Accounting Exam 3 SmartBooks + Lecture Guides

liabilities

Assets are financed with _____________ and stockholders' equity.

liabilities or debt or credit or creditor's debit

Assets are financed with _________________ and stockholders' equity.

issued minus the number of shares in treasury

the number of shares outstanding equals the number of shares __________________________________________________________

effective-interest

Which method of bond amortization amortizes the premiums/discounts accurately and is considered a conceptually superior method?

not generating enough income to cover its interest expense (Times interest earned ratio = (net income + interest expense + income tax expense)/interest expense. If the ratio is less than 1.0, it means there is not enough income (the numerator) to cover its interest expense (the denominator).)

When the times interest earned ratio is less than 1.0, a company is ______.

Additional Paid-in Capital (Reason: Retained Earnings and Common Stock are used for both small and large, and Cash is used for neither. Because a small stock dividend is recorded at market value, Additional Paid-in Capital is used for a small stock dividend; large stock dividends are recorded at par, so there is no Additional Paid-in Capital to record.)

Which of the following accounts is used to record a small stock dividend on common stock but is not used to record a large stock dividend on common stock?

Accounts Payable Salaries and Wages Payable Note Payable due in 3 months

Which of the following are current liabilities?

Accounts Payable Salaries and Wages Payable Note Payable due in 3 months

Which of the following are current liabilities? (Check all that apply.

Federal unemployment tax (FUTA) Charitable contributions State unemployment tax (SUTA)

Which of the following are not required payroll deductions from an employees' gross earnings? (Check all that apply.)

Federal unemployment tax (FUTA) State unemployment tax (SUTA) Charitable contributions

Which of the following are not required payroll deductions from an employees' gross earnings? (Check all that apply.)

Treasury Stock Additional Paid-in Capital Common Stock

Which of the following line items would be found on a statement of stockholders' equity that would not be on the statement of retained earnings?

Stock Issuances Treasury Stock Dividends Net Income Additional Paid-in Capital

Which of the following would be found on a statement of stockholders' equity?

Probable contingent liability that can be estimated

Which type of contingent liability would most likely be found on a balance sheet prepared under US GAAP?

Installment notes

Which type of note requires the borrower to pay interest and principal to the lender over the note's life to maturity with no balloon payment at maturity?

Because small stock dividends are recorded at market value. (Reason: Because a small stock dividend is recorded at market value, Additional Paid-in Capital is used to report the amount by which the market value of the stock exceeds its par value.)

Why is Additional Paid-in Capital recorded for a small stock dividend?

retained earnings

_____________ ___________________ reports the cumulative amount of net income earned by the company less the cumulative amount of dividends since the corporation was first organized. Represents earned capital

preferred stockholders

________________ _____________________ has preference to dividends and is useful for raising capital without reducing common stockholders control

contributed

________________ capital, also called paid-in capital, reports the amount of capital the company received from investors

face value of the bonds are paid

A bond's maturity date is the date on which the ______.

used to calculate interest payments always expressed as an annual interest rate

A bond's stated interest rate is ______. (Check all that apply.)

Treasury Stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use.

dues are paid purchases are made on credit

Accounts (or trade) Payable is debited when ________________ and credited when ___________________

is shown in parentheses on the balance sheet means that Retained earnings has a debit balance indicates accumulated net losses

Accumulated Deficit ______.

$100,000 ( interest only arrises as time passes, it is initially recorded as the initial amount )

Ace Electronics signed a 10-year, $100,000, 4% note payable on January 1. When the note is signed, Ace should record a liability of ______.

accumulated more net losses than net income

An accumulated deficit means a company has ______.

pay equal amounts over the note's life to maturity with each payment consisting of interest and principal

An installment note differs from an interest-only note in that it requires the borrower to ______.

0.6 or 60%. (Reason: Beginning liabilities equal $60,000 or $120,000 x 0.5. Ending liabilities equal $96,000 or $60,000+$36,000. Debt-to-assets equals 0.6 or $96,000/($120,000+$40,000).)

At the beginning of the year, a firm had $120,000 in total assets and a debt-to-assets ratio of 0.5 or 50%. During the year, the firm's assets increased by $40,000, and its liabilities increased by $36,000. What is the debt-to-assets ratio at the end of the year?

Additional Paid-in Capital Common Stock Retained Earnings

Daffy Duct Inc. declared a small stock dividend and issued 1,000 shares of $1 par value common stock when the price of the stock was $4 each. Identify all appropriate account titles that may be used to record this issuance of stock.

Retained Earnings Common Stock Additional Paid-in Capital

Daffy Duct Inc. declared a small stock dividend and issued 1,000 shares of $1 par value common stock when the price of the stock was $4 each. Identify all appropriate account titles that may be used to record this issuance of stock. (Check all that apply.)

equity financing (this does not have to be repaid and the company is already in debt)

Dew Drop Inc has a current ratio of 0.9 to 1.0 and $4 of debt for every 41 of equity. If Dew Drop Inn needs additional financing it would best improve its financial situation with _________________________

20.00

During the year, Lox, Stock and Bagel Inc.'s net income was $60,000. Its average stockholders' equity was $240,000, and it had 120,000 shares outstanding the entire year. Its stock was selling for $10 per share. Its P/E ratio equals ______. The company has no preferred stock. Multiple choice question.

$0 (Reason: No liability should be recorded because the loss is "not likely" to occur (and, therefore, is not probable).)

During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet? Multiple choice question.

Net Income

Earnings per share (EPS) equals ______ divided by the average shares of common stock outstanding.

dividing net income less preferred dividends by the average common shares outstanding dividing the stock price by the P/E ratio

Earnings per share (EPS) may be determined by ______.

Federal and state income tax FICA tax Payroll taxes

Employees' gross earnings differ from their net pay because of

federal and state income taxes payroll deductions FICA taxes

Employees' gross earnings differ from their net pay because of ______. (Select all that apply.)

Moody's Standard & Poor's

For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are ______. (Check all that apply.)

Credit rating agencies

For investors, the _____________ ______________ _________________provide independent, easy-to-use measurements of relative credit risk.

Asset investment

From the issuing company's perspective, a bond is a liability. From a bondholder's perspective, the bond is a(n)

do not include a single "balloon" payment since a portion of the principal is paid each period

How are installment notes different from interest-only notes? Installment notes ______.

current stock price earnings per share

Identify what is needed to calculate the P/E ratio

stockholders equity on the balance sheet increases; the financing activities section of the statement of cash flows increases

Ima Rich purchased 100 shares of Stockits, Inc's $1 par value value common stock from Stockits' for $5 per share. Which statements are true regarding the effect of this transaction on Stockits' financial statements?

Contingent

Liabilities are potential liabilities that arise as a result of past transactions or events and are reported on the balance sheet if the loss will probably occur and can be reasonably estimated.

45,000 (we only count the shares issued, and do not count the treasury shares)

Lox, Stock, and Bagel Inc issued 50,000 shares of 100,000 authorized. It has since repurchased 5,000 of its shares. The number of shares outstanding equals ___________________ shares

are amounts subtracted from employees' gross earnings to determine their net pay decrease the amount of cash an employee receives

Payroll deductions ______. (Check all that apply.) Multiple select question.

kept; balance sheet and statement of retained earnings

Retained Earnings of $100,000 represent a corporation's cumulative earnings ______ and is shown on the ______.

profits retained net income kept

Retained Earnings represents cumulative ______ by the business. (Check all that apply.)

dividend

Similar to a stock split, a stock _____________________ also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders.

False

T/F When a corporation declares a dividend its Net Income on the income statement is reduced

stated

The __________ rate on a bond is the rate used to determine the interest payments.

the percentage of assets financed by debt a higher ratio means greater financing risk

The debt-to-asset ratio indicates _____. (Check all that apply.)

Assets

The debt-to-asset ratio is calculated by dividing total liabilities by total

What is the percentage of assets financed by debt?

The debt-to-assets ratio best answers which financial question?

Cash for $1,000,000 and credit Common Stock for $10,000 and Additional Paid-in Capital for $990,000

The entry to record the issuance of 100,000 shares of $0.10 par value common stock for $10 per share is debit ______.

debit accounts payable, credit cash

The entry to record the payment of previous purchases made on account includes a ______. (Select all that apply.)

Contributed Capital

The money a corporation receives from investors by issuing stock is called

contributed capital

The money a corportation receives from investors by issuing stock is called_____________

interest payment

The stated rate is the rate used to determine the ______.

interest payments

The stated rate is the rate used to determine the ______.

retained earnings

Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating

Balance Sheet

Transactions between a company and its stockholders affect the company's _____ accounts only.

false (Installment notes require periodic payments that include interest and repayment of a portion of the principal. Interest-only notes require periodic interest payments and a single "balloon" payment of the principal at maturity.)

True or false: Both installment notes and interest-only notes require periodic payments of interest and repayment of a portion of the principal.

It will decrease.

What effect will issuing more bonds have on the times interest earned ratio over time?

Current Liabilities

__________________ __________________ on a classified balance sheet report the obligations that will be paid or met within the company's operating cycle or within 1 year, whichever is longer. (Enter one word per blank.)

outstanding; issued

_____________________ shares equals the number of shares ____________________ minus the number of shares repurchased by the company

preferred

______________________ stock carries priority over common stock with regard to dividends

True

an advantage of equity over debt financing is corporations are not required to pay dividends or repay stockholders

stock splits

an increase in the number of shares and a corresponding decrease in par value per share

Bonds

are financial instruments, traded on established exchanges, that specify future payments a company promises to make in exchange for receiving a sum of money now. (Enter one word per blank.)

benefits of preferred stock

different voting rights usually has a fixed dividend rate priority over common stock

Sole Proprietorship and general partnership

if a business cannot pay its debts, creditors can expect the owners to pay the debts with their personal assets if the business is a ________________________

only stand to lose what you paid to buy the stock

if you own a stock and the company goes bankrupt, you __________________

accumulated other comprehensive income (loss)

reports unrealized gains and losses, which are the temporary changes in the value of certain assets and liabilities the company holds. they can relate to pensions, foreign currencies and financial investments, such as national beverages contacts to stabilize the cost of its aluminum cans

Dividends

similar to a stock split, a stock ___________________ dividend also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders

face value

the ____________ ___________ is the payment made when a bond matures

Balance Sheet

transactions between a company and its stockholders affect the company's ___________________ _____________________ accounts only

True

two sources of financing for a corporation are debt and equity

excludes

A liability is first recorded at the amount of cash a creditor would accept to immediately settle the liability, which ______ interest.

causes retained earnings to decrease. distributes additional shares of stock to existing stockholders on a pro rata basis.

A stock dividend ______.

causes retained earnings to decrease.; distributes additional shares of stock to existing stockholders on a pro rata basis.

A stock dividend ______.

installment

A(n) note requires the borrower to pay equal payments over the note's life to maturity with each payment consisting of interest and principal. (Enter one word per blank.)

promises

Bonds are financial ______________ outline the future payments a company promises to make in exchange for receiving a sum of money now. (Enter one word per blank.)

not be reported if the loss is remote and unable to be estimated be reported on the balance sheet if the loss will probably occur and can be reasonably estimated be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated

Under US GAAP, a contingent liability should ______. (Enter one word per blank.)

subtracting the preferred stock balance from total stockholders' equity subtracting preferred stock dividends from net income

When a company has both common and preferred stock, its ROE must be adjusted by ______.

increases

When using the effective-interest method of bond amortization, Interest Expense ______ each payment if the bonds were issued at a discount.