Test 3 (9-13)
When a company sold its equipment, it recorded a $10,000 debit to Cash and $40,000 debit to Accumulated Depreciation and a $48,000 credit to Equipment and $2,000 credit to Gain on Disposal. What will be the amount reported in the investing activities section of the statement of cash flows?
$10,000
When a company has both common and preferred stock, its ROE must be adjusted by ______.
-subtracting preferred stock dividends from net income -subtracting the preferred stock balance from total stockholders' equity
Times Interest Earned Ratio
Divides net income before interest and taxes by interest expense to determine the extent to which earnings before taxes and financing costs are sufficient to cover interest incurred on debt.
If total assets increase but total liabilities remain the same, what is the impact on the debt-to-assets ratio?
It decreases.
What is the purpose of the Statement of Cash Flows?
It is intended to provide a cash-based view of a company.
What effect will issuing more bonds have on the times interest earned ratio over time?
It will decrease.
straight-line method and formula
allocates cost of asset to expense evenly over its useful life. - cost-salvage value/useful life= depreciation expense
Ratio analysis
allows you to evaluate how well a company has performed relative to other different-sized companies within the same industry
A liability is first recorded at the amount of cash a creditor would accept to immediately settle the liability, which ______ interest.
excludes
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?
$0, No liability should be recorded because the loss is "not likely" to occur (and, therefore, is not probable).
Why is the accrual-based income statement superior to a cash-based income statements in measuring profitability?
- It reflects well the operating activities of the business and the best measure of a company's profitability during the period. - It reports the expenses incurred in generating the revenues regardless of when the cash was paid. - It reports the revenues generated regardless of when the cash was collected.
Which of the following line item amounts would be under the Retained Earnings column of a statement of stockholders' equity?
- Net Income - Dividends: Preferred - Dividends: Common
Which of the following are the classifications on the statement of cash flows?
- Operating - Investing - Financing
Which of the following are current liabilities?
- Salaries and Wages Payable - Note Payable due in 3 months - Accounts Payable
Barclay, Inc. sold equipment that originally cost $30,000 four years ago for $8,000 cash. The equipment had accumulated depreciation totaling $24,000. How will this transaction be listed in the investing activities section of Barclay's statement of cash flows?
Cash inflow of $8,000
Which method of bond amortization amortizes the premiums/discounts accurately and is considered a conceptually superior method?
effective-interest
A failing, shrinking company would most likely show a ______ cash flow from investing activities.
positive
Contingent Liabilities
potential liabilities that have arisen as a result of a past transaction or event; their ultimate outcome will not be known until a future event occurs or fails to occur
To properly evaluate the statement of cash flows, it is important to evaluate ______.
the pattern of the three sections, not just the change in cash during the period
Which of the following would be found on a statement of stockholders' equity?
- Net Income - Additional Paid-in Capital - Dividends - Stock Issuances - Treasury Stock
The most well-known credit rating agencies are ______.
- Standard & Poor's - Moody's
When using the T-account approach to prepare the indirect method of the statement of cash flows, which of the following would be associated with amounts entered on the credit side of the Cash T-account?
Increase in Accounts Receivable
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 ___
$100,000 (interest arises only when time passes, so no interest is recorded on the day the company purchases an item on account or the day the company recieved a loan.)
XYZ Co. sold equipment that originally cost $14,000 with accumulated depreciation of $11,000 for $4,000 cash, resulting in a gain of $1,000. Which of the statements below are correct regarding the treatment of this transaction on the statement of cash flows for the current period?
- $1,000 is deducted from operating activities. - $4,000 is a cash inflow in investing activities.
Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. The journal entry to record this transaction will include a ______
- $5,750 credit to Cash - $315,000 credit to Note Payable - $320,750 debit to Machinery
Which of the following may lead to a revision of an estimate of a company's depreciation expense?
- A change in the estimated useful life - A change in the estimated residual value - Extraordinary repairs that significantly extend the asset's usefulness
After its first year of business, Best Measures, Inc.'s sales revenue were $100,000 of which $90,000 was collected and total expenses of $60,000 of which $20,000 was paid. Which of the following statements is correct?
- Accrual-basis net income equals $40,000. - Cash-basis net income equals $70,000.
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.
- Additional Paid-in Capital - Retained Earnings - Common Stock
Which of the following statements are true about debt v. equity financing?
- An advantage of equity over debt financing is corporations are not required to pay dividends or repay stockholders. - Two sources of financing for a corporation are debt and equity.
Identify the equity accounts for a sole proprietorship.
- Capital - Drawing
Which of the following cash flows are classified as operating activities?
- Cash flow causing decrease in current liabilities - Cash from revenue earned in daily transactions
The journal entry to record depreciation include which of the following?
- Credit Accumulated Depreciation - Debit Depreciation Expense
When using the T-account approach to prepare the indirect method of the statement of cash flows, which of the following would be associated with amounts entered on the credit side of the Cash T-account?
- Increase in Accounts Receivable - Increase in Inventory - Increase in Prepaid Expenses
X-it Company signed a $500,000, 5-year note payable to buy a new machine. The company paid $2,000 cash for transporting and $1,000 cash for installing the machine. What is the effect of this transaction on the accounting equation? (Check all that apply.)
- Total assets increase $500,000. - Machinery, an asset, increases $503,000. - Total liabilities increase $500,000
The debt-to-asset ratio indicates _____.
- a higher ratio means greater financing risk - the percentage of assets financed by debt
On-a-Roll, Inc. amortizes its copyright of $20,000 over 20 years. Miss Hap, the bookkeeper, forgot to record the amortization in the current year. The effect of this mistake causes ______.
- assets to be overstated - net income to be overstated
Amortizing intangible assets affects the accounting equation by causing ______.
- assets to decrease - stockholders' equity to decrease
A stock dividend ______.
- causes retained earnings to decrease. - distributes additional shares of stock to existing stockholders on a pro rata basis.
The complete list of items needed to prepare a statement of cash flows includes ______.
- comparative balance sheets - complete income statement - additional data concerning accounts in investing and financing activities
The entry to record the payment of previous purchases made on account includes a ______.
- credit to Cash - debit to Accounts Payable
Earnings per share (EPS) may be determined by
- dividing the stock price by the P/E ratio - dividing net income less preferred dividends by the average common shares outstanding
Ratio analysis is useful for ______
- evaluating a company's performance given the level of its other resources - comparing a company's performance with itself over time - comparing two companies of different size in the same industry
Preferred stock is advantageous in that it ______.
- has priority over common stock when dividends are declared - has priority over common stock at liquidation
Accumulated Deficit ______.
- indicates accumulated net losses - means that Retained earnings has a debit balance - is shown in parentheses on the balance sheet
Preferred stock ______.
- is useful for raising capital without reducing common stockholders' control - has preference as to dividends
A higher residual value will result in a(n) __________ depreciation expense per year and a(n) _______ net income.
- lower - higher
Indicate whether each item would be added (+) or subtracted (−) in the computation of cash flows from operating activities 1. depreciation 2. inventory decreases 3. accounts payable decrease 4. accounts receivable increase 5. accrued liabilities increase
1. added 2. added 3. subtracted 4. subtracted 5. added
During the year, Squid Roe Inc.'s revenues were $200,000 and its net income was $60,000. It had not preferred shares, and its stockholders' equity and total assets were $380,000 and $780,000 at the beginning of the year and $420,000 and $900,000 at year-end, respectively. ROE (rounded to the nearest tenth of a percent) equals ______.
15.0% $60,000/(($380,000+420,000)/2)
Which of the following is the best measure of a company's profitability?
Accrual-based net income
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?
Additional Paid-in Capital
Why is Additional Paid-in Capital recorded for a small stock dividend?
Because small stock dividends are recorded at market value.
Using the simplified effective-interest amortization, the debit to Interest Expense equals ______.
Bonds Payable, Net x Market Interest Rate x Time
Which of the following would be classified as discontinued operations?
Closing the largest of the company's three stores Abandoning a product line
The money a corporation receives from investors by issuing stock is called
Contributed Capital
Which account is debited in an adjusting entry to record depreciation on machinery?
Depreciation Expense
Straight-Line Method of Amortization
Evenly allocates the amount of bond premium or discount over each period of a bond's life to adjust interest expense for differences between its stated interest rate and market interest rate. it distorts the financial results somewhat because it produces an equal Interest Expense each period despite a change in the bond's carrying value
Using the simplified effective-interest amortization, the credit to Cash each interest payment equals ______.
Face Value x Stated Interest Rate x Time
True or false: Changes in cash are classified as either operating activities, direct activities or indirect activities.
False
When a corporation declares a dividend its Net Income on the income statement is reduced.
False, All transactions between a company and its stockholders do not affect the income statement. Dividends do not affect Net Income.
True or false: Both installment notes and interest-only notes require periodic payments of interest and repayment of a portion of the principal.
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.
Depreciation
Matching part of the cost of a long-lived asset with the revenues generated by the asset
Sunny Sky paid $30,000 cash for piece of land to be used for a new corporate headquarters building. What is the effect of this transaction on the accounting equation?
One asset increases, while another asset decreases.
Which type of contingent liability would most likely be found on a balance sheet prepared under US GAAP?
Probable contingent liability that can be estimated
Depletion
Process of allocating a natural resource's cost over the period of its extraction or harvesting.
Sony, Inc. uses an accelerated depreciation method while GE, Inc. uses straight-line depreciation. Which of the following is more likely to be true, if both companies invest $400 million this year in new equipment?
Sony, Inc. may show a lower times interest earned because its net income may be lower due to higher depreciation expense.
Capitalize
To record a cost as an asset, rather than an expense.
Long-lived assets (except land) are expensed over their useful lives.
True
Which method should be used to calculate depletion for a natural resource company?
Units-of-production
An accumulated deficit means a company has ______.
accumulated more net losses than net income
Tangible assets are first recorded at
all costs to acquire them and prepare them for use
_________are financial instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now.
bonds
All reasonable and necessary costs to acquire and prepare an asset for its intended use should be
capitalized as an asset
The old Metropolitan Theater, which had been unused for years, was purchased for $1, renovated at a cost of $3.5 million, and then reopened for business. The renovation cost should be
capitalized as part of the cost of the theater
If there are more debits to Accounts Receivable than credits during the year, then Cash ______.
collected from customers on the statement of cash flows will be less than Revenues on the income statement
Ratio analyses must b
compared to benchmarks, such as prior-years' results and industry averages, to properly interpret the results
horizontal analysis
compares individual financial statement line items from one period to the next
ratio analysis
compares relationships among various financial statement line items within the same period and over multiple periods
vertical analysis
compares the relative contribution made by each financial statement line item by expressing line items as a percentage of another total, such as total assets, or line item, such as sales - Calculating the proportion of each individual asset balance sheet to total assets
For investors, the ______ provide independent, easy-to-use measurements of relative credit risk.
credit rating agencies
When using the T-account approach to prepare the indirect method of the the statement of cash flows, a decrease in Accounts Payable will be associated with the ______ side of the Cash T-Account because the decrease is a cash ______.
credit; outflow
If a growing company uses an accelerated depreciation method instead of straight-line, it is likely that its
debt-to-assets ratio is higher than if it had used straight-line
A company's debt-to-assets ratio is 0.7 or 70%. If the company issues common stock for cash, then the debt-to-assets ratio will ______.
decrease
The two alternative methods that may be used in preparing the operating section of the statement of cash flows are the_______ and _______ methods
direct and indirect
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.
dividend
The P/E ratio is calculated by ______.
dividing the stock price by EPS
How are installment notes different from interest-only notes? Installment notes ______.
do not include a single "balloon" payment since a portion of the principal is paid each period and pay equal amounts over the note's life to maturity with each payment consisting of interest and principal.
_______ per share equals Net Income divided by the average shares of common stock _______
earnings, outstanding
managers analyze _____ _____ to evaluate past financial performance and make future decisions. managers use these to prepare horizontal, vertical, and ratio analyses
financial statements
Profitability Ratios
include net profit margin, gross profit percentage, asset turnover, fixed asset turnover, return on equity, earnings per share and price/earnings ratios.
When Accounts Receivable decrease, cash from customer collections will______
increase
When using the effective-interest method of bond amortization, Interest Expense ______ each payment if the bonds were issued at a discount.
increases
The sale of property, plant, and equipment results in a cash________ to the _______activities section of the statement of cash flows.
inflow, investing
An ___________ note requires the borrower to pay equal payments over the note's life to maturity with each payment consisting of interest and principal
installment
An increase in Prepaid Insurance ______ net income.
is subtracted from
A productive asset
is used to produce goods or services that will be sold to customers
Assume ABC Company issues a bond with a stated interest rate above the market rate. Using the simplified effective-interest amortization, interest expense is ______ the cash interest payment.
less than, Since the market rate is below the stated rate, the interest expense (based on the market rate) is less than the cash interest payments (based on the higher stated rate).
A increase in Prepaid Expenses indicates that ______ was expensed than paid during the period. Thus the increase will be ______ net income on the statement of cash flows prepared using the indirect method.
less; subtracted from
A major advantage of the corporate form of ownership is ______.
limited legal liability
Inflow
money going into the business
outflow
money leaving the business
A decrease in Prepaid Expenses indicates that ______ was expensed than paid. Thus the decrease will be ______ net income on the statement of cash flows prepared using the indirect method.
more; added to
A healthy expanding company would most likely show a ______ cash flow from investing activities.
negative
Fixed Rato
net sales/fixed assets - the higher number is always better
When the times interest earned ratio is less than 1.0, a company is
not generating enough income to cover its interest expense
The objectives of both IFRS and US GAAP objectives are to provide information that is
relevant and faithfully represented
discontinued operations
result from a strategic shift, such as abandoning or selling a major business component
Which of the following reports net income relative to average common stockholders' equity?
return on equity
If a business has one capital account and one drawing account, then the business must be a ______
sole proprietorship
When using the straight-line method of bond amortization, Interest Expense ______ each payment.
stays the same
Advantages of debt financing over equity financing include that ______
stockholders' control will not be diluted interest payments are tax deductible
The statement of ____________ reports the changes in retained earnings as well as paid-in capital. (Enter one word per
stockholders' equity
Contributed capital of $1,000,000 is found in the ______ section of the ______.
stockholders' equity; balance sheet
Long-Lived Assets
tangible and intangible resources owned by a business and used in its operations over several years ex:Land on which to build a new store
debt to assets ratio
total liabilities/total assets
The T-account approach ______.
uses a large Cash T-account to reflect the cash effect of the changes in all the other balance sheet accounts
