Unit 7 Quizzes

When reviewing a corporation's financial statements, shareholders' equity is computed by A) subtracting total liabilities from total assets. B) multiplying the current market price per share times the number of outstanding shares. C) adding together retained earnings, preferred and common stock, and long-term debts. D) subtracting current liabilities from current assets.

A Shareholders' equity is the corporation's net worth, sometimes called owners' equity. It is computed by subtracting the total liabilities from the total assets. Current assets minus current liabilities is the working capital. Taking all of the equity capital, including retained earnings, and adding the long-term debt to that is the company's total capitalization, and the market price per share times the number of outstanding shares is the company's market capitalization. LO 7.a

Due to changes in customer preferences, a manufacturing company has decided to discontinue the operations of one of its subsidiaries. An explanation of this decision would most likely be found in the company's A) tax return. B) footnotes to the financial statements. C) balance sheet. D) income statement.

B Footnotes are used to explain extraordinary items such as the sale of a subsidiary. LO 7.c

Current assets on a corporate balance sheet would include which of these? I. Accounts payable II. Accrued wages III. Cash IV. Inventory A) III and IV B) I and II C) II and IV D) I and III

A Cash is the most obvious current asset. The general definition of current asset is one that is expected to be turned into cash within the year. One would certainly hope that to be true of inventory. Accounts payable and accrued wages are liabilities—obligations that must be paid on a current basis. LO 7.a

If, during a given year, a company has net income of $1 million and pays out dividends of $800,000, its retained earnings will A) increase by $200,000. B) increase by $1 million. C) decrease by $200,000. D) decrease by $1 million.

A Retained earnings represent the net income a company has retained and not paid out in dividends. If a company has net income of $1 million and pays out only $800,000 in dividends, its retained earnings will increase by $200,000. LO 7.a

The owners' equity portion of a corporation's balance sheet would contain all of the following except A) Treasury stock. B) net income. C) paid-in capital. D) preferred stock.

B Net income is only found on the income statement. The other three are part of stockholders' equity (net worth). Treasury stock is company stock that has been issued to the public and then reacquired by the issuer (the company). It appears as a negative number, so it reduces the net worth (owners' equity). Note, even though the Treasury stock reduces the owners' equity, the question is asking for the items you would see in the owners' equity section on the balance sheet, and if it exists, it would appear there as a deduction. LO 7.a

An IAR is doing some research on a company. When viewing the corporation's financial statements, prepaid expenses would most likely be found as A) a current liability on the balance sheet. B) a current asset on the balance sheet. C) a fixed asset on the balance sheet. D) an expense on the income statement.

B Prepaid expenses, such as rent, insurance, and postage, are considered current assets and are shown as such, sometimes under the listing "other assets." The amounts paid for those expenses will not appear on the income statement until the specific item is actually used. For example, if a company pays its property insurance premiums six months in advance, it isn't until the next premium is paid that the prepaid expense comes off the balance sheet and is reflected as an actual expense. LO 7.a

Which of the following would appear as assets on a corporation's balance sheet? I. Prepaid expenses II. Deferred tax credits III. Notes payable IV. Notes receivable A) II and III B) I and III C) I and IV D) I, II, and IV

C Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability. LO 7.a

Issuance of which of the following would most likely increase the leverage in a company's capital structure? A) Warrants B) Common stock C) Preferred stock D) Bonds

D Leverage is the use of borrowed money. This is reflected in a company's debt-to-equity ratio. Of these choices, the only one that is borrowed money is the bonds. LO 7.b

Which of the following acts requires publicly traded corporations to issue annual reports? A) Securities Exchange Act of 1934 B) Trust Indenture Act of 1939 C) Securities Act of 1933 D) Investment Company Act of 1940

A The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC. LO 7.e

One of the components of a cash flow statement is cash flow from investing activities. Included would be A) payments to retire bonds and the payment of dividends. B) cash proceeds from issuing stocks or bonds. C) transactions and events involving the purchase and sale of land, buildings, and equipment. D) cash receipts (money coming in) from items such as interest and dividends.

C Investing activities include transactions and events involving the purchase and sale of securities, land, buildings, equipment, and other assets not generally held for resale as a product of the business. The proceeds from issuing securities (stocks or bonds) is a financing activity, as is using funds to retire bonds and/or pay dividends. Cash receipts are included in cash flow from operating activities, even when generated through investments such as interest or dividends. LO 7.d

An analyst is viewing financial statements of Diderot Clothing Stores (DCS), a chain of high-fashion women's apparel. DCS had $7 million as its beginning-of-year retained earnings and it made post-tax profits of $3 million. The board of directors decides to pay a dividend of $1 million. Once paid, what will be the ending retained earnings? A) $10 million B) $7 million C) $9 million D) $3 million

C Which of the following acts requires publicly traded corporations to issue annual reports? A) Securities Exchange Act of 1934 B) Trust Indenture Act of 1939 C) Securities Act of 1933 D) Investment Company Act of 1940