Chapter 9-12 Review Questions
Which of the following are profitability ratios?
1. price-earnings ratio 2. return on assets 3. gross profit ratio
A bond with an issue price of $10,100 and a face value of $10,000 was issued at ______.
a premium
Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at
a premium.
The higher a company's earnings relative to its interest expense, the more likely it is that it will be able to pay its
current and future interest payments.
Cash flows from ____ activities include both inflows and outflows of cash from the external funding of a business.
financing
Issuing stock to owners is classified as a(n) ____ activity
financing
Repayments of formal, long-term debt contracts are classified as ______ activities.
financing
The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company.
higher
Cash transactions involving the purchase and sale of long-term assets and current investments are classified on the statement of cash flows as ____ activities
investing
Evaluation of the company's profitability requires consideration of the amount of a company's earnings in relation to the size of the
investment.
The number of shares outstanding equals the number of shares ______.
issued minus the number of shares in treasury
Improved cash flows is a common advantage of acquiring equipment through ____
leasing
When prepaid accounts increase, it indicates the company has paid ______ cash than it recorded as operating expenses.
more
Receivable turnover equals:
net credit sales divided by average net receivables
Noncash items, nonoperating items, and changes in current assets and liabilities are necessary adjustments to ____ ____ to prepare the operating section for the indirect format of the statement of cash flows.
net income
The formula for return on equity is ___________ ___________ divided by average total shareholders' equity. (Enter one word per blank)
net income
What is the formula to compute the return on assets?
net income / average total assets
What is the formula for the profit margin ratio?
net income/net sales
The ________ margin measures the income earned on each dollar of sales.
profit
Which type of ratios do investors and creditors use most frequently in making financial decisions?
profitability ratios
The date on which a company determines the registered owners of the stock who will receive a dividend is referred to as the
record date.
Corporations will declare a stock split in order to ______.
reduce the market price of a share of stock and make it more attractive to some investors
Changes to current assets and current liabilities require adjustment of net income under the indirect method because
related cash may be higher or lower than the accrued amount included in net income
A bond will be issued at a premium when the market rate of interest is ______ the stated rate.
less than
A(n) ____ in accounts payable indicates that cash payments were less than credit purchases and must be subtracted from purchases to calculate cash payments to suppliers.
increase
True or false: A corporation is owned by debt and equity holders.
false
A distribution of a company's accumulated prior earnings is a(n) ______.
dividend
Market rates of bonds vary depending on the ____ risk of the company issuing the bonds.
default
Which of the following ratios are used to evaluate a company's ability to pay long-term debts?
1. debt to equity ratio 2. times interest earned ratio
The advantages to the corporate form of business include
1. transferability of ownership 2. easy of raising capital
Common terms used for the market interest rate are:
1. yield rate 2. effective interest rate
The formula for average collection period is
365 divided by the receivable turnover ratio
____ has grown into the most popular method of external financing of corporate assets in America. (Enter one word per blank.)
Leasing
When using the ____ method for determining cash flows from operations, noncash expenses are omitted from the Statement of Cash Flows.
direct
An item that requires separate disclosure on the income statement after income from continuing operations is
discontinued operations.
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 amount of dividends paid out relative to the share price is referred to as:
dividend yield
Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing:
long-term liabilities
In order to determine cash flows from financing activities, we need to examine changes to
long-term liability and stockholders' equity accounts
The true interest rate used by investors to value a bond issue is referred to as the:
market interest rate
The return on assets is calculated by dividing ____ by _______.
net income; average total assets
Stock splits have the following effects on stockholders' equity
no change to total stockholders' equity
_______ refers to a company's ability to pay its long-term liabilities
solvency
The rate of interest printed on the face of a bond is referred to as the ____ interest rate. (Enter one word per blank)
stated
True or false: The board of directors is responsible for establishing corporate policies.
true
The ____ rate of interest is used to compute the cash interest paid to bondholders. (Enter one word per blank)
stated
The financial statement that provides information about cash receipts and cash disbursements for the period is the
statement of cash flows.
A corporation will issue bonds when
the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan.
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
false
Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?
40.6 days
The terms "effective interest rate" and "yield rate" refer to the ____ interest rate.
market
The effect on the accounting equation of declaring a dividend that will be paid at a later date includes a(n):
1. decrease in stockholders' equity. 2. increase in liabilities.
Preferred stock generally (has/does not have) ______ voting rights and (has/does not have) ______ preference as to dividends.
1. does not have 2. has
The profit margin ratio is defined as ______ ________ divided by net sales
net income
When accounts receivable decrease
net sales are less than cash receipts from customers.
What is the formula for the asset turnover ratio?
net sales/average total assets
The ____ rate of interest is used to pay periodic interest on the bonds, whereas the market rate of interest is used to calculate interest expense. (Enter one word per blank)
stated
Mark wants to determine whether a specific company has become more profitable over time. Mark should compare the company's performance to:
its prior years' performance
In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:
long-term debt
Gross margin is a synonym for gross ________.
profit
The ability of reported earnings to reflect the company's true earnings is referred to as:
quality of earnings
A company's ability to pay its long-term debt is referred to as:
solvency
Kleister Company issues bonds for $100 million and repays a long-term notes payable of $10 million. The company also sells its own shares for $12 million and pays cash dividends of $5 million. Cash inflows from financing activities will be:
$112 mill
On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:
$13,000 Reason: $4,000 + $9,000
A review of Elisa Company's financial statements reveals the following information: cost of goods sold: $200,000; increase in inventory: $10,000; increase in accounts payable: $20,000. Cash paid to suppliers was:
$190,000
Roberts Company's operating expenses (excluding depreciation expense) were $50,000 and its balance in prepaid insurance increased by $2,000. Cash paid for operating expenses was:
$52,000
Adam Company's operating expenses (excluding depreciation expense) were $80,000 and its balance in prepaid insurance decreased by $5,000. Cash paid for operating expenses was:
$75,000
Wyanot Company issued 1,000 shares of its 5%, $100 par value, cumulative preferred stock for $110 cash per share. The journal entry to record this transaction includes:
1. $10,000 credit to Additional paid-in capital - preferred. 2. $100,000 credit to Preferred stock. 3. $110,000 debit to Cash.
X-Co issued 1,000 shares of its 5%, $10 par value, cumulative preferred stock for $100 cash per share. The journal entry to record this event includes:
1. $100,000 debit to Cash. 2. $10,000 credit to Preferred stock. 3. $90,000 credit to Additional paid-in capital.
Which of the following nonoperating items require adjustments to net income under the indirect method?
1. gains from sale of long-term assets 2. losses from sale of long-term assets
Which of the following are common synonyms of the gross profit ratio?
1. gross profit margin 2. gross margin
Which of the following items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio?
1. inventory 2. prepaid expenses
When comparing the financial statements of two different companies, a financial analyst would use which two categories of ratios?
1. risk ratios 2. profitability ratios
Limited liability and ease of raising outside capital are advantages of this business form:
Corporation
What is the formula for the inventory turnover ratio?
Cost of goods sold divided by average inventory.
____ financing refers to borrowing money from creditors.
Debt
In order to expand its business, Mueller Inc. is selling $10 million in common stock. Mueller is utilizing this type of financing:
Equity
True or false: The times interest earned formula is net income divided by interest expense.
False
Which term best describes a company having a suitable amount of cash or easily-convertible assets to pay incurred current liabilities?
Liquidity
ROE relates ______.
Net Income / Average Stockholders' Equity
Which of the following would result in a cash outflow from investing activities?
Purchase of a machine for cash.
Which of the following ratios measures the ability of company management to generate earnings from the resources owners provide?
Return on equity
The debt to equity ratios for three otherwise comparable companies are as follows: Adams: 1.5; Flagler: 1.8; Roberts: 1.4. The risk of bankruptcy appears to be lowest for:
Roberts
Which of the following would result in a cash inflow from investing activities?
Sale of a machine for cash.
Which of the following statements is correct concerning a decrease in accounts payable?
Since the cash payments were more than the credit purchases, the decrease must be added to purchases to calculate cash payments to suppliers.
Which of the following ratios provides the most conservative measure of a firms ability to pay its current liabilities.
The acid-test ratio
Which is typically preferable for a company?
a short average collection period
In a private placement of bonds, bonds may be sold to
a single large investor.
The ________ - ________ ratio provides a more conservative measure of a company's ability to pay its current liabilities from current sources.
acid-test
The sum of cash, current investments, and accounts receivable divided by current liabilities equals the
acid-test ratio
Grant's income statement reveals a loss from the sale of land. In preparing the operating activities section of the statement of cash flows using the indirect format, the loss should be
added to net income.
The number of shares authorized is set forth in the company's:
articles of incorporation
When a business incorporates, it must file its ______ with the state in which it incorporates.
articles of incorporation
The total number of shares that a company may sell is referred to as _________ shares
authorized
The formula to compute the receivables turnover ratio is net credit sales divided by
average accounts receivable.
Preferred stock tends to have attributes of
both bonds and common stock.
Preferred stock carries priority over common stock:
both for dividends and at dissolution
Which of the following represents the first step in preparing a statement of cash flows in the correct order?
calculate the net cash flows from operating activities
A high times interest earned ratio indicates the company
can meet its interest obligations as they become due.
Vertical analysis is also commonly known as _____ - site analysis.
common
One of the purposes of adjusting net income for changes to certain balance sheet accounts is to
convert items included in net income to cash.
Additional taxes and more paperwork are the two primary disadvantages of this business form:
corporation
The formula for the inventory turnover ratio is
cost of goods sold divided by average inventory.
Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:
credit to Notes Payable for $24,000
A ratio used to measure liquidity is the
current ratio
In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:
debt
The two types of financing are
debt financing and equity financing
Preferred stock has a mixture of attributes of both equity and _____________
debt, liabilities, bonds
Which of the following is a solvency ratio?
debt-to-equity
The dividend yield is calculated by dividing:
dividends per share by the stock price per share
Investors who acquire preferred stock:
do not have voting rights. have preference as to dividends.
The profit margin measures the income earned
each dollar of sales
Positive ______ represent the key to a company's long-run survival.
earnings
The _______ profit ratio indicates the portion of each dollar of sales above the cost of goods sold.
gross
Preferred stockholders
have the right to receive dividends only in the years the board of directors declares dividends.
The times interest earned ratio provides an indication of
how many times greater earnings are than interest expense.
The return on assets measures the amount of ____ generated for each dollar of assets. (Enter only one word.)
income
A decrease in accounts receivable will result in a(n) ____ in cash from sales revenue when using the direct method to determine cash flows from operations.
increase
The times interest earned formula is calculated as earnings before interest and taxes divided by ______ _______.
interest expense
The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by ____ ____
interest expense
________ capital is the amount of money paid into a company by its owners.
invested
A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)
lease
An increase in accounts receivable indicates that the company collected _____ cash than the amount of ______.
less; sales revenue
The most important advantage to the corporate form of business is
limited liability
In a corporation, the stockholders' potential loss is
limited to the amount of the investment.
_________ refers to a company having enough cash or convertible assets to pay its current liabilities.
liquidity
The ____ rate of interest is an implied rate based on the price investors pay to purchase a bond. (Enter one word per blank)
market
Depreciation expense and amortization expense represent ____ items requiring adjustments to net income under the indirect method.
noncash
Gains and losses on the sale of long-term assets represent common ____ items needing adjustment under the indirect method.
nonoperating
When using the direct method to prepare the Statement of Cash Flows, depreciation expense is
not reported on the statement of cash flows.
When the ______ account decreases, it means the company paid less cash for insurance than it recorded as insurance expense.
prepaid insurance
Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) ____ placement
private
Earned capital increases ____.
retained earnings
A corporation's accumulated, undistributed net income or loss is referred as
retained earnings.
Diva, Inc. declared and paid $10,000 of dividends in 2018. The dividends result in a reduction of
retained earnings.
A(n) ____ bond is backed by a lien on specified real estate owned by the issuer.
secured
Bonds that are backed by collateral are ______.
secured
Which of the following will decrease the par value of shares?
stock split
A corporation is owned by its _______.
stockholders
A 2-for-1 stock split increases the marketability of the stock because
the market price per share decreases.
A company's capital structure refers to
the mixture of debt and equity used to finance the company.
The ratio that provides an indication to creditors of how much greater net income is than interest expense is called the
times interest earned ratio
The debt to equity ratio is calculated as
total liabilities divided by total stockholders' equity.
The possibility that a company will be unable to pay its loans and its interest payments when due refers to the company's ____ risk.
default
Debt can be an advantage for stockholders if it
earns a return on borrowed funds that exceeds the cost of borrowing.
A bond will be issued at a discount when the market rate of interest is
greater than the stated rate.
Which of the following provides the clearest indication of an organization's ability to pay current and future interest.
high earnings relative to interest expense
____ financing refers to obtaining investment from stockholders. (Enter only one word.)
Equity
What information does the times interest earned ratio provide to investors or creditors?
It provides the creditor with an indication of the ability of the debtor to pay the interest on its debts.
Which of the following financial ratios provides information about the income generated per dollar of assets?
Return on assets
____ bonds are supported by a specific asset the issuer pledges as collateral.
Secured
Corporate bonds most often pay interest ____
Semiannually
Most corporate bonds pay interest
Semiannually
Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at:
a discount
Return on assets is calculated as net income divided by
average total assets.
The two types of adjustments to net income for the indirect method are adjustments for
1. components of net income that do not affect cash. 2. changes in operating assets and liabilities during the period that affected cash and were not in net income.
Special contractually granted features can make preferred stock:
1. convertible 2. redeemable 3. cumulative
The starting point for preparing the operating activities section using the indirect method is:
net income
When using the indirect method to prepare the operating activities section of the statement of cash flows, the first amount listed is ____ ____
net income
The declaration of cash dividends reduces ______ _________.
retained earnings
The average collection period is an estimate of
the number of days the average account receivable balance is outstanding.
Which of the following items are classified as cash outflows from operating activities on the statement of cash flows?
1. Interest paid on bonds 2. payment on account payable 3. purchase of supplies 4. payment on account 5. Payment of salaries
Which of the following are included in the duties of the board of directors?
1. establish corporate policies 2. appoint officers to manage the corporation
The three classifications on the statement of cash flows are cash flows from (Select all that apply.)
1. financing activities. 2. operating activities. 3. investing activities.
The rights of common stockholders typically include which of the following?
1. right to vote for corporate directors 2. right to distribution of assets in liquidation 3. right to dividends when declared
Compute the inventory turnover ratio using the following information: Net sales is $100,000 for the year, costs of goods sold are $40,000, last year's assets in place were $900,000, and this year's assets in place are $1,100,000. Receivables for both years are $50,000. Inventory changed from $30,000 last year to $10,000 this year.
2
Receipts, Inc.'s Sales were $200,000 while its Accounts receivable was $23,000 at the beginning of the year and $27,000 at the end. All sales were credit sales. Receipts' receivables turnover equals:
8.0
Which of the following transactions are classified as a stock dividend?
A distribution of additional shares of a corporation's stock to current shareholders of the corporation.
_____ enables a company to earn a higher return using debt than without debt.
Leverage
Which of the following reports net income relative to average stockholders' equity in dollars?
ROE
Disadvantages of the corporate form of business are
1. more paperwork 2. additional taxes
Which of these are liquidity ratios?
1. receivables turnover 2. current ratio 3. average collection period
A corporate charter:
1. specifies the shares of stock to be issued 2. describes the business activities 3. names the board of directors
AnuU, Inc. sold 100,000 shares of the 1,000,000 shares it is allowed to sell. AnuU repurchased 10,000 of these shares. The number of shares issued equals ______ shares.
100,000
Which of the following occurs on the date of record?
A list of shareholders that are entitled to receive a dividend is made.
True or false: At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond.
False
True or false: The market interest rate for corporate bonds is the same for each company and is set by the Federal Reserve Board.
False
True or false: The times interest earned formula is net income divided by interest expense.
False Reason: The times interest earned formula is calculated as earnings before interest and taxes divided by interest expense.
During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?
The balance is $48,880. Reason: $50,000 - (5,120 + 4,000 interest)
The direct method presents a summary of all operating transactions that result in either a debit or credit to the ____ account
cash
Which of the following is the formula for the current ratio?
current assets / current liabilities
Mathematically, the current ratio is expressed as current assets divided by ______________ ____________.
current liaibilities
If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a
debit to Cash of $100,000 and a credit to Bonds payable of $100,000.
When a corporation distributes assets of the company to its investors, it is referred to as a(n)
dividend.
A company that earns a return in excess of the cost of borrowing the funds is providing its shareholder with a greater return than what would have been earned with ______.
equity
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of ____ risk.
financial
Trend analysis and time-series analysis refer to ________ analysis.
horizontal
Loans requiring periodic payments of interest and principle are referred to as ____ notes.
installment
Average days in inventory is calculated as 365 days divided by the
inventory turnover ratio
The amount of money paid into a company by its owners is referred to as:
invested capital
What is the formula to compute return on shareholders' equity?
net income / average stocholder's equity
Depreciation expense is added back to net income when preparing the cash flow from operating activities section because depreciation represents a(n) ______ reduction to net income.
noncash
Cash receipts and cash payments for transactions relating to revenue and expense activities are classified on the statement of cash flows as
operating activities
The legal capital per share of stock that is assigned when the corporation is first established is referred to as _________ ______________
par value
Large stock dividends are recorded at _______ and small stock dividends are recorded at ______.
par value; market value
__________ of ___________ refers to the ability of reported earnings to reflect a company's true earnings, as well as the usefulness of reported earnings to predict future earnings.
quality of earnings
The average collection period equals 365 days divided by ______.
receivables turnover
A corporation's accumulated income that has not been distributed as dividends to shareholders is referred to as ________ earnings.
retained
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:
secured
The number of shares issued represents the number of shares:
sold
P/E ratio equals ______.
stock price divided by earnings per share
The price of a single share of stock divided by earnings per share is:
the Price to Earnings ratio
Bondholders are willing to pay a premium to acquire a bond because ______.
the bond's stated interest rate is higher than the market interest rate
The statement of shareholders' equity reports
the changes in each shareholder equity account
Historically, par value was considered to be
the value of the company's shares of stock.
Shares of stock that are repurchased are referred to as ____________ stock.
treasury
Common-size analysis is another term used for a ____ analysis
vertical
Many investors view this type of indicator as the number one measure of a company's success.
Profitability
Which of the following would be reported as a cash outflow from financing activities?
Purchase of treasury shares
Cash from operating activities differs between the direct and indirect method with respect to the:
detail and presentation only
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes ______.
1. a debit to Interest expense of $6,000 2. a credit to Cash of $6,000
Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:
1. a lease asset 2. a lease payable
Periodic payments on installment notes typically include (Select all that apply.)
1. a portion that reduces the outstanding loan balance 2. a portion that reflects interest
The ____ rate of interest on a bond is the interest rate printed on the bond, whereas the ____ rate of interest is the current rate of interest being paid on investments with similar characteristics. (Enter one word per blank)
1. stated 2. market
The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.
Cash; Bonds Payable
An advantage to financing with debt is that
interest is tax deductible
Debt is considered a lower cost method of financing than equity because
interest on debt is tax deductible.
A(n) ____ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time. (Enter one word per blank)
lease
In the U.S., the most popular method for financing corporate long-term assets is:
leasing
A company borrows funds for a project. If the interest rate charged for the borrowed funds is less than the rate of return on the project, this is referred to as financial ____
leverage
Shareholders' equity is another common term for __________ equity.
stockholders
When is it more economical for a company to borrow funds by issuing bonds?
When the interest savings exceed the additional bond issuance costs.
Sales on account are $200,000. Cash sales during the period are $50,000. Beginning accounts receivable is $20,000, and ending accounts receivable is $30,000. What is the total cash collected from customers during the period?
$240,000 Reason: Sales on account + cash sales + the change in accounts receivable = cash collected for the period. $200,000 + 50,000 - 10,000 = $240,000
XYZ Company has a 10 year installment note requiring $5,000 to be paid within the current year and $45,000 to be paid over the remaining 9 years. How is this installment note reported in the balance sheet of XYZ Company?
$5,000 current note payable; $45,000 long-term note payable
Return on _______ measures the ability of company management to generate earnings from the resources provided by owners.
Blank 1: equity
What does the inventory turnover ratio measure?
The average number of times inventory is sold during a period.
Company A has an accounts receivable turnover of 8.0. Company B has an accounts receivable turnover of 10.0. Which of the following is true?
Company B collects its receivables faster than Company A.
Which of the following statements best describes the reason depreciation expense is added to net income when preparing the statement of cash flows?
Depreciation expense originally reduced net income, but it is a noncash expense.
Which of the following items requires separate disclosure after income from continuing operations?
Discontinued operations
If interest payable increases, which of the following is true?
Interest paid is lower than the interest expense on the income statement.
Albert Inc. has both common and preferred stock outstanding. Which should be listed first in the stockholders' equity section of the balance sheet?
Preferred stock
Which of the following is typically presented first in the equity section of the balance sheet?
Preferred stock
Which of the following are profitability ratios?
Profit Margin & Return on Equity
Which ratio indicates the portion of each sales dollar above its cost of goods sold?
The gross profit ratio
When using the direct method, why is cash received from customers greater than sales revenue on the income statement when accounts receivable decreases?
There were more collections of accounts receivable than sales on account during the year.
Which of these is a solvency ratio?
Times interest earned
Which of the following are the most common types of bonds?
Unsecured
Shares of stock previously sold by the corporation that are repurchased are called
treasury stocks
Risk ratios and profitability ratios represent common ratios used for analysis.
true
Most bonds issued today are ______.
unsecured
Which of the following items are classified as cash inflows from operating activities on the statement of cash flows?
1. Collection of interest 2. Collection from customers
Identify two ratios commonly used to assess a company's financial risk.
1. Debt to equity ratio 2. Times interest earned ratio
Which of the following are possible benefits of leasing an asset rather than purchasing an asset?
1. Improvement in cash flows 2. Protection against declining asset value 3. Lower periodic payments on the asset
Compute the average days in inventory ratio using the following information: Net sales is $200,000 for the year, cost of goods sold are $80,000, last year's total assets were $900,000, and this year's total assets are $1,100,000. Receivables for both years are $40,000. Inventory changed from $30,000 last year to $10,000 this year.
Reason: Average days in inventory is 365/inventory turnover ratio = 365/4. Inventory turnover is calculated as cost of goods sold/average inventory = $80,000/[($30,000 + 10,000)/2] = 4.
True or false: Cost of goods sold must be adjusted to a cash number because the cost of merchandise sold may be more or less than the amount of cash paid to suppliers during the period.
True Reason: Inventory is purchased from suppliers and sold to customers. The inventory may either be paid for with cash or purchased on account to be paid in the future. The cost of the inventory sold may be more or less than the cash that has actually been paid for the inventory at year end.
At the beginning of a lease period, the lessee records
a lease asset and lease payable for the present value of the lease payments.
Joann is preparing a statement of cash flows as part of a homework assignment. She hopes to find a check figure that will help her assess the accuracy of her results. What should Joann do to quickly find a check figure?
Calculate the change in the beginning and ending balance of cash
Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal? (Select all that apply.)
1. Interest expense based on the beginning period carrying value and the effective rate of the loan 2. The carrying value of the note at the end of the period 3. The decrease in the carrying value of the note 4. The cash paid each payment period
Which of the following accounts results in adjustments to net income under the indirect method of preparing the statement of cash flows if their balances change during the year?
1. Inventory 2. account payable 3. accounts receivable
Which information regarding the receivables turnover ratio is true?
1. It shows the number of times during a period that the average accounts receivable balance is collected. 2. It provides an indication of a company's efficiency in collecting receivables.
Adjustments to net income in calculating operating cash flows include:
1. Nonoperating items 2. Noncash items 3. Changes in current assets and current liabilities
Which of the following are classified as cash outflows from investing activities?
1. Purchase of land 2. Purchase of an investment
Which of the following cash transactions are classified as cash inflows from investing activities?
1. Sale of building 2. Sale of equipment 3. Sale of investments
Which of the following are typically shown in an amortization schedule related to an installment notes payable? (Select all that apply.)
1. The carrying value of the note at the beginning of the period 2. the cash paid each payment period 3. the carrying value of the note at the end of the period
Which of the following are correct regarding bonds?
1. They obligate the issuing company to repay the bonds at a specific date. 2. They obligate the issuing company to pay a specific amount.
Which of the following is/are common terms used for horizontal analysis?
1. Time-series analysis 2. Trend analysis
The journal entry to record the declaration of a dividend includes ______.
1. a credit to dividends payable 2. a debit to dividends
Common types of analysis that help assess a specific company's performance include comparisons:
1. between companies 2. over time 3. to the same industry
Which of the following are methods of long-term financing with debt?
1. bonds 2. notes payable 3. leases
When cash from operating activities is presented using the indirect method, net income must be adjusted for increases and decreases in balance sheet accounts that relate to
amounts presented in the income statement.
A corporation that wishes to borrow from the general public rather than a bank will issue
bonds.
The mixture of debt financing and equity financing a company uses is referred to as the company's ____ structure.
capital
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
False Reason: The debt to equity ratio is total liabilities divided by total stockholders' equity.
Preferred stock:
1. is useful for raising capital without reducing common stockholder's control 2. generally does not having voting right 3. has preference as to dividends
Which statements about the inventory turnover ratio are correct?
1. it indicates how quickly inventory is sold 2. it shows the number of times the average inventory balance is sold during a reporting period
Which of the following are nonoperating items that require adjustments under the indirect method?
1. Losses on the sale of long-term assets 2. Gains on the sale of long-term assets
Which of the following are classified as cash inflows from investing activities?
1. Sale of equipment 2. Sale of land
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes ______.
1. a debit to Interest expense of $500 2. a credit to Interest payable of $500
The journal entry to recognize the signing of an installment notes payable includes:
1. credit notes payable 2. debit cash
On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to
1. notes payable for $1,120. 2. interest expense for $4,000.
Preferred stock is "preferred" over common stock by providing preferred stock holders with these rights:
1. preference in distribution of assets during dissolution of corporation 2. first right to specified amount of dividends
Morgan Company issued cumulative preferred stock. What additional special feature(s) could also have been granted to preferred stock holders?
1. right to redeem the preferred shares for cash 2. right to convert the shares to common shares
Which of the following is included in the rights of common stockholders?
Right to vote (not right to dividends every year as they sometimes are not paid every year)
Which of the following is a ratio used to evaluate a company's solvency?
Debt to equity
Asset turnover ratio is net sales divided by
average total assets.
The declaration and payment of a cash dividend ultimately causes a(n):
1. decrease in Retained earnings. 2. decrease in Cash. 3. decrease in stockholders' equity.
Stock dividends have the following effects on stockholders' equity
1. decrease in retained earnings 2. increase in common stock 3. no change to total stockholders' equity
What is the formula to compute the average days in inventory?
365 days/inventory turnover ratio
When there is no change in interest payable, the interest expense on the income statement is ______ the actual cash paid out during the period.
equal to
What is the formula for the receivables turnover ratio?
Net credit sales divided by average accounts receivable (net).
True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.
False Reason: The note must be split into its current and long-term portions.
The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as:
default risk
At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:
$8,600 Reason: $10,000 - $(2,000 - (10,000 x .06) = $8,600
A review of Munchen Corporation's financial statements reveals the following information: cost of goods sold: $100,000; decrease in inventory: $5,000; increase in accounts payable: $10,000. Cash paid to suppliers was:
$85,000
Financing with _____ requires borrowing, whereas financing with _____ requires issuing shares of stock.
1. debt 2. equity
The purpose of the statement of shareholders' equity is to
report the changes and the sources of the changes in shareholder equity accounts.
Which of the following are common characteristics or provisions of bonds?
1. convertible 2. term or serial 3. secured or unsecured 4. callable
Smith Company enters into a lease agreement with Rent-All Corp. The present value of the lease payments is equal to $25,000. Smith records:
1. debit lease asset $25,000 2. credit lease payable $25,000
You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0
Company D
Western Company enters into a lease agreement with ABC Rents. The present value of the lease payments is equal to $50,000. Western records:
debit lease asset $50,000; credit lease payable $50,000
Bonds and leases are normally classified as ______ liabilities.
long-term
