Multiple Choice Questions

A bond with a face value of $100,000 is sold on January 1. The bond has a coupon rate of 10% and matures in 10 years. When the bond was issued, the market rate of interest was 10%. On December 31, the market rate of interest increased to 11%. What amount should be reported on December 31 as the bond liability on the balance sheet? a) $100,000 b) $94,112 c) $94,460 d) $87,562

a) $100,000 *The changes in market rate after a bond is issued does not impact the bonds that are issued at par. They keep their market interest rate.

The inventory turnover ratio for Natural Foods stores is 14.6. The company reports cost of goods sold in the amount of $1,500,000 and total sales of $2,500,000. What is the average amount of inventory for Natural Foods? a) $102,740 b) $171,233 c) $100,000 d) $60,000

a) $102,740

Given the following ratios for four companies, which company is least likely to experience problems paying its current liabilities properly? QUICK RATIO -- RECEIVABLE TO a) 1.2, 58 b) 1.2, 25 c) 1.0, 55 d) 0.5, 60

a) 1.2, 58

Conceptually, does a 2-for-1 stock dividend immediately increase an investor's personal wealth? a) No, because the stock price per share drops by half when the number of shares doubles b) Yes, because the investor has more shares c) Yes, because the investor acquired additional shares without paying a brokerage fee d) Yes, because the investor will receive more in cash dividends by owning more shares

a) No, because the stock price per share drops by half when the number of shares doubles

Which of the following would not appear in the investing section of the statement of cash flows? a) Purchase of inventory b) Sale of obsolete equipment used in the factory c) Purchase of land for a new office building d) All of the above would appear in the investing section

a) Purchase of inventory

Which order best describes the largest number of shares to the smallest number of shares? a) Shares authorized, shares issued, shares outstanding b) Shares issued, shares outstanding, shares authorized c) Shares outstanding, shares issued, shares authorized d) Shares in the treasury, shares outstanding, shares issued

a) Shares authorized, shares issued, shares outstanding

If the balance in prepaid expenses has increased during the year, what action should be taken on the statement of cash flows when following the indirect method, and why? a) The change in the account balance should be subtracted from net income because the net increase in prepaid expenses did no impact net income but did reduce the cash balance b) The change in the account balance should be added to net income because the net increase in prepaid expenses did not impact net income but did increase the cash balance c) The net change in prepaid expenses should be subtracted from net income to reverse the income statement effect that had no impact on cash d) The net change in prepaid expenses should be added to net income to reverse the income statement effect that had no impact on cash

a) The change in the account balance should be subtracted from net income because the net increase in prepaid expenses did no impact net income but did reduce the cash balance

Consider the following: Issued common stock for $18,000, sold office equipment for $1,200, paid cash dividends of $4,000, purchased investments for $2,000, paid accounts payable of $4,000. What was the net cash inflow (outflow) from financing activities? a) $20,000 b) $14,000 c) ($20,000) d) ($4,800)

b) $14,000

A bond with a face value of $100,000 was issued for $93,500 on January 1 of this year. The stated rate of interest was 8 percent and the market rate of interest was 10 percent when the bond was sold. Interest is paid annually. How much interest will be paid on December 31 of this year? a) $10,000 b) $8,000 c) $7,480 d) $9,350

b) $8,000 (Interest Expense = Face Value of Bonds x Stated Rate x Period = 100,000 x 8% x 1 year)

A bond with a face value of $100,000 has a coupon rate of 8%. The bond matures in 10 years. When the bond is issued, the market rate of interest is 10%. What amount will investors pay for this bond? a) $100,000 b) $87,707 c) $49,157 d) $113,421

b) $87,707

Which of the following dates does not require a journal entry? a) Date of declaration b) Date of record c) Date of payment d) A journal entry is required on all of these dates

b) Date of record

A company has a net income of $225,000 and declares and pays dividends in the amount of $75,000. What is the net impact on retained earnings? a) Increase of $225,000 b) Decrease of $75,000 c) Increase of $150,000 d) Decrease of $150,000

b) Increase of $150,000 (Retained earnings = Net Income - Dividends Paid)

Which of the following statements about stock dividends is true? a) Stock dividends are reported on the statement of cash flows b) Stock dividends are reported on the statement of stockholder's equity c) Stock dividends increase total equity d) Stock dividends decrease total equity

b) Stock dividends are reported on the statement of stockholder's equity

Which of the following items would not appear in the financing section of the statement of cash flows? a) The repurchase of the company's own stock b) The receipt of dividends c) The repayment of debt d) The payment of dividends

b) The receipt of dividends

A decrease in selling and administrative expenses would impact what ratio? a) Fixed asset turnover ratio b) Times interest earned ratio c) Debt to equity ratio d) Current ratio

b) Times interest earned ratio

Consider the following: Net Income = $10,000, depreciation expense = $2000, accounts receivable increased by $800, inventory decreased by $100, and accounts payable increased by $500. Based on this information alone, what is cash flow from operating activities? a) $12,000 b) $11,600 c) $11,800 d) $13,400

c) $11,800

Katz Corporation has issued 400,000 shares of common stock and holds 20,000 shares in treasury. The charter authorized the issuance of 500,000 shares. The company has declared and paid dividends of $1 per share of common stock. What is the total amount of the dividend paid to common stockholders? a) $400,000 b) $20,000 c) $380,000 d) $500,000

c) $380,000

A company issued 100,000 shares of common stock with a par value of $1 per share. The stock sold for $20 per share. By what amount will stockholders' equity increase? a) $100,000 b) $1,900,000 c) $2,000,000 d) No change

c) 2,000,000

A company has total assets of $500,000 and noncurrent assets of $400,000. Current liabilities are $40,000. What is the current ratio? a) 12.5 b) 10.0 c) 2.5 d) Cannot be determined without additional information

c) 2.5

Positive financial leverage indicates a) Positive cash flow from financing activities b) A debt-to-equity ratio higher than 1 c) A rate of return on assets exceeding the interest rate on debt d) A profit margin in one year exceeding the previous year's profit margin

c) A rate of return on assets exceeding the interest rate on debt

Which statement regarding dividends is false? a) Dividends represent a distribution of corporate profits to owners b) Both stock and cash dividends reduce retained earnings c) Cash dividends paid to stockholders reduce net income d) None of the above statements are false

c) Cash dividends paid to stockholders reduce net income

Which of the following ratios is used to analyze liquidity? a) Earnings per share b) Debt to equity ratio c) Current ratio d) Both a and c

c) Current ratio

Which of the following would no change the receivables turnover ratio for a retail company? a) Increases in the retail prices of inventory b) A change in credit policy c) Increases in the cost incurred to purchase inventory d) None of theabove

c) Increases in the cost incurred to purchase inventory

Which of the following is false when a bond is issued at a premium? a) The bond will issue for an amount above its par value b) Bonds payable will be credited for an amount greater than the bond's face value c) Interest expense will exceed all interest cash payments d) All of the above are false

c) Interest expense will exceed all interest cash payments

When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by the a) Face value of the bonds b) Coupon rate stated in the bond certificate c) Market rate of interest on the date the bonds were issued d) Both a and b

c) Market rate of interest on the date the bonds were issued

Annual interest expense for a single bond issue continuous to increase over the life of the bonds. Which of the following explains this? a) The market rate of interest has increased since the bonds were sold b) The coupon rate has increased since the bonds were sold c) The bonds were sold at a discount d) The bonds were sold at a premium

c) The bonds were sold at a discount

To determine whether a bond will be sold at premium, at a discount, or at face value, one must know which of the following pairs of information? a) Face value and the coupon rate on the date the bond is issued b) Face value and the market rate of interest on the date the bond is issued c) The coupon rate and the market rate of interest on the date the bond is issued d) The coupon rate and the stated rate on the date that the bond is issued

c) The coupon rate and the market rate of interest on the date the bond is issued

The total change in cash as shown near the bottom of the statement of cash flows for the year should agree with which of the following? a) The difference in retained earnings when reviewing the comparative balance sheet b) Net income or net loss as found on the income statement c) The difference in cash when reviewing the comparative balance sheet d) None of the above

c) The difference in cash when reviewing the comparative balance sheet

Which of the following is not an advantage of issuing bonds when compared to issuing additional shares of stock in order to obtain additional capital? a) Stockholders maintain proportionate ownership percentages b) Interest expense reduces taxable income c) The payment of interest is flexible and at the discretion of the issuing firm d) All of the above are advantages associated with bonds

c) The payment of interest is flexible and at the discretion of the issuing firm

When using the effective interest method of amortization, the book value of a bond changes by what amount on each interest payment date? a) Interest expense b) Interest cash payment c) The difference between interest expense and the cash interest payment d) None of the above

c) the difference between interest expense and the cash interest payment

Consider the following: Issued common stock for $18,000, sold office equipment for $1,200, paid cash dividends of $4,000, purchased investments for $2,000, purchased new equipment for $4,000. What was the net cash inflow (outflow) from investing activities? a) $20,200 b) ($2,800) c) ($10,800) d) ($4,800)

d) ($4,800)

Total cash inflow in the operating section of the statement of cash flows should include which of the following? a) Cash received from customers at the point of sale b) Cash collections from customer accounts receivables c) Cash received in advance of revenue recognition d) All of the above

d) All of the above

Which of the following is not added to net income when computing cash flows from operations under the indirect method? a) The net increase in accounts receivable b) The net decrease in accounts receivable c) Depreciation expense reported on the income statement d) All of the above are added to net income

d) All of the above are added to net income

Which account would not be included in the debt-to-equity ratio calculation? a) Unearned revenue b) Retained Earnings c) Income Taxes Payable d) All of the above are included

d) All of the above are included

If a potential investor is analyzing three companies in the same industry and wishes to invest in only one, which ratio is least likely to affect the investor's decision? a) Earnings per share b) Price/earnings ratio c) Dividend yield ratio d) All of the above would likely influence the investor's decision

d) All of the above would likely influence the investor's decision

When treasury stock is purchased with cash, what is the impact on the balance sheet equation? a) No change: the reduction of the asset cash is offset with the addition of the asset treasury stock b) Assets decrease and stockholder's equity increases c) Assets increase and stockholder's equity decreases d) Assets decrease and stockholders' equity decreases

d) Assets decrease and stockholder's equity decreases

A creditor is least likely to use what ratio when analyzing a company that has borrowed funds on a long-term basis? a) Cash coverage basis b) Debt to equity ratio c) Times interest earned ratio d) Dividend yield ratio

d) Dividend yield ratio

Which statement regarding treasury stock is false? a) Treasury stock is considered to be issued but not outstanding b) Treasury stock has no voting, dividend, or liquidation rights c) Treasury stock reduces total equity on the balance sheet d) None of the above are false

d) None of the above are false

In what order do the three sections of the statement of cash flows usually appear when reading from top to bottom? a) Financing, Investing, Operating b) Investing, Operating, Financing c) Operating, Financing, Investing d) Operating, Investing, Financing

d) Operating, Investing, Financing