividends and meet obligations, reasons for difference in net income and net cash by operating activities, cash investing and financing transactions during the period
Why might a company acquire treasury stock?
1. To reissue the shares to officers and employees under bonus and stock compensation plans. 2.To increase trading of the company's stock in the securities market. Companies expect that buying their own stock will signal that management believes the stock is underpriced, which they hope will enhance its market price. 3.To have additional shares available for use in acquiring other companies. 4.To reduce the number of shares outstanding and thereby increase earnings per share.
Non-cash activities
1.Direct issuance of common stock to purchase assets. 2.Conversion of bonds into common stock. 3.Direct issuance of debt to purchase assets. 4.Exchanges of plant assets
Direct Method
A method of determining net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis. The direct method shows operating cash receipts and payments. (Cash payments to suppliers is an example)
Indirect Method
A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities. (98% of companies use this)
he following are data concerning cash received or paid from various transactions for Orange Peels Corporation. Sale of land $100,000 Sale of equipment 50,000 Issuance of common stock 70,000 Purchase of equipment 30,000 Payment of cash dividends 60,000 Net cash provided by investing activities is: (a)$120,000. (b)$130,000. (c)$150,000. (d)$190,000.
A. 120,000 (Sales of land +Sale of equipment - Purchase of equipment)
During the introductory phase of a company's life cycle, one would normally expect to see: (a)negative cash from operations, negative cash from investing, and positive cash from financing. (b)negative cash from operations, positive cash from investing, and positive cash from financing. (c)positive cash from operations, negative cash from investing, and negative cash from financing. (d)positive cash from operations, negative cash from investing, and positive cash from financing.
A. Negative cash from operations, negative cash from investing, and positive cash from financing.
Which is an example of a cash flow from an operating activity? (a)Payment of cash to lenders for interest. (b)Receipt of cash from the sale of common stock. (c)Payment of cash dividends to the company's stockholders. (d)None of the above.
A. Payment of cash to lenders for interest
How do you get net cash provided by operating activities?
Take Net Income, add credit accounts, then subtract by debit accounts
Which of the following will not be reported in the statement of cash flows? (a)The net change in stockholders' equity during the year. (b)Cash payments for plant assets during the year. (c)Cash receipts from sales of plant assets during the year. (d)Sources of financing during the period.
A. The net change in stockholders equity during the year
In the stockholders' equity section, the cost of treasury stock is deducted from: (a)total paid-in capital and retained earnings. (b)retained earnings. (c)total stockholders' equity. (d)common stock in paid-in capital.
A. Total paid-in capital and retained earnings
he following data are available for Retique! Increase in accounts payable $ 40,000 Increase in bonds payable 100,000 Sale of investment 50,000 Issuance of common stock 60,000 Payment of cash dividends 30,000 Net cash provided by financing activities is: (a)$90,000. (b)$130,000. (c)$160,000. (d)$170,000.
B. 130,000 (Increase in bonds payable + Issuance of common stock - payment of cash dividends)
The following data are available for Bill Mack Corporation. Net income $200,000 Depreciation expense 40,000 Dividends paid 60,000 Gain on sale of land 10,000 Decrease in accounts receivable 20,000 Decrease in accounts payable 30,000 Net cash provided by operating activities is: (a)$160,000. (b)$220,000. (c)$240,000. (d)$280,000.
B. 220,000 (Net Income + Depreciation expense - gains on disposal of land + decrease in accounts receivable - decrease in accounts payable)
Jackson Inc. reported net income of $186,000 during 2017 and paid dividends of $26,000 on common stock. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 on January 1, 2017, and $1,600,000 on December 31, 2017. The company's return on common stockholders' equity for 2017 is: (a)10.0%. (b)9.0%. (c)7.1%. (d)13.3%.
B. 9.0% Net income - preferred dividends/ common stockholders' equity
A major disadvantage of a corporation is: (a)limited liability of stockholders. (b)additional taxes. (c)transferable ownership rights. (d)None of the above.
B. Additional taxes
Items that are added back to net income in determining net cash provided by operating activities under the indirect method do not include: (a)depreciation expense. (b)an increase in inventory. (c)amortization expense. (d)loss on disposal of equipment.
B. An increase in inventory
Thomas is nearing retirement and would like to invest in a stock that will provide a good steady income. Thomas should choose a stock with a: (a)high current ratio. (b)high dividend payout. (c)high earnings per share. (d)high price-earnings ratio.
B. High Dividend payout
Which is an example of a cash flow from a financing activity? (a)Receipt of cash from sale of land. (b)Issuance of debt for cash. (c)Purchase of equipment for cash. (d)None of the above
B. Issuance of debt for cash
Entries for cash dividends are required on the: (a)declaration date and the record date. (b)record date and the payment date. (c)declaration date, record date, and payment date. (d)declaration date and the payment date.
B. Record date and payment date
hich of these statements about stock dividends is true? (a)Stock dividends reduce a company's cash balance. (b)A stock dividend has no effect on total stockholders' equity. (c)A stock dividend decreases total stockholders' equity. (d)A stock dividend ordinarily will increase total stockholders' equity.
B. Stock dividend has no effect on total stockholders' equity
For corporation to pay cash dividend, it must have:
Retained Earnings, adequate cash, declared dividends
The return on common stockholders' equity is usually increased by all of the following, except: (a)an increase in the return on assets ratio. (b)an increase in the use of debt financing. (c)an increase in the company's stock price. (d)an increase in the company's net income.
C. An increase in the company's stock price
ABC Corp. issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, credits are made to: (a)Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $2,000. (b)Common Stock $12,000. (c)Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000. (d)Common Stock $10,000 and Retained Earnings $2,000.
C. Common stock 10k and paid-in capital in excess of par value 2k
Which of these is not a major advantage of a corporation? (a)Separate legal existence. (b)Continuous life. (c)Government regulations. (d)Transferable ownership rights.
C. Government regulations
In the stockholders' equity section of the balance sheet, common stock: (a)is listed before preferred stock. (b)is added to total capital stock. (c)is part of paid-in capital. (d)is part of additional paid-in capital.
C. Is part of Paid-in capital
Which of the following is incorrect about the statement of cash flows? (a)It is a fourth basic financial statement. (b)It provides information about cash receipts and cash payments of an entity during a period. (c)It reconciles the ending cash account balance to the balance per the bank statement. (d)It provides information about the operating, investing, and financing activities of the business.
C. It reconciles the ending cash account balance to the balance per the bank statement
Which is an example of a cash flow from an investing activity? (a)Receipt of cash from the issuance of bonds payable. (b)Payment of cash to repurchase outstanding common stock. (c)Receipt of cash from the sale of equipment. (d)Payment of cash to suppliers for inventory.
C. Receipt of cash from the sale of equipment
Which of the following is incorrect about the statement of cash flows? (a)The direct method may be used to report net cash provided by operating activities. (b)The statement shows the net cash provided (used) for three categories of activity. (c)The operating activities section is the last section of the statement. (d)The indirect method may be used to report net cash provided by operating activities.
C. The operating activities section is the last section
Treasury stock may be repurchased: (a)to reissue the shares to officers and employees under bonus and stock compensation plans. (b)to signal to the stock market that management believes the stock is underpriced. (c)to have additional shares available for use in the acquisition of other companies. (d)More than one of the above.
D. (All of the above)
U-Bet Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2017. No dividends were declared in 2015 or 2016. If U-Bet wants to pay $375,000 of dividends in 2017, common stockholders will receive: (a)$0. (b)$295,000. (c)$215,000. (d)$135,000.
D. 135,000 10,000 * 8 =80000 (Dividends in arrears) = 80000 * 2 = 160000 (Plus current year dividend) = 160,000 + 80000 =240,000, the amount preferred stockholders will receive, -Company wants to pay 370,000 so preferred gets 240,000 and common gets 130,000 (370,000-240,000)
Free cash flow provides an indication of a company's ability to: (a)manage inventory. (b)generate cash to pay dividends. (c)generate cash to invest in new capital expenditures. (d)both (b) and (c).
D. Both B and C. -Free cash flow provides and indication of a company's ability to generate cash to pay dividends and invest in new capital expedentures.
Cash dividends paid to stockholders are classified on the statement of cash flows as: (a)operating activities. (b)investing activities. (c)a combination of (a) and (b). (d)financing activities.
D. Financing activities
Which of these statements is false? (a)Ownership of common stock gives the owner a voting right. (b)The stockholders' equity section begins with paid-in capital. (c)The authorization of capital stock does not result in a formal accounting entry. (d)Legal capital is intended to protect stockholders.
D. Legal Capital is intended to protect stockholders
If everything else is held constant, earnings per share is increased by: (a)the payment of a cash dividend to common shareholders. (b)the payment of a cash dividend to preferred shareholders. (c)the issuance of new shares of common stock. (d)the purchase of treasury stock.
D. The purchase of treasury stock
Preferred stock may have priority over common stock except in: (a)dividend preference. (b)preference to assets in the event of liquidation. (c)cumulative dividends. (d)voting.
D. Voting -Preferred stock usually does not even have voting rights
Zealot Inc. has retained earnings of $500,000 and total stockholders' equity of $2,000,000. It has 100,000 shares of $8 par value common stock outstanding, which is currently selling for $30 per share. If Zealot declares a 10% stock dividend on its common stock (a)net income will decrease by $80,000. (b)retained earnings will decrease by $80,000 and total stockholders' equity will increase by $80,000. (c)retained earnings will decrease by $300,000 and total stockholders' equity will increase by $300,000. (d)retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000.
D. retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000. (100,000 multiplied by 10%) * 30
True/False: Payment of dividends from retained earnings is illegal in some states
False. Payment of dividends from retained earnings is legal in all states
Product life cycle
Introductory, growth, maturity, decline
What effect would a treasury stock and a retained earnings deficit have on stockholders' equity?
It would reduce it.
How to get Preferred stock dividends:
Multiply the rate given * par value to give you the dividend per share, then multiply by number of shares. This will give you the year value, if dividend is in 2 years in arrears, multiply by 2.
Free Cash Flow
Net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.
The statement of cash flows classifies cash receipts and cash payments by these activities
Operating, Investing, and Financing
Cumulative Dividend
Preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders are paid dividends.
True/False: In many states, payment of dividends from legal capital is prohibited
True
True/False: Payment of dividends in excess of par is legal in some states
True
Stock Split
issuance of additional shares to stockholders in proportional to percentage ownership -Same proportion that par value is decreased -Has no effect on paid-in capital, retained earnings, and total stockholders' equity
Financing activities
nclude (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends. (Long term liability and stockholders' equity)
