Financial Final Exam Study Guide

A bond with a face value of $10,000 has a current price quote of 102.62. The price in dollars and cents is

$10,262,00

_____ are liabilities that arise from a contract that requires a company to make payments to its employees after they retire

Pensions

An advantage of the corporate form is the separation of ownership and control

false

Use the following information to answer the question below. The following accounts appear in the ledger of Pepper Corporation on December 31, 20x5 Preferred Sotck: $60,000 Common Stock: 116,000 Additional Paid-in Capital, Preferred: 14,000 Additional Paid-in Capital, Common: 36,000 Retained Earnings: 80,000 A balance sheet prepared on December 31, 20x5, would report total contributed capital of

$226,000

During 20x5, Oates Company had sales of $250,000, net income of $25,000, average total assets of $350,000, dividend payments of $17,500, net cash flows from operating activities of $26,000, purchases of plant assets of $37,500, and sales of plant assets of $45,000. Cash flow yield equals (round amounts to one decimal place)

1.0 times

Company A's current assets = $10,000 total assets = $26,000 current liabilities = $7,000 and total liabilities = $47,000. What is Company A's current ratio?

1.43

A company with income before income taxes of $194,000 and $20,000 in interest expense, has an interest coverage ration of:

10.7 times

Use this information to answer the following question. The transactions below pertain to Dunhill Company, whose fiscal year ends April 30. April 10 Received cash for a 90-day, 12 percent, %50,000 note payable. Interest in in addition to the face value. 30 Made end-of-year adjusting entry to accrue interest expense. The entry to record the April 10 transaction (amounts rounded) is:

Cash 50,000 Notes Payable 50,000

Of a company's employees, 50 percent typically qualify to receive two weeks' paid vacation a year (50 weeks). The entry to record the estimated liability for vacation pay a week in which the total payroll is $8,800 would be:

Cash 88 Estimated Liability for Vacation Pay 88

A company purchases 600 shares of its $100 par value common stock at $110 per share. It then reissues 100 shares at $114 per share. The entry upon reissue of the stock is

Cash: 11,400 Treasury Stock-Common: 11,000 Paid-in Capital, Treasury Stock: 400

Rufina Corp. sold $20,000 plant assets that cost $40,000 and that had an accumulated depreciation of $8,000. The journal entry to record the transaction is:

Cash: 20,000 Accumulated Depreciation: 8,000 Loss on Sale of Plant Assets: 12,000 Plant Assets: 40,000

A company receives $360 for a sale, of which $20 is for sales tax. The journal entry to record the sale is:

Cash: 360 Sales Tax Payable: 20 Sales 340

A company purchases 800 shares of its $50 par value common stock at $55 per share. It then reissues 120 shares at $58 per share. The entry upon reissue of the stock is:

Cash: 6,960 Treasury Stock-Common: 6,600 Paid-in Capital, Treasury Stock: 360

If Rex Corporation issued ten $1,000 bonds issued at 99.75 on the interest date, the entry to record this transaction is

Cash: 9,975 Unamortized Bond Discount: 25 Bonds Payable: 10,000

The board of directors of Lark Corporation declared a cash dividend of $3.50 per share on 57,000 shares of common stock on June 14, 20x5. The dividend is to be paid on July 15, 20x5, to shareholders of record on July 1, 20x5. The proper entry to be recorded on July 15, 20x5 is

Dividends Payable: 199,500 Cash: 199,500

Use the following information to answer the question below. When Langston Corporation was formed on January 1, 20x5, the corporate charter provided for 100,000 shares of $10 par value common stock. The following transactions were among those engaged in by the corporation during its first month of operation: 1. The corporation issues 400 shares of stock to its lawyer in full payment of $10,000 bill for assisting the company in drawing up its articles of incorporation and filing the proper papers with the state agency. 2. The company issues 16,000 shares of stock at a price of $50 per share. 3. The company issued 14,000 shares of stock in exchange for equipment that had a fair market value of $320,000. The entry to record transaction 3 is:

Equipment: 320,000 Common Stock: 140,000 Additional Paid-in Capital: 180,000

Which of the following statements is not true about trading on the equity?

It will increase the number of shares of stock owned

Flint Company produces widgets that cost $30 each and have a 5 percent failure rate. If 500 widgets are sold, the entry to record the estimated product warranty expense would be:

Product Warranty Expense 750 Estimated Product Warranty Liability 750

Which of the following is not an advantage of issuing long-term debt?

The risk of becoming bankrupt is reduced

The entry that includes a debit to Payroll Taxes and Benefits Expense also includes credits to Federal Unemployment Tax Payable and State Unemployment Tax Payable

True

Which of the following typically would not be done to satisfy a current liability?

Use long-term assets to satisfy the liability

Plum Corporation issues $400,000 of 7 percent, five-year bonds on January 1, 20x5, and sells them on the date for their face value. The bond indenture states that interest is to be paid on January 1 and July 1 of each year. The entry to record the issuance includes

a credit to Bonds Payable

Plum Corporation issues $400,000 of 7 percent, five-year bonds on January 1, 20x5, when the market rate of interest is 8 percent. The bond indenture states that interest is to be paid on January 1 and July 1 of each year. The entry to record the issuance includes

a debit to Unamortized Bond Discount

Which of the following statements is correct regarding the statement of cash flows?

a survey of large companies showed 98% of them use the indirect method

Investing activities involve

all of these choices (long-term assets, short-term investments, long-term investments)

Which of the following classifications represents the largest number of shares?

authorized shares

In preparing a statement of cash flows using the indirect method, a decrease in an unearned revenue account should

be shown as a deduction from net income in computing net cash flows from operating activities

Term bonds are

bonds that have a single maturity date

If only common stock is outstanding, total stockholders' equity divided by the number of shares of common stock outstanding is called the

book value per share

Northbrook Corporation is preparing a statement of cash flows. The following transactions occurred during the year: 1. Sold machinery for $9,000 cash. 2. Purchased a building for $80,000 cash. 3. Issues $70,000 worth of stock to acquire an airplane. 4. Converted long-term bonds by issuing $100,000 worth of stock. 5. Declared and paid a $10,000 cash dividend

cash flows from investing activities section

Which of the following is not considered a long-term obligation

contributed capital

Par value is the minimum cushion of capital established for the protection of

creditors

What would be the adjusting entry for a note payable whose interest is not included in the face amount of the note?

debit interest expense and credit interest payable

If the indirect method is used, which of the following would be added to net income to arrive at net cash flows from operating activities?

decrease in prepaid expenses

Sales Tax Payable is an example of a(n)

definitely determinable liability

Management would not use the statement of cash flows to

determine the financial position of the company

Any unamortized bond discount should be reported on the balance sheet of the issuing corporation as a(n)

direct deduction from the face amount of the bonds in the liability section

Which of the following is a contingent liability?

disputed additional tax assessment

All of the following are stockholders' equity accounts except

dividends payable

Which of the following items will not be disclosed on a statement of stockholders' equity?

extraordinary gains and losses

Because accounting measures should be verifiable, liabilities should not be estimated

false

Bondholders share voting rights with stockholders

false

Both the employee and the employer must bear the tax burden for unemployment benefits

false

Cash payments made on accounts payable or accrued liabilities are considered repayments of loans and are classified as financing activities on the statement of cash flows

false

Commercial paper consists of secured loans that are sold to the public

false

Commercial paper normally is issued by companies with poor credit ratings

false

Dividends in arrears are disclosed as liabilities of a corporation

false

Dividends in arrears on cumulative preferred stock are not paid until after dividends are paid on common stock

false

If a bond with a face value of $1,000 and a face interest rate of 7 percent is issued for $970, the market interest rate at the date of issuance must have been less than 7 percent.

false

If an accrued liability for salaries is not recorded, income for the following period will be overstated

false

If the amount of a liability cannot be exactly determined, it should not be recorded

false

Lawsuits against a company in connection with an industrial accident would not be listed in the contingent liabilities section on the balance sheet

false

Legal capital of a corporation is the maximum amount that can be reported as contributed capital

false

Liabilities generally arise from expected future transactions

false

Lines of credit from the bank need not be disclosed in the financial statements or in the notes

false

Payment of dividends would be reflected as a cash outflow in the investing activities section of the statement of cash flows

false

Potential vacation pay should be accounted for as a commitment

false

Promises to pay employees pensions after they retire are difficult to identify and vale and therefore need not be recognized in the financial statements until cash payment is made

false

Receiving dividends is the only way in which stockholders can earn a return on their investment in a corporation

false

The activity on the balance sheet to be presented in the financing activities section of the statement of cash flows is based on an analysis of stockholders' equity only.

false

The debt to equity ratio is expressed in terms of dollars

false

The distinction between current and long-term liabilities affects the evaluation of a company's solvency

false

The entry required to record start-up and organization costs will cause an increase in assets

false

The fewer debt securities a corporation issues, the greater risk of default

false

The interest coverage ratio is expressed as a percentage

false

The number of outstanding shares should exceed the number of authorized shares

false

The primary purpose of the statement of cash flows is to provide information about a company's investing and financing activities during an accounting period

false

The purchase of treasury stock qualifies as a financing activity, but it is not a cash flow.

false

To determine the payables turnover, one first calculates the days' payable

false

Unamortized Bond Premium is subtracted from Bonds Payable on the balance sheet.

false

When common stock with a par value is sold for a price that exceeds value, the Common Stock account is credited for the cash proceeds received from the sale of the shares

false

When earnings from the investment exceed the interest payments on an investment, negative financial leverage has occurred

false

When preparing a statement of cash flows using the indirect method, an increase in wages payable is subtracted from net income

false

Working capital equals current assets divided by current liabilities

false

All of the following can be employee payroll withholdings except

federal unemployment tax

Investors and creditors would find the statement of cash flows least useful in assessing

financial position at a point in time

Lincoln Company engaged in this transaction: Issued common stock for cash Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows.

financing activities section

Which of the following descriptions would not fit the definition of a liability?

future obligation for future salary payments

A disadvantage of the corporate form of businesses is

government regulation

Days' payable is the shortest in which of the following industries:

grocery stores

Which of the following is most likely an example of an accrued liability?

interest payable

An advantage of the corporate form of business is:

lack of mutual agency

Which of the following businesses most likely would have a large Unearned Revenue account balance at all times?

magazine publisher

When a statement of cash flows is prepared using the indirect method

net income is the starting point in determining cash flows from operations

Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements -- Dividend Income (assume that cash received is equal to amount reported) - indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following:

not used to adjust net income to calculate net cash flows from operating activities

Current liabilities are debts that are expected to be satisfied within

one year or the normal operating cycle, whichever is longer

Lincoln Company engaged in this transaction: Collected accounts receivable Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows.

operating activities section

Lincoln Company engaged in this transaction: Received 6-month's rent in advance from a tenant in its office building. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows.

operating activities section

Legal capital is a descriptive phrase for

par value

If a corporation has issued common stock at various prices that exceed par value, legal capital will be made up of the

par value of the shares issued

All of the following are estimated liabilities except:

payroll liabilities

Start-up and organization costs for a corporation that is to operate a retail store would include the costs of

promoters' fees and printing stock certificates

Which of the following is an example of a commitment?

purchasing agreement

Failure to record a liability probably will

result in an overstated net income

Determining cash flows from investing activities is the ____ step in preparing the statement of cash flows

second

The advantages of financial leverage accrue primarily to

stockholders

Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements -- Decrease in Accrued Liabilities - indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following:

subtract from net income to arrive at net cash flows from operating activities

The purpose of a statement of stockholders' equity is to

summarize the changes in the components of stockholders' equity for a period of time

A bond indenture is

the agreement between the issuing corporation and the bondholders

How are cash equivalents treated on a statement of cash flows?

they are combined with the Cash account

A U.S. Treasury bill with an original maturity of 90 days or less is considered a cash equivalent

true

A bond agreement is referred to as the bond indenture

true

A bond sells at face value when the face interest rate of the bond is identical to the market interest rate for similar bonds on the date of the issue

true

A corporation often uses an underwriter to guarantee the sale of stock in an initial public offering (IPO)

true

A dividend that represents a return to the stockholders of a part of their paid-in capital rather than a distribution out of retained earnings is called a liquidating dividend

true

A liquidating dividend is usually paid when a company is going out of business or reducing its operations

true

Because noncash investing and financing transactions do not affect cash, they should not be reflected in the body of the statement of cash flows

true

Bondholders are creditors of the issuing corporation

true

Callable preferred stock is preferred stock that may be redeemed or retired at the option of the issuing corporation

true

Cash inflows and outflows are not netted in the investing activities section of the statement of cash flows but are separately disclosed to give the reader full information

true

Deferred income taxes are a type of long-term liability that result from using different accounting methods to calculate income taxes on the income statement and income tax liability on the income tax return

true

Dividends in arrears pertain only to cumulative preferred stock

true

For accounting purposes, stated value is treated the same as par value

true

Free cash flow is measured in terms of dollars

true

If a bond has a face interest of 6 percent, a face value of $40,000, and pays interest semiannually, each interest payment will amount to $1,200

true

Interest received on investments would be included in the operating activities category on the statement of cash flows

true

Investors could use the statement of cash flows to determine whether the company will be able to pay dividends and interest

true

Limited liability can be viewed as both an advantage and disadvantage

true

Long-term notes and bonds have similar effects on the financial statements

true

Noncash investing and financing transactions, such as the exchange of a long-term asset for a long-term liability, represent significant investing and financing activities and are reflected in a separate schedule as part of the statement of cash flows

true

Product warranties are an expense of the period in which the related product is sold

true

The FUTA tax rate most often actually paid by employers is 0.8 percent

true

The acquisition of treasury stock with cash is shown as a financing activity on the statement of cash flows

true

The call feature of bonds is useful if a company wants to retire a bond issue

true

The debt to equity ratio is a measure of financial leverage

true

The declaration of a cash dividend causes an increase in a corporation's liabilities at the date of the declaration

true

The entry to record the purchase of treasury stock will cause total stockholders' equity to decrease by the amount of the cost of the treasury shares

true

The payment of taxes would be included in the operating activities section of the statement of cash flows

true

The product warranty liability is an example of an estimated liability

true

There is no limit to the amount of income subject to Medicare tax

true

To calculate payables turnover, an increase in merchandise inventory must be added to cost of goods sold before dividing by average accounts payable

true

Treasury stock is considered a reduction in stockholders' equity, not a purchase of assets

true

Unamortized Bond Discount is a contra-liability account.

true

Unsecured bonds are also known as debentures

true

When all of the bonds of an issue mature at the same time, they are called term bonds.

true

When preparing a statement of cash flows using the indirect method, an increase in accounts payable is added to net income

true

Which of the following phrases is not descriptive of the corporate form of business?

unlimited liability

Which of the following is both an estimated liability and a contingent liability?

warranty liability