exam 1 multiple choice

Which of the following is a measure of short-term liquidity? a. Quick ratio b. Return on assets c. Dividend yield d. Debt ratio.

a.

uick assets include which of the following? a. Cash, marketable securities, and receivables. b. Cash, marketable securities, and inventories. c. Cash, prepaid rent, and receivables. d. Market securities, receivables, and inventories.

a.

All of the following are measures of liquidity except: a. Quick ratio. b. Debt ratio. c. Current ratio. d. Working capital.

b.

If a material accounting error was made in a prior year, that error: a. Should be reflected on the current year's income statement. b. Should be reflected, net of taxes, on the retained earnings statement. c. Should be reflected as a change in accounting principle. d. Should be considered as a non-recurring item, and shown, net of taxes, on the income statement.

b.

In a statement of cash flows, payments of dividends are classified as: a. Operating activities. b. Financing activities. c. Investing activities. d. Costs and Expenses.

b.

On common size income statements, each component in the income statement is represented as a percentage of: a. Net income. b. Net sales. c. Total assets. d. Profit.

b.

The current ratio will be _______________ the quick ratio. a. less than b. greater than or equal to c. the same as d. always different than

b.

The excess of current assets over current liabilities is called: a. Current ratio. b. Working capital. c. Debt ratio. d. Quick ratio.

b.

The statement of stockholders' equity: a. Is a required financial statement. b. May be issued as a substitute for the statement of retained earnings. c. Shows the changes during the year in all stockholders' equity accounts except retained earnings. d. Is a statement sent to each stockholder showing that person's overall return on equity.

b.

All of the following captions or subtotals are typical of a multiple-step income statement, except: a. Net sales. b. Gross profit. c. Total costs and expenses. d. Operating income.

c.

An example of a non-cash investing or financing activity that is disclosed in a supplementary schedule accompanying the statement of cash flows is: a. Recording depreciation expense for the current year. b. Declaring, but not paying, dividends on common stock. c. Selling land in exchange for a note receivable. d. Transferring cash from a checking account into a money market fund.

c.

As a result of a 5% stock dividend: a. Total stockholders' equity decreases by 5%. b. The par value per share decreases by 5%. c .The number of shares owned by each stockholder increases by 5%, but total stockholders' equity does not change. d. Both the number of shares outstanding and the total stockholders' equity increase by 5%.

c.

Dividends are first recorded and retained earnings are reduced on: a. The ex-dividend date. b. The date of record. c. The date of declaration. d. The date of payment

c.

Generally speaking, which appears to be a desirable current ratio? a. 20 to 1. b. 1 to 20. c. 2 to 1. d. 1 to 2.

c.

The debt ratio indicates the percentage of: a. Total assets financed by long-term mortgages. b. Revenue consumed by interest expense. c. Total assets financed by creditors. d. Total liabilities classified as current.

c.

The financial ratio intended to measure the effectiveness with which management has utilized the resources of the business, regardless of how these resources are financed, is: a. Gross profit rate. b. Current ratio. c. Return on assets. d. Return on equity.

c.

The gross profit rate represents: a. Total sales revenue. b. The percentage change in net sales from the prior period. c. The percentage of sales revenue remaining after providing for the cost of the merchandise sold. d. Net income stated as a percentage of total sales revenue.

c.

The operating cycle of a company: a. Must be less than one year. b. Is usually greater than one year. c. Is the time it takes to purchase inventory, sell inventory, and collect cash from the sale. d. Is the time it takes to acquire a loan, pay the interest, and retire the loan by paying the creditor in full.

c.

The price-earnings ratio is measured by dividing: a. Book value by earnings per share. b. Par value by earnings per share. c. Market value by earnings per share. d. Market value by total net income.

c.

A high quality of earnings is indicated by: a. Earnings derived largely from newly introduced products. b. Declaration of both cash and stock dividends. c. Use of the FIFO method of inventory during sustained inflation. d. A history of increasing earnings and conservative accounting methods.

d.

A large stock dividend and a stock split are similar in that they both cause a: a. Reduction in total stockholders' equity. b. Reduction in retained earnings. c. Reduction in the par value per share. d. Reduction in the market price per share.

d.

A statement of cash flows is not intended to assist investors in evaluating: a. Reasons for differences between the amount of net income and net cash flow from operations. b. The company's ability to meet its obligations and to pay dividends. c. Non-cash aspects of investing and financing activities. d. The profitability of business operations.

d.

Cash flows from investing activities include all of the following except: a. Cash proceeds from selling investments. b. Cash proceeds from collections on loans. c. Cash advanced to borrowers. d. Cash proceeds from borrowing.

d.

Cash flows from operating activities include all of the following except: a. Collections from customers for sales of goods. b. Interest and dividends received. c. Payments of interest. d. Payments of dividends.

d.

Treasury stock appears as: a. An asset account. b. A liability account. c. An expense account. d. An equity account.

d.

A small stock dividend is recorded at: a. Market value. b. Book value. c. Par value. d. No amount, just a memorandum entry is required.

a.

Which of the following is a measure of profitability? a. Inventory turnover rate. b. Quick ratio. c. Interest coverage ratio. d. Return on assets.

d.

A cash dividend paid to shareholders is reported on the: a. Financing activities section of the statement of cash flows. b. Balance sheet. c. Income statement. d. Operating activities section of the statement of cash flows.

a.

A prior period adjustment is a correction made to: a. Retained earnings of the beginning of the period. b. Retained earnings at the end of the period. c. Net income of the current year. d. Only to last years' financial statements.

a.

A statement of stockholders' equity discloses each of the following except: a. The market value of the stockholders' equity at the end of the year. b. The cost of treasury stock owned at the end of the year. c. Net income for the current year. d. The amount of cash dividends declared during the current year.

a.

All of the following are considered cash equivalents except: a. Marketable securities. b. Money market funds. c. Commercial paper. d. Treasury bills.

a.

Comparative financial statements compare the company's current statements with: a. Those of prior periods. b. Those of other companies in the same industry. c. Those of the company's principal competitor. d. The budgeted level of performance for the period.

a.

Dividends become a liability of a corporation: a. On the date the board of directors declares the dividend. b. On the date of record. c. On the date payment is to be made. d. When cumulative preferred stock dividends are in arrears.

a.

Earnings per share figures are shown in the income statement: a. For income from continuing operations, discontinued operations, and net income. b. For common stock as well as for preferred stock. c. For all publicly owned, as well as for all privately held, corporations. d. As an optional disclosure for all corporations, and may be omitted completely or disclosed in a footnote at the option of the issuing corporation.

a.

Free cash flow arises out of: a. Operating activities. b. Investing activities. c. Financing activities. d. Management activities.

a.

How would a company's working capital be affected if a substantial amount of accounts payable were paid in cash? a. It would be unaffected. b. It would fall. c. It would increase. d. The change would depend on the relationship between the payables liquidated and current liabilities.

a.

In a statement of cash flows, collections of accounts receivable are classified as: a. Operating activities. b. Financing activities. c. Investing activities. d. Revenues and Gains.

a.

In calculating earnings per share, the denominator of the equation includes: a. Only common stock outstanding. b. Common stock plus preferred stock. c. Common stock less preferred stock. d. The total shares of authorized common stock.

a.

In the statement of cash flows, the purchase of supplies is classified as: a. Operating activities. b. Financing activities. c. Investing activities. d. Managing activities.

a.

Peak pricing charges: a. A higher price when demand is high and a lower price when demand is low. b. A lower price when demand is high and a higher price when demand is low. c. A low price when demand is high and a lower price when demand is low. d. A high price when demand is high and a higher price when demand is low.

a.

The "bottom line" in a statement of cash flows shows: a. The cash (including cash equivalents) on the balance sheet at the end of the period. b. Net increase or decrease in cash during the period. c. Net income, computed by the cash basis of accounting. d. Net cash flow from operating activities.

a.

The interest coverage ratio is computed by dividing: a. Operating income by annual interest expense. b. Net income by annual interest expense. c. Carrying value of bonds by cash interest payments. d. Earnings per share by the prime interest rate.

a.

The measures most often used in evaluating solvency—the current ratio, quick ratio, and amount of working capital—are developed from amounts appearing in the: a. Balance sheet. b. Income statement. c. Statement of retained earnings. d. Statement of cash flows.

a.

The purpose of developing the subtotal "Income from Continuing Operations" in an income statement is to: a. Assist investors in forecasting future operating results. b. Increase the amount of reported net income. c. Decrease the amount of income subject to income taxes. d. Provide investors with the information necessary to compute earnings per share.

a.

Unusual and infrequent non-recurring items are found on the income statement: a. Before discontinued operations. b. After discontinued operations. c. After income from continuing operations. d. After prior period adjustments

a.

When equipment is sold at a loss: a. The net proceeds are shown in the investing section. b. The book value of the asset is shown in the investing section. c. The book value of the asset is shown in the investing section, and the loss is shown in the operating section. d. The net proceeds are shown in the financing section.

a.

When using the indirect method, depreciation expense: a. Increases net cash flow from operations. b. Decreases net cash flow from operations. c. Does not affect net income. d. Does not affect net cash flow from operations.

a.

Which of the following is an investing activity? a. Purchase of equipment. b. Payment of interest. c. Issuing common stock. d. Issuing long-term debt.

a.

Which of the following is considered a quick asset? a. Accounts receivable. b. Inventory. c. Automobiles. d. Prepaid expenses.

a.

Which of the following would not be classified as an unusual and/or infrequent item? a. A loss from write down of inventory b. A loss from settlement of a lawsuit c. A loss from a natural disaster that affects the company at infrequent intervals d. A loss from restructuring charges associated with a discontinued segment of the business

a.

Which of the following is a financing activity? a. Payment of interest. b. Payment of dividends. c. Making sales on account. d. Paying off accounts payable.

b.

All of the following are financing activities except: a. Borrowing money. b. Lending money. c. Selling capital stock. d. Paying dividends.

b.

All things being equal, if investors expect earnings to increase substantially from current levels, the price to earnings ratio will: a. Be quite low. b. Be quite high. c. Not change. d. Not be affected by income expectations.

b.

An increasing gross profit rate most strongly suggests: a. An increase in physical sales volume. b. Strong consumer demand for the company's products. c. Intense competition. d. Increased short-term solvency.

b.

Component percentages indicate the relative size of each item included in a total. Which of the following statements is true? a. Income statement items are expressed as a percentage of net income, while statement of financial position (balance sheet) items are expressed as a percentage of total assets. b. Income statement items are expressed as a percentage of net sales, while statement of financial position (balance sheet) items are expressed as a percentage of total assets. c. Income statement items are expressed as a percentage of net income, while statement of financial position (balance sheet) items are expressed as a percentage of net assets. d. Both income statement and statement of financial position (balance sheet) items are expressed as a percentage of net assets.

b.

Return on equity computations are used in evaluating: a. Liquidity. b. Profitability. c. Gross profit. d. Whether a ratio is improving or deteriorating over time.

b.

The amount of earnings per share is usually computed: a. For both preferred and common stock. b. For common stock by deducting the dividends on preferred stock from net income and dividing the remaining amount by the weighted average number of common shares outstanding. c. By dividing net income by the combined number of preferred and common shares. d. On the basis of the number of shares outstanding at year-end, regardless of changes in the number of shares during the year.

b.

The changes in financial statement items from a base year to following years are sometimes expressed as: a. Money changes. b. Trend percentages. c. Component percentages. d. Ratios.

b.

The debt ratio is used primarily as a measure of: a. Short-term liquidity. b. Creditors' long-term risk. c. Profitability. d. Return on Investment.

b.

The price-earnings ratio is the: a. Book value of a share of common stock divided by EPS. b. Market price of a share of common stock divided by EPS. c. Par value of a share of common stock divided by EPS. d. Market price divided by book value of a share of stock.

b.

The return on equity ratio usually is computed as: a. Net income divided by average total assets. b. Net income divided by average total stockholders' equity. c. Gross profit divided by average total stockholders' equity. d. Net income less preferred dividends, divided by average common stockholders' equity.

b.

Which of the following does not decrease the cash flow from operating activities? a. The prepayment of an expense. b. The purchase of operating equipment. c. The payment of interest. d. The prepayment of an expense, the purchase of operating equipment, and the payment of interest all decrease cash from operating activities.

b.

Which of the following indicates cash receipts? a. Debit entries in the Notes Receivable account. b. Credit entries in the Marketable Securities account. c. Debit entries in the Notes Payable account. d. Credit entries in the Accumulated Depreciation account.

b.

Which of the following is not classified among the operating activities in a statement of cash flows? a. Payment of interest on a bank loan. b. Payment of the principal amount owed on a bank loan. c. Payment of an account payable to a merchandise supplier. d. Payment of income taxes.

b.

In a statement of cash flows, the term "cash" includes: a. Only money on deposit in bank accounts. b. Only bank accounts and cash on hand. c. Bank accounts, cash on hand, and cash equivalents. d. Bank accounts, cash on hand, cash equivalents, and marketable securities classified as current assets.

c.

Large stock dividends tend to: a. Increase stock prices. b. Have no effect upon stock prices. c. Keep stock prices down. d. Decrease total assets.

c.

The measurement of the relative size of each item included in a total is called: a. Money changes. b. Trend percentages. c. Component percentages. d. Ratios.

c.

The principle factor(s) affecting the quality of working capital is (are): a. The nature of the current assets. b. The length of time to convert current assets into cash. c. Both the nature of the current assets and the length of time to convert current assets into cash. d. Neither the nature of the current assets nor the length of time to convert current assets into cash.

c.

The ratio that measures total liabilities as a percentage of total assets is called the: a. Current ratio. b. Working capital. c. Debt ratio. d. Quick ratio.

c.

The return on assets ratio usually is computed as: a. Net sales divided by average total assets. b. Gross profit divided by average total assets. c. Operating income divided by average total assets. d. Net income divided by average total assets.

c.

Which method will yield higher cash flows from operating activities? a. The indirect method. b. The direct method. c. Both direct and indirect methods will yield the same amount. d. Depends upon the situation.

c.

Which method will yield the higher cash flows from financing activities? a. The indirect method yields higher cash flows from financing activities. b. The direct method yields higher cash flows from financing activities. c. The net cash flow from financing activities is not impacted by the choice between the direct and indirect methods. d. It depends upon the situation.

c.

Which of the following is not classified among the financing activities in a statement of cash flows? a. Long-term borrowing. b. Payment of dividends to stockholders. c. Payment of interest to creditors. d. Short-term borrowing.

c.

Which of the following is not classified among the investing activities in a statement of cash flows? a. Purchase of marketable securities for cash. b. Collection of the principal amount of cash loans made to others. c. Investment of cash made in the business by the owners. d. Purchase of plant assets for cash.

c.

Which of the following items would be included in the discontinued operations section of the income statement? a. Income or loss from operating the segment prior to its disposal. b. The gain or loss on disposal of the segment. c. Both the income or loss from operating the segment prior to its disposal, and the gain or loss on disposal of the segment. d. Only losses and not gains on the disposal of a segment.

c.

A liquidating dividend: a. Occurs when a corporation distributes shares of its own stock as a dividend, rather than cash. b. Occurs whenever a corporation distributes non-cash assets as a dividend to its stockholders. c. Represents a distribution of a corporation's profits to the stockholders. d. Occurs when a corporation pays a dividend that exceeds the balance in its Retained Earnings account.

d.

A prior period adjustment appears in: a. The income statement following the subtotal "Income before Prior Period Adjustments." b. The statement of retained earnings, as an adjustment to the ending balance of retained earnings. c. Footnotes to the financial statements. d. The statement of retained earnings, as an adjustment to the beginning balance of retained earnings.

d.

In computing earnings per share, the number of shares used is: a. The year-end number of shares outstanding. b. The beginning of the year number of shares outstanding. c. The average of the beginning and the year-end number of shares outstanding. d. The weighted average of shares outstanding for the year.

d.

Of the items listed, which would appear closest to the bottom of the income statement? a. Unusual and infrequent non-recurring items b. Prior period adjustment c. Income from continuing operations d. Discontinued operations

d.

One number expressed as a percentage of another is called: a. Money changes. b. Trend percentages. c. Component percentages. d. Ratios.

d.

Stock splits: a. Allow management to conserve cash. b. Give stockholders more shares. c. Cause no change in total assets, liabilities, or stockholders' equity. d. Allow management to conserve cash, give stockholders more shares, and cause no change in total assets, liabilities, or stockholders' equity.

d.

The term, classified financial statements, refers to: a. The financial statements of all companies working on government projects. b. The financial statements of defense contractors working on secret projects. c. Financial statements prepared for use by management, but not for distribution outside of the organization. d. Financial statements in which items with certain characteristics are placed together in a group in an effort to develop useful subtotals.

d.

When equipment is purchased entirely through a loan: a. The equipment is shown as an increase in the investing activities section. b. The equipment is shown as a decrease in the investing activities section. c. The loan is shown as an increase in the financing section. d. Neither the loan nor the purchase of equipment is shown in the investing or the financing sections.

d.