Module 2 Exam - Proctored Midterm Exam

Some banks require business borrowers to maintain a compensating balance in the bank on short-term loans; for example, if the bank requires a 20 percent compensating balance and you borrow $50,000, at least ___ of the loan amount must be kept on deposit at the bank.

$10,000

Tyler's Yard Art turns over inventory 10.0 times a year. Tyler's cost of goods sold is $300,000. What is its average inventory?

$30,000

Sarah's Salon ordered $5,000 worth of merchandise from Cosprof, Inc. The invoice to Sarah's has a discount term of 2/10, net30. Eight days after the purchase Sarah writes a check for

$4,900.

Sarah's Beauty Salon has $260,000 in assets and $158,000 in stockholders' equity. It owes $55,000 from a long-term loan (this is its only long-term liability). Sarah's has ___ in total current liabilities.

$47,000

Peter Pauper's Clothing store had net sales for the period of $175,000 and a cost of goods sold of $85,000. What is the firm gross profit on sales?

$90,000

Jenny bought a sweater at J.C. Penney and later returned it to the store for a refund. What would the sweater be called on J.C. Penney's books?

A sales return.

All of the following statements about the Sarbanes-Oxley Act are correct except:

All of the following statements about the Sarbanes-Oxley Act are correct except:

Teri is applying for a job at an accounting office. As part of her interview for the position she has been asked to state the accounting equation. She correctly answers

Assets = liabilities + owners' equity

____ is (are) the most liquid asset.

Cash

Jamison and Jamison, Attorneys at Law, have a staff of five including the two attorneys. The company charges $400 per hour for partner time, $350 for nonpartners, $250 for paralegal time, and $100 per hour for legal secretary time. Last year the company grossed $2 million. The partnership invests half of its profit in the stock market and uses a portion of the remaining profit to make payments on the land where the store is located. It also periodically upgrades its equipment. Where would the information regarding the company's stock purchases, land purchase, and equipment be found on the statement of cash flows?

Cash flows from investing activities

Assets and liabilities are presented in a specific order on the balance sheet. Which of the following presents assets in the correct balance sheet order?

Cash, inventory, equipment

_____ have the right to vote on major corporate actions.

Common stockholders

If Facebook decided to issue new stock to expand its facilities, where would the receipt of cash from the sale appear on the statement of cash flows?

Financing

Merit is an accountant who keeps his clients' books according to GAAP. What does GAAP stand for?

Generally accepted accounting principles.

______ are/is the total dollar amount of all goods and services sold during the accounting period.

Gross sales

____ is borrowed money that will be used for more than one year.

Long-term financing

Christina is a manager for a large furniture designer. The furniture industry is highly competitive and staying on top demands long hours, research, and accurate decision-making. Her department utilizes the latest software to compile information about the successes and failures of new furniture designs from around the world. They data-mine social media sites, competitors' advertising, news articles, furniture magazine articles, and other media to discover competitors' pricing strategies, what products they are test marketing, and new and pending product legislation. In addition to compiling information from and about competitors and legislation that may impact future sales, her department collects detailed information about her own firm's products, cost of goods sold, customers, and suppliers. What department does Christina manage?

Marketing

___ occurs when expenses exceed revenues.

Net loss

Husky Farms, Inc. raises carrots in Kern County, California. The company has high water fees and must pay for water a year in advance even if it does not plant its fields. If it does not do so, it will lose the right to buy water. The company was losing money on undersized, damaged, and oddly shaped carrots until a buyer saw the value in trimming, cutting, and shaping the odd carrots and packaging them as snack carrots. Since then, Husky has been able to sell its entire crop. Recently the grower has been suffering cash flow problems and will need financing to make it through harvest. It needs funds for the next three months to cover payroll, machinery and equipment expenses, advertising, and operating expenses. It has several thousand dollars in accounts receivable that it is working diligently to collect and has revamped its accounts receivable practices to remove lags between billing and payment. The current crop is not ready for picking and has not been sold. The board directors need to consider the best, least expensive, way to pay the bills for the next three months. What should the company do to be able to pay bills for the next three months?

Obtain short-term financing

____ is the value of a firm's stock plus any retained earnings that have accumulated to date.

Owners' equity

___ occur(s) when stock and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors.

Private placement

Lindsay has a Fiat 126p that was made in 1972 which she purchased new. She has been driving it since then but can no longer find inexpensive parts for it in the United States. She has been looking at several new cars that she thinks will suit her needs and that she can use for her housecleaning business. She went to her bank to see if they would give her a business loan for the vehicle. Her bank turned her down. She has considered other options including trading in the Fiat and getting a loan through the car manufacturer, but the Fiat is a classic so she hesitates to trade it in, and the interest rate on a loan from the car manufacturer is quite high. She considered seeking crowdfunding but did not feel she could ethically ask other people to pay for her car. During dinner at her parents' house, she tells them her predicament and asks for a loan. Her parents agree to loan her $13,000, but require her to sign a written pledge to repay the $13,000 plus interest in equal payments due the first day of each month for five years. What was the written pledge she signed?

Promissory note

The financial officer of Been There, Inc. recently met with the heads of the marketing, operations, and administration departments to consider adoption of a decision support system. The marketing department and administrative staff supported adoption of the system because it would filter irrelevant information from relevant information. The financial officer thought the system would be too expensive for the company's current income level. The administrative staff argued that it would improve productivity by freeing up time wasted on sorting spam, junk mail, and irrelevant mail such as brokerage notices from statements, and therefore improve profits. The financial officer said the current email system already eliminated spam, junk mail could be unsubscribed to, and unwanted brokerage notices could be eliminated through the brokerage's website so these things did not require investing in additional software. The operations officer said the system could be used to run "what if" scenarios, compile relevant data on competitors' pricing, and compile costs of proposed projects. He said this information could be used to change the "what if" scenarios using different variables. Which of the following was not a benefit of using the decision support system discussed by the Been There, Inc. officers?

Reduce risk

____ (is) are the portion of a corporation's profit not distributed to stockholders.

Retained earnings

Bree and Jake live on a farm and sell the farm produce and eggs to local grocery stores. The partners have endured financial changes throughout the years. In their early years, they had cash flow problems due to having to wait for payment from the stores. In those years, they made an agreement with a bank to loan them money as needed without delay except when there were issues with the bank having insufficient funds available to make the loan. These issues were usually resolved in a week or less. In later years, they had the loan guaranteed. The partners are currently in the position that they are able to place excess funds with a bank which has issued an agreement with the bank stating it will pay the partners a guaranteed interest rate on the money left on deposit for five years. What is the name of the agreement they made with the bank?

Revolving credit agreement

____ is money that will be used for one year or less.

Short-term financing

___ provide equity capital for a corporation.

Stockholders

Saul's Store Supplies is selling seafood to Sally's Seafood Shop. Saul is considering whether to extend trade credit to Sally or to require Sally to execute a promissory note. From Saul's perspective, which of the following is not an advantage that promissory notes have over trade credit?

The seller may demand payment from the buyer at any time.

____ is the sales arrangement in which a seller allows a buyer 30 to 60 days to pay for a purchase.

Trade credit

Adamaris sells used cars which he buys from rental agencies. The agencies usually require part of the payment upfront or proof that payment will be made on delivery. Because Adamaris has been in business for many years, and has used the same bank for his business for the entire time he has been in business, he works out an agreement with his banker that the bank will advance him funds for a short term at prime interest rate plus one percent without collateral because he has a good credit rating. What kind of transaction did Adamaris enter into with the bank?

Unsecured bank loan

____ is short-term financing not backed by collateral.

Unsecured financing

_____ is (are) rights held by common stockholders but not by preferred stockholders.

Voting rights

Generally _____ require(s) some equity capital to start.

a business, regardless of its legal form,

Often, when _____ in short-term financing, a warehouse receipt may be held by the lender.

a loan has been secured by inventory

Tito's Tamarinds Restaurant had a total of $320,000 in expenses and $295,000 in revenues. Tito's had

a net loss of $25,000 for the year.

Armando's Furniture buys its inventory on credit. Before Armando pays for this merchandise in 60 days, the amount owed is classified on its balance sheet as a(n)

account payable.

Jazmin, a lawyer, has written a will for a client. The client has not yet paid the bill. On Jazmin's books, this amount would be recorded under

accounts receivable.

Terry's Tire Shop is located in a building owned by the business. The building is a(n) ___ of the business.

asset

The proper order for information reported on the ____ is assets = liabilities + owners' equity.

balance sheet

A ___ is a written order for a bank to pay a third party a stated amount of money on a specific date.

banker's acceptance

Gregory, a finance manager for XCV Corporation, uses a _____ to estimate major expenditures for assets, expansion of facilities, and mergers and acquisitions.

capital budget

The _____ is a financial statement that provides information about a firm's operating, investing, and financial activities during an accounting period.

cash flow statement

The normal reference to profit and loss for a business on its income statement is ___.

cash surplus and cash deficit

Many companies have a(n) ____ which gives them confidence in seeking short-term financing.

close working relationship with a lender

The ___ normally elect the board of directors of a corporation.

common stockholders

Your business took out a $5 million loan and is required to keep $500,000 on deposit with the lender as a _____ balance.

compensating

Inventory turnover is calculated by dividing the _____ by the average inventory.

cost of goods sold

Jeremy owes $2,000 to his attorney and $500 to his accountant. He will pay off both of these debts, which on a balance sheet are classified as _____, in a year or less.

current liabilities

Jan's business had a hard first year. It experienced all of the following that caused a cash flow problem except

customers who pay early.

A ____ bond is backed only by the reputation of the issuing corporation.

debenture

On Terry's Tire Shop books, the cost of the car lifts, which are fixed assets, will be spread over their useful life which is called

depreciation.

John's Café may use long-term financing for all of the following reasons except

eliminating immediate cash-flow problems.

Bonnie and Bret decide to start a new bagel breakfast business. They each contribute $20,000 to get the business started. This money is considered

equity capital.

Maria is the finance manager of SDF Corporation and tasked with establishing the company's financial plan. The steps to effective financial planning are

establishing organizational goals and objectives, budgeting for financial needs, and identifying sources of financing.

By selling accounts receivable to a ___, a company receives cash and shifts the task of collection and the risk of nonpayment to the other company.

factor

Fred has established a ___ business in which he buys accounts receivable at a discount and then collects the full dollar amount due, thus profiting on the difference between the face value of the accounts receivable and the amount he has paid for them.

factor

A business that receives short-term financing via ___ normally incurs the highest loan costs.

factoring

A(n) ____ is developed by a finance manager to determine the company's financial needs and how to obtain the necessary financing to implement its goals and objectives.

financial plan

A ____ shows a relationship between two elements of a company's financial statements.

financial ratio

In order to compare financial data in their annual reports, most corporations include important elements of their financial statements

for recent years.

Tom Taxin, C.P.A., is auditing the books of a business. Audits are performed to ensure that financial statements have been prepared according to

generally accepted accounting principles.

When giving financing advice, an advisor would most likely tell a client seeking a loan that the first step would be to

get to know the potential lenders before requesting debt financing.

The ___ is summarized in the formula: Revenues - cost of goods sold - expenses = net income.

income statement

The _____ is also called the earnings statement.

income statement

When Facebook, Inc. sold common stock for the first time to whoever wanted to buy it, this ___ generated millions of dollars for the company.

initial public offering

The ____ is the number of times a company sells and replaces its merchandise inventory in one year.

inventory turnover

For a department store, the most likely need for short-term financing would be for

inventory.

Farmer Fred is hesitant to extend trade credit to Gleason's Market. Gleason's agrees to execute a promissory note instead; which Farmer Fred agrees to because

it is a legally binding and enforceable agreement.

Managers need different specific types of information which depend on their area of management and

level within the firm.

Of the following, only ____ would not be a section of the income statement for a business.

liabilities

Terry's Tire Shop has debts. In accounting, debts are known as

liabilities

Westchester Mall has decided to expand the mall square footage. To do so it had to borrow money from a local bank. The debt owed to the banker is a(n)

liability

Jan's Jujitsu owes money for mats, light fixtures, bulletin boards, and white boards that Jan's will repay to the seller over a five-year period. On Jan's balance sheet, these debts will be classified as

long-term liabilities.

Kenny's Muffler Service will pay the mortgage off on its shop over a 20-year period. The majority of this mortgage will be classified on Kenny's balance sheet as a

long-term liability.

A ____ manager would be most concerned about the competitor's product offerings.

marketing

Dishes, luggage, clothing, golf clubs, and camping gear that Costco owns for selling to its customers are classified as

merchandise inventory.

Every year Walmart used to open early and had hundreds of employees and temporary helpers count everything in the store. On a balance sheet, the value of these goods is called

merchandise inventory.

Teri is explaining the statement of financial positions to the firm's client. One of the things she will explain to the client is that on the asset side of the statement she has included

merchandise inventory.

Bill graduated from college and obtained a job selling insurance. He later obtained a full-time job in accounting. At the end of his first year of employment, his assets, which included his car and some money in the bank, totaled $9,000 and his liabilities totaled $3,000, therefore, his ___ was $6,000.

net worth

If Microsoft issued commercial paper in denominations of $10,000 to raise a large sum of money, the commercial paper would be secured only by Microsoft's reputation; therefore,

no collateral is involved.

Jeff's Automotive ran a tire sale that significantly increased sales. The day following the sale, Jeff realized that he would be unable to meet the month's bills because most of the sales were on credit. To rectify this situation, Jeff can temporarily

obtain short-term financing.

Accountant Andy will include all of the following on the company's books as current assets except

office equipment. cash.

Terry's Tires owner, Terry, has no accounting training and has three employees. He will most likely_____ to handle the necessary accounting for his business.

pay a public accountant

In the event of a corporate dissolution, after the creditors are paid, the ____ owners have first claim on profits and assets.

preferred stock

Stock is sold in the ___ when a corporation uses an initial public offering to raise capital.

primary market

Alpha and Omega Inc. has borrowed money from its bank at various times over the years but has always been slow in making its payments. Based on its payment history, when it is next in need of financing, the interest rate Alpha and Omega Inc. will pay is

prime rate plus 4 percent.

A ____ is an accountant who is the employee of the company for which he or she provides accounting services.

private accountant

Bill is hired by Mike's Mufflers to help with determining the costs of the firm's muffler services, record transactions, and create financial statements. Bill is a

private accountant.

A ____ is a written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date.

promissory note

Most corporate bonds today are

registered bonds.

Peter provides math tutoring services in his home five days a week. The money he earns from tutoring is called ___ on an income statement.

revenue

What is the name given to the ratio that is based on the principle that a high-risk investment should generate higher financial returns for a business and more conservative decisions often generate lesser returns?

risk-return

When a business manager is faced with competing decisions and one is risky and the other more conservative, the manager should calculate the ____ to help make the right decision.

risk-return ratio

Travis has worked for his school district for two weeks but the district only pays monthly. The amount of money the district owes him is classified as ____ on the district's balance sheet.

salaries payable

Sierra's Snow and Ski Shop orders snow gear ten months in advance of winter, but receives the inventory in early fall—about three months before ski season. Due to the lack of sales at the time the inventory is received, Sierra's is unable to pay for the inventory up front. Instead, its suppliers allow it to use its inventory as collateral in ____ agreements.

secured short-term financing

A(n) ___ is a marketplace where member brokers meet to buy and sell securities.

securities exchange

Marilyn's Beauty Salon has assets of $107,000, and the owners' equity is $75,000, therefore,

the liabilities are $32,000.

Charity's Cupcakes has liabilities totaling $59,000 and owners' equity of $124,000, therefore,

the total assets equal $183,000.

Following the economic crisis, the U.S. House of Representatives and Senate proposed all of the following financial reform regulations except

tighten access to long-term financing by large corporations.

Becky's Bakery follows a ____ budgeting process in which each department manager is required to provide documentation justifying every expected expense.

zero-based