Accounting Chapter 9/10 study guide

Which of the following financial ratios provides information about the income generated per dollar of assets?

Return on assets

Which of the following ratios measures the ability of company management to generate earnings from the resources owners provide?

Return on equity

The _______rate of interest is used to compute the cash interest paid to bondholders

Stated

True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.

false, it needs to split in current and long term

debt financing

funds provided by lenders (creditors)

Evaluation of the company's profitability requires consideration of the amount of a company's earnings in relation to the size of the

investment.

Green Company declares and issues a 20% stock dividend. The stock dividend will cause total stockholders' equity to

remain the same

bonds are supported by a specific asset the issuer pledges as collateral.

secured

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.

dividend

The amount of dividends paid out relative to the share price is referred to as

dividend yield

The dividend yield is calculated by dividing:

dividends per share by the stock price per share

Periodic payments on installment notes typically include

a portion that reduces the outstanding loan balance. a portion that reflects interest.

The rate of interest printed on the face of a bond is referred to as the

stated interest rate

Squid Roe Inc.'s P/E ratio is 12. Which of the following statements is true?

Investors are willing to pay 12 times the current year's earnings per share of stock.

Treasury stock:

is shares of stock no longer outstanding. reduces stockholders' equity. is a contra-equity account.

equity financing

money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital)

Stock splits have the following effects on stockholders' equity

no change to total stockholders' equity

Retained earnings of $100,000 represent a corporation's cumulative earnings ______ and is shown on the ______.

not paid out by dividends; balance sheet and statement of retained earnings

Preferred stock is "preferred" over common stock by providing preferred stock holders with these rights

preference in distribution of assets during dissolution of corporation first right to specified amount of dividends

Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n

private placement

he return on assets measures the amount of_____ generated for each dollar of assets.

profit

Special contractually granted features can make preferred stock

redeemable cumulative convertible

Which of the following are common characteristics or provisions of bonds?

term or serial secured or unsecured convertible

The price of a bond includes

the present value of the face amount plus the present value of the periodic interest payments

Preferred stockholders have the right

to receive dividends only in the years the board of directors declares dividends.

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

Loans requiring periodic payments of interest and principle are referred to as

Installment Notes

On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:

$13,000

Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a discount. At the end of the current fiscal period, unamortized bond discount is $4,500. The total bond-related liability reported on Omar's balance sheet should be:

195,500

Which of the following transactions are classified as a stock dividend?

A distribution of additional shares of a corporation's stock to current shareholders of the corporation.

Which of the following are correct regarding bonds?

They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount.

Werner issues bonds at a discount. The related Discount account should be classified as a(n)

contra liability

Preferred stock has a mixture of attributes of both equity and

debt

The two types of financing are

debt financing and equity financing

Dividends payable is recorded as a credit on the

declaration date

Stock dividends have the following effects on stockholders' equity

decrease in retained earnings increase in common stock no change to total stockholders' equity

Retained earnings are:

all of the company's earnings not distributed to stockholders. sometimes called earned capital. increased by net income. decreased by dividends.

Callable bonds can be redeemed at the choice of

bond issuer

Preferred stock tends to have attributes of

both bonds and common stock.

Charatcteristics of Preferred stock:

has preference as to dividends. is useful for raising capital without reducing common stockholders' control. generally does not have voting rights.

Preferred stock is advantageous in that it:

has priority over common stock at liquidation has priority over common stock when dividends are declared

The effect on the accounting equation of declaring a dividend that will be paid at a later date includes a(n):

increase in liabilities. decrease in stockholders' equity.

A company borrows funds for a project. If the interest rate charged for the borrowed funds is less than the rate of return on the project, this is referred to as financial

leverage

Financing with_______ requires borrowing, financing with _________ requires issuing shares of stock

liabilities, equity

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:

long term debt

A common reason for redeeming a bond prior to its maturity date is that

market interest rates decreased.

Earnings per share measures the ______ earned per share of common stock

net income

The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by

Interest Expense

The journal entry to record the declaration of a dividend includes ______.

a debit to Dividends a credit to Dividends payable

Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:

a lease asset a lease payable

Preferred stock generally (has/does not have) ______ voting rights and (has/does not have) ______ preference as to dividends.

does not have has

On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to

interest expense for $4,000. notes payable for $1,120.

A bond will be issued at a premium when the market rate of interest is

less than the stated rate

Earnings per share measures the net income earned

per share of common stock

A company's past profits that are not paid out in dividends are ______

retained earnings

When a corporation repurchases its bonds from the bondholders, the corporation

retired the bonds

The ______ rate of interest on a bond is the interest rate printed on the bond, whereas the _____rate of interest is the current rate of interest being paid on investments with similar characteristics.

Stated Market

At the beginning of a lease period, the lessee records

a lease asset and lease payable for the present value of the lease payments. a lease asset and lease payable for the market value of the leas

In a private placement of bonds, bonds may be sold to

a single large investor.

Identify the characteristics of an annuity.

Equal time periods between payment dates A series of amounts that are equal

The debt to equity and the times interest earned ratios provide investors and creditors with a measure of

Financial risk

is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time

Lease

ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price? Multiple choice question.

The issue price will be above the bond's face value.

Identify two ratios commonly used to assess a company's financial risk.

Times interest earned ratio Debt to equity ratio

Which of the following is typically presented first in the equity section of the balance sheet?

preferred stock