Analysis (Basic Tax Rules) - Fundamental : Review Questions

A corporation's capitalization is: 1st Mortgage Bonds 10% M '32 $20,000,000 Preferred Stock 5% 10,000,000 Common Stock ($.01 par) 500,000 Capital in Excess of Par 700,000 Retained Earnings 3,000,000 The company's common stock ratio is: A. 12% B. 15% C. 22% D. 26%

A. 12%

Which of the following will reduce net working capital? A. Declaration of a cash dividend B. Declaration of a stock dividend C. Reduction in the allowance for bad debts D. Increase in depreciation deductions taken

A. Declaration of a cash dividend

All of the following are methods of depreciation EXCEPT: A. First In; First Out B. Double Declining Balance C. Sum of Years Digits D Straight Line

A. First In; First Out

A corporate issuer declares a reverse stock split. After the split is effected, which statement is TRUE? A. The market price of the corporation's shares will increase B. The number of shares outstanding will increase C. The reported earnings per common share will decrease D. The P/E Ratio will increase

A. The market price of the corporation's shares will increase

ABC Corporation splits its stock 4:1. As a result of the split, which of the following will occur? A. The per share price of ABC stock is reduced B. The par value of ABC stock remains unchanged C. The retained earnings of ABC Corporation are reduced D. The Price / Earnings ratio for ABC stock is reduced

A. The per share price of ABC stock is reduced

A corporation would split its stock 1:10 in order to: A. prevent the stock from being delisted B. increase the number of shares outstanding C. increase the stock's P/E ratio D. decrease the market price per share

A. prevent the stock from being delisted

If a corporation issues new stock at a price above par value, the excess above par is termed: A. surplus capital B. retained earnings C. earned surplus D. adjusted par value

A. surplus capital

A company has reported operating income of $25,000,000. The bond interest expense for the year is $4,000,000 and principal repayments on bonds totaled $1,000,000. The company's debt service coverage ratiois: A. 1:5 B. 5:1 C. 16:1 D. 25:1

B. 5:1 $25,000,000 /($4,000,000 + $1,000,000) = 5 : 1

If a corporation declares a cash dividend, which of the following statements are TRUE? A. Both net working capital and stockholders' equity increase B. Both net working capital and stockholders' equity decrease C. Net working capital increases and stockholders' equity decreases D. Net working capital decreases and stockholders' equity increases

B. Both net working capital and stockholders' equity decrease

A corporation has previously declared a cash dividend. When the dividend is actually paid, which of the following are reduced? A. Current Assets only B. Current Assets and Current Liabilities C. Net Worth D. Net Working Capital

B. Current Assets and Current Liabilities

All of the following items are found on a company's income statement EXCEPT: A. Depreciation Expense B. Current Liabilities C. Cost of Goods Sold D. Bond Interest Expense

B. Current Liabilities

A corporation receives, but has not paid for, a shipment of goods that go into inventory. Which of the following choices is TRUE? A. Current Assets decreases B. Current Liabilities increases C. Cash decreases D. Net Working Capital increases

B. Current Liabilities increases

Which item would NOT be found on a corporation's income statement? A. Interest B. Dividends C. Revenue D. Expenses

B. Dividends

All of the following are methods of depreciation EXCEPT: A. Double Declining Balance B. Last In; First Out C. Sum of Years Digits D. Straight Line

B. Last In; First Out

Corporate financial reports that are filed with the SEC by publicly traded companies are required to use: A. cash accounting B. accrual accounting C. FIFO accounting D. LIFO accounting

B. accrual accounting

All of the following will affect the reported net income per share of a corporation EXCEPT: A. discontinuance of operations of an operating division B. declaration of a common dividend C. decrease in the number of common shares outstanding D. change in accounting method for valuing inventories

B. declaration of a common dividend

A corporation would repurchase its debt for all of the following reasons EXCEPT to: A. refinance at lower interest rates B. increase its capitalization C. increase the market value of its equity issues D. reduce its sensitivity to earnings fluctuations due to cyclical conditions

B. increase its capitalization

The reported net income of a company has declined at a faster rate than operating income. This could result only from an increase in: A. depreciation expense B. interest expense C. cost of goods sold D. product returns

B. interest expense

If total liabilities of a company are subtracted from total assets of a company, the result is the company's: A. market value B. net worth C. capitalization D. net working capital

B. net worth

If a corporation has an operating margin of profit of 9.50%, this means that for every $1 of revenue, the company has: A. $.095 of expenses B. $.95 of expenses C. $.905 of expenses D. $.0905 of expenses

C. $.905 of expenses If the company has an Operating Margin of Profit of 9.50%, this means that it had operating income of $.095 for each $1 of revenue ($.095 / $1 = 9.50%). Because operating expenses are deducted from revenue to arrive at the operating margin, this means that for every $1 of revenue, there were $.905 of expenses.

XYZ common stock is currently trading at $96 per share. Last year, XYZ common stock earned $8.00 per share, giving the company a Price / Earnings Ratio of 12:1. If XYZ splits 3 for 1, the new Price / Earnings ratio will be: A. 4:1 B. 6:1 C. 12:1 D. 24:1

C. 12:1

XYZ Corporation Income Statement Net Sales $10,000,000 Cost of Goods Sold 5,000,000 Gross Margin 5,000,000 Operating Expenses 2,000,000 Operating Income 3,000,000 Bond Interest 1,000,000 Net Income Before Tax 2,000,000 Tax at 50% 1,000,000 Net Income After Tax $1,000,000 What is XYZ's Bond Interest Coverage Ratio? A. 1:1 B. 2:1 C. 3:1 D. 4:1

C. 3:1 $3,000,000/$1,000,000=3 x

Corporate earnings that are not paid to shareholders as a dividend are credited to: A. Common at Par B. Capital in Excess of Par C. Retained Earnings D. Current Assets

C. Retained Earnings

If a corporation decides to split its stock 3 for 1, which of the following will occur after the split? A. The Price / Earnings Ratio changes B. The market price increases C. The Earnings Per Share changes D. The number of shares decreases

C. The Earnings Per Share changes

If a corporation repurchases its debt, which statement is TRUE? A. The corporation's capitalization will increase B. Interest costs will rise C. The company will be deleveraged D. The market value of the common stock will decrease

C. The company will be deleveraged

XYZ Company has 100,000,000 authorized common shares. 25,000,000 shares have been issued and another 10,000,000 shares are currently in registration. The sale of the 10,000,000 shares will result in all of the following EXCEPT a(n) A. decrease in earnings per share B. increase in net worth C. decrease in net working capital. D. increase in the number of shares outstanding

C. decrease in net working capital.

Bond interest expense of a corporation is : A. deductible before operating expenses B. deducted before computing operating income C. deductible before taxes D. not deductible since these are not tax free issues

C. deductible before taxes

Accelerated depreciation deductions: A. increase reported income in early years B. do not impact the income statement since these are balance sheet items C. increase reported income in later years D. increase each quarter

C. increase reported income in later years

A corporation would repurchase its debt for each of the following reasons EXCEPT: A. to increase the market value of its equity issues B. to reduce its sensitivity to earnings fluctuations due to cyclical conditions C. to refinance at higher interest rates D. to decrease its leverage

C. to refinance at higher interest rates

A corporation's capitalization is: 1st Mortgage Bonds 9% M '45$10,000,000 Preferred Stock 8% 5,000,000 Common Stock ($.10 par)200,000 Capital in Excess of Par 800,000 Retained Earnings6,000,000 The company's common stock ratio is: A. 3% B. 14% C. 27% D. 32%

D. 32%

A corporation's capitalization is: 1st Mortgage Bonds 9% M '32$10,000,000Preferred Stock 8%5,000,000Common Stock ($.10 par)200,000Capital in Excess of Par800,000Retained Earnings6,000,000 The company's debt or bond ratio is: A. 14% B. 27% C. 32% D. 45%

D. 45%

DEF Corporation Income Statement Net Sales $30,000,000 Cost of Goods Sold 15,000,000 Gross Margin 15,000,000 Operating Expenses 5,000,000 Operating Income 10,000,000 Bond Interest 2,000,000 Net Income Before Tax 8,000,000 Tax at 50% 4,000,000 Net Income After Tax $4,000,000 What is DEF's bond interest coverage ratio? A. 2:1 B. 3:1 C. 4:1 D. 5:1

D. 5:1 $10,000,000/ $2,000,000 = 5 x

All of the following are components of total long term capital of a corporation EXCEPT: A. Common Stockholders' Equity B. Preferred Stockholders' Equity C. Long Term Bonded Debt D. Current Liabilities

D. Current Liabilities

All of the following are components of common stockholders' equity EXCEPT: A. Common at Par B. Capital in Excess of Par C. Retained Earnings D. Intangibles

D. Intangibles

What does the Current Ratio measure? A. Suitability B. Profitability C. Financial leverage D. Liquidity

D. Liquidity

A corporation has previously declared a cash dividend. When the dividend is actually paid, all of the following choices are affected EXCEPT: A. Cash B. Current Assets C. Current Liabilities D. Net Working Capital

D. Net Working Capital

A corporation issues convertible debentures at par. Which of the following is affected? A. Shares outstanding B. Current Liabilities C. Net Worth D. Net Working Capital

D. Net Working Capital

All of the following will affect the reported net income per share of a manufacturing corporation EXCEPT: A. Discontinuance of operations of an operating division B. Rise in basic materials prices C. Change in accounting method for valuing inventories D. Payment of corporate taxes

D. Payment of corporate taxes

ABC Corporation declares a 1:5 stock split. As a result of this action all of the following will occur EXCEPT the: A. market price of ABC common stock will increase B. number of common shares of ABC outstanding will decrease C. Earnings per Share of ABC common stock will increase D. Price / Earnings ratio of ABC common stock will increase

D. Price / Earnings ratio of ABC common stock will increase

A corporation issues a 20% stock dividend. What is affected? A. Current Assets B. Total Liabilities C. Net Worth D. Retained Earnings

D. Retained Earnings

A corporation issues new common stock. All of the following will increase EXCEPT: A. Current Assets B. Cash Position C. Net Worth D. Retained Earnings

D. Retained Earnings

If current liabilities of a company are subtracted from current assets of a company, the result is the company's: A. market value B. net worth C. capitalization D. net working capital

D. net working capital

All of the following terms are synonymous EXCEPT: A. capital in excess of par B. capital surplus C. additional paid in capital D. retained earnings

D. retained earnings