Series 65 Chapter 9: Financing

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is

the net change in the cash position of the firm for the reporting period

One of the components of a cash flow statement is cash flow from investing activities. Included would be

transactions and events involving the purchase and sale of land, buildings, and equipment.

Issuance of which of the following would most likely increase the leverage in a company's capital structure? A) Common stock B) Warrants C)Preferred stock D) Bonds

Bonds Leverage is the use of borrowed money. This is reflected in a company's debt-to-equity ratio. Of these choices, the only one that is borrowed money is the bonds.

If a client has 100 shares of XYZ publicly traded stock and it undergoes a split, afterward the client will have:

no effective change in the value of his ownership share When a stock splits, the number of shares each shareholder holds increases. However, the value of each share decreases proportionately. The client experiences no effective change in the value of his ownership share.

LMN Manufacturing Company, listed on the NYSE, is an SEC reporting company. Each of the following would require the filing of a Form 8-K EXCEPT

A)a change in top management B) a change in external CPA firm engaged to perform the annual audit C) relocation of wholly owned subsidiary D) acquisition of a major asset **The Form 8-K is used to report significant events that could affect the price of the company's stock. The SEC does not consider a relocation of a subsidiary to be of significant magnitude.

A fundamental analyst would be interested in funds available for use in the business. Doing which of the following would have the greatest impact on future cash flow?

Retiring outstanding bonds

Which of the following is NOT affected by the issuance of a bond?

Shareholders' equity When bonds are issued, cash is received (thus increasing current assets) and long-term debt increases (increasing total liabilities). Because there is no corresponding increase in current liabilities, working capital increases. There is no effect on shareholders' equity because the increased liability is offset by the asset (cash) received.

Due to changes in customer preferences, a manufacturing company has decided to discontinue the operations of one of its subsidiaries. An explanation of this decision would most likely be found in the company's

footnotes to the financial statements

Those investors wishing to examine a document that would probably give them the most information about an issuer's current and planned operations would seek out

the annual report

The owners' equity portion of a corporation's balance sheet would contain all of the following EXCEPT

A) paid-in capital B) treasury stock C) net income D) preferred stock

KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income?

Higher taxes mean less net income. Interest charged on loans is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings and have no effect on the net income the company reports.

Which of the following would appear as assets on a corporation's balance sheet?

Prepaid expenses Notes receivable

A fundamental analyst would be interested in funds available for use in the business. Doing which of the following would have the greatest impact on future cash flow?

The retirement of outstanding bonds means that there will be no future interest payments made. Because a major component of cash flow is a company's net income, this reduced expense would lead to increased income resulting in higher cash flow. U9LO2

Which items change when a company pays a cash dividend? A. Working capital B. Total assets C. Total liabilities D. Shareholders' equity

When a dividend is paid, total assets are decreased as are total liabilities. The liabilities were increased at declaration time and are now decreased to reflect the payout. The two accounts affected would be decrease cash and decrease dividend payable.

If a publicly traded corporation was going to sell a wholly-owned subsidiary, the information would be made available through the filing of a Form

8-K

Components of a company's net worth would include all of these EXCEPT A) goodwill B) fixed assets C) operating income D) inventory

C) Operating Income Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.

Current assets on a corporate balance sheet would include

Cash and Inventory Bish

When a member of the board of directors of a publicly traded company resigns due to a disagreement over an operational matter,

The Form 8-K is used to report significant events of importance to investors. Examples would be the resignation of a member of the board because of an operational dispute, liquidation of a significant asset, filing for bankruptcy, or change in management control. When any of these occur, the Form 8-K must be filed with the SEC no later than 4 business days after the event. The Form 10-K is the company's annual filing and that is due, depending on the size of the company, 60 to 90 days after the end of the fiscal year.

The issuance of a long-term debt instrument, such as a bond, by a company would have an immediate effect on which of the following balance sheet items? Total assets Total liabilities Working capital Shareholders' equity

Total assets, total liabilities and working capital

If a publicly traded corporation was going to sell a wholly-owned subsidiary, the information would be made available through the filing of a Form

8K

Which of the following acts requires publicly traded corporations to issue annual reports?

The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC.

Due to changes in market rates, a corporation is able to purchase some of its outstanding 20-year bonds at a discount. Which of the following is CORRECT? (multiple) Working capital is increased. Working capital is reduced. Net worth is increased. Net worth is reduced.

Working capital is reduced and Net worth is increased Even though the bonds are purchased for less than par value, working capital is reduced because the company is using a current asset—cash—to pay off a long-term liability. However, the fact that it is reducing its debt for less than the amount shown on the books will result in an increase to net worth.

If a corporation issues mortgage bonds, all of the following would be affected EXCEPT

shareholder's equity

A corporate executive decides that it is in the company's best interest to purchase a yacht. Over the years, the company has built up substantial retained earnings and will use accumulated funds to make the purchase. An analyst interested in how this purchase will affect the company's debt-to-asset ratio would examine

the balance sheet. Where do we find a company's assets, liabilities, and retained earnings? On the balance sheet.

Which items would change if a company declared a cash dividend? A) Working capital B) Total assets C) Total liabilities D) Shareholders' equity

A) Working Capital C) TOtal liabilities D) Shareholders equity The key word is "declared." Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid.

Which of the following statements about balance sheets are TRUE? Balance sheets provide a snapshot of a company's financial position on a given date. Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity. Balance sheets provide a record of a company's earnings over a given period.

Balance sheets provide a snapshot of a company's financial position on a given date. Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity. A balance sheet shows a company's assets, liabilities, and stockholders' equity on a specific date. The financial statement that reflects a company's operating activities and earnings over a period of time is the income statement.

A profitable company reports net income of $10 million. A cash dividend of $7 million is declared. From an accounting standpoint, the other $3 million will be credited to which balance sheet account?

Retained earnings are increased to the extent that company profits (net income) are undistributed—in essence, retained. Capital surplus comes from original investors purchasing stock at a price in excess of stated or par value. Working capital is not a balance sheet account; it is a computation. When the dividend is declared, it becomes a current liability (dividends payable), but this question is asking for the portion of the income that is not going to be paid out.

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is

the net change in the cash position of the firm for the reporting period The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows which is a separate financial statement.

When viewing a corporation's balance sheet, you would expect to see all of the following included in owner's equity EXCEPT --CASH

Owner's equity, sometimes referred to as stockholders' equity, is simply the net worth of a corporation. Net worth is the total assets minus the total liabilities. The primary components listed on a balance sheet under owner's equity are the (1) par value of the outstanding preferred stock; (2) par value of the outstanding common stock; (3) any excess paid in over the par value of the common stock at issuance, known as paid-in capital or paid-in surplus; (4) retained earnings (years ago referred to as earned surplus); and, (5), if the company has reacquired any of its common stock (treasury stock), the cost of that purchase is subtracted from retained earnings. Note, even though the treasury stock reduces the owner's equity, the question is asking for the items you would see on the balance sheet, and if it exists, it would appear in the owner's equity section as a deduction.