Series 66 - Unit 7: Financial Reporting
When a corporation's accounting year ends on a date other than December 31, the company is using A. a fiscal year. B. a non-calendar year. C. a Gregorian year. D. a lunar year.
A. a fiscal year. Fiscal year accounting refers to any entity ending its accounting year on a date other that December 31. The largest user of a fiscal year is the U.S. government. For accounting purposes, the government's year begins on October 1 and ends September 30.
A company has filed for an initial public offering for its $10 par common stock. The IPO is priced at $35 per share. Where on the balance sheet is the extra $25 per share recorded? A. Capital surplus B. Retained earnings C. Distributed dividends D. Paid-in earnings
A. Capital surplus Capital surplus is the amount of premium paid by shareholders above par value. It may also be called paid-in capital or paid-in surplus, but it is not paid-in earnings.
Potential litigation for patent infringement would appear on a corporation's A. balance sheet as a deferred asset. B. footnotes. C. income statement as an expense. D. statement of potential litigation.
B. footnotes. The footnotes to the financial statements carry information such as potential legal actions, accounting methods used, and off-book debt.
Which of the following corporate actions will lead to an increase in a company's owners' equity? A. Issuing $10 million of 6% $100 par preferred stock B. Issuing $10 million of 4% debentures C. Payment of a cash dividend to common shareholders D. Redemption of outstanding debt securities at a price in excess of par value
A. Issuing $10 million of 6% $100 par preferred stock Stock represents equity in a corporation; issuing additional stock is a straightforward method of increasing net worth (owners' equity). Issuing a debt security brings in cash, but that is offset by the new debt. Payment of a cash dividend reduces cash on hand but reduces the declared dividend current liability by an equal amount. Eliminating debt is good, when done so at a price in excess of the par value, is a decrease to owners' equity.
As a result of corporate transactions, a company's assets remain the same and its owners' equity decreases. Which of the following statements is true? A. Prepaid expenses decrease. B. Total liabilities increase. C. Accrued expenses decrease. D. Net worth increases.
B. Total liabilities increase. Sometimes questions are best answered by analyzing the question before we even look at the answer choices. We are told in the question that assets have remained the same, but somehow the net worth (owners' equity) has gone down. If the balance sheet formula is Assets — Liabilities = Net worth, then somehow the liabilities must have increased. That seems to make choice B a straightforward answer, but let's just check the others to be sure. Prepaid expenses are an it can't be choice , because we know assets haven't changed. Choice D is so simple that students sometimes choose it because they think there is a "trick" somewhere. No trick here—if owners' equity goes down, that is the net worth, so we can't choose "net worth increases." Finally, accrued expenses are a liability, so if they decrease, net worth goes up, not down. If you take these questions step by step, they tend to be very logical.
A corporation calls in $5 million of its outstanding 6% bonds. The call price is 103. The effect on the balance sheet is all of the following except A. current assets decrease. B. current liabilities decrease. C. long-term liabilities decrease. D. owners' equity decreases.
B. current liabilities decrease. There is no change to current liabilities. Cash is used to pay for the called bonds. That reduces current assets. Those bonds, a long-term liability, are no longer on the books, so the long-term liabilities decrease. Because the company had to pay $5,150,000 to eliminate $5 million in debt, the net worth drops by that extra $150,000.
