ACNT 2336 Final Exam Ch. 7-11

Which of the following could cause return on assets to decline when net profit margin is increasing? A. Sale of investments at year-end B. Increased turnover of operating assets C. Decline in book value D. A stock split E. Purchase of a new building at year-end

Purchase of a new building at year-end

A reason that equity earnings create a problem in analyzing profitability is that equity earnings are: A. usually greater than the related cash flow B. less than dividends declared C. more than dividends declared D. extraordinary E. nonrecurring

A.

Dawn Alive reported the following for 2012. Ending market price $40.75 Earnings per share: Basic 2.50 Diluted 2.08 Dividends per share 1.10 The price/earnings ratio and dividend payout were: Correct Response A. 19.59 and 52.88% B. 16.30 and 52.88% C. 16.30 and 44.00% D. 19.59 and 44.00% E. 37.04 and 52.88%

A.

Joseph and John, Inc., had the following balance sheet results for 2012: (in millions) Current liabilities $12.6 Bonds payable 18.6 Lease obligations 2.7 Noncontrolling interest 1.4 Common stock 8.6 Retained earnings 22.9 Total $66.8 Compute the debt-equity ratio. A. 112.1% B. 87.6% C. 67.6% D. 46.7% E. None of the answers are correct

A.

Net profit margin measures return on: A. sales B. owners' equity C. productive assets D. total assets E. inventory

A.

Smith reported the following for 2012. Beginning market price $20.00 Average market price 24.00 Ending market price 26.00 Earnings per share: Basic 1.80 Diluted 1.60 Cash dividends per share 1.00 The price earnings ratio and dividend payout were: Correct Response A. 16.25 and 62.50%. B. 16.25 and 65.00%. C. 17.00 and 62.50%. D. 15.00 and 62.50%. E. 15.00 and 60.00%.

A.

The earnings per share is computed for: A. Common stock B. non-redeemable preferred C. redeemable preferred D. common stock and non-redeemable preferred stock E. common stock and fully diluted preferred stock.

A.

There are many definitions or descriptions given to financial failure. Which of the following does NOT appear to be a reasonable definition or description: A. refinancing of bonds payable B. liquidation C. deferment of payments to short-term creditors D. deferment of payments of interest on bonds E. deferment of payments of principal on bonds

A.

Tim Company had sales of $30,000, increase in accounts payable of $5,000, decrease in accounts receivable of $1,000, increase in inventories of $4,000, and depreciation expense of $4,000. What is the cash collected from customers? A. $31,000 B. $35,000 C. $34,000 D. $25,000 E. $26,000

A.

Tom Copeland, Tim Keller, and Jack Morrin, on their book Valuation, Measuring and Managing the Value of Companies, observed that acquirers paid too much for companies because of all but one of the following reasons: A. market potential greater than estimated B. overoptimistic appraisal of market potential C. overestimation of synergies D. poor due diligence E. overbidding

A.

Which of the following is NOT a multiple approach to valuation? A. Discounted cash flow B. Price-to-earnings (PE) C. Price-to-Book D. Price-to-operating cash flow E. Price-to-sales

A.

Which of the following ratios appears most frequently in annual reports? A. Earnings per Share B. Return on Equity C. Profit Margin D. Effective Tax Rate E. Debt/Equity

A.

Which of the following variables indicates a measure of cumulative profitability over time? A. Retained earnings (balance sheet)/total assets B. Earnings before interest and taxes/total assets C. Working capital/total assets D. Market value of equity/book value of total debt E. Sales/total assets

A.

Which of these items represents a definite commitment to pay out funds in the future? A. Bonds payable B. Reserves for rebuilding furnaces C. Deferred taxes D. Noncontrolling shareholders' interests E. Redeemable preferred stock

A.

Return on investment measures the return on long-term suppliers of funds. A. True B. False

A. True

The operating ratios may give significantly different results from net earnings ratios if a firm has large amounts of nonoperating assets generating income. A. True B. False

A. True

Which of the following ratios represents dividends per common share in relation to market price per common share? A. Dividend payout B. Dividend yield C. Price/earnings D. Book value per share E. Percentage of earnings retained

B

A fixed charge coverage: A. is a balance sheet indication of debt carrying ability B. is an income statement indication of debt carrying ability C. is a liquidity ratio D. frequently includes research and development E. computation is standard from firm to firm.

B.

A number of assumptions about future events must be made regarding a defined benefit plan. Which of the following does not represent one of the assumptions? A. Interest rates B. Termination date for the firm C. Employee turnover D. Mortality rates E. Compensation

B.

Conroy Company had sales of $50,000, increase in accounts payable of $4,000, decrease in accounts receivable of $3,000, tax expense of $5,000, and an increase in taxes payable of $1,000. What was the cash outflow for taxes? A. $54,000 B. $4,000 C. $6,000 D. $53,000 E. $45,000

B.

Gross profit margin is an important ratio of merchandising firms because: A. their investments in real property are high B. cost of goods sold is usually the largest expense C. selling expenses, like advertising, are usually quite high D. it measures their ability to collect receivables E. it measures their ability to use total assets

B.

Income tax expense in interim reporting should: A. Be based on the quarterly income only B. contain a judgment estimation of the annual effective tax rate C. be based on the income year-to-date D. exclude extraordinary items in earlier quarters of the year E. disregard year-end adjustments

B.

Jordan Manufacturing reports the following capital structure: Current liabilities $100,000 Long-term debt 400,000 Deferred income taxes 10,000 Preferred stock 80,000 Common stock 100,000 Premium on common stock 180,000 Retained earnings 170,000 What is the debt ratio? A. 0.48 B. 0.49 C. 0.93 D. 0.96 E. None of the answers are correct

B.

Operating assets equals: A. cash, accounts receivable, and equipment B. current assets plus tangible assets C. total assets minus intangible assets D. only long-term assets E. only current assets

B.

The following financial statement data are taken from Xeron Company's 2012 annual report: (in millions) Current assets $12.6 Investments 9.4 Intangibles 6.8 Property, plant, and equipment 58.1 Current liabilities 6.4 Long-term debt 39.7 Stockholders' equity 40.8 Compute the debt to tangible net worth ratio. A. 146.8% B. 135.6% C. 53.0% D. 45.7% E. None of the answers are correct

B.

The price/earnings ratio: A. measures the past earning ability of the firm. B. is a gauge of future earning power as seen by investors. C. relates price to dividends D. relates price to total net income E. All of the answers are correct

B.

Total asset turnover measures the ability of a firm to: A. generate profits on sales B. generate sales through the use of assets. C. buy new assets. D. move inventory E. cover long-term debt

B.

Under the Employee Retirement Income Security Act, a company can be liable for its pension plan up to: A. 30 percent of its total assets B. 30 percent of its net worth C. 40 percent of its total assets D. 40 percent of its net worth E. 50 percent of its total assets

B.

Which of the following circumstances will cause sales to fixed assets to be abnormally high? A. A recent purchase of land B. A labor-intensive industry C. A highly mechanized facility D. High direct labor costs from a new union contract E. The use of unity-of-production depreciation.

B.

Which of the following is the focus for the statement of cash flows? A. Cash B. Cash and cash equivalents C. Current assets D. Working capital E. None of the answers are correct.

B.

Which of the following ratios is given the highest significance rating by controllers? A. Current Ratio B. Earning per Share C. Return on Equity - After Tax D. Return on Assets - After Tax E. Price/Earnings Ratio

B.

Which of the following ratios is rated to be a primary measure of liquidity and the highest significance rating of the liquidity ratios according to commercial loan departments? A. Debt/Equity B. Current Ratio C. Degree of Financial Leverage D. Inventory Turnover in Days E. Accounts Receivable Turnover in Days

B.

Which of the following transactions is not reflected in a statement of cash flows? A. Sale of treasury stock B. Declaration of a stock dividend C. Purchase of foreign subsidiary with cash D. Issuance of convertible bonds E. Purchase of equipment with cash

B.

If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in the financial statements, then: A. the times interest earned ratio will be overstated, based upon the financial statements. B. the fixed charge ratio will be overstated, based upon the financial statements C. the debt ratio will be understated D. the working capital will be understated E. None of the answers are correct.

C

Which of the following ratios usually reflects investors opinions of the future prospects for the firm? A. Dividend yield B. Book value per share C. Price/earnings ratio D. Earnings per share E. Dividend payout

C

Amortization of patents can be added to income in the operations section of the statement of cash flows because: A. it is not a tax deductible expense B. it results in an increase in income C. it does not require the outlay of cash D. patent amortization is not an expense E. it represents an inflow of cash

C.

Book value per share may not approximate market value per share because: A. the book value is after tax B. book values are based on replacement costs rather than market values C. book value is related to book figures and market value is related to the future potential as seen by investors D. investors do not understand book value E. book value is not related to dividends

C.

Francis Company had operating expenses of $20,000 and depreciation expenses of $4,000. Assuming no other transactions, what was the cash paid for operating expenses? A. $24,000 B. $22,000 C. $16,000 D. $20,400 E. $23,000

C.

In the analysis of profitability, if equity earnings are substantial, it is advisable to: A. consider them as extraordinary B. consider them as nonrecurring C. investigate the earning power of the parent outside of the related investing activities D. recompute the debt ratio and times interest earned to remove the impact of equity earnings. E. use the DuPont method to lessen the impact of equity earnings

C.

In the formula for return on investment, interest expense is multiplied by (1 - tax rate). Why is this adjustment made? A. Interest is not tax deductible B. Debt is excluded from the denominator C. Net income in the formula is after tax D. Dividends are not deductible for tax purposes E. None of the answers are correct

C.

Return on assets cannot fall under which of the following circumstances? Net Profit Margin Total Asset Turnover I. decline rise II. rise decline III. rise rise IV. decline decline A. I B. II C. III D. IV E. The ratio could fall under all of the answers.

C.

Return on investment measures: A. return to all suppliers of funds B. return to all long-term creditors C. return to all long-term suppliers of funds D. return to stockholders E. return to all short-term suppliers of funds

C.

Stable dividend policy would most commonly imply: A. a high price/earnings ratio B. a stable dividend yield C. stable dividends per share D. stable earnings per share. E. increasing dividends per share

C.

The following data were gathered from the annual report of Desk Products. Market price per share $ 30.00 Number of common shares 10,000 Preferred stock, 5% $100 par $ 10,000 Common equity $140,000 The book value per share is: A. $30.00. B. $15.00 C. $14.00. D. $13.75. E. $13.50.

C.

The following financial statement data are taken from Xeron Company's 2012 annual report: (in millions) Current assets $12.6 Investments 9.4 Intangibles 6.8 Property, plant, and equipment 58.1 Current liabilities 6.4 Long-term debt 39.7 Stockholders' equity 40.8 Compute the debt ratio. A. 196.9% B. 113.0% C. 53.0% D. 45.7% E. None of the answers are correct.

C.

The ratio percentage of earnings retained is the same as that termed: A. dividend yield. B. dividend payout. C. this year's retained earnings to net income. D. return on common equity. E. book value.

C.

Using financial leverage is a good financial strategy from the viewpoint of stockholders of companies having: A. a high debt ratio B. cyclical highs and lows C. steady or rising profits D. a steadily declining current ratio E. none of the answers are correct

C.

Which financial ratio appears most frequently in loan agreements according to commercial loan officers? A. Quick Ratio B. Cash Flow/Total Debt C. Debt/Equity D. Times Interest Earned E. Cash ratio

C.

Which of the following accounts will not be considered when computing cash flow from operations? A. Accounts receivable B. Inventories C. Equipment D. Accounts Payable E. Taxes Payable

C.

Which of the following depreciation methods is considered to be the least conservative? A. Sume-of-the-Years' Digits B. Declining-Balance Method C. Straight-Line D. each method is equally conservative E. Sume-of-the-Years' Digits and Declining-Balance Method are equally conservative

C.

Which of the following expresses DuPont analysis? A. Net profit margin = total asset turnover times return on assets B. Total asset turnover = operating asset turnover times financial leverage C. Return on assets = net profit margin times total asset turnover D. Return on investment = return on equity (1 - tax rate) E. Dividend yield = dividend payout times earnings per share

C.

Which of the following is NOT a typical cash flow under investing activities? A. Cash inflow from receipt of loans B. Cash inflow from sale of property, plant, and equipment C. Cash outflow for payment of amounts borrowed D. Cash outflow for loans to other entities E. Cash outflow for purchase of property, plant, and equipment

C.

Working capital is defined as: A. total assets less intangible assets B. current assets divided by current liabilities C. current assets less current liabilities D. total assets less current assets. E. current assets less liabilities

C.

In 2012, ABC Company reported earnings per share of $2.00 for 10,000 shares. In 2013, there was a 2-for-1 stock split, for which 2013 earnings per share were reported at $2.10. The appropriate earnings per share presentation for a 2-year comparative analysis would be: 2013 2012 I. $2.10 $2.00 II. $1.05 $2.00 III. $1.05 $2.00 IV. $2.10 $1.00 A. I B. II C. III D. IV E. none of the answers are correct

D.

In a statement of cash flows (indirect method), depreciation expense should be presented as: A. a cash flow from financing activities B. a cash flow from investing activities C. a deduction from net income D. an addition to net income E. a financial activity.

D.

In computing debt to tangible net worth, which of the following is not subtracted in the denominator? A. Copyrights B. Goodwill C. Patents D. Investments E. Trademarks

D.

Ingram Dog Kennels had the following financial statistics for 2012: Long-term debt (average rate of interest is 8%) $400,000 Interest expense 35,000 Net income 48,000 Income tax 46,000 Operating income 107,000 What is the times interest earned for 2012? A. 11.4 times B. 3.3 times C. 3.1 times D. 3.7 times E. None of the answers are correct.

D.

Noncontrolling interest share of earnings is: A. the total earnings of unconsolidated subsidiaries B. earnings based on the percent of holdings by parent company of unconsolidated subsidiaries C. the total earnings of consolidated subsidiaries D. earnings based on the percent of holdings by outside owners of consolidated subsidiaries E. None of the answers are correct

D.

The debt ratio indicates: A. the ability of the firm to pay its current obligations B. the efficiency of the use of total assets C. the magnification of earnings caused by leverage. D. a comparison of liabilities with total assets E. noe of the answers are correct

D.

The statement of cash flows became a required statement in which year? A. 1995 B. 1978 C. 1971 D. 1987 E. 1993

D.

What is the effect of the exercise of stock options? A. they generate cash to the issuing firm and therefore increase profit per share. B. They are an expense at the time of exercise. This lowers net income. C. They increase debt and lower borrowing capacity but have no effect on profit. D. They increase the number of shares outstanding E. They have no immediate effect on profitability

D.

Which of the following is NOT a discounted cash flow model for valuation? A. Free cash flow B. Dividend discount model C. Discounted cash flow D. Discounted abnormal earnings E. All of the answers are discounted cash flow models

D.

Which of the following is NOT a typical cash flow under financing activities? A. Cash inflow from sale of equity securities B. Cash inflow from sale of bonds C. Cash outflow for payment of dividends D. Cash outflow for loans to other entities E. Cash outflow for payment of amounts borrowed

D.

Which of the following is NOT an item added back to income in the operations section of the statement of cash flows when using the indirect presentation? A. Depreciation B. Amortization of goodwill C. Increase in deferred income taxes D. Amortization of bond premium E. Amortization of patents

D.

Which of the following is NOT correct? A. A ratio that indicates a firm's long-term, debt-paying ability from the income statement view is the times interest earned. B. Some of the items on the income statement that are excluded in order to compute times interest earned are interest expense, income taxes, and unusual or infrequent items. C. Capitalized interest should be included with interest expense when computing times interest earned. Correct Response D. Usually, the highest times interest coverage in the most recent five-year period is used as the primary indication of the interest coverage. E. In the short run, a firm can often meet its interest obligations, even when the times interest earned is less than 1.00.

D.

Which of the following is not a type of operating asset? A. Inventory B. Cash C. Land D. Long-term investments E. Equipment

D.

Which of the following ratios is a primary measure of liquidity according to the corporate controller survey? A. Earnings per Share B. Debt/Equity Ratio C. Return on Equity after Tax D. Current Ratio E. None of the answers are correct

D.

Which of the following ratios is given the highest significance rating by Certified Public Accountants? A. Quick Ratio B. Debt/Equity C. Net Profit Margin D. Current Ratio E. Times Interest Earned

D.

Which of the following ratios will usually have the lowest percent? A. Return on investment B. Return on total equity C. Return on common equity D. Return on total assets E. There is not enough information to tell

D.

Which of the following would most likely cause a rise in net profit margin? A. increased sales B. Decreased preferred dividends C. Increased cost of sales D. Decreased operating expenses E. Decreased earnings per share

D.

Which of the following is NOT a purpose of the statement of cash flows? A. To show cash flow from operations B. To show cash flow from financing activities C. To show cash flow from investing activities D. To show all investing and financing transactions E. To show operating expenses for a period of time

E

A firm has a deree of financial leverage of 1.20. If earnings before interest and tax increase by 20%, then net income: A. will not necessarily change B. will increase by 20% C. will decrease by 24% D. will decrease by 20% E. None of the answers are correct.

E.

A times interest earned ratio indicates that: A. preferred stock has no maturity date. B. the debt will never become due C. the firm will be able to repay the principal when due. D. the principal can be refinanced E. None of the answers are correct

E.

Edward I. Altman developed a multivariate model to predict bankruptcy. The model produces an overall discriminant score called a Z value. Which of the following statements is probably an unreasonable statement relating to the Z value? A. The sales generating ability of the firm's assets is one of the important considerations in the Z value. B. The lack of a market value for a company's stock will reduce the significance of the Z value approach. C. Total assets is an important consideration in the Z value computation. D. Cumulative profitability over time is considered in the Z value computation. E. A Z score of 2.00 or below indicates a very healthy company.

E.

Included in the Employee Retirement Income Security Act are the following: A. provisions requiring minimum funding of pension plans B. minimum rights to employees upon termination of their employment C. creation of the Pension Benefit Guaranty Corporation D. provisions requiring minimum funding of pension plans and minimum rights to employees upon termination of their employment. E. Provisions requiring minimum funding of pension plans, minimum rights to employees upon termination of their employment, and creation of the Pension Benefit Guaranty Corporation.

E.

Interest expense creates magnification of earnings through financial leverage because: A. the interest rate is variable B Interest accompanies debt financing C. the use of interest causes higher earnings D. interest costs are cheaper than the required rate of return to equity owners E. while earnings available to pay interest rise, earnings to residual owners rise faster

E.

Jones Company has long-term debt of $1,000,000, while Smith Company, Jones' competitor, has long-term debt of $200,000. Which of the following statements best represents an analysis of the long-term debt position of these two firms? A. Smith Company's times interest earned should be lower than Jones B. Jones obviously has too much debt when compared to its competitor. C. Jones should sell more stock and use less debt. D. Smith has five times better long-term borrowing ability than Jones. E. Not enough information to determine if any of the answers are correct.

E.

Management should not use the statement of cash flows for which of the following purposes? A. To determine dividend policy B. To determine cash flow from operations C. To determine cash flow from investing activities D. To determine cash flow from financing activities E. To determine the balance in accounts receivable

E.

The Beaver Study indicated the following ratio (ratios) to be the best for forecasting financial failure: A. cash flow/total debt B. net income/total assets C. total debt/total assets D. cash flow/total debt and net income/total assets E. all of the answers are correct

E.

The best dividend payout ratio: A. approximates 50% B. continues at the same level as was historically paid C. is similar to the industry average D. is higher than that of competitors E. does not follow any rule of thumb for dividend payout

E.

Which of the following accounts is not part of working capital? A. Cash B. Accounts receivable C. Inventory D. Accounts payable E. Investments

E.

Which of the following is NOT a reason to interpret book value with caution? A. Land may be worth more than it coust B. Depreciable assets may be held C. Investments may be worth more than their purchase price D. Patents may have a high market value E. All of the answers are correct

E.

Which of the following is NOT a true statement regarding stock options? A. They may cause dilution of earnings per share B. They generally allow the purchase of common stock at favorable terms C. They involve a compensation expense D. Exercise improves the short-term liquidity and debt position of the issuing firm E. The potential dilution can be disregarded in financial analysis

E.

Which of the following is NOT a typical cash flow under operating activities? A. Cash inflows from sale of goods or services B. Cash inflows from interest C. Cash outflows to employees D. Cash outflows to suppliers E. Cash inflows from sale of property, plant, and equipment

E.

Which of the following is not a reasonable matching? Item Related Conservative Policy I. inventory LIFO II. fixed assets accelerated depreciation III. intangible assets short period of time for amortization IV. pensions short period of time to amortize prior service cost V. receivables direct write-off method A. I B. II C. III D. IV E. V

E.

Which of the following ratios is given the highest significance rating by commercial loan officers? A. Inventory Turnover in Days B. Degree of Financial Leverage C. Times Interest Earned D. Fixed Charge Coverage E. Debt/Equity

E.

Which of the following should not be considered as part of "cash and cash equivalents"? A. Cash on hand B. Cash on deposit C. Highly liquid investments D. Investments in short-term securities (<90 day maturity) E. Cash restricted for retirement of bonds

E.

Which of the following statements is NOT true? A. A review of financial statements, including the notes, will indicate how conservative the statements are in regard to accounting policies. B. Accounting policies that result in the slowest reporting of income are the most conservative. C. When a firm has conservative accounting policies, it is said that its earnings are of high quality. D. Under inflationary conditions, the least conservative inventory method is fifo. E. Conservative accounting policies always result in the lowest reported income for any given period of time.

E.

Which of the following statements is not true relating to a capitalized (capital) lease? A. A capital lease is handled as if the lessee bought the asset. B. The leased asset is in the fixed assets and the related obligation is included in liabilities. C. On the balance sheet, the capitalized asset amount will not usually agree with the capitalized liability amount because the liability is reduced by payments, and the asset is reduced by depreciation taken. D. Usually, a company depreciates capitalized leases faster than payments are made. E. On the balance sheet, the capitalized asset amount will usually be higher than the capitalized liability amount.

E.

Which of the following statements is not true relating to a defined contribution pension plan? A. A defined contribution plan defines the contributions of the company to the pension plan. B. Once the defined contribution is paid, the company has no further obligation to the pension plan. C. This type of plan shifts the risk to the employee as to whether the pension plan will grow to provide for a reasonable pension payment upon retirement. D. There is no problem estimating the company's pension expense. E. This type of plan presents substantial problems in estimating the pension liability.

E.

Which suppliers of funds bear the greatest risk and should, therefore, earn the greatest return? A. Bondholders B. Suppliers C. General creditors such as banks D. Preferred shareholders E. Common shareholders

E.

Capitalized interest should not be considered as part of interest in the times interest earned computation. A. True B. False

False

The degree of financil leverage is the multiplication factor by which debt to equity changes as new debt is issued A. True B. False

False

The statement of cash flows is presented on a working capital basis. True False

False

With the Altman model, the higher the Z score, the more likely the firm will go bankrupt. True False

False

A firm might have a low dividend payout ratio if it were planning a major expansion. A. True B. False

True

Accounting policies that result in the fastest reporting of income are the most conservative. True False

True

In general, controllers rate profitability ratios to have a higher significance than debt ratios. True False

True

Noncontrolling shareholders' interest in earnings of subsidiaries are included in earnings for the times interest earned coverage. A. True B. False

True

The income statement does not fairly represent the cash from operations. True False

True