Finance 470- MC

A company's current ratio is 1.5. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio and return on assets ratio? A. Current Ratio: Increase; Return on Assets: Increase B. Current Ratio: Increase; Return on Assets: Decrease C. Current Ratio: Decrease; Return on Assets: Increase D. Current Ratio: Decrease; Return on Assets: Decrease

A

A firm has a current ratio greater than 1.0. During the course of the year the firm sells $60M of accounts receivable with limited recourse. If it had not sold the receivables it would have to have taken out a short-term loan. The effect of selling the receivables is: AR Turnover Current Ratio A. Higher; Lower B. Higher; Higher C. Lower; Lower D. Lower; Higher

A

If Harms had decreased its compensation growth rate to 4.5% in 2006, the effect would have been: A. an increased ABO. B. an increased PBO. C. a decreased ABO. D. a decreased PBO.

D.

A lessee must account for a lease as a capital lease if: I. lease transfers ownership to lessee at the end of the lease. II. lease contains option to purchase the asset at the end of the lease at a bargain price. III. lease is longer than 20 years. IV. present value of lease is greater than 10% of lessee's assets. A. I and II B. I, II and III C. I, III and IV D. I, II and IV

A

Depreciation is based on the principle of: A. allocation. B. appropriation. C. estimation. D. approbation.

A

Dylan Corporation issues a zero-coupon bond with $100,000 face value, with a 5-year maturity, and the market rate is 7%. Interest on corporate bonds is normally paid semiannually. In the liability section of Dylan's balance sheet, the proceeds from selling the zero-coupon immediately after issuance will be closest to: A. $70,892. B. $71,299. C. $70,000. D. $100,000.

A

The inventory costing method used by a company (LIFO, FIFO, etc.) will affect: Asset Turnover Debt/Equity Ratio A. Yes; Yes B. Yes; No C. No; No D. No; Yes

A

The plan is said to be underfunded, if: A. the pension obligation is more than the asset value. B. the pension obligation is less than the asset value. C. the pension obligation is equal to the asset value. D. none of the above.

A

Which of the following is an example of off-balance sheet financing? A. Operating leases B. Capital leases C. Issuance of convertible bonds D. Issuance of common stock

A

Which of the following is not an effect of capitalization? A. Capitalization usually reduces net income. B. Capitalization usually yields a smoother net income. C. Capitalization usually decreases the volatility of the return on investment. D. Capitalization usually increases net income.

A

Which of the following might give rise to off-balance sheet financing? I. Long-term operating leases II. Sale of receivables without recourse III. Through-put agreements IV. Purchase commitments A. I, II, III and IV B. I, II and IV C. II, III and IV D. I, III and IV

A

Which of the following statements about stock dividends is true? A. Stock dividends increase the number of shares outstanding. B. Stock dividends are more valuable than stock splits. C. Stock dividends are recorded as a reduction in cash. D. Stock dividends are dividends given in the form of stock from another company.

A

Securitization through the use of a properly structured SPE may result in the following benefits to the company: I. Remove receivables from the balance sheet. II. Remove debt from the balance sheet. III. Lower financing costs. IV. Recognize gains on the sale of assets to the SPE. A. I, II, III and IV B. I, II and III C. I and IV D. II and III

A.

Which of the following statements about inventories is true? A. U.S. generally accepted accounting principles (GAAP) require the use of lower-of-cost or market-valuation basis for inventories. B. Last-in, last-out (LIFO) inventory accounting makes management of income more difficult than first-in, first-out (FIFO) accounting. C. During inflation, LIFO inventory accounting tends to overstate the current ratio. D. FIFO inventory balances generally contain old and outdated costs that have little or no relationship to current costs.

A.

Which of the following would not be found listed as a liability on a company's balance sheet? A. Operating lease obligations B. Capital lease obligations C. Bonds payable D. Taxes payable

A.

The majority of financing for most companies comes from which of the following sources? A. Owners and customers B. Creditors and customers C. Owners and managers D. Creditors and owners

D.

If a company leases equipment to other companies and records these leases as operating leases rather than capital leases, its: I. recorded liabilities will be lower. II. recorded assets will be higher. III. total cash flows will be higher. IV. leverage ratios will be higher. A. I and III B. II and IV C. I only D. II, III and IV

B

One advantage of LIFO over FIFO under normal conditions is that: A. it reports higher retained earnings. B. it results in higher cash flows. C. it results in higher current ratios. D. it results in higher gross margins.

B

Pension intensity can be measured by expressing the pension plan assets and the pension obligation separately as: A. a percentage of company's total liabilities. B. a percentage of company's total assets. C. a percentage of company's net income. D. a percentage of company's shareholders' equity.

B

The net deferrals are included in the balance sheet as part of: A. assets. B. current liabilities. C. shareholders' equity. D. long-term liabilities

B

Under current US GAAP, goodwill is: I. amortized over a period not to exceed 40 years. II. tested annually for impairment. III. exclusive of separately identifiable intangible assets. IV. recorded only upon purchase of another entity. A. I, II, III and IV B. II, III and IV C. I, II and III D. II and IV

B

Which of the following is incorrect with respect to recognized goodwill on the balance sheet? A. It should not be amortized over 30 years. B. It arises when another company is purchased or when internally generated. C. It should be written-down if the future benefits no longer exist. D. It may be negative.

B

Which of the following is not a common characteristic of a company choosing to use LIFO rather than FIFO? A. Larger inventory balances B. Higher variability in inventory balances C. Greater expected tax savings D. Larger in size

B

Which of the following is reported in the equity section of the balance sheet? A. Redeemable Preferred stock B. Treasury stock C. Investment in affiliates D. Debentures

B

Which of the following lease provisions would cause a lease to be classified as an operating lease? A. The lease contains a bargain purchase option. B. The collectibility of lease payments by the lessor is unpredictable. C. The term of the lease is more than 75 percent of the estimated economic life of the leased property. D. The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property.

B

Which of the following would not be classified as a current asset? A. Inventory B. Accounts payable C. Accounts receivable D. Prepaid expenses

B

Which of the following would rarely be classified as a current asset? A. Prepaid insurance B. Goodwill C. Marketable Securities D. Work-in-progress

B

Which one of the following statements is false? A. Short-term obligations may be classified as long term if the company intends to refinance them on a long-term basis and can demonstrate the ability to do so. B. Violation of a long-term debt covenant automatically means the company must reclassify the debt as current. C. Current liabilities are recorded at their maturity value, and not their present value. D. If a bond is issued at a discount the effective interest rate is greater than the coupon rate.

B.

A Corporation wants to increase its current ratio from its present level of 1.2 before it ends the fiscal year. The action having the desired effect is: A. delaying the next payroll. B. writing down impaired assets. C. selling furniture for cash. D. selling current marketable securities at cash for their book value.

C

An analyst should consider whether a company acquired assets through a capital lease or an operating lease because a company may structure: A. leases to be treated like capital leases to enhance its leverage ratios. B. leases to be treated like capital leases to enhance its cash flow. C. leases to be treated like operating leases to enhance its leverage ratios. D. leases to be treated like operating leases to enhance its cash flow.

C

An asset is considered to be liquid if: A. it is readily converted into a current asset. B. it is an intangible asset. C. it is readily converted into cash. D. it is part of retained earnings.

C

During fiscal 2006, Huy sold fully depreciated assets that originally cost $20,000 for $4,000. In 2006, they purchased assets that cost: A. $5,000 B. $6,000 C. $10,000 D. $30,000

C

Financial Statements of ABC Corp. indicates that ending inventory levels in 2005 and 2006 were $200,000 and $350,000 respectively. Cost of Goods sold for 2005 and 2006 were $1,900,000 and $2,200,000 respectively. Purchases in 2006 were: A. $1,950,000 B. $2,150,000 C. $2,350,000 D. $1,850,000

C

Goodwill is: A. the excess of the purchase price of net assets over the book value of net assets. B. the excess of the appraised value of net assets over the book value of net assets. C. the excess of the purchase price of net assets over the fair value of net assets. D. the excess of the appraised value of net assets over the fair value of net assets.

C

If a company engages in off-balance sheet financing, generally the effect is: I. to cause assets to be understated. II. to increase leverage ratios. III. to increase cash flows. IV. to cause liabilities to be understated. A. I, II, III and IV B. I, III and IV C. I and IV D. IV only

C

If a company that leases equipment from another company records these leases as operating leases rather than capital leases, its: I. recorded liabilities will be lower. II. recorded assets will be higher. III. total cash flows will be higher. IV. leverage ratios will be higher. A. I and III B. II and IV C. I only D. II, III and IV

C

Look Good Corporation has current assets of $1.1M and current liabilities of $1M. It is close to year-end and it would like to increase its current ratio. Which of the following will achieve this? A. Encourage customers to pay their bills more quickly. B. Increase short-term borrowings by $0.1M. C. Sold building for $0.2M in cash. D. Liquidate some of its trading marketable securities.

C

Many of the postretirement health benefit plans offered by companies to their employees are unfunded, while all of their pension plans have some degree of funding. Which of the following statements is false? A. There is no legal requirement to fund postretirement health benefits, but there are legal requirements covering pension funding. B. Contributions to pension plans are normally tax deductible, but contributions to postretirement health plans are not tax deductible. C. Funds contributed to a pension plan can be withdrawn at any time, but funds contributed to a postretirement health plan cannot be withdrawn by law. D. Taxes do not have to be paid on investment income earned by assets in pension plan, but they do normally have to be paid on postretirement health plans.

C

On January 1, a company entered into a capital lease resulting in an obligation of $20,000 being recorded on the balance sheet. The lessor's implicit interest was 10 percent. At the end of the first year of the lease, the cash flow from financing activities section of the lessee's statement of cash flows showed a use of cash of $2,200 applicable to the lease. How much did the company pay the lessor in the first year of the lease? A. $2,000 B. $2,200 C. $4,200 D. $20,000

C

Recording a long-term lease as an operating lease, as opposed to a capital lease, for a lessee will cause the following ratios to be: Debt/ Equity Total Asset Turnover A. Higher; Lower B. Higher; Higher C. Lower; Higher D. Lower; Lower

C

Synthetic leases may achieve all of the following benefits to the borrower except: A. window dress the balance sheet. B. increase cash flow. C. reduce tax expense on the income statement. D. increase net income.

C

The difference between the accumulated benefit obligation (ABO) and the projected benefit obligation (PBO) is: A. the PBO considers non-vested obligations and the ABO does not. B. the PBO takes into account the time value of money and the ABO does not. C. the PBO takes into account future pay increases and the ABO does not. D. the PBO takes into account mortality rates of employees and the ABO does not.

C

The use of LIFO rather than FIFO for inventory costing under normal economic conditions results in: I. lower net income. II. higher total assets. III. gher retained earnings. IV. unchanged retained earnings. A. II and III B. I, II and IV C. I only D. I and IV

C

Treasury stock is: A. investments in government securities. B. retained earnings that have been appropriated to make equity investments. C. a company's own stock that it has repurchased. D. assets held for safekeeping in company's vaults.

C

Which of the following is not a component of pension expense? A. Service cost B. Interest cost C. Actual return on plan assets D. Expected return on plan assets

C

Which of the following is not a criterion for defining a lease as a capital lease? A. Ownership is transferred by the end of the lease agreement. B. The lease contains an option to purchase the asset at a bargain price. C. The present value of the lease payments at the beginning of the lease is 75% or more than the value of the asset. D. The lease term is at least 75% of the economic life of the asset.

C

Which of the following is not an analysis issue arising with impairment? A. Evaluating the appropriateness of the amount of the impairment. B. Evaluating the appropriateness of the timing of the impairment. C. Analyzing the effect of the impairment on asset. D. Analyzing the effect of the impairment on income.

C

Which of the following is not considered an intangible asset? A. Goodwill B. Customer lists C. Prepaid advertising expenses D. Memberships

C

A firm has a current ratio greater than 1.0. If the firm's ending inventory is understated by $3,000 and beginning inventory is overstated by $5,000, the firm's net income (before taxes) and current ratio will be: Net Income Current Ratio A. understated by 2,000; Too low B. Overstated by 2,000; Too low C. Understated by 8,000; Too low D. Understated by 8,000; Too high

C.

Target Inc. has 30M shares outstanding and trades at $50 per share. Target has net identifiable assets with a book value of $1,000M and a fair value of $1,200M. Acquirer Corporation purchases all of Target Inc. stock for $60 per share. How much will Acquirer record as goodwill upon acquiring Target? A. 300M B. 500M C. 600M D. 800M

C.

A write-down in asset value is: A. a very rare occurrence. B. not allowed under GAAP. C. results in a direct debit to stockholders' equity. D. required if an asset is deemed to have permanent impairment of value.

D

Companies are supposed to write-down value of assets if a permanent impairment of value or loss of utility occurs. If a company writes down its assets this year the effect on: This year's ROA New Year's ROA A. Increased; No Change B. Decreased; No Change C. Decreased; Decreased D. Decreased; Increased

D

If a LIFO liquidation occurs during a period of rising prices, which of the following statements about the effects on a firm's financial statements, all other things equal, is generally true? I. Cost of goods sold increases. II. Gross profit margin increases. III. Taxes decrease. IV. Net income increases. A. I only B. II only C. I and III only D. II and IV only

D

If a company increases its expected return on plan assets this year, the effect would be to: I. increase plan assets. II. decrease PBO. III. decrease pension expense. IV. decrease minimum liability. A. I, II and IV B. I and IV C. III and IV D. III only

D

LIFO liquidation occurs when: A. a firm changes from LIFO to another inventory method. B. a firm experiences an increase in cost of raw materials. C. the LIFO reserves decline in value. D. the quantity of goods sold is greater than the quantity produced.

D

Minority interest appears on the balance sheet of some companies. Minority interest: A. is classified as a liability. B. is classified as an equity. C. arises when a company records investments using the equity method. D. arises when a company owns controlling interest in another company, but less than 100%.

D

One way for a company to increase its book value per share is to: A. issue long-term debt. B. retire long-term debt. C. increase dividend payout ratio. D. buy back shares at market prices below their book value.

D

When considering defined benefit pension plans, which of the following will not increase the projected benefit obligation (PBO)? A. A decrease in the discount rate. B. An increase in estimated compensation growth. C. An increase in expected average length of lives of employees. D. A decrease in the expected rate of return on plan assets.

D

Which of the following is not a component of recognized OPEB cost? A. Service cost B. Amortization of prior service costs C. Interest cost D. Amortization of prior interest costs

D

Which of the following is not an actuarial assumption underlying the computation of the pension obligation? A. Employee turnover B. Life expectancy C. Interest rate D. Service cost

D

Which of the following statements concerning contingencies is correct? I. Gain contingencies are recorded if they are probable and reasonably estimable. II. Unredeemed frequent flyer mileage is an example of a loss contingency. III. A loss contingency is a form of off-balance sheet financing. IV. Loss contingencies are not recognized unless there is a greater than 95% chance they will be realized. A. I, II, III and IV B. II, III, and IV C. II and III D. II only

D

Which of the following steps are required to adjust LIFO to FIFO? A. Inventory needs to be calculated as reported LIFO inventory plus LIFO reserve. B. Increase deferred tax payable by LIFO reserve times Tax rate. C. Retained earnings need to be calculated as reported retained earnings plus LIFO reserve times (1 - Tax rate). D. All of the above.

D

With respect to LIFO, which of the following is incorrect? A. If a company uses LIFO for tax purposes it must use it for GAAP purposes. B. If the LIFO reserve increases in a given year, the LIFO COGS is higher than it would have been if FIFO had been used for that year. C. LIFO results in better matching on the income statement than FIFO. D. LIFO results in inventory levels on the balance sheet that are closer to current cost than FIFO.

D

With respect to pension liabilities, which of the following statements are true? I. The projected benefit obligation (PBO) is always greater than or equal to the accumulated benefit obligation (ABO). II. The vested benefit obligation (VBO) is always as least as or as big as the accumulated benefit obligation (ABO). III. If the PBO is greater than the plan assets, the plan is said to be overfunded. IV. If the weighted-average assumed discount rate is increased, the PBO will decrease. A. I, III and IV B. I and III C. II and IV D. I and IV

D

Analysis of a company's assets will help evaluate its: I. liquidity. II. solvency. III. operational capacity. IV financing ability. A. I, II, III and IV B. 1, II and IV C. II, III and IV D. I, II and III

D.

Which of the following is true concerning bond covenants? A. Bond covenants are restrictions placed on bondholders to protect rights of equity holders. B. Violation of a bond covenant requires that a company declares bankruptcy. C. If a company violates a bond covenant, it means it has failed to make interest or principal repayments on debt in a timely manner. D. Bond covenants are legal restrictions placed in order to minimize the risk of default on bonds.

D.

Which of the following would be found listed as a liability on a company's balance sheet? A. Operating lease obligations B. Projected benefit obligation C. Purchase Commitment obligation D. Postretirement benefits other than pension obligation

D.