Accounting Final Exam

Free Cash Flow Calculation Formula

Cash flows from operations - Dividends - Capital Expenditures

What is free cash flow?

Is the excess cash a company generates beyond what it needs to invest in a productive capacity and pay dividends to stockholders.

What is a bank reconciliation?

Is the process of reconciling the differences between the cash balance on a bank statement and the cash balance in a company's records.

Cash dividend

a cash distribution of earnings by a corporation to its shareholders

Double Declining Balance Method

a method of depreciation that provides periodic depreciation expense based on the declining book value of a fixed asset over its estimated life.

Select the type of business that is most likely to obtain large amounts of resources by issuing stock. a.) Corporation b.) Sole proprietorship c.) Partnership d.) None are correct.

a.) Corporation

One of the main disadvantages of the corporate form is the: a.) Double taxation of dividends. b.) Obligatory issuing of stock. c.) Professional management. d.) Charter.

a.) Double taxation of dividends.

The depreciation method that does NOT use salvage value in calculating the first year's depreciation expense is: a.) Double-declining-balance method b.) Units-of-activity method c.) Straight-line method d.) Straight-line method and units-of-activity method

a.) Double-declining-balance method

A DISADVANTAGE of the corporate form of business entity is: a.) The ease of transfer of ownership. b.) Mutual agency for stockholders. c.) That corporations are subject to more governmental regulations. d.) Unlimited liability for stockholders.

c.) That corporations are subject to more governmental regulations.

A petty cash custodian should always: a.) Sign the checks for items paid from the petty cash fund. b.) Record petty cash expenditures in the company's accounting records. c.) Prepare the bank reconciliation for the petty cash account. d.) Maintain supporting documentation for any payment made from the petty cash fund.

d.) Maintain supporting documentation for any payment made from the petty cash fund.

Cash Equivalents include: a.) Equity investments. b.) Certificates of deposit. c.) Treasury bills. d.) Money market accounts and commercial paper.

d.) Money market accounts and commercial paper.

Straight Line Method

depreciation spreads depreciation expense evenly over each year of the asset's useful life.

Treasury stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use. Record using cost or par value method.

Units-of-activity method

A depreciation method in which useful life is expressed in terms of the total units of production or use expected from the asset.

Franchise

A business established or operated under an authorization to sell or distribute a company's goods or services in a particular area

Trademark

A brand that has exclusive legal protection for both its brand name and its design

What are the limitation of internal control?

Human element (internal controls are often based on human judgement and actions) and Cost-benefit analysis (cost of implementing a control activity versus the benefit that the control provides)

What is a deposit in transit?

Is a deposit that has been made by the company but does not appear on the bank statement because it had not cleared the bank as of the statement date.

Preferred stock

Is a form of capital stock that receives one or more priorities over common stock.

What is petty cash?

Is an amount of cash kept on hand to pay for minor expenditures.

What are the characteristics of the corporate form of business?

Separate Legal Entity, Ability to Raise Capital, Limited Liability of Owners, Transferability of Ownership, Double Taxation, Regulation

Which of the following is NOT a characteristic of a corporation? a.) A corporation's resources are limited to their individual stockholder's resources. b.) Ownership is divided into shares of stock. c.) Corporations experience an ease in obtaining large amounts of resources by issuing stock. d.) Corporations are organized as a separate legal taxable entity.

a.) A corporation's resources are limited to their individual stockholder's resources.

A company should choose a depreciation method that: a.) Best allocates the original cost of the asset to the periods benefited by the use of the asset. b.) Shows the highest amount of net income. c.) Generates the most conservative estimate of the depreciation expense for the period. d.) Saves the most taxes by generating the highest amount of expense and decreasing the net income.

a.) Best allocates the original cost of the asset to the periods benefited by the use of the asset.

Which of the following would NEVER be considered a cash equivalent? a.) Common stock issued by a corporation. b.) Corporate commercial paper. c.) U.S. Treasury bills d.) Money market funds.

a.) Common stock issued by a corporation.

Which inventory cost flow method assigns the cost of the most recent items purchased to ending inventory? a.) FIFO b.) LIFO c.) Specific identification d.) Weighted average

a.) FIFO

Treasury shares represent the: a.) Number of previously issued shares that have been repurchased by the corporation. b.) Maximum number of shares that can be sold by the corporation. c.) Number of shares that are currently held by stockholders. d.) Number of shares that the corporation has sold.

a.) Number of previously issued shares that have been repurchased by the corporation.

Which of the following is NOT considered to be a cash equivalent? a.) Treasury bills with an original maturity of six months. b.) Corporate commercial paper due in 60 days after purchase. c.) A certificate deposit with a term of 75 days when acquired. d.) A money market account with a stock brokerage film.

a.) Treasury bills with an original maturity of six months.

In recording the cost of merchandise sold for cash, based on data available from perpetual inventory records, the journal entry is: a.) debit Cost of Merchandise Sold; credit Merchandise Inventory b.) debit Merchandise Inventory; credit Cost of Merchandise Sold c.) debit Accounts Receivable; credit Sales d.) debit Cost of Merchandise Sold: credit Sales

a.) debit Cost of Merchandise Sold; credit Merchandise Inventory

On the balance sheet, the cumulative amount of depreciation expense recognized to date on a fixed asset is called: a.) Accumulated amortization b.) Accumulated deprecation c.) Depreciation expense d.) Amortization expense

b.) Accumulated depreciation

Which of the following is NOT characteristic of a corporation? a.) The financial loss that a stockholder may suffer from owning stock in a public company is limited. b.) Cash dividends paid by a corporation are deductible as expenses by the corporation. c.) A corporation can own property in its name. d.) Corporations are required to file federal income tax returns.

b.) Cash dividends paid by a corporation are deductible as expenses by the corporation.

Authorized shares represent the: a.) Number of previously issued shares that have been repurchased by the corporation. b.) Maximum number of shares that a company can legally issue. c.) Number of shares that the corporation has sold. d.) Number of shares that are currently held by stockholders.

b.) Maximum number of shares that a company can legally issue.

Outstanding shares represent the: a.) Number of shares that the corporation sold. b.) Number of shares that are currently held by stockholders. c.) Number of previously issued shares that have been repurchased by the corporation. d.) Maximum number of shares that can be sold by the corporation.

b.) Number of shares that are currently held by stockholders.

Characteristic of a corporation include: a.) Direct management by the shareholders (owners). b.) Shareholders who have limited liability. c.) Its inability to own property. d.) Shareholders who are mutual agents.

b.) Shareholders who have limited liability.

Which inventory cost flow method assigns the average unit cost to all units whether sold or left in ending inventory? a.) FIFO b.) Weighted average c.) LIFO d.) Specific identification

b.) Weighted average

Which of the following is INCORRECT for establishing and maintaining a petty cash fund? a.) The company must obtain the cash needed for the fund and record and entry for the establishment of the fund. b.) When the petty cash fund needs to be replenished, an entry is recorded to recognize an increase in the petty cash account. c.) When appropriate documentation is presented, cash payments are made from the fund; the petty cash custodian retains the documentation. d.) A check is prepared for a small, fixed amount; when the check is cashed, the money is entrusted to a petty cash custodian.

b.) When the petty cash fund needs to be replenished, an entry is recorded to recognize an increase in the petty cash account.

Which of the following statements best describes the term "outstanding checks" from a company's point of view? a.) A check written by a customer to the company, but it has not yet been presented to the bank for payment. b.) A check written by the company and presented to the bank for payment. c.) A check written by the company but not yet presented to the bank for payment. d.) A check written by a customer to the company, and the check has been presented to the bank for payment.

c.) A check written by the company but not yet presented to the bank for payment.

Par values represents the: a.) Amount for which any treasury shares have been acquired by the corporation. b.) Current market price of the stock. c.) Arbitrary amount that establishes a minimum price for stock when it is first issued. d.) Amount for which treasury shares may be reissued.

c.) Arbitrary amount that establishes a minimum price for stock when it is first issued.

When is a liability for cash dividends created? a.) At the date of payment. b.) At the date of record. c.) At the date of declaration. d.) At the end of each fiscal year.

c.) At the date of declaration.

While preparing a bank reconciliation, which of the following items would be subtracted from the balance per the company records? a.) Deposits in transit b.) Outstanding checks c.) Bank service charges d.) Interest earned on the bank account

c.) Bank service charges

Which inventory costing method results in the highest inventory balance during a period of rising purchase prices? a.) LIFO b.) Both FIFO and LIFO result in the same inventory balance c.) FIFO d.) Weighted average cost

c.) FIFO

All of the following are reasons that a corporation may purchase treasury stock except: a.) To buy out the ownership of stockholders. b.) To increase the reported amount of earnings per share. c.) If it desires to make an investment in its own stock and is reported as an asset. d.) If it needs the stock for its employee stock bonus program.

c.) If it desires to make an investment in its own stock and is reported as an asset.

Land is NOT depreciated because: a.) Its revenue generating potential is limited by wear and tear. b.) It has useful life that is limited to the period of time a company is in business. c.) It will provide future benefits for the company for an unlimited period of time. d.)It appreciates in value.

c.) It will provide future benefits for the company for an unlimited period of time.

Which inventory cost flow method assigns the cost of the most recent items purchased to cost of goods sold? a.) Specific identification b.) Weighted average c.) LIFO d.) FIFO

c.) LIFO

After a corporation declares a cash dividend, what takes place on the date of record? a.) Liabilities decrease. b.) Cash decreases. c.) No entry is necessary. d.) Equity decreases.

c.) No entry is necessary.

While preparing a bank reconciliation, which of the following items would be subtracted from the balance per the bank statement? a.) Bank service Charges b.) Interest earned on the bank account c.) Outstanding checks d.) Deposits in transit

c.) Outstanding checks

If the depreciation method is known, which of the following sets of factors is needed to calculate depreciation on plant and equipment? a.) The estimated salvage value of the asset, its replacement cost, and its market value. b.) The asset's historical cost, replacement cost, and its estimated salvage value. c.) The useful life of the asset, its historical cost, and its estimated salvage value. d.) The asset's replacement cost, its estimated life, and its estimated salvage value

c.) The useful life of the asset, its historical cost, and its estimated salvage value.

Which of the following should be included in the acquisition cost of a piece of equipment? a.) Installation costs b.) Testing costs prior to placing the equipment into production c.) Transportation costs d.) All of these

d.) All of these

The amount of inventory expensed during the year is reported on the income statement as: a.) Administrative expenses b.) Sales revenue c.) Operating Expenses d.) Cost of goods sold

d.) Cost of goods sold

Issued shares represent the: a.) Maximum number of shares that can be sold by the corporation. b.) Number of shares that are currently held by stockholders. c.) Number of previously issued shares that have been repurchased by the corporation. d.) Number of shares that the corporation has distributed to owners to date.

d.) Number of shares that the corporation has distributed to owners to date.

Plant assets are depreciated because: a.) Cash basis of accounting requires depreciation. b.) The book values equal market values. c.) The replacement cost of plant assets may fluctuate over time. d.) The accrual basis of accounting requires matching of costs to revenues.

d.) The accrual basis of accounting requires matching of costs to revenues.

Depreciation is a process by which: a.) The difference between market value and historical cost of plant and equipment is recorded. b.) Replacement funds are accumulated for plant and equipment. c.) The decline in market value of plant and equipment is determined and recorded. d.) The cost of plant and equipment is allocated to expense over its useful life.

d.) The cost of plant and equipment is allocated to expense over its useful life.

How are cash equivalents reported or disclosed in the financial statements? a.) They are only reported on the statement of cash flows. b.) They are included with short-term investments as a current asset on the balance sheet. c.) They are only disclosed in the notes to the financial statements. d.) They are included with cash a current asset on the balance sheet.

d.) They are included with cash a current asset on the balance sheet.

Copyright

the exclusive legal right, given to an originator or an assignee to print, publish, perform, film, or record literary, artistic, or musical material, and to authorize others to do the same.

Patent

when an owner has the right to exclude others from making, using, selling, and importing an invention for a limited period of time, usually twenty years