ACG2021 FSU Paterson Exam 1 Chapter 2
Which of the following is a financial ratio classification that measures the ability of the company to survive over a long period of time? Liquidity ratios Financial ratios Analysis ratios Solvency ratios Profitability ratios
Solvency ratios
What is the primary criterion by which accounting information can be judged? Predictive value Comparability Usefulness for decision making Consistency
Usefulness for decision making
Which of the following is not a fundamental quality of useful accounting information? All of these are fundamental qualities of useful accounting information. Relevance Neutrality Verifiability Faithful representation
Verifiability
Bombay Corporation had $48,000 at the beginning of the year and it had cash disbursements of $21,000 during the year. At the end of the year, Bombay Company had $51,000. What was Bombay Corporation's cash receipts for the year? $24,000 $69,000 $22,000 $36,000 $12,000
$24,000 The ending balance equals beginning cash minus cash disbursements plus cash receipts $51,000 = $48,000 + X - $21,000 Solve for X: Cash disbursements = $24,000
Pilgrim Corporation reports the following on its financial statements. Cash paid for new equipment, $35,000 Cash collected from customers, $120,000 Paid a note payable, $10,000 Cash collected in exchange for issuing additional shares of Pilgrim stock to stockholders, $15,000 Cash dividends paid, $5,000 The company reports $75,000 of net income for the year and it has $80,000 of cash at year-end. What is the company's free cash flow? $45,000 $35,000 $80,000 $5,000 $15,000
$80,000 Free cash flow is computed by subtracting capital expenditures and cash dividends from cash provided by operations. The company has only one cash inflow or outflow from operating activities (i.e., cash collected from customers) and it has only one capital expenditure (cash paid for new equipment). Free cash flow = $120,000 - $35,000 - $5,000 = $80,000. The payment of the note payable is not an operating activity cash flow. It is a financing activity cash flow, and it is neither a capital expenditure nor a payment of a dividend so it is not used to compute free cash flow. Similarly, the cash collected from stockholders who paid for additional shares of stock is a financing activity inflow for the company, but it does not affect free cash flow.
Which of the following is not an example of an intangible asset? Trademarks Goodwill Copyrights Patents Accounts receivable
Accounts receivable
At the end of the year, Red Company had retained earnings of $2,184,000. During the year, the company issued stock for $98,000 and paid dividends of $34,000. Net income for the year was $402,000. How much was the retained earnings balance at the beginning of the same year? $2,253,000 $2,454,000 $1,914,000 $1,816,000 $2,552,000
$1,816,000 Ending retained earnings equals beginning retained earnings plus net income minus dividends. $2,184,000 = X + $402,000 - $34,000 Solve for X: Beginning retained earnings = $1,816,000.
For a given company, total assets are $160,000, current liabilities are $10,000, long-term liabilities are $40,000, common stock is $50,000, and retained earnings is $60,000. How much is total stockholders' equity? $110,000 $190,000 $150,000 $120,000 $140,000
$110,000 Stockholders' equity equals common stock plus retained earnings. Common stock of $50,000 plus retained earnings of $60,000 equals $110,000 in stockholders' equity. Assets equals liabilities plus stockholders' equity. $160,000 = $10,000 + $40,000 + X Solving for X: Stockholders' equity = $110,000
Jose Inc. reports the following balances and amounts. The following information is presented in random order (amounts are in dollars). Accounts payable, 35,000 Cash provided by operations, 90,000 Accounts receivable, 37,500 Net income, 36,000 Average common shares, 20,000 Salaries and wages payable, 8,000 Average current liabilities, 110,000 Stockholders' equity, 240,000 Average and total assets, 600,000 Total current assets, 300,000 Average total liabilities, 320,000 Total current liabilities, 120,000 Cash, 100,000 How much is its working capital? $250,000 $200,000 $300,000 $280,000 $180,000
$180,000 Working capital is current assets minus current liabilities. Working capital = $300,000 - $120,000 = $180,000
Riverview Inc. reports the following balances and amounts. The following information is presented in random order. Accounts payable, $50,000 Cash provided by operations, 100,000 Accounts receivable, 35,000 Net income, 40,000 Average common shares, 15,000 Salaries and wages payable, 40,000 Average current liabilities, 225,000 Stockholders' equity, 200,000 Average total assets, 600,000 Current assets, 300,000 Average total liabilities, 320,000 Current liabilities, 250,000 Dividends paid to preferred shareholders, 5,000 How much is earnings per share? $2.33 $4.00 $1.80 $1.30 $1.50
$2.33 Earnings per share equals net income earned on each share of common stock. Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding. This company has no preferred dividends. Earnings per share = ($40,000 - 5,000)/15,000 shares = $2.33/share.
Stonebrook Corporation reported net income of $32,000, net sales of $500,000, and average shares outstanding of 12,000. There were $2,000 of preferred stock dividends. How much was its earnings per share? $2.67 $2.50 $1.60 $4.00 $16.67
$2.50 Earnings per share equals net income earned on each share of common stock. Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding. This company has no preferred dividends. Earnings per share = ($32,000 - $2,000)/12,000 shares = $2.50/share.
The net cash inflow from operating activities is $200,000; cash received from issuing stock is $150,000; cash paid for capital expenditures is $90,000; cash paid for bonds held as an investment is $50,000; and cash paid for dividends is $20,000. How much is free cash flow? $110,000 $40,000 $90,000 $180,000
$90,000 Free cash flow is cash provided by operating activities minus cash paid for capital expenditures and dividends paid. Free cash flow = $200,000 - $90,000 -$20,000 = $90,000.
Clawson Corporation has current assets of $3,150,000 and current liabilities of 2,250,000. If Clawson Corporation pays $500,000 of its accounts payable what will its new current ratio be? 1.80 2.10 1.40 1.45 1.51
1.51 Current ratio equals current assets divided by current liabilities. Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). Current ratio = ($3,150,000 − $500,000) ÷ ($2,250,000 − $500,000) Current ratio = 1.514 (i.e., 1.51 to 1 or 1.51:1)
A ratio summarizes the relation between selected items. Financial statement analysis (i.e., ratio analysis) focuses on the relation between certain financial statement data, such as earnings and the number of shares of common stock (i.e., earnings per share or EPS). A ratio by itself is not particularly useful. Rather, ratios tend to be compared to standards. Which of the following is a comparison facilitated by ratios when conducting a financial statement analysis (i.e., ratio analysis)? Intercompany comparisons such as comparing a company's ratio to the ratio of a competitor in the same industry. Industry-average comparisons such as comparing a company's ratio to an industry average. None of these. All of these. Intracompany comparisons such as comparing two years' ratios for the same company.
All of these. Ratios facilitate comparisons and they are frequently used to assess a company's performance. Comparisons include (i) intracompany comparisons (i.e., comparing one company to itself across time), (ii) industry-average comparisons, and (iii) intercompany comparisons (i.e., comparing one company to another company).
Which of the following describes a company's ability to pay its obligations that are expected to become due within the next year or operating cycle whichever is longer? Economy Working capital Solvency Liquidity Profitability
Liquidity
In what order are the following accounts and their balances listed on a classified balance sheet? Cash, inventories, accounts receivable, equipment.. Cash, accounts receivable, inventories, equipment. Inventories, cash, accounts receivable, equipment. Accounts receivable, cash, equipment, inventories. Inventories, equipment, cash, and accounts receivable.
Cash, accounts receivable, inventories, equipment. These accounts are current assets. Current assets are listed in order of their liquidity. Liquidity is the ability of an amount to be converted into cash. Cash is always listed first; it is the most liquid. Accounts receivable are very liquid; most accounts receivable will be collected within 30 days. Inventory is probably sold (or exchanged into cash) in a couple days, weeks, or months but that varies by company and industry. Equipment is property, plant, and equipment rather than a current asset. Equipment is probably not sold (or converted into cash) for several years.
Dividing net income minus preferred stock dividends by the average of common shares outstanding produces the following: Earnings per share The leverage ratio The net income return ratio The gross margin ratio Current ratio
Earnings per share
What are the accounting rules that have substantial authoritative support and are recognized as a general guide for financial reporting purposes in the U. S.? General accounting principles Generally accepted accounting principles Generally accepted auditing principles Generally accepted accounting standards
Generally accepted accounting principles (GAAP)
How does a company compute its free cash flow? None of these Net cash flow from all activities minus (i) its expenditures on property, plant, and equipment and (ii) its dividends paid. Net cash provided by its operating activities plus (i) its expenditures on property, plant, and equipment and (ii) its dividends paid. Net cash flow from all activities plus (i) its expenditures on property, plant, and equipment and (ii) its dividends paid. Net cash provided by its operating activities minus (i) expenditures on property, plant, and equipment and (ii) its dividends paid.
Net cash provided by its operating activities minus (i) expenditures on property, plant, and equipment and (ii) its dividends paid
Which financial statement is used by most corporations instead of the retained earnings statement? Statement of cash flows Balance sheet Statement of sources and uses None of these Statement of stockholders' equity
Statement of stockholders' equity Most companies use a statement of stockholders' equity instead of the retained earnings statement because the statement of stockholders' equity reports the changes in all of the stockholders' accounts. A statement of retained earnings reports only the changes in retained earnings.
Accounting information has relevance is it would make a difference in a business decision. Characteristics associated with relevant accounting information include: being historical and timely. being neutral and verifiable. being faithfully represented and neutral. being material and having predictive value. being consistent and understandabible.
being material and having predictive value.
The accounting concept that indicates that assets and liabilities should be reported at the price received to sell the asset or settle the liability is the periodicity assumption economic entity assumption. fair value principle. monetary unit assumption. historical cost principle.
fair value principle.
Accounting information should be neutral in order to enhance relevance. comparability. faithful representation. consistency. timely.
faithful representation.
The following ratios are available for Rock Inc. and Pebble Inc. Rock Inc. Pebble Inc. Current Ratio 1.8 1.6 Compared to Rock Inc., Pebble Inc. has: higher solvency. lower liquidity. higher liquidity. lower solvency. lower profitability.
lower liquidity.
The notion that the life of a business can be divided into artificial time periods for financial reporting purposes is known as the economic entity assumption. the going concern assumption. the periodicity assumption. the monetary unit assumption. the historical cost principle.
the periodicity assumption.
