Series 65: Unit 7 Exam

In order to be in compliance with SEC reporting rules, a company will typically file a Form 10-Q how many times during its fiscal year? A. Three times B. One time C. Four times D. Two times

3 times

All of the following are considered to be components of cash flow except A. financing activities. B. operating activities. C. investing activities. D. banking activities.

Banking activities

When a company recognizes a sale only when payment is made, it is using which form of accounting? A. Double entry B. Audited C. Accrual D. Cash

Cash

When an analyst adds back the current year's depreciation to the net income, she is computing the company's A. cash flow from investments. B. earnings per share. C. cash flow from operations. D. net value of fixed assets.

Cash flow from operations

If a client has 100 shares of XYZ publicly traded stock and it undergoes a split, afterward the client will have A. a proportionately decreased interest in XYZ company. B. no effective change in the value of the ownership share. C. a greater role in the daily management of the company. D. a proportionately increased interest in XYZ company.

No effective change in the value of the ownership share

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

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.

A stock analyst viewing a corporation's income statement would not be able to determine the company's A. cash on hand. B. income. C. revenues. D. expenses.

Cash on hand The income statement reflects the firm's revenues (sales), expenses, and income. Assets, such as cash, are found on the balance sheet

Under SEC rules, Form 8-K must be filed A. within 4 business days of the event. B. within 15 business days of the event. C. within 10 business days of the event. D. promptly.

Within 4 business days of the event

An IAR is doing some research on a company. When viewing the corporation's financial statements, prepaid expenses would most likely be found as A. a fixed asset on the balance sheet. B. a current liability on the balance sheet. C. a current asset on the balance sheet. D. an expense on the income statement.

A current asset on the balance sheet Prepaid expenses, such as rent, insurance, and postage, are considered current assets and are shown as such, sometimes under the listing "other assets." The amounts paid for those expenses will not appear on the income statement until the specific item is actually used. For example, if a company pays its property insurance premiums six months in advance, it isn't until the next premium is paid that the prepaid expense comes off the balance sheet and is reflected as an actual expense.

Many businesses choose to use a date other than December 31 to close out their financial year for accounting purposes. When this is done, it is said that the entity is reporting on A. a calendar-year basis. B. a fiscal-year basis. C. a nontraditional basis. D. an alternative-year basis.

A fiscal-year basis Fiscal-year accounting uses a date other than December 31 as its year-end.

Publicly traded corporations are subject to an annual audit of their financial records. Those audits must comply with GAAP (generally accepted accounting principles). When preparing to recommend a stock to a customer, you would most likely want to see that the auditor gave A. a qualified opinion. B. a certified opinion. C. a comprehensive opinion. D. an unqualified opinion.

An unqualified opinion An unqualified, or clean, opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements.

What is the balance sheet equation? A. Assets = shareholders' equity − liabilities B. Assets = liabilities + shareholders' equity C. Assets = liabilities − shareholders' equity D. Assets = net worth

Assets = liabilities + shareholders' equity Total assets equal total liabilities plus total shareholders' equity.

An analyst comparing revenues with expenses is most likely analyzing A. cash flow. B. capitalization. C. liquidity. D. working capital.

Cash flow The analyst is most likely measuring the income statement for cash flow (money coming in against money going out). Working capital analysis would involve examining the balance sheet's current assets and current liability entries, not the income statement. Capitalization analysis involves examination of long-term debt and stock issues. Liquidity analysis involves examining current assets and liabilities from the balance sheet.

On a balance sheet, dividends payable would fall under the category of A. assets. B. stockholders' equity. C. fixed liabilities. D. current liabilities.

Current liabilities Dividends payable are dividends that have been declared but have not yet paid out. They are a type of current liability—that is, an obligation that will come due within one year from the date on the balance sheet.

An analyst wishing to check on the most recent financial performance of an SEC-registered issuer would probably examine the A. Schedule 13D. B. Form 8-K. C. Form 10-Q. D. Form 10-K.

Form 10-Q

A commentator on a cable news show mentions that the capital structure of the Lowveh Corporation is highly leveraged. This means that the company A. has very little default risk. B. has significant long-term debt. C. is in arrears on its cumulative preferred stock dividends. D. has issued employee stock options.

Has significant long-term debt

All of the following appear on a corporation's balance sheet as fixed assets except A. real estate. B. furniture. C. computer equipment. D. inventory.

Inventory

ABC Manufacturing Company is in the business of making high-quality machine tools. Which of the following would be included in ABC's cash flow from financing activities? A. The purchase of a new computer-driven lathe B. The sale of XYZ Lathe Manufacturing bonds C. The purchase of a new building to store inventory D. Payment of cash dividends

Payment of cash dividends All financing activities deal with the flow of cash to or from the business owners. Who do dividends go to? The company's shareholders, and that is why they are included in financing activities. The other choices are part of cash flow from investing activities. This is a perfect example of the need to read every word in the question and answer choices. Payment of cash dividends is a financing activity while receipt of cash dividends is considered an operating activity.

An analyst wishing to view a good consolidated indicator of a business's cash inflow and outflow would most likely ask to look at A. the statement of cash flows. B. the consolidated income statement. C. the working capital. D. the current ratio.

The statement of cash flows

An analyst is viewing financial statements of Diderot Clothing Stores (DCS), a chain of high-fashion women's apparel. DCS had $7 million as its beginning-of-year retained earnings and it made post-tax profits of $3 million. The board of directors decides to pay a dividend of $1 million. Once paid, what will be the ending retained earnings? A. $7 million B. $10 million C. $9 million D. $3 million

$9 million The ending retained earnings = beginning retained earnings + net income - dividend. That means $7 million + $3 million - $1 million = $9 million.

Under SEC regulations, publicly traded (reporting) companies are required to file all of the following except A. Form 10-Q. B. Form 8-K. C. Form 13F. D. Form 10-K.

Form 13F Form 13F is used by money managers who manage equity portfolios with at least $100 million in equity securities. The other choices are forms that are filed as appropriate with the SEC by companies whose securities are registered with the SEC.

Which items would change if a company declared a cash dividend? 1. Working capital 2. Total assets 3. Total liabilities 4. Shareholders' equity

Working capital, total liabilities, and 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.

Debts that will come due more than one year after the date on the balance sheet are known as A. current liabilities. B. fixed (or long-term) liabilities. C. deferred charges. D. accounts payable.

Fixed (or long-term) liabilities Debts that will come due more than one year after the date on the balance sheet are known as fixed (or long-term) liabilities. Current liabilities are debts that may come due within one year from the date on the balance sheet.

Which of the following would have the effect of increasing a company's cash flow? A. Reducing sales B. Extending credit to good customers C. Increasing inventory D. Issuance of a bond

Issuance of a bond One of the ways to increase cash flow is through financing. When a company issues a bond, it receives cash but does not have to pay the money back until maturity—a number of years in the future. Extending credit means waiting a longer period to receive the cash from sales. Increasing inventory means spending money for raw material and waiting for it to be sold. The company would want to increase sales to bring in more cash, not decrease them.

When cash flow of a business is negative, all of the following are true except A. the company will probably increase its dividend. B. the company might not be agile enough to respond to new opportunities. C. the company might have a hard time figuring out how to cover expenses it hasn't budgeted for. D. the company may struggle to pay its bills.

The company will probably increase its dividend The basic definition of negative cash flow is when a business does not have enough cash on hand to pay its immediate outstanding bills. It certainly would not be the time to increase its dividend. In fact, the dividend might be cut or even eliminated. Negative cash flow may also lead to the company being unable to take advantage of a business opportunity and meeting emergencies.

Which of the following equations correctly shows the relationship between the items on a company's balance sheet? A. Assets = liabilities − net worth B. Assets + liabilities = net worth C. Assets = liabilities + stockholders' equity D. Assets = stockholders' equity − liabilities

Assets = liabilities + stockholders' equity

Federal securities laws require publicly traded companies to disclose certain information on a regular basis. Which of these forms must be submitted quarterly? A. Form 10-K B. Form 10-Q C. Form 8-K D. Form PF

Form 10-Q Domestic companies must submit quarterly reports on Form 10-Q (Q for quarterly) and annual reports on Form 10-K. Form 8-K is used to report certain events, and Form PF is for private fund investment advisers.

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 A. the balance sheet. B. the seaworthiness of the ship. C. the statement of cash flows. D. the income statement.

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

If a corporation issues mortgage bonds, all of the following would be affected except A. working capital. B. total liabilities. C. total assets. D. shareholders' equity.

Shareholders' equity When issued, the corporation receives the net proceeds in cash, increasing current assets (and thus total assets). Simultaneously, the corporation's long-term liabilities increase, reflecting the debt (and thus total liabilities). Working capital increases because of the increase in current assets. Shareholders' equity, or net worth, is only affected by the sale of new equity securities or by any profit or loss generated by the corporation.

A corporation ends its accounting year on September 30. It would be correct to state that it uses A. a nine-month year. B. an accounting year. C. an alternative year. D. a fiscal year.

A fiscal year Fiscal-year accounting is the term used to describe whenever an entity ends its accounting year on a date other than December 31.

Which of the following best describe the balance sheet formula? 1. Assets minus liabilities equals net worth. 2. Sales minus expenses equals operating income. 3. Liabilities plus equity equals assets. 4. Dividends plus retained earnings equals net income.

Assets minus liabilities equals net worth & liabilities plus equity equals assets A balance sheet basically lists what is owned (assets) and what is owed (liabilities). The difference between these two is the net worth or equity. Sales, expenses, and dividends are all found on the income statement.

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? 1. Tax rate 2. Cash dividend 3. Interest charged on bank loans

Tax rate and interest charged on bank loans 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.

Current liabilities on a company's balance sheet would include A. mortgage payable. B. accounts payable. C. prepaid rent. D. accounts receivable.

Accounts payable Current liabilities are those that are expected to be paid within a normal operating cycle and would include accounts payable. A mortgage payable is a liability, but it is a long-term debt and would be included in fixed or long-term liabilities. Accounts receivable and prepaid expenses are current assets.

Current assets on a corporate balance sheet would include which of these? 1. Accounts payable 2. Accrued wages 3. Cash 4. Inventory

Cash and inventory Cash is the most obvious current asset. The general definition of current asset is one that is expected to be turned into cash within the year. One would certainly hope that to be true of inventory. Accounts payable and accrued wages are liabilities—obligations that must be paid on a current basis.

An analyst reviewing a company's financial statements would examine the footnotes to A. discover any pending legal action against the company. B. identify the authors of quoted information. C. compute the net worth. D. determine the average age of the receivables.

Discover any pending legal action against the company

All of the following corporate actions would have the effect of increasing the firm's net worth except A. purchasing some of the corporation's outstanding bonds at a discount. B. issuing common stock. C. issuing convertible debentures. D. issuing convertible preferred stock.

Issuing convertible debentures

What is the purpose of the Securities Exchange Act of 1934? A. It provides policies relating to unethical business practices. B. It provides requirements relating to new issues. C. It regulates the persons involved in the secondary market. D. It provides standards among the states.

It regulates the persons involved in the secondary market The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and securities firms that trade in the secondary market. The Securities Act of 1933 was designed to provide regulation in the new issue market. Unethical business practices are covered in NASAA's Statements of Policy on Unethical Business Practices. The Uniform Securities Act provides a model for the states.

Net income A. must be paid out in dividends. B. is paid out in cash to stockholders in addition to any declared dividends. C. reflects the operating profits of a firm only. D. represents the amount of money remaining after all expenses, including taxes.

Represents the amount of money remaining after all expenses, including taxes Net income is not a cash item that is paid out to stockholders. Dividends, both preferred and common, are generally cash distributions paid out from net income. Net income after taxes can reflect all sources of income in addition to the operating income generated by business activities. Net income also reflects investment income, as well as operating income. Net income may be paid out in the form of dividends; however, most firms retain a portion of net income in order to reinvest the funds in the business.

Those investors wishing to examine a document that would probably give them the most information about a corporation's current and planned operations would seek out A. Form 10-K. B. the balance sheet. C. the investor's brochure. D. the annual report.

The annual report The annual report to shareholders contains not only a complete financial report of the prior year's operations but also a statement from key personnel dealing with the company's future plans. Form 10-K does not include discussion of future business plans—it is a report of what happened over the previous fiscal year.

One of the best sources of financial information is found in the reports required to be filed with the SEC by publicly traded companies. The easiest way to access this information is by A. visiting the SEC's offices. B. making an appointment to meet with the company's CFO. C. using EDGAR. D. writing a letter to the company.

Using EDGAR EDGAR stands for Electronic Data Gathering, Analysis, and Retrieval. It is the easiest (and surely the fastest) way to obtain all of the financial information filed by reporting companies. It is available at SEC.gov.

Which of the following would appear as assets on a corporation's balance sheet? 1. Prepaid expenses 2. Deferred tax credits 3. Notes payable 4. Notes receivable

Prepaid expenses and notes receivable Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.

Which items change when a company pays a cash dividend? 1. Working capital 2. Total assets 3. Total liabilities 4. Shareholders' equity

Total assets and liabilities From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash—a current asset—is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).

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? A. Retiring outstanding bonds B. Depreciation on assets used in the business C. Amortizing goodwill D. Retaining earnings

Retiring outstanding bonds 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.

Balance sheets contain A. no reference to the accounting methods used to construct the balance sheet. B. the net worth of the firm at the end of the reporting period. C. gross revenues for the year. D. the amount of cash and cash equivalents expended during the first half of the fiscal year as opposed to the second half.

The net worth of the firm at the end of the reporting period The balance sheet provides a snapshot view of the financial condition of the firm at the end of the reporting period. It does not provide information on the flow of expenses, revenues, and cash during the reporting period. Gross revenues are reflected on the income statement, not on the balance sheet. The balance sheet provides a description of the assets, liabilities, and owner's equity at the end of the reporting period. References to accounting methods used are contained in the footnotes of the balance sheet.

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? 1. Total assets 2. Total liabilities 3. Working capital 4. Shareholders' equity

Total assets, total liabilities, and working capital The cash received from the sale of the bonds is a current asset of the company and, as such, would increase assets and working capital on the balance sheet. The bonds are debt of the company and would increase the liabilities of the company. Shareholders' equity is only affected by gains, losses, new invested capital, and the declaration of cash distributions (dividends) to shareholders.

SSS Corporation's total assets amount to $780,000, of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is SSS Corporation's shareholders' equity? A. $980,000 B. $170,000 C. $1,150,000 D. $410,000

$410,000 Total assets minus total liabilities equals shareholders' equity ($780,000 − $370,000 = $410,000).

Which of the following is not affected by the issuance of a bond? A. Working capital B. Total liabilities C. Assets D. Shareholders' equity

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.

When reviewing a corporation's financial statements, shareholders' equity is computed by A. subtracting total liabilities from total assets. B. adding together retained earnings, preferred and common stock, and long-term debts. C. multiplying the current market price per share times the number of outstanding shares. D. subtracting current liabilities from current assets.

Subtracting total liabilities from total assets Shareholders' equity is the corporation's net worth, sometimes called owners' equity. It is computed by subtracting the total liabilities from the total assets. Current assets minus current liabilities is the working capital. Taking all of the equity capital, including retained earnings, and adding the long-term debt to that is the company's total capitalization, and the market price per share times the number of outstanding shares is the company's market capitalization.

A fundamental analyst is reviewing a company's financial statements. When attempting to determine their debt exposure, all of the following would be included except A. accounts receivable. B. outstanding principal balance on long-term debt. C. taxes payable. D. accounts payable.

Accounts receivable Accounts receivable are assets; all the other listings represent liabilities of the company.

When a member of the board of directors of a publicly traded company resigns due to a disagreement over an operational matter, A. Form 10-K must be filed with the SEC within four business days of the event. B. FINRA must be notified promptly. C. the administrator must be notified no later than the close of the business day following the event. D. Form 8-K must be filed with the SEC within four business days of the event.

Form 8-K must be filed with the SEC within four business days of the event 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 a change in management control. When any of these occur, Form 8-K must be filed with the SEC no later than four business days after the event. 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.

An analyst who wants to examine a firm's financing transactions during the most recent period is most likely to evaluate the firm's statement of A. changes in equity. B. cash flows. C. comprehensive income. D. financial position.

Cash flows The statement of cash flows describes a firm's inflows and outflows of cash during a reporting period from operating, investing, and financing activities. Financing transactions such as issuance of debt or stock are shown on the statement of cash flows. The statement of financial position (balance sheet) presents the firm's assets, liabilities, and equity at a point in time. The statement of comprehensive income (income statement) does not directly reflect a firm's financing transactions. Cash raised is not included in a firm's revenues and dividends paid and debt principal repaid are not included in its expenses.

Publicly traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP? A. Adverse opinion B. Qualified opinion C. Unqualified opinion D. Disclaimer of opinion

Unqualified opinion An unqualified or "clean" opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements. An adverse opinion means the auditor is not willing to vouch for the accuracy of the information. Note: This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes A. contain information that doesn't have a place in the main body of the financial statements. B. serve as a bibliography indicating where additional information may be obtained. C. are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background. D. contain a detailed history of the enterprise and its products or services.

Contain information that doesn't have a place in the main body of the financial statements There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are method of accounting used, collateral securing debt, pension liabilities, and many others. Footnotes are an integral part of the financial statements and are usually found with this notation: "The accompanying footnotes to the financial statements are an integral part of these statements."