Self-topic-finance

E. Sunny's money is worth more than Ian's money given the 7 percent discount rate.

4. Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts? A. The present values of Ian and Sunny's monies are equal. B. In future dollars, Sunny's money is worth more than Ian's money. C. In today's dollars, Ian's money is worth more than Sunny's. D. Twenty years from now, the value of Ian's money will be equal to the value of Sunny's money. E. Sunny's money is worth more than Ian's money given the 7 percent discount rate. F. None of the above.

A. coupon.

4. Mike just purchased a bond which pays $40 each year in interest. The $40 interest payment is also called the: A. coupon. B. par value. C. discount. D. call premium. E. yield. F. None of the above.

B. the total cash flow of the firm.

4. The basic lesson of the M&M theory is that the value of a firm is dependent upon: A. the firm's capital structure. B. the total cash flow of the firm. C. minimizing the marketed claims. D. the amount of marketed claims to that firm. E. the size of the stockholders' claims. F. None of the above.

A. The timing of when revenues and expenses are recorded.

4. The primary difference between accrual-basis and cash-basis accounting is: A. The timing of when revenues and expenses are recorded. B. Cash-basis accounting is allowed for financial reporting purposes but not accrual-basis accounting. C. Accrual-basis accounting violates both the revenue recognition and matching principles. D. Adjusting entries are only a necessary part of cash-basis accounting.

C. Financing activity.

4. The purchase of treasury stock is classified in the statement of cash flows as a(n): A. Operating activity. B. Investing activity. C. Financing activity. D. Noncash activity.

E. I, III, and IV only

4. Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis A. II and IV only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

B. Comparing income statement items as a percentage of sales.

4. Which of the following is an example of vertical analysis? A. Comparing gross profit across companies. B. Comparing income statement items as a percentage of sales. C. Comparing debt with industry averages. D. Comparing the change in sales over time.

B. II and IV only

4. Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. I, III, and IV only

E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

4. Which of the following statements is true? A. Rapid growth spurs increases in market share and profits and thus, is always a blessing. B. Firms that grow rapidly only very rarely encounter financial problems. C. The cash flows generated in a given time period are equal to the profits reported. D. Profits provide assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". F. None of the above

B. III only

4. Which of the following statements is/are correct? I. Going-concern value of a firm is equal to the present value of expected net income. II. When a buyer values a target firm, the appropriate discount rate is the buyer's weighted-average cost of capital. III. The liquidation value estimate of terminal value usually vastly understates a healthy company's terminal value. IV. The value of a firm's equity equals the discounted cash flow value of the firm minus all liabilities. A. II only B. III only C. I and II only D. II and III only E. II, III, and IV only F. None of the above.

A. income statement

4. Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. cash flow statement D. sources and uses statement E. market value statement

d. it has top management support.

40. A budget is most likely to be effective if a. it is used to assess blame when things do not occur according to plans. b. it is not used to evaluate a manager's performance. c. employees and managers at the lower levels do not get involved in the budgeting process. d. it has top management support.

A. A discontinued operation.

40. The sale or disposal of a significant component of a company's operations is referred to as: A. A discontinued operation. B. An extraordinary item. C. Other revenues and expenses. D. Gain or loss on sale of assets.

A. The sale or disposal of a significant component of a company's operations.

41. A discontinued operation refers to: A. The sale or disposal of a significant component of a company's operations. B. Discontinued inventory items. C. Inventory items that have been completed and sold. D. The sale of most long-term assets.

d. a budget committee.

41. In many companies, responsibility for coordinating the preparation of the budget is assigned to a. the company's independent certified public accountants. b. the company's internal auditors. c. the company's board of directors. d. a budget committee.

d. long enough to provide an obtainable goal under normal business conditions.

42. A budget period should be a. monthly. b. for a year or more. c. long-term. d. long enough to provide an obtainable goal under normal business conditions.

C. Unusual in nature and infrequent in occurrence.

42. An extraordinary item must meet which of the following criteria? A. Unusual in nature. B. Infrequent in occurrence. C. Unusual in nature and infrequent in occurrence. D. Unusual in nature or infrequent in occurrence.

B. Are items that are both unusual in nature and occur infrequently.

43. Extraordinary items: A. Include very large gains or losses from ordinary business activities. B. Are items that are both unusual in nature and occur infrequently. C. Are shown on the income statement before the tax effect. D. Include the write-down of obsolete inventories.

b. a full year ahead.

43. If a company has adopted continuous budgeting, the budget will show plans for a. every day. b. a full year ahead. c. the current year and the next year. d. at least five years.

d. one year.

44. The most common budget period is a. one month. b. three months. c. six months. d. one year.

D. Uninsured losses from a natural disaster.

44. Which of the following items is most likely to be reported as an extraordinary loss? A. Losses due to the write-down of inventory. B. Losses on the sale of long-term assets. C. Losses due to business restructuring. D. Uninsured losses from a natural disaster.

c. several months before the end of the current year.

45. Budget development for the coming year usually starts a. a year in advance. b. the first month of the year to be budgeted. c. several months before the end of the current year. d. the last month of the previous year.

A. Other revenues and expenses, income tax expense, discontinued operations, extraordinary items.

45. What is the correct order to present the following items on the income statement? A. Other revenues and expenses, income tax expense, discontinued operations, extraordinary items. B. Other revenues and expenses, income tax expense, extraordinary items, discontinued operations. C. Discontinued operations, extraordinary items, other revenues and expenses, income tax expense. D. Discontinued operations, extraordinary items, income tax expense, other revenues and expenses.

d. external auditor.

46. The budget committee would not normally include the a. research director. b. treasurer. c. sales manager. d. external auditor.

A. Higher profitability.

46. The financial statements of a firm that uses more aggressive accounting practices would be likely to report: A. Higher profitability. B. Higher dividends. C. Higher liabilities. D. Fewer total assets.

d. budget director.

47. The budget committee in a company is often headed by the a. president. b. controller. c. treasurer. d. budget director.

D. Increasing the useful life used in calculating depreciation.

47. Which of the following is NOT an example of applying conservatism in accounting? A. Recording contingent losses that are probable. B. Expensing all research and development costs are they are incurred. C. Using the lower-of-cost-or-market rules for inventory accounting. D. Increasing the useful life used in calculating depreciation.

b. generally encompasses a longer period of time than an annual budget.

48. Long-range planning a. generally presents more detailed information than an annual budget. b. generally encompasses a longer period of time than an annual budget. c. is usually more accurate than an annual budget. d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis.

B. Waiting to record a litigation loss.

48. Which of the following is an aggressive accounting practice? A. The use of a shorter service life for depreciation. B. Waiting to record a litigation loss. C. Adjust the allowance for uncollectible accounts to a larger amount. D. The write-down of overvalued inventory

c. 5 years.

49. Long-range planning usually encompasses a period of at least a. six months. b. 1 year. c. 5 years. d. 10 years.

C. Adjust the allowance for uncollectible accounts to a larger amount.

49. Which of the following is a conservative accounting practice? A. Change from double-declining balance to straight-line depreciation. B. Record sales revenue before it is actually earned. C. Adjust the allowance for uncollectible accounts to a larger amount. D. Record inventory at market rather than lower of cost or market.

A. Vertical analysis.

5. Comparing operating expenses as a percentage of sales is an example of: A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis.

D. Dividends paid.

5. Operating cash flows exclude: A. Interest received. B. Interest paid. C. Dividends received. D. Dividends paid.

E. I, II, III, and IV

5. The term "financial distress costs" includes which of the following? I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed, but not bankrupt IV. Indirect costs related to being financially distressed, but not bankrupt A. I only B. III only C. I and II only D. III and IV only E. I, II, III, and IV F. None of the above.

C. The risk of going bankrupt is less.

5. Which of the following is a reason that a corporation would prefer to issue stock instead of bonds? A. Dividend payments can be deducted for income tax purposes but interest payments cannot. B. Expansion is accomplished without surrendering ownership control. C. The risk of going bankrupt is less. D. All of the above are reasons for issuing stock.

D. I, II, and III only

5. Which of the following statements are correct concerning diversifiable, or unsystematic, risks? I. Diversifiable risks can be largely eliminated by investing in thirty unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk. A. I and III only B. II and IV only C. I and IV only D. I, II, and III only E. I, II, III, and IV F. None of the above.

C. (1) and (3)

5. Which of the following statements are correct? A. (1) and (4) B. (2) and (3) C. (1) and (3) D. (2) and (4)

B. additions to retained earnings divided by net income

5. Which one of the following correctly defines the retention ratio? A. one plus the dividend payout ratio B. additions to retained earnings divided by net income C. additions to retained earnings divided by dividends paid D. net income minus additions to retained earnings E. net income minus cash dividends F. None of the above.

C. cash flow statement

5. Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time? A. income statement B. balance sheet C. cash flow statement D. shareholders' equity statement E. market value statement

D. A cumulative cash deficit indicates a borrowing need.

5. Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit indicates a borrowing need. E. The ending cash balance must equal the minimum desired cash balance.

B. par value.

5. Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the: A. coupon. B. par value. C. discount. D. yield. E. call premium. F. None of the above.

a. Preparing the budgeted balance sheet

50. Which is the last step in developing the master budget? a. Preparing the budgeted balance sheet b. Preparing the cost of goods manufactured budget c. Preparing the budgeted income statement d. Preparing the cash budget

B. Record sales revenue before it is actually earned.

50. Which of the following is an aggressive accounting practice? A. Change from straight-line to double-declining balance depreciation. B. Record sales revenue before it is actually earned. C. Adjust the allowance for uncollectible accounts to a larger amount. D. Record inventory at lower of cost or market rather than at cost.

b. production budget.

51. The total direct labor hours required in preparing a direct labor budget are calculated using the a. sales forecast. b. production budget. c. direct materials budget. d. sales budget.

c. shows forecasts for the industry and for the firm.

52. A sales forecast a. shows a forecast for the firm only. b. shows a forecast for the industry only. c. shows forecasts for the industry and for the firm. d. plays a minor role in the development of the master budget.

d. Cash budget

53. Which of the following is not an operating budget? a. Direct labor budget b. Sales budget c. Production budget d. Cash budget

c. Manufacturing overhead budget

54. Which of the following is not a financial budget? a. Capital expenditure budget b. Cash budget c. Manufacturing overhead budget d. Budgeted balance sheet

d. excessive inventories.

56. An overly optimistic sales budget may result in a. increases in selling prices late in the year. b. insufficient inventories. c. increased sales during the year. d. excessive inventories.

c. interrelated financial budgets and operating budgets.

57. A master budget consists of a. an interrelated long-term plan and operating budgets. b. financial budgets and a long-term plan. c. interrelated financial budgets and operating budgets. d. all the accounting journals and ledgers used by a company.

b. sales budget.

58. The starting point in preparing a master budget is the preparation of the a. production budget. b. sales budget. c. purchasing budget. d. personnel budget.

b. Accounts receivable

59. Of the following items, which one is not obtained from an individual operating budget? a. Selling and administrative expenses b. Accounts receivable c. Cost of goods sold d. Sales

B. II., III., V.

6. Advantages of the corporate form of business include which of the following? I. Double taxation II. Ability to raise capital III. Lack of mutual agency IV. More paperwork V. Limited liability A. II. B. II., III., V. C. I., II., III. D. II., IV., V.

E. February, March, and April

6. Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May and June), AmDocs will collect payment for the sales it made during which of the months listed below? A. October, November, and December B. November, December, and January C. December, January, and February D. January, February, and March E. February, March, and April

D. A prepaid expense.

6. Making insurance payments in advance is an example of: A. An accrued revenue. B. An accrued expense. C. An unearned revenue. D. A prepaid expense.

A. Vertical analysis.

6. The following is an example of: 300 6% 500 10% 800 16% 3400 68% ------ ------- 5,000,00 100 A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis.

D. cash flow statement.

6. The sources and uses of cash over a stated period of time are reflected on the: A. income statement. B. balance sheet. C. shareholders' equity statement. D. cash flow statement. E. statement of operating position.

C. Operating, investing, and financing.

6. The statement of cash flows reports cash flows from the activities of: A. Operating, purchasing, and investing. B. Borrowing, paying, and investing. C. Operating, investing, and financing. D. Using, investing, and financing.

C. I and III only

6. Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios II. The recognition that financing decisions do not affect firm or shareholder value III. A range of earnings chart and proximity of expected EBIT to the breakeven value IV. A conservative debt policy that obviates the need to evaluate risk A. I only B. III only C. I and III only D. II and III only E. IV only F. None of the above.

A. I and III only

6. Which of the following statements concerning risk are correct? I. Systematic risk is measured by beta. II. The risk premium increases as unsystematic risk increases. III. Systematic risk is the only part of total risk that should affect asset prices and returns. IV. Diversifiable risks are market risks you cannot avoid. A. I and III only B. II and IV only C. I and II only D. III and IV only E. I, II, and III only

C. dividend policy

6. Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. net working capital policy B. capital structure policy C. dividend policy D. capital budgeting policy E. capacity utilization policy F. None of the above.

D. asset turnover

6. Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales? A. current ratio B. debt-to-equity C. retention D. asset turnover E. return on assets

F. None of the above.

6. Which one of the following statements is true? A. Debt instruments offer residual claims to future cash payouts. B. Bonds with call provisions will have lower coupon rates than otherwise identical bonds. C. Bondholders enjoy a direct voice in company decisions. D. Bonds are low-risk investments that do well in inflationary periods. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation. F. None of the above.

c. budgeted balance sheet.

60. The projection of financial position at the end of the budget period is found on the a. budgeted income statement. b. cash budget. c. budgeted balance sheet. d. sales budget.

b. expected cash receipts and cash disbursements from all sources.

61. The cash budget reflects a. all revenues and all expenses for a period. b. expected cash receipts and cash disbursements from all sources. c. all the items that appear on a budgeted income statement. d. all the items that appear on a budgeted balance sheet.

c. Investing

62. Which one of the following sections would not appear on a cash budget? a. Cash receipts b. Financing c. Investing d. Cash disbursements

c. Depreciation expense

63. Which one of the following items would never appear on a cash budget? a. Office salaries expense b. Interest expense c. Depreciation expense d. Travel expense

a. Direct labor budget

64. Which one of the following budgets would be prepared for a manufacturer but not for a merchandiser? a. Direct labor budget b. Cash budget c. Sales budget d. Budgeted income statement

c. Staff turnover may increase.

65. Which one of the following is a problem resulting from a service company being overstaffed? a. Labor costs will be disproportionately low. b. Profits will be higher because of the additional salaries. c. Staff turnover may increase. d. Revenue may be lost.

d. includes a service revenue budget based on expected client billings.

66. The master budget for a service enterprise a. will have the same types of budgets as a merchandiser. b. may include a sales budget for sales revenue. c. will not include a budgeted income statement. d. includes a service revenue budget based on expected client billings.

b. usually starts with budgeting expenditures, rather than receipts.

67. Budgeting in not-for-profit organizations a. is not important because they are not profit-oriented. b. usually starts with budgeting expenditures, rather than receipts. c. is necessary only if some product is produced and sold. d. consists entirely of budgeted contributions.

b. sales budget.

68. For a merchandiser, the starting point in the development of the master budget is the a. cash budget. b. sales budget. c. selling and administrative expenses budget. d. budgeted income statement.

b. merchandise purchases budget.

69. Instead of a production budget, a merchandiser will prepare a a. pseudo-production budget. b. merchandise purchases budget. c. master time sheet. d. sales forecast.

D. vary significantly across industries.

7. In general, the capital structures used by non-financial U.S. firms: A. typically result in debt-to-asset ratios between 60 and 80 percent. B. tend to converge to the same proportions of debt and equity. C. tend to be those that maximize the use of the firm's available tax shelters. D. vary significantly across industries. E. None of the above.

B. Horizontal analysis.

7. The following is an example of: A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis.

D. An unearned revenue.

7. When a magazine sells subscriptions to customers, it is an example of: A. An accrued expense. B. An accrued revenue. C. A prepaid expense. D. An unearned revenue.

E. I, II, III, and IV

7. Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process? I. Should the firm merge with a competitor? II. Should additional equity be sold? III. Should a particular division be sold? IV. Should a new product be introduced? A. I, II, and III only B. I, II, and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

B. Disadvantages are that the business is subject to government regulations and double taxation on its income.

7. Which of the following statements regarding the corporate form of business is correct? A. The disadvantages are that generating capital is difficult and that owners have limited liability. B. Disadvantages are that the business is subject to government regulations and double taxation on its income. C. One disadvantage is that ownership is easy to transfer. D. All of the other options are correct.

D. Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills

7. Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1900-2015 period)? A. Short-term government bills, long-term corporate bonds, long-term government bonds, common stocks B. Long-term corporate bonds, long-term government bonds, common stocks, short-term government bills C. Common stocks, long-term government bonds, long-term corporate bonds, short-term government bills D. Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills E. Long-term corporate bonds, common stocks, short-term government bills, long-term government bonds F. None of the above.

A. The Federal Reserve unexpectedly announces an increase in target interest rates.

7. Which one of the following is an example of systematic risk? A. The Federal Reserve unexpectedly announces an increase in target interest rates. B. A flood washes away a firm's warehouse. C. A city imposes an additional one percent sales tax on all products. D. A toymaker has to recall its top-selling toy. E. Corn prices increase due to increased demand for alternative fuels. F. None of the above.

C. Paying dividends to investors creates a cash outflow from financing activities.

7. Which one of the following is correct about the statement of cash flows? A. A company with a net loss will always have a cash outflow from operating activities. B. Collecting interest earned from a note receivable creates a cash inflow from investing activities. C. Paying dividends to investors creates a cash outflow from financing activities. D. The repayment of long-term debt is a cash inflow from financing activities.

c. credit hours taught by a department.

70. An appropriate activity index for a college or university for budgeting faculty positions would be the a. faculty hours worked. b. number of administrators. c. credit hours taught by a department. d. number of days in the school term.

b. coordinate professional staff needs with anticipated services.

71. A critical factor in budgeting for a service firm is to a. hire professional staff to perform the budgeting work. b. coordinate professional staff needs with anticipated services. c. classify all personnel as either variable or fixed. d. budget expenditures before anticipated receipts.

a. requires only top management to plan ahead and formalize their future goals.

72. The primary benefits of budgeting include all of the following except it a. requires only top management to plan ahead and formalize their future goals. b. provides definite objectives for evaluating performance. c. creates an early warning system for potential problems. d. motivates personnel throughout the organization.

d. budget committee.

73. Coordinating the preparation of the budget is the responsibility of the a. treasurer. b. president. c. chief accountant. d. budget committee.

c. lower levels of management.

74. For better management acceptance, the flow of input data for budgeting should begin with the a. accounting department. b. top management. c. lower levels of management. d. budget committee.

a. budgeted income statement.

75. The important end-product of the operating budgets is the a. budgeted income statement. b. cash budget. c. production budget. d. budgeted balance sheet.

a. cash budget.

76. The budget that is often considered to be the most important financial budget is the a. cash budget. b. capital expenditure budget. c. budgeted income statement. d. budgeted balance sheet.

C. increase in the inventory turnover rate

8. Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm's financial ratios? A. decrease in the fixed asset turnover rate B. decrease in the financial leverage ratio C. increase in the inventory turnover rate D. increase in the day's sales in inventory E. no change in the total asset turnover rate

A. Over time.

8. Horizontal analysis examines trends in a company: A. Over time. B. Between income statement accounts in the same year. C. Between balance sheet accounts in the same year. D. Between income statement and balance sheet accounts in the same year.

A. Cash payment (or an obligation to pay cash) occurs before the expense recognition.

8. Prepayments occur when: A. Cash payment (or an obligation to pay cash) occurs before the expense recognition. B. Sales are delayed pending credit approval. C. Customers are unable to pay the full amount due when goods are delivered. D. Cash payment occurs after the expense is incurred and liability is recorded.

C. cash budget.

8. Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a: A. pro forma income statement. B. sales projection. C. cash budget. D. receivables analysis. E. credit analysis. F. None of the above.

B. Additional taxes.

8. The disadvantages of the corporate form of business include: A. Lack of mutual agency. B. Additional taxes. C. Limited liability. D. Ability to raise capital.

B. risk premium.

8. The excess return earned by a risky asset, for example with a beta of 1.4, over that earned by a risk-free asset is referred to as a: A. market risk premium. B. risk premium. C. systematic return. D. total return. E. real rate of return. F. None of the above.

D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

8. The sustainable growth rate of a firm is best described as the: A. minimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. F. None of the above.

C. Cash dividends received on stock investments are classified as cash flows from operating activities.

8. Which of the following is correct about the statement of cash flows? A. A company with a net loss on the income statement will always have a net cash outflow from operating activities. B. A purchase of equipment is classified as a cash inflow from investing activities. C. Cash dividends received on stock investments are classified as cash flows from operating activities. D. Cash dividends paid are classified as cash flows from operating activities.

D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.

8. Which one of the following statements is true? A. Equity securities offer fixed claims on future cash payouts. B. Unlike bondholders, for their returns, shareholders rely entirely on price appreciation. C. In theory, common shareholders exercise very little control over company decisions. D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation. F. None of the above.

C. $150 million Minimum economic value in PV terms = $860 million - $710 million = $150 million

9. Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated value of the enhancements from the merger have to be? A. $0 B. $75 million C. $150 million D. $710 million E. $860 million F. None of the above.

B. Outstanding, issued, and authorized.

9. The correct order from the smallest number of shares to the largest number of shares is: A. Authorized, issued, and outstanding. B. Outstanding, issued, and authorized. C. Issued, outstanding, and authorized. D. Issued, authorized, and outstanding.

C. II and III only

9. The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations? I. Firms that have a 100 percent retention ratio II. Firms that pay an unchanging dividend III. Firms that pay a constantly increasing dividend IV. Firms that pay an erratically growing dividend A. I and II only B. I and IV only C. II and III only D. I, II, and III only E. I, III, and IV only F. None of the above.

C. assumes the debt-equity ratio is constant.

9. The sustainable growth rate: A. assumes there is no external financing of any kind. B. assumes no additional long-term debt is available. C. assumes the debt-equity ratio is constant. D. assumes the debt-equity ratio is 1.0. E. assumes all income is retained by the firm. F. None of the above.

C. Financing.

9. Under what section of the Statement of Cash Flows would you classify dividends paid on common stock? A. Operating. B. Investing. C. Financing. D. Noncash activity.

D. Comparing the growth in sales over time.

9. Which of the following is an example of horizontal analysis? A. Comparing COGS with sales. B. Comparing net income across companies. C. Comparing debt with equity. D. Comparing the growth in sales over time.

D. Both b and c are true.

9. Which of the following is(are) true regarding the characteristics of adjusting entries? A. Adjusting entries reduce the balance of revenue, expense, and dividend accounts to zero. B. Adjusting entries allow for the proper application of the revenue recognition principle. C. Adjusting entries allow for the proper application of the matching principle. D. Both b and c are true.

A. decrease in accounts receivable

9. Which one of the following is a source of cash? A. decrease in accounts receivable B. decrease in common stock C. decrease in long-term debt D. decrease in accounts payable E. increase in inventory

E. I, II, III, and IV

9. You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

[($320,000 - $20,000) - $250,000] = $50,000. D. $50,000.

. Given the information below, what is the company's gross profit? A. $250,000. B. $70,000. C. $220,000. D. $50,000.

D. II, III, and IV only

1. Financial leverage: I. increases expected ROE but does not affect its variability. II. increases breakeven, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners. A. I and II only B. I and III only C. II and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

C. shows that the change in total cash from one year to the next is equal to the net operating, investing, and financing cash flows.

1. The Statement of Cash Flows: A. lists all cash flows over the life of a company. B. breaks down all cash transactions into Investing and Financing cash flows. C. shows that the change in total cash from one year to the next is equal to the net operating, investing, and financing cash flows. D. has two methods for Investing Cash Flows - direct and indirect.

B. return on equity.

1. The most popular yardstick of financial performance among investors and senior managers is the: A. profit margin. B. return on equity. C. return on assets. D. times burden covered ratio. E. earnings yield. F. None of the above.

B. Revenue should be recognized in the period earned.

1. The revenue recognition principle states that: A. Revenue should be recognized in the period the cash is received. B. Revenue should be recognized in the period earned. C. Revenue should be recognized in the balance sheet. D. Revenue is a component of common stock.

D. standard deviation; beta

1. Total risk is measured by _____ and systematic risk is measured by ____. A. beta; alpha B. beta; standard deviation C. WACC; beta D. standard deviation; beta E. standard deviation; variance F. None of the above.

C. Sales Revenue.

1. Which of the following accounts is not reported in the stockholders' equity section of the balance sheet? A. Treasury Stock. B. Common Stock. C. Sales Revenue. D. Retained Earnings.

B. Comparisons of earnings per share between companies.

1. Which of the following is not a common type of comparison in accounting? A. Comparisons of sales growth between companies. B. Comparisons of earnings per share between companies. C. Comparisons over time. D. Comparisons to industry.

B. Estimate the accounting rate of return for the investment.

1. Which of the following is not an important step in the financial evaluation of an investment opportunity? A. Calculate a figure of merit for the investment. B. Estimate the accounting rate of return for the investment. C. Estimate the relevant cash flows. D. Compare the figure of merit to an acceptance criterion. E. All of the above are important steps.

C. II and III only

1. Which of the following statements are correct? I. Liquidation value of a firm is equal to the present worth of expected future cash flows from operating activities. II. When an acquiring firm purchases a target firm's equity, the acquirer must assume the target's liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value. A. I and III only B. II and IV only C. II and III only D. I, II, and III only E. II, III, and IV only F. None of the above.

C. Financial instruments are greatly constrained by law and regulation.

1. Which one of the following statements is false? A. Financial executives must design financial securities to meet the needs of the firm and its investors. B. Financial instruments are subject to full disclosure requirements. C. Financial instruments are greatly constrained by law and regulation. D. Financial instruments are claims against a company's cash flows and assets. E. None of the above.

D. decrease in the dividend payout ratio

1. Which one of the following will increase the sustainable rate of growth a corporation can achieve? A. avoidance of external equity financing B. increase in corporate tax rates C. reduction in the retention ratio D. decrease in the dividend payout ratio E. decrease in sales given a positive profit margin F. None of the above.

A. $20 million

1. You are estimating your company's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year? A. $20 million B. $70 million C. $150 million D. $160 million E. $180 million F. None of the above.

D. considers multiple options and scenarios for the next two to five years.

10. Financial planning: A. focuses solely on the short-term outlook for a firm. B. is a process that firms employ only when major changes to a firm's operations are anticipated. C. is a process that firms undergo once every five years. D. considers multiple options and scenarios for the next two to five years. E. provides minimal benefits for firms that are highly responsive to economic changes.

D. expenses, like depreciation, which do not directly affect cash flows.

10. Noncash items refer to: A. sales which are made on a credit basis. B. inventory items purchased using credit. C. intangible assets such as patents. D. expenses, like depreciation, which do not directly affect cash flows. E. administrative expenses.

D. total assets for the current year.

10. On a common-size balance sheet, all accounts are expressed as a percentage of: A. sales for the period. B. the base year sales. C. total equity for the base year. D. total assets for the current year. E. total assets for the base year.

C. Issued less treasury stock.

10. Outstanding common stock refers to the total number of shares: A. Issued. B. Issued plus treasury stock. C. Issued less treasury stock. D. Authorized.

C. Long-term assets.

10. Resources owned by the company that will provide a benefit for more than one year are called: A. Current assets. B. Current liabilities. C. Long-term assets. D. Revenues.

C. ignores the firm's risks when that cost is based on the dividend growth model.

10. The cost of equity for a firm: A. tends to remain static for firms with increasing levels of risk. B. increases as the unsystematic risk of the firm increases. C. ignores the firm's risks when that cost is based on the dividend growth model. D. equals the risk-free rate plus the market risk premium. E. equals the firm's pretax weighted average cost of capital. F. None of the above.

D. Noncash activity.

10. Under what section of the Statement of Cash Flows would you classify the purchase of equipment by issuing a long-term note payable? A. Operating. B. Investing. C. Financing. D. Noncash activity.

E. I, II, III, and IV

10. Which of the following can affect a firm's sustainable rate of growth? I. Asset turnover ratio II. Profit margin III. Dividend policy IV. Financial leverage A. III only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

D. Comparing the change in sales over time.

10. Which of the following is an example of horizontal analysis? A. Comparing gross profit across companies. B. Comparing gross profit with operating expenses. C. Comparing assets with equity. D. Comparing the change in sales over time.

D. That can be issued.

11. Authorized common stock refers to the total number of shares: A. Outstanding. B. Issued. C. Issued and outstanding. D. That can be issued.

B. Horizontal analysis.

11. Comparing changes in net income for one company over time is an example of: A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis.

A. is based on the current yield to maturity of the firm's outstanding bonds.

11. The pre-tax cost of debt: A. is based on the current yield to maturity of the firm's outstanding bonds. B. is equal to the coupon rate on the latest bonds issued by a firm. C. is equivalent to the average current yield on all of a firm's outstanding bonds. D. is based on the original yield to maturity on the latest bonds issued by a firm. E. has to be estimated as it cannot be directly observed in the market. F. None of the above.

A. $14,700 Change in retained earnings = $437,500 .048 (1 - 0.30) = $14,700

11. Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings? A. $14,700 B. $17,500 C. $18,300 D. $20,600 E. $21,000 F. None of the above.

B. Borrow funds rather than limit growth, thereby limiting growth only as a last resort.

11. Which of the following is NOT a likely financing policy for a rapidly growing business? A. Adopt a modest dividend payout policy that enables the company to finance most of its growth externally. B. Borrow funds rather than limit growth, thereby limiting growth only as a last resort. C. Maintain a conservative leverage ratio to ensure continuous access to financial markets. D. If external financing is necessary, use debt to the point it does not affect financial flexibility. E. None of the above.

E. I, III, and V only

11. Which of the following tends to cause differences between market values and book values? I. Accounting often creates a dichotomy between realized and unrealized income. II. Accountants allocate goodwill when a firm is acquired for more than book value. III. Many accounting values are transactions-based and hence backward-looking. IV. The use of fair-value accounting. V. Accountants refuse to assign a cost to equity capital. A. I and II only B. I and III only C. II and IV only D. I, III, and IV only E. I, III, and V only F. I, III, IV, and V only

B. Payment of a dividend.

11. Which of the following transactions would not create a cash flow? A. The company purchased some of its own stock from a stockholder. B. Payment of a dividend. C. The company purchased land by issuing common stock. D. Sale of equipment at book value.

D. I, II, and IV only

12. According to the pecking-order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. A firm's capital structure is dictated by its need for external financing. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

B. Three.

12. Consider the following items: How many of the items listed above are generally long-term assets? A. Two. B. Three. C. Four. D. Five. Long-term assets include Land, Buildings, and Equipment.

D. Stock in the hands of stockholders.

12. Outstanding common stock is: A. Stock that is performing well on the New York Stock Exchange. B. Stock that has been authorized by the state for issue. C. Stock issued plus treasury stock. D. Stock in the hands of stockholders.

B. II and III only

12. The after-tax cost of debt generally increases when: I. a firm's bond rating increases. II. the market-required rate of interest for the company's bonds increases. III. tax rates decrease. IV. bond prices rise. A. I and III only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

B. based on historical cost.

12. The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value.

B. Purchase of land by issuing debt.

12. Which of the following is an example of a noncash activity? A. Sale of land for less than its cost. B. Purchase of land by issuing debt. C. Sale of land for more than its cost. D. Purchase of land using cash proceeds from issuance of common stock.

D. All of the other options are correct.

12. Which of the following is correct? A. Receivables turnover ratio depicts the company's frequency of cash collections. B. Inventory turnover ratio can be used to assess the company's frequency of selling inventory. C. Current ratio reflects the company's ability to pay current debt. D. All of the other options are correct.

A. II and III only

12. Which of the following should be included in the analysis of a new product? I. Money already spent for research and development of the new product II. Reduction in sales for a current product once the new product is introduced III. Increase in working capital needed to finance sales of the new product IV. Interest expense on the loan used to finance the new product launch A. II and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

C. I, II, and IV only

12. Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. III. Issue costs for debt are typically greater than issue costs for equity. IV. Private equity financing is a common source of financing for startup firms. A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the above.

D. 15.22% Rate of return = ((34.88 + 0.55) - 30.75)/30.75 = 15.22%

13. At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What rate of return did the common stock owners earn in fiscal year 2012? A. 1.79% B. 4.33% C. 13.43% D. 15.22% E. 17.76% F. None of the above.

A. reduces both taxes and net income.

13. Depreciation expense: A. reduces both taxes and net income. B. increases the net fixed assets as shown on the balance sheet. C. reduces both the net fixed assets and the costs of a firm. D. is a noncash item that increases net income. E. decreases current assets, net income, and operating cash flows.

B. Operating; Financing.

13. Dividends received from an investment is classified as a(an) __________ cash flow, and paying dividends on stock issued is classified as a(an) ____________ cash flow on the Statement of Cash Flows. A. Operating; Operating. B. Operating; Financing. C. Financing; Operating. D. Investing; Financing.

A. Outstanding plus treasury shares.

13. Issued stock refers to the number of shares: A. Outstanding plus treasury shares. B. Authorized. C. In the hand of stockholders. D. That may be issued under state law.

B. $1,380

13. Please refer to Oscar's financial statements. What was the increase in retained earnings of Oscar's during 2012? A. $450 B. $1,380 C. $1,830 D. $2,280 E. None of the above.

B. II and III only

13. Pro forma free cash flows for a proposed project should: I. exclude the cost of employing existing assets that could be sold anyway. II. exclude interest expense. III. include the depreciation tax shield related to the project. IV. exclude any required increase in operating current assets. A. I and II only B. II and III only C. II and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the above.

B. $28,000.

13. The following financial information is from Bronco Company. All debt is due within one year unless stated otherwise. What is the amount of current liabilities? A. $63,000. B. $28,000. C. $45,600. D. $22,000.

D. Current ratio.

13. Which of the following ratios is most useful in evaluating liquidity? A. Return on assets. B. Return on equity. C. Debt to equity ratio. D. Current ratio.

A. 1.79% Dividend yield = 0.55/30.75 = 1.79%

14. At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the dividend yield in fiscal year 2012? A. 1.79% B. 4.33% C. 13.43% D. 15.22% E. 17.76% F. None of the above.

B. 4.10% The correct approach is to use the YTM on the firm's bonds for the before-tax cost. Thus, after-tax cost = 6.3% (1 - .35) = 4.10%.

14. Estimate FM's after-tax cost of debt capital. A. 2.21% B. 4.10% C. 4.55% D. 6.30% E. 7.00% F. None of the above.

C. Operating.

14. The collection of cash from customers would be classified as which type of cash flow on the Statement of Cash Flows? A. Financing. B. Investing. C. Operating. D. Not reported on the statement of cash flows.

B. Common Stock account.

14. The par value of shares issued is normally recorded in the: A. Additional Paid-in Capital account. B. Common Stock account. C. Retained Earnings account. D. Treasury Stock account.

A. Debt to equity ratio.

14. Which of the following ratios is most useful in evaluating solvency? A. Debt to equity ratio. B. Current ratio. C. Receivables turnover ratio. D. Inventory turnover ratio.

B. I and III only

14. Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR is the discount rate at which an investment's NPV equals zero. II. An investment should be undertaken if the discount rate exceeds the IRR. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. The IRR is the best tool available for deciding between mutually exclusive investments. A. I and II only B. I and III only C. II and III only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

Percentage change in share price = (34.88- 30.75)/30.75 = 4.13/30.75 = 13.43%. C. 13.43%

15. At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2012? A. 1.79% B. 4.33% C. 13.43% D. 15.22% E. 17.76% F. None of the above

D. 88.5% Market value of equity = $40 * 240 million = $9,600 million. Weight of equity = 9,600/(9,600 + 1,250) = .8848 or 88.5%.

15. Estimate the appropriate weight of equity to be used when calculating FM's weighted average cost of capital. A. 11.5% B. 19.3% C. 80.7% D. 88.5% E. 100.0% F. None of the above.

B. $1,034 Proforma accounts receivable = $940 (1 + .10) = $1,034

15. Please refer to Oscar's financial statements. All of Oscar's costs and net working capital vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year? A. $949 B. $1,034 C. $1,113 D. $1,730 E. $2,670 F. None of the above.

Assets include Cash ($12,000), Supplies ($4,500), Prepaid Rent ($2,000), and Equipment ($65,000). D. $83,500

15. The following table contains financial information for Trumpeter Inc. before closing entries: What is the amount of Trumpeter's total assets? A. $81,500 B. $82,500 C. $68,500 D. $83,500

A. The legal capital per share of stock assigned when the corporation was first established.

15. The par value of common stock represents: A. The legal capital per share of stock assigned when the corporation was first established. B. The liquidation value of a share. C. The market value of a share of stock. D. The amount received when the stock was issued.

c. The use of budgets in controlling operations

15. What is budgetary control? a. Another name for a flexible budget b. The degree to which the CFO controls the budget c. The use of budgets in controlling operations d. The process of providing information on budget differences to lower level managers

B. A high receivables turnover ratio.

15. Which of the following is a sign that a company can quickly turn its receivables into cash? A. A low receivables turnover ratio. B. A high receivables turnover ratio. C. A high average collection period. D. Both a low receivables turnover ratio and a high average collection period.

B. Payment of cash for the purchase of land.

15. Which of the following is an example of a cash outflow from an investing activity? A. Payment of cash for treasury stock. B. Payment of cash for the purchase of land. C. Payment of cash for inventory. D. Payment on a long-term note payable.

r = A/P = $2.40/$50 = 4.80% A. 0.48 percent

15. You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize? A. 0.48 percent B. 2.40 percent C. 4.80 percent D. 5.10 percent E. 20.83 percent F. None of the above.

b. the comparison of actual results with planned objectives.

16. A major element in budgetary control is a. the preparation of long-term plans. b. the comparison of actual results with planned objectives. c. the valuation of inventories. d. approval of the budget by the stockholders.

A. 11.5% Market value of equity = $40 * 240 million = $9,600 million. Weight of debt = 1,250/(9,600 + 1,250) = .1152 or 11.5%.

16. Estimate the appropriate weight of debt to be used when calculating FM's weighted average cost of capital. A. 11.5% B. 19.3% C. 80.7% D. 88.5% E. 100.0% F. None of the above.

D. Dividends and distribution of assets if the corporation is dissolved.

16. Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to: A. Dividends and voting rights. B. Par value and dividends. C. The preemptive right and voting rights. D. Dividends and distribution of assets if the corporation is dissolved.

A. $5,000 Liabilities include Accounts Payable ($5,000).

16. The following table contains financial information for Trumpter's Inc. before closing entries: What is the amount of Trumpter's total liabilities? A. $5,000 B. $78,500 C. $68,500 D. $83,500

B. A low receivables turnover ratio.

16. Which of the following is a sign that a company cannot quickly turn its receivables into cash? A. A high receivables turnover ratio. B. A low receivables turnover ratio. C. A low average collection period. D. Both a high receivables turnover ratio and a low average collection period.

B. Sale of an intangible asset.

16. Which of the following is an example of a cash inflow from a financing activity? A. Issuance of bonds. B. Sale of an intangible asset. C. Receipt of cash dividends. D. Purchase of land.

E. I, II, and III only

16. Which of the following statements related to market efficiency tends to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for the typical investor to earn above-average returns without taking above-average risks. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely weak form efficient. A. I and III only B. II and IV only C. I and IV only D. I, III, and IV only E. I, II, and III only F. None of the above.

d. as frequently as needed.

17. Budget reports should be prepared a. daily. b. monthly. c. weekly. d. as frequently as needed.

C. 11.27%

17. Estimate FM's weighted-average cost of capital. A. 6.46% B. 6.58% C. 11.27% D. 11.32% E. 11.52% F. None of the above.

B. make the markets increasingly more efficient.

17. Individuals who continually monitor the financial markets seeking mispriced securities: A. earn excess profits over the long-term. B. make the markets increasingly more efficient. C. are never able to find a security that is temporarily mispriced. D. are overwhelmingly successful in earning abnormal profits. E. are always quite successful using only historical price information as their basis of evaluation. F. None of the above.

C. can have features of both liabilities and stockholders' equity.

17. Preferred stock: A. is always recorded as a liability. B. is always recorded as part of stockholders' equity. C. can have features of both liabilities and stockholders' equity. D. is not included in either liabilities or stockholders' equity.

C. $4.5 million

17. The ending Retained Earnings balance of Juan's Mexican Restaurant chain increased by $3.2 million from the beginning of the year. The company declared a dividend of $1.3 million during the year. What was the net income earned during the year? A. $1.9 million B. $3.2 million C. $4.5 million D. $1.3 million

A. A low inventory turnover ratio.

17. Which of the following is a negative sign that a company is not selling its inventory quickly? A. A low inventory turnover ratio. B. A high inventory turnover ratio. C. A low average days in inventory. D. Both a high inventory turnover ratio and a low average days in inventory.

B. Purchasing land; repaying a bank loan.

17. _________ is an investing cash flow and ________ is a financing cash flow, as reported on the Statement of Cash Flows. A. Issuing bonds; selling investments. B. Purchasing land; repaying a bank loan. C. Receiving cash from the sale of inventory; paying cash dividends. D. Purchasing treasury stock; lending cash to an employee.

E. II and III only

18. FM is contemplating an average-risk investment costing $100 million and promising an annual after-tax cash flow of $15 million in perpetuity. Which of the following statements is/are correct? I. FM should reject the project because the IRR is greater than the firm's WACC. II. FM should accept the project because the IRR is greater than the firm's WACC. III. FM should accept the project because the NPV is greater than zero. IV. FM should reject the project because the NPV is less than zero. A. I only B. II only C. IV only D. I and IV only E. II and III only F. None of the above.

A. Increase of $11,000.

18. Frosty Inc. has the following balances on December 31 prior to closing entries: Based upon the balances above, what net adjustment would be made to Retained Earnings due to closing entries? A. Increase of $11,000. B. Increase of $13,000. C. Increase of $12,000. D. Increase of $14,000. Revenues ($35,000) - Expenses ($23,000) - Dividends ($1,000).

Stock price per share = $5 million/500,000 shares = $10 per share C. $10

18. JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share? A. $3.50 B. $5 C. $10 D. $25 E. $50 F. None of the above.

d. all of these.

18. On the basis of the budget reports, a. management analyzes differences between actual and planned results. b. management may take corrective action. c. management may modify the future plans. d. all of these.

B. Investing cash inflows of $12,000.

18. Shively Mfg. Co. sold land costing $10,000 for $12,000. Shively would report: A. Operating cash inflows of $12,000. B. Investing cash inflows of $12,000. C. Financing cash inflows of $12,000. D. Financing cash inflows of $2,000.

E. None of the above.

18. The gross margin for 2012 is: A. -94% B. 13% C. 26% D. 31% E. None of the above.

C. I, III, and IV only

18. The interest tax shield has no value when a firm has: I. no taxable income. II. debt-equity ratio of 1. III. zero debt. IV. no leverage. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, and IV only F. None of the above.

C. III only

18. When making a capital budgeting decision, which of the following is/are NOT relevant? I. The size of a cash flow. II. The risk of a cash flow. III. The accounting earnings from a cash flow. IV. The timing of a cash flow. A. I only B. II only C. III only D. II and III only E. III and IV only F. They are all relevant.

E. III and IV only

18. Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? I. Insiders knew the information prior to the announcement II. Investors need time to digest the information prior to reacting III. The information has no bearing on the value of the firm IV. The information was anticipated A. I and II only B. I and III only C. II and III only D. II and IV only E. III and IV only F. None of the above.

C. Bonds.

18. Which of the following financing alternatives has the highest preference of payment in a case where the company liquidates its assets? A. Common Stock. B. Preferred Stock. C. Bonds. D. They have equal preference.

D. Both a high inventory turnover ratio and a low average days in inventory.

18. Which of the following is a positive sign that a company is selling its inventory quickly? A. A low inventory turnover ratio. B. A high inventory turnover ratio. C. A low average days in inventory. D. Both a high inventory turnover ratio and a low average days in inventory.

C. A post-closing trial balance.

19. A list of all accounts and their balances after posting closing entries is referred to as: A. A trial balance. B. An adjusted trial balance. C. A post-closing trial balance. D. An accounting trial balance.

C. Financing

19. Cash received from issuing common stock would be classified in which section of the Statement of Cash Flows? A. Operating B. Investing C. Financing D. Not shown

Book value per share = $1,750,000/500,000 shares = $3.50 per share A. $3.50

19. JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share? A. $3.50 B. $5 C. $10 D. $25 E. $50 F. None of the above.

B. Current assets divided by current liabilities.

19. The current ratio is calculated as: A. Current assets divided by noncurrent assets. B. Current assets divided by current liabilities. C. Current liabilities divided by noncurrent liabilities. D. Current liabilities divided by current assets.

A. -94%

19. The profit margin for 2012 is: A. -94% B. -57% C. 13% D. 31% E. None of the above.

d. control overhead costs.

19. The purpose of the departmental overhead cost report is to a. control indirect labor costs. b. control selling expense. c. determine the efficient use of materials. d. control overhead costs.

D. They all are potential features of preferred stock.

19. Which of the following is not a potential feature of preferred stock? A. Convertible. B. Redeemable. C. Cumulative. D. They all are potential features of preferred stock.

D. I and IV only

19. Which of the following statements are correct? I. Using the same risk-adjusted discount rate to discount all future cash flows adjusts for the fact that the more distant cash flows are often more risky than cash flows occurring sooner. II. If you can borrow all of the money you need for a project at 5%, the cost of capital for this project is 5%. III. The best way to obtain the cost of debt capital for a firm is to use the coupon rates on its bonds. IV. The cost of capital, or WACC, is not the correct discount rate to use for all projects undertaken by a firm. A. I and III only B. II and IV only C. I and II only D. I and IV only E. I, II, and III only F. None of the above

A. November.

2. A customer purchased a drill press on November 14 on account from Sears. The drill press was delivered two weeks later. The customer paid for the drill press on December 5. When should Sears record the revenue for this transaction according to the revenue recognition principle? A. November. B. December. C. Evenly in each of the two months. D. One-third in November and two-thirds in December.

D. $6.38 billion The value of the bid to Ginormous's shareholders is the value of the assets acquired in the merger. This would include the value of the equity acquired and the liabilities that accompany the equity. Therefore, the cost of the acquisition was ($60 x 82 million shares) + $1.46 billion = 6.38 billion.

2. Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil? A. $1.46 billion B. $3.46 billion C. $4.92 billion D. $6.38 billion E. $8.38 billion F. None of the above.

C. maximizes expected cash flows.

2. The best financing choice is the one that: A. sets the debt-to-assets ratio equal to 1. B. trades off the tax disadvantage of debt against the signaling effects of equity. C. maximizes expected cash flows. D. ignores the false comfort of financial flexibility. E. results in the lowest possible financial distress costs.

B. Investing activity.

2. The purchase of land is classified in the statement of cash flows as a(n): A. Operating activity. B. Investing activity. C. Financing activity. D. Noncash activity.

A. $169,000

2. To estimate Missed Places, Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? A. $169,000 B. $170,400 C. $181,400 D. $506,300 E. $518,700 F. None of the above.

E. spreading an investment across many diverse assets will eliminate some of the total risk.

2. When investment returns are less than perfectly positively correlated, the resulting diversification effect means that: A. making an investment in two or three large stocks will eliminate all of the unsystematic risk. B. making an investment in three companies all within the same industry will greatly reduce the systematic risk. C. spreading an investment across five diverse companies will not lower the total risk. D. spreading an investment across many diverse assets will eliminate all of the systematic risk. E. spreading an investment across many diverse assets will eliminate some of the total risk. F. None of the above.

C. Sales.

2. When using vertical analysis, we express income statement accounts as a percentage of: A. Net income. B. Gross profit. C. Sales. D. Total assets.

D. I & IV only

2. Which of the following figures of merit might not use all possible cash flows in its calculations? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Accounting rate of return A. III only B. I & III only C. II & III only D. I & IV only E. III & IV only F. I, II, III, and IV

D. bonds

2. Which of the following securities has a purely fixed claim against a firm's cash flows? A. preferred stock B. options C. common stock D. bonds E. None of the above.

C. Initial public offering (IPO).

2. Which of the following stages of equity financing comes last in the traditional order of progression? A. Investment by friends and family of the founders. B. Investment by the founders of the business. C. Initial public offering (IPO). D. Outside

B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

2. Which of the following statements concerning a firm's cash flows and profits is false? A. Managers must be at least as concerned with cash flows as with profits. B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production. C. The cash flows generated in a given time period can differ from the profits reported. D. Profits are no assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

E. I, II, III, and IV

2. Which of these ratios are the determinants of a firm's sustainable growth rate? I. Assets-to-equity ratio II. Profit margin III. Retention ratio IV. Asset turnover ratio A. I and III only B. II and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV F. None of the above.

C. I, II, and IV only

2. Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover A. I and IV only B. II and IV only C. I, II, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

A. Current ratio.

20. The acid-test ratio is most similar to the: A. Current ratio. B. Debt to equity ratio. C. Times interest earned ratio. D. Inventory turnover ratio.

B. are based on the market value of the firm's debt and equity securities.

20. The capital structure weights used in computing the weighted average cost of capital: A. are based on the book values of total debt and total equity. B. are based on the market value of the firm's debt and equity securities. C. are computed using the book value of the long-term debt and the book value of equity. D. remain constant over time unless the firm issues new securities. E. are restricted to the firm's debt and common stock. F. None of the above.

c. determine whether sales goals are being met.

20. The purpose of the sales budget report is to a. control selling expenses. b. determine whether income objectives are being met. c. determine whether sales goals are being met. d. control sales commissions.

A. Common Stock.

20. Which of the following has the highest expected return to the investor? A. Common Stock. B. Preferred Stock. C. Bonds. D. They all have similar expected returns.

C. Cash, net receivables, and current investments divided by current liabilities.

21. The acid-test ratio is: A. The liquidity ratio divided by the equity ratio. B. Current assets minus inventory divided by current liabilities minus accounts payable. C. Cash, net receivables, and current investments divided by current liabilities. D. Cash divided by accounts payable.

d. appears on periodic budget reports.

21. The comparison of differences between actual and planned results a. is done by the external auditors. b. appears on the company's external financial statements. c. is usually done orally in departmental meetings. d. appears on periodic budget reports.

E. the risks associated with the use of the funds required by the project.

21. The discount rate assigned to an individual project should be based on: A. the firm's weighted average cost of capital. B. the actual sources of funding used for the project. C. an average of the firm's overall cost of capital for the past five years. D. the current risk level of the overall firm. E. the risks associated with the use of the funds required by the project. F. None of the above.

D. Additional Paid-in Capital is increased.

21. When treasury stock is resold at a price above cost: A. A gain account is credited. B. A loss is reported. C. A revenue account is credited. D. Additional Paid-in Capital is increased.

B. rate of return a firm must earn on its existing assets to maintain the current value of its stock.

22. The weighted average cost of capital for a firm is the: A. discount rate which the firm should apply to all of the projects it undertakes. B. rate of return a firm must earn on its existing assets to maintain the current value of its stock. C. coupon rate the firm should expect to pay on its next bond issue. D. minimum discount rate the firm should require on any new project. E. rate of return shareholders should expect to earn on their investment in this firm. F. None of the above.

b. variance.

22. When budgeted and actual results are not the same amount, there is a budget a. error. b. variance. c. anomaly. d. by-product.

A. Additional Paid-in Capital is decreased.

22. When treasury stock is resold at a price below cost: A. Additional Paid-in Capital is decreased. B. Additional Paid-in Capital is increased. C. A gain is reported on the income statement. D. A loss is reported on the income statement.

C. The current ratio.

22. Which of the following is not a solvency ratio? A. Time interest earned ratio. B. The debt to equity ratio. C. The current ratio. D. All of the other options are solvency ratios.

b. is an aid to management.

29. A budget a. is a substitute for management. b. is an aid to management. c. can operate or enforce itself. d. is the responsibility of the accounting department.

A. That there is no effect on total stockholders' equity.

29. A feature common to both stock splits and stock dividends is A. That there is no effect on total stockholders' equity. B. A reduction in the contributed capital of a corporation. C. A transfer to earned capital of a corporation. D. An increase in total liabilities of a corporation

b. his or her ability to control costs.

29. A manager of a cost center is evaluated mainly on a. the profit that the center generates. b. his or her ability to control costs. c. the amount of investment it takes to support the cost center. d. the amount of revenue that can be generated.

A. 73 days. receivables turnover=1900000/(40,000+36,000)/2=5.00 365/5.00=73

29. Stealth Company's 2013 average collection period is: A. 73 days. B. 104 days. C. 109 days. D. 128 days.

C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.

3. Homemade leverage is: A. the incurrence of debt by a corporation in order to pay dividends to shareholders. B. the exclusive use of debt to fund a corporate expansion project. C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. D. best defined as an increase in a firm's debt-equity ratio. E. the term used to describe the capital structure of a levered firm. F. None of the above.

C. Corporation.

3. In terms of total sales, assets, and earnings, the dominant form of business organization is the: A. Sole proprietorship. B. Partnership. C. Corporation. D. Limited liability company (LLC).

A. asset turnover and control

3. Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. A. asset turnover and control B. financial leverage C. coverage D. profitability E. None of the above.

C. Financing activity.

3. The issuance of notes payable for borrowing is classified in the statement of cash flows as: A. Operating activity. B. Investing activity. C. Financing activity. D. Noncash activity.

D. percent-of-sales method.

3. The most common approach to developing proforma financial statements is called the: A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach. F. None of the above.

B. the percentage of net income available to the firm to fund future growth.

3. The retention ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the asset turnover ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales. F. None of the above.

A. can be effectively eliminated by portfolio diversification.

3. Unsystematic risk: A. can be effectively eliminated by portfolio diversification. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. is related to the overall economy. F. None of the above.

B. Total average assets.

3. When using vertical analysis, we express balance sheet accounts as a percentage of: A. Sales. B. Total average assets. C. Total liabilities. D. Total stockholders' equity.

B. Revenue recognition

3. Which accounting principle states that a company should "record revenues when they are earned"? A. Matching B. Revenue recognition C. Conservatism D. Materiality

E. I & IV only

3. Which of the following figures of merit does not directly take into consideration the time value of money? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Accounting rate of return A. IV only B. I & III only C. II & III only D. I & II only E. I & IV only F. I, II, III, and IV

C. common stock

3. Which of the following securities has a purely residual claim against a firm's cash flows? A. preferred stock B. callable bonds C. common stock D. non-callable bonds E. None of the above.

C. balance sheet

3. Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets? A. income statement B. creditor's statement C. balance sheet D. cash flow statement E. sources and uses statement

b. a responsibility center that incurs costs and generates revenues.

30. A profit center is a. a responsibility center that always reports a profit. b. a responsibility center that incurs costs and generates revenues. c. evaluated by the rate of return earned on the investment allocated to the center. d. referred to as a loss center when operations do not meet the company's objectives.

b. expressing the budget in financial terms.

30. Finance & Accounting generally has the responsibility for a. setting company goals. b. expressing the budget in financial terms. c. enforcing the budget. d. administration of the budget.

A. 3.62 times.

30. Stealth Company's 2013 inventory turnover is: A. 3.62 times. B. 3.96 times. C. 4.07 times. D. 6.03 times.

A. Lower the trading price of the stock per share.

30. Stock splits are issued primarily to: A. Lower the trading price of the stock per share. B. Increase the number of authorized shares. C. Increase legal capital. D. Increase the number of outstanding shares.

a. Planning

31. Budgeting is usually most closely associated with which management function? a. Planning b. Directing c. Motivating d. Controlling

C. 100.8 days.

31. Stealth Company's 2013 average days in inventory is: A. 60.5 days. B. 92.2 days. C. 100.8 days. D. 89.7 days.

C. The number of common shares issued x the stock's par value per share.

31. The Common Stock account on a company's balance sheet is measured as: A. The number of common shares outstanding x the stock's par value per share. B. The number of common shares outstanding x the stock's current market value per share. C. The number of common shares issued x the stock's par value per share. D. The number of common shares issued x the stock's current market value per share.

c. amount of controllable margin generated by the profit center.

31. The best measure of the performance of the manager of a profit center is the a. rate of return on investment. b. success in meeting budgeted goals for controllable costs. c. amount of controllable margin generated by the profit center. d. amount of contribution margin generated by the profit center.

B. The stockholders' equity section shows balances at a point in time, whereas the statement of stockholders' equity shows activity over a period of time.

32. How does the stockholders' equity section in the balance sheet differ from the statement of stockholders' equity? A. The stockholders' equity section is more detailed than the statement of stockholders' equity. B. The stockholders' equity section shows balances at a point in time, whereas the statement of stockholders' equity shows activity over a period of time. C. The stockholders' equity section shows activity over a period of time, whereas the statement of stockholders' equity is at a point time. D. There are no differences between them.

d. is considered a non-operating asset.

32. In computing ROI, land held for future use a. will hurt the performance measurement of an investment center's manager. b. is important in evaluating the performance of a profit center manager. c. is included in the calculation of operating assets. d. is considered a non-operating asset.

Assets = Liabilities + Stockholders' Equity. $425,000 = Liabilities + $240,000. So, Liabilities = $185,000. Debt to equity ratio = $185,000/$240,000 = 77.1%. A. 77.1%.

32. Stealth Company's 2013 debt to equity ratio is: A. 77.1%. B. 80.0%. C. 40.0%. D. 60.0%.

d. Guarantee of accomplishing the profit objective

32. Which of the following items does not follow from the adoption of a budget? a. Promote efficiency b. Deterrent to waste c. Basis for performance evaluation d. Guarantee of accomplishing the profit objective

A. Net income divided by average stockholders' equity.

33. Return on equity is calculated as: A. Net income divided by average stockholders' equity. B. Net income divided by ending stockholders' equity. C. Net income divided by average market value of equity. D. Net income divided by ending market value of equity.

d. They are used in performance evaluation.

33. Which is true of budgets? a. They are voted on and approved by stockholders. b. They are used in the planning, but not in the control, process. c. There is a standard form and structure for budgets. d. They are used in performance evaluation.

d. It provides a guarantee for favorable results.

33. Which of the following would not be considered an aspect of budgetary control? a. It assists in the determination of differences between actual and planned results. b. It provides feedback value needed by management to see whether actual operations are on course. c. It assists management in controlling operations. d. It provides a guarantee for favorable results.

b. past performance.

34. A common starting point in the budgeting process is a. expected future net income. b. past performance. c. to motivate the sales force. d. a clean slate, with no expectations.

B. is useful in comparing earnings performance for the same company over time.

34. Earnings per share (EPS) A. is useful in comparing earnings performance across companies. B. is useful in comparing earnings performance for the same company over time. C. is useful in both comparing earnings performance across companies and in comparing earnings performance for the same company over time. D. is not useful in comparing earnings performance across companies or in comparing

$500,000/$2,000,000 = 25%. B. 25%.

34. Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The return on assets is: A. 200%. B. 25%. C. 50%. D. 12.5%.

c. An increase in sales

34. Which of the following will cause an increase in ROI? a. An increase in variable costs b. An increase in average operating assets c. An increase in sales d. An increase in controllable fixed costs

C. $0.50.

35. Financial information for Retro Designs includes the following selected data: What is the company's earnings per share? A. $0.60. B. $0.71. C. $0.50. D. $0.05. C. $0.50.

c. stockholders' approval of the budget.

35. If budgets are to be effective, all of the following must be present except a. acceptance at all levels of management. b. research and analysis in setting realistic goals. c. stockholders' approval of the budget. d. sound organizational structure.

$500,000/$4,000,000 = 12.5%. A. 12.5%.

35. Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is: A. 12.5%. B. 25%. C. 50%. D. 8 times.

A. 20.0. $10 $0.50* = 20.0. *Earnings per share = ($145 - $25) 240 = $0.50.

36. Financial information for Retro Designs includes the following selected data: What is the company's price-earnings ratio? A. 20.0. B. 15.0. C. 6.9. D. 0.05. *Earnings per share = ($145 - $25) 240 = $0.50.

c. an organizational structure with clearly defined lines of authority and responsibility.

36. If budgets are to be effective, there must be a. a history of successful operations. b. independent verification of budget goals. c. an organizational structure with clearly defined lines of authority and responsibility. d. excess plant capacity.

$4,000,000/$2,000,000 = 2 times. C. 2 times.

36. Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The asset turnover is: A. 0.25 times. B. 0.5 times. C. 2 times. D. 8 times.

d. all of these.

37. It is important that budgets be accepted by a. division managers. b. department heads. c. supervisors. d. all of these.

$100,000/$1,000,000 = 10%. A. 10%.

37. Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The return on assets is: A. 10%. B. 20%. C. 50%. D. 5 times.

A. tends to be higher for growth stocks.

37. The PE ratio: A. tends to be higher for growth stocks. B. tends to be higher for value stocks. C. indicates how a stock is trading in relation to cumulative earnings over the life of the company. D. typically is less than 1.

$100,000/$500,000 = 20%.

38. Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The profit margin is: A. 10%. B. 20%. C. 50%. D. 5 times.

d. Budgets have a greater chance of acceptance if all levels of management have provided input into the budgeting process.

38. Which of the following statements about budget acceptance in an organization is true? a. The most widely accepted budget by the organization is the one prepared by top management. b. The most widely accepted budget by the organization is the one prepared by the department heads. c. Budgets are hardly ever accepted by anyone except top management. d. Budgets have a greater chance of acceptance if all levels of management have provided input into the budgeting process.

a. has been developed in a top down fashion.

39. An unrealistic budget is more likely to result when it a. has been developed in a top down fashion. b. has been developed in a bottom up fashion. c. has been developed by all levels of management. d. is developed with performance appraisal usages in mind.

$500,000/$1,000,000 = 0.5 times. B. 0.5 times.

39. Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The asset turnover is: A. 0.1 times. B. 0.5 times. C. 2 times. D. 5 times.

D. To participate in the day-to-day operations.

4. Common stockholders usually have all of the following rights except: A. To receive dividends when declared. B. To share in the distribution of assets. C. To elect board of directors. D. To participate in the day-to-day operations.

D. 12.20% KE = gov't borrowing rate + equity beta * market risk premium = .044 + 1.2(.065) = 0.122

Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011, appear below. 13. Estimate FM's after-tax cost of equity capital. A. 4.50% B. 6.92% C. 7.93% D. 12.20% E. 17.48% F. None of the above.

C. 2.76

Selected financial data for Link, Inc. follows: ($ in thousands) 12. The current ratio at the end of 2012 is: A. 10.21 B. 2.31 C. 2.76 D. 10.30 E. None of the above.

D. 324 $324 = $364 - $40

Selected information about South, Inc., a restaurant chain, follows. 14. During 2011, how much cash (in $ millions) did South collect from sales? A. 364 B. 277 C. 404 D. 324 E. 451 F. None of the above. In 2011, sales were $364 million, but account receivable rose $40 million, indicating that the company only received $324 million in cash.

D. $5,500.

Unearned Revenue ($6,000), Accounts Payable ($15,000), and Interest Payable ($7,000) are normally current liabilities. 14. The following table contains financial information for Trumpeter Inc. before closing entries: What is Trumpeter's net income? A. $3,500. B. $2,500. C. $5,000. D. $5,500.

Cash ($10,500), Accounts Receivable ($9,500), and Supplies ($40,000) are normally current assets. B. $60,000.

What is the amount of current assets, assuming the accounts above reflect normal activity? A. $20,000. B. $60,000. C. $140,000. D. $175,000.

A. 10.39 percent Re = 0.028 + 1.34 (0.112 - 0.028) = 0.14056; Rp = (0.07 $100)/$53 = 0.13208 Market values of: debt = 80,000*$1,000 = $80.00M; preferred = 750,000*$53 = $39.75M; and common = 2.5M * $42 = $105.00M. These sum to $224.75M. Thus, the WACC = ($105M/$224.75M) (0.14056) + ($39.75M/$224.75M) (0.13208) + ($80M/$224.75M) (0.0675) (1 - 0.38) = 10.39 percent.

23. Blue Diamond Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital? A. 10.39 percent B. 10.64 percent C. 11.18 percent D. 11.30 percent E. 11.56 percent F. None of the above.

C. Treasury Stock.

23. The corporation's own stock that has been issued and then repurchased by the company is referred to as: A. Preferred Stock. B. Authorized Stock. C. Treasury Stock. D. Common Stock.

c. the materiality of the difference.

23. Top management's reaction to a difference between budgeted and actual sales often depends on a. whether the difference is favorable or unfavorable. b. whether management anticipated the difference. c. the materiality of the difference. d. the personality of the top managers.

A. Its debt to equity ratio decreases.

23. When a company pays a bill from a plumber for previous services on account: A. Its debt to equity ratio decreases. B. Its acid-test ratio always remains unchanged. C. Its current ratio always remains unchanged. D. All of the other options are correct.

B. No change to the current ratio.

24. Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio? A. Increase the current ratio. B. No change to the current ratio. C. Decrease the current ratio. D. Could either increase or decrease the current ratio.

A. 12.46 percent KE = gov't borrowing rate + equity beta*market risk premium = 0.035 + 1.12(0.08) = 0.1246 or 12.46 percent

24. Honest Abe's is a chain of furniture retail stores. Integral Designs is a furniture maker and a supplier to Honest Abe's. Honest Abe's has a beta of 1.38 as compared to Integral Designs' beta of 1.12. Both firms carry no debt, i.e., are 100% equity-financed. The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should Honest Abe's use if it considers a project that involves the manufacturing of furniture? A. 12.46 percent B. 12.92 percent C. 13.50 percent D. 14.08 percent E. 14.54 percent F. None of the above.

d. fixed.

24. If costs are not responsive to changes in activity level, then these costs can be best described as a. mixed. b. flexible. c. variable. d. fixed.

B. Increases stockholders' equity.

24. When treasury stock is resold at a gain, the difference between its cost and the cash received when resold: A. Increases net income. B. Increases stockholders' equity. C. Has no effect on net income or stockholders' equity. D. Increases net income but decreases stockholders' equity.

b. projects budget data for various levels of activity.

25. A flexible budget a. is prepared when management cannot agree on objectives for the company. b. projects budget data for various levels of activity. c. is only useful in controlling fixed costs. d. cannot be used for evaluation purposes because budgeted data are adjusted to reflect actual results.

A. Net income less dividends since the company first started.

25. Retained Earnings represent a company's: A. Net income less dividends since the company first started. B. Undistributed net assets. C. Extra paid-in capital. D. Undistributed cash.

$505/$320 = 1.58. B. 1.58.

25. The current ratio is: A. 1.98. B. 1.58. C. 1.17. D. 0.66.

D. Stock splits.

26. The Retained Earnings balance reported on the balance sheet typically is not affected by: A. Net income. B. Net loss. C. Dividends paid. D. Stock splits.

$430/$330 = 1.30. D. 1.30.

26. The debt to equity ratio is: A. 0.33. B. 0.77. C. 1.17. D. 1.30.

c. all costs.

26. Top management can control a. only controllable costs. b. only noncontrollable costs. c. all costs. d. some noncontrollable costs and all controllable costs.

B. 1.13. $540/$480 = 1.13.

27. HHF's debt to equity ratio is: A. 0.75. B. 1.13. C. 0.38. D. 1.80.

B. total earnings less payments to owners over the life of the company.

27. The balance of Retained Earning at the end of the year represents: A. current year's profits less payments to owners. B. total earnings less payments to owners over the life of the company. C. total contributions from owners less withdrawals over the life of the company. D. total earnings over the life of the company.

c. cost center.

27. The maintenance department of a manufacturing company is a(n) a. segment. b. profit center. c. cost center. d. investment center.

a. only incurs costs and does not directly generate revenues.

28. A cost center a. only incurs costs and does not directly generate revenues. b. incurs costs and generates revenues. c. is a responsibility center of a company which incurs losses. d. is a responsibility center which generates profits and evaluates the investment cost of earning the profit.

D. increases stockholders' equity.

28. Retained Earnings: A. has a normal debit balance. B. decreases stockholders' equity. C. is equal to the balance in cash. D. increases stockholders' equity.

receivables turnover=1900000/(40,000+36,000)/2 C. 5.00.

28. Stealth Company's 2013 receivables turnover ratio is: A. 2.85. B. 4.70. C. 5.00. D. 10.63.

b. They help communicate goals and provide a basis for evaluation.

28. Why are budgets useful in the planning process? a. They provide management with information about the company's past performance. b. They help communicate goals and provide a basis for evaluation. c. They guarantee the company will be profitable if it meets its objectives. d. They enable the budget committee to earn their paycheck.