Exam 2 Fin/Mgrl Acct Questions

Hunt Company is considering purchasing a competing company in order to expand its market share. Estimates of the excess of the value of the individual assets, less liabilities to be assumed, range from $50,000 to $60,000, depending on the manner in which that excess is calculated. Hunt believes it can purchase the competitor for a direct cash outlay of $700,000, which is only $25,000 more than the value of the individual assets less the liabilities that Hunt will assume. Assuming Hunt makes the purchase for $700,000, at what amount should goodwill be recorded?

$25,000

At the beginning of the current year, Wilson Corporation had 230,000 shares of $1 par common stock outstanding and had retained earnings of $5,100,000. During the year, the company earned $1,705,000 and paid a year-end cash dividend of $3 per share. What was Wilson Corporation's retained earnings at the end of the year?

$5,100,000 + $1,705,000 - (230,000 x $3) = $6,115,000

Corona Corp's financial statements for the current year include the following: Income before income tax: $626,300 Income tax expense: $133,000 Prior period adj. (inc. prior year net income, net of taxes): $130,600 Cash dividends paid to preferred stockholders: $269,520 Gain from discontinued operations (net of taxes): $408,778 Non-recurring loss: $127,000 On the basis of this information, net income for the current year is:

$626,300 - $133,000 + $408,778 = $902,078

The Piazza Company has working capital of $547,000 and current assets of $845,000. The current ratio is:

$845,000 − Current liabilities = $547,000 Current liabilities = $845,000 − $547,000 = $298,000 Current ratio = $845,000 ÷ $298,000 = 2.84

A company had 105,000 shares of common stock outstanding on January 1 and then sold 25,000 additional shares on March 30. Net income for the year was $480,000. What are earnings per share?

(105,000 x 3 / 12) + (130,000 x 9 / 12) = 123,750 $480 / 123,750 = $3.88

The legal life of most patents is:

20 years

Thurman Corporation issued 300,000 shares of $0.50 par value capital stock at its date of incorporation for cash at a price of $4.5 per share. During the first year of operations, the company earned $120,000 and declared a dividend of $35,000. At the end of this first year of operations, the balance of the Common Stock account is:

300,000 shares × $0.50 = $150,000.

On April 30, Year 1, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value. Tilton uses a calendar year-end for financial reporting. In Year 7, Tilton Products sells this machinery for $4,500. At the date of sale, the machinery had been depreciated by Tilton Products to its estimated residual value of $8,000. This sale results in:

A $3,500 loss in both the company's financial statements and its income return.

With respect to depreciation policies, the principle of consistency means:

A company should use the same depreciation method from year to year for a given plan asset.

Peak pricing charges:

A higher price when demand is high and a lower price when demand is low

On January 31, Year 2, Village Bank had 440,000 shares of $3 par value common stock outstanding. On that date, the company declared a 7% stock dividend when the market price of the stock was $36 per share. The immediate effect of this dividend upon Village Bank was:

A reduction in retained earnings of $1,108,800 -$36 x (440,000 x 0.07)

The cost of a new windshield wiper on a delivery vehicle would be classified as:

A revenue expenditure

The advantages of corporations going public include all of the following except:

Ability to remove assets

All of the following may be considered intangible assets except:

Accounts receivable

The term net identifiable assets means:

All assets except goodwill, minus all liabilities

Capital expenditures are recorded as:

An asset.

Treasury stock appears as:

An equity account

Revenue expenditures are recorded as:

An expense

In a statement of cash flows, the term "cash" includes:

Bank accounts, cash on hand, and cash equivalents

International standards require that goodwill:

Be capitalized and reviewed annually and its value should be adjusted if subject to impairment.

The quick ratio:

Cannot be higher than the current ratio

Quick assets include which of the following?

Cash, marketable securities, and receivables

Responsibility for selection of the depreciation methods used in financial reporting rests with:

Company Management

A primary disadvantage of the corporate form of organization is:

Corporate earnings are subject to double taxation

Jarman Company had current and noncurrent liabilities of $50,000 and $160,000, respectively. The company's current assets were $76,000, out of a total asset figure of $457,000. Calculate the company's debt ratio. (Round your percentage value answer to 1 decimal place, i.e. 0.1234 as 12.3%.)

Debt ratio ($50,000 + $160,000) ÷ $457,000 = 46.0%

The book value of equipment:

Decreases with the passage of time

Operating income excludes each of the following, except:

Depreciation

Of the items listed, which would appear closest to the bottom of the income statement?

Discontinued operations

A cash dividend paid to shareholders is reported on the:

FInancing activities section of the statement of cash flows

T/F: In the Stockholders' Equity section of a balance sheet, par value of common stock is presented first, followed by par value of preferred stock, followed by additional paid-in capital on common stock, followed by additional paid-in capital on preferred stock.

False

T/F: Land improvements are not subject to depreciation.

False

T/F: The additional paid-in capital account represents profit to the corporation and, as such, it is credited to Retained Earnings.

False

T/F: The general principle underlying revenue recognition is that revenue is recognized when it has been collected.

False

T/F: The payment of cash dividends to common stockholders is classified as a financing activity on the statement of cash flows whereas payment of a cash dividend to preferred stockholders is classified as an investing activity.

False

In a statement of cash flows, payments of dividends are classified as:

Financing activities

Which of the following would not be amortized?

Goodwill

The current ratio will be ______________ the quick ratio.

Greater than or equal to

Accelerated depreciation methods are used primarily in:

Income tax returns

Which of the following best describes retained earnings?

Income that has been reinvested in the business rather than distributed as dividends to stockholders.

Which of the following is not classified among the investing activities in a statement of cash flows?

Investment of cash made in the business by the owners.

For the financial statements of publicly traded companies, MACRS:

Is not considered to be in conformity with GAAP.

The operating cycle of a company:

Is the time it takes to purchase inventory, sell inventory, and collect cash from the sale.

Which of the following statements regarding a contract is not true?

It creates unenforceable rights and obligations for both parties.

When revenue is included in a company's income statement.

It is said to have been "recognized"

Intangible Assets:

Lack physical properties

All of the following are financing activities except:

Lending money

In a statement of cash flows, cash transactions are classified into three major categories. Which of the following is not one of these three categories?

Managing activities

When shares of stock are sold from one investor to another, they will trade at:

Market Value

The price-earnings ratio is measured by dividing:

Market value by earnings per share

All of the following are considered cash equivalents except:

Marketable securities

Old South Company purchased investments for $55,000 and plant assets for $147,000 during the current year, during which it also sold plant assets for $66,000, at a gain of $6,000. The company also purchased treasury stock for $78,000 and sold a new issue of common stock for $523,000. Determine the amount of cash provided by or used for investing activities for the year.

Net cash used for investing activities $136,000. $55,000(cash paid for investments) - 147,000(cash paid for plant assets) + 66,000(cash received for plant assets)

The return on equity ratio usually is computed as:

Net income divided by average total stockholders' equity.

A 2-for-1 stock split will:

Not change the total par value of the stock and increase the number of shares outstanding.

Current assets are those assets that can be converted into cash within:

One year or the operating cycle, whichever is longer.

In the statement of cash flows, the purchase of supplies is classified as:

Operating activities

The return on assets ratio usually is computed as:

Operating income divided by average total assets

Shares that have been sold and are in the hands of stockholders are called:

Outstanding

Which of the following does not create a difference between net income and the net cash flow from operations?

Payment of a cash dividend.

Which of the following is a financing activity?

Payment of dividends

Which of the following is not classified among the financing activities in a statement of cash flows?

Payment of interest to creditors

Which of the following is not classified among the operating activities in a statement of cash flows?

Payment of the principal amount owed on a bank loan.

Cash flows from operating activities include all of the following except:

Payments of dividends

Which of the following is an investing activity?

Purchase of equipment

Which of the following is a measure of short-term liquidity?

Quick ratio

A large stock dividend and a stock split are similar in that they both cause a:

Reduction in the market price per share

Which of the following is not an addition to total paid-in-capital?

Retained earnings and treasury stock

A prior period adjustment is a correction made to:

Retained earnings of the beginning of the period

The financial ratio intended to measure the effectiveness with which management has utilized the resources of the business, regardless of how these resources are financed, is:

Return on assets

Which of the following is a capital expenditure?

Sales tax paid in conjunction with the purchase of office equipment

A 2-for-1 stock split:

Should logically cause the market price per share to drop by approximately 50%

In a corporation's organization chart, who has/have the highest position?

Stockholders

Which depreciation method is most commonly used among publicly owned corporations?

Straight-line

The "bottom line" in a statement of cash flows shows:

The cash (including cash equivalents) on the balance sheet at the end of the period

Which of the following would not be considered as part of the cost of equipment recently purchased?

The cost to repair damage incurred after dropping the equipment

Dividends are first recorded and retained earnings are reduced on:

The date of declaration

For depreciable property other than real estate, MACRS is based upon:

The declining-balance method

The term "accumulated depreciation" as used in accounting is best defined as:

The portion of a plant asset recognized as expense since the asset was acquired.

Tomasa Company paid $450,000 to acquire a piece of real estate consisting of land and an office building with a parking lot. In this situation:

The purchase price should be apportioned among the Land, Land Improvement, and Building accounts.

When a transaction involves multiple performance obligations in a single transaction:

The seller must separate the revenue into two or more elements.

The book value of an assent in the plant and equipment category is:

The undepreciated cost of an asset

Which of the following apply to closely held corporations?

There is no organized market for buying and selling the company's shares.

Comparative financial statements compare the company's current statements with:

Those of prior periods

Which of the following is not a right of stockholders?

To select the chief executive officer.

The ownership of common stock in a corporation usually carries all of the following rights except:

To set corporate policies

The rights of a common stockholder do not include the right:

To withdraw a share of corporate net assets proportionate to the person's stockholdings

The net assets of a corporation are equal to:

Total assets - total liabilities

Which statement is true about a stock split?

Total shareholders' equity remains the same.

The term paid-in capital means:

Total stockholders' equity minus retained earnings.

Stock that had been issued by a corporation, and later reacquired, is classified as:

Treasury stock

T/F: A revenue expenditure is recorded in an expense account.

True

T/F: Earnings per share is equal to net income applicable to common stock, divided by the weighted number of common shares outstanding.

True

T/F: Prior period adjustments are shown in the financial statements by adjusting the beginning balance of retained earnings in the statement of retained earnings.

True

T/F: The par value of a stock is the minimum amount of capital of the corporation existing for the protection of creditors.

True

T/F: The term "plant assets" refers to long-lived assets acquired for use in business operations, rather than for resale to customers.

True

T/F: When par value capital stock is issued, capital stock is credited with the par value of the shares issued, regardless of whether the issuance price is equal to par value, more than par value, or less than par.

True

Most preferred stocks have one or more of the following characteristics, except:

Voting rights

Harrisonburg Company had current and total assets of $470,000 and $1,000,000, respectively. The company's current and total liabilities were $267,000 and $600,000, respectively. Calculate the amount of working capital and the current ratio using this information. (Round your current ratio answer to 2 decimal places.

Working capital: $470,000 - $267,000 = $203,000 Current ratio: $470,000 / $267,000 = 1.76

An asset that costs $14,400 and has accumulated depreciation of $8,000 is sold for $5,600. What amount of gain or loss will be recognized when the asset is sold?

[Loss on sale = $5,600 − ($14,400 − $8,000) = ($800)] A loss of $800

Smelling Company declared a 2-for-1 stock split on its common stock in order to intentionally reduce the market value of its stock so that it would be an attractive investment for a larger set of investors. The company's common stock before the split is described as follows. Common stock: 100,000 shares outstanding, $10 par value, originally sold at $12.50, current market price $50. Describe the expected impact, if any, that the 2-for-1 stock split will have on. a. The number of shares outstanding: b. The market price of the stock: c. The total stockholders' equity attributable to common stock:

a. The stock split will double the number of shares outstanding. b. The split will reduce the market price of the stock to half of its current price. c. The split will have no impact on the total stockholders' equity attributable to common stock.

Twin-Cities, Inc., purchased a building for $600,000. Straight-line depreciation was used for each of the first two years using the following assumptions: 25-year estimated useful life, with a residual value of $100,000. a. Calculate the annual depreciation for the first two years that Twin-Cities owned the building. b. Calculate the book value of the building at the end of the second year.

a. Year1: $20,000 ←[(600,000-100,000) / 25] Year2: $20,000 b. 560,000 ←[600,000 - (20,000 x 2)