Finance Test #5

Pension funds and mutual funds regularly invest in debt and stock securities to A) general earnings B) meet strategic goals. C) control the company in which they invest. D) house excess cash until needed.

A) general earnings

The acquisition of land by issuing common stock is a. a non-cash transaction which is not reported in the body of a statement of cash flows b. a cash transaction and would be reported in the body of a statement of cash flows. c. a non-cash transaction and would be reported in the body of a statement of cash flows. d. only reported if the statement of cash flows is prepared using the direct method.

A. a non-cash transaction which is not reported in the body of a statement of cash flows

Which of the following would not be considered a motive for making a stock investment in another corporation? A. appreciation in the market value of the stock investment. B. use of the investment for expanding its own operations C. use of the investment to diversify its own operations D. an increase in the amount of interest revenue from the stock investment

A. appreciation in the market value of the stock investment.

An unrealized gain or loss on trading securities is reported as a separate component of stockholder's equity True or False

False

Available for sale securities bought and held primarily for sale in the near term to generate income on short term price differences. True or False

False

For available for sale securities, the unrealized gain or loss account is carried forward to future periods. True or False

True

If an investor owns a between 20% and 50% of an investees common stock, it is presumed that the investor has significant influence on the investee. True or False

True

One of the reasons a corporation may purchase investments is that it has excess cash. True or False

True

The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement. True or False

True

To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle. True or False

True

Under the cost method, the investment is recorded at cost and revenue is recognized only when cash dividends are received. True or False

True

Investing activities include a. Collecting cash on loans made. b. Obtaining cash from creditors c. Obtaining capital from owners

a. Collecting cash on loans made.

Generally, the most important category on the statement of cash flows is from a. Operating activities b. Investing activities c. Financing activities d. Significant noncash activities

a. Operating activities

The order of presentation of activities on statement of cash flows is a. Operating, investing, and financing b. Operating, financing, and investing c. Financing, operating, and investing d. Financing, investing, and operating

a. Operating, investing, and financing

The statement of cash flows will not provide insight into a. Why dividends were not increased b. Whether cash flow is greater than net income. c. The exact proceeds of a future bond issue. d. How the retirement of debt was accomplished.

a. Why dividends were not increased

Free cash flow equals cash provided by a.operations less capital expenditures and cash dividends. b.operations less cash dividends. c.investing activities less capital expenditures and cash dividends. d.operations less capital expenditures

a. operations less Capital Expenditures and Cash Dividends

Each of the following would be reported under operating activities except cash receipts a. From sales of goods b. From sales of investments c. Of interest on loans d. Of dividends from investments

b. From sales of investments

The statement of cash flows a. Is a prepared instead of an income b. Is used to assess an entity's ability to pay dividends and meet obligations

b. Is used to assess an entity's ability to pay dividends and meet obligations

If 10% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is a. The equity method b. The cost method c. The preparation of consolidated financial statements. d. Determined by agreement with whomever owns the remaining 90% of the stock.

b. The cost method

At the time of acquisition of a debt investment a. No journal entry is required b. The cost principle applies c. The stock investments account is debited when bonds are purchased

b. The cost principle applies

In addition to the three basic financial statements, which of the following is also a required financial statement? a. The cash budget b. The statement of cash flows c. The statement of cash inflows and outflows d. The cash reconciliation

b. The statement of cash flows

If a short-term debt investment is sold, the Investment account is a.credited for the book value of the bonds at the sale date. b.credited for the cost of the bonds at the sale date. c.credited for the fair value of the bonds at the sale date. d.debited for the cost of the bonds at the sale date.

b. credited for the cost of the bonds at the sale date.

If the cost method is used to account for a long-term investment in commonstock, dividends received should be a.credited to the Stock Investments account. b.credited to the Dividend Revenue account. c.debited to the Stock Investments account. d.recorded only when 20% or more of the stock is owned.

b. credited to the Dividend Revenue account.

When a company holds stock of several different corporations the group of securities is identified as a(n) a. Affiliated investment b. Consolidates portfolio c. Investment portfolio d. Controlling interest

c. Investment portfolio

Financing activities involve a. Lending money b. Acquiring investments c. Issuing debt d. Acquiring long lived assets

c. Issuing debt

Under the equity method of accounting for long term investments in common stock when a dividend is received from the investee company a. The dividend revenue account is credited b. The stock investment account is increased c. The stock investments account is decreased d. No entry necessary

c. The stock investments account is decreased

If an investor owns less than 20% of the common stock of another corporation as a long-term investment, a. the equity method of accounting for the investment should be employed. b. no dividends can be expected. c. it is presumed that the investor has relatively little influence on the investee. d. it is presumed that the investor has significant influence on the investee

c. it is presumed that the investor has relatively little influence on the investee.

Cash equivalents do not include a. Short term corporate notes b. Treasury bills c. Money market funds d. 2year certificates of deposit

d. 2year certificates of deposit

Which of the following is not a true statement regarding short-term debt investments? a. The securities usually pay interest. b. Investments are frequently government or corporate bonds. c. This type of investment must be currently traded in the securities market. d. Debt investments are recorded at the price paid less brokerage fees

d. Debt investments are recorded at the price paid less brokerage fees

Land acquired from the issuance of common stock is reported a. As a financing activity b. As an investing activity c. As an operating activity d. In a separate schedule at the bottom of the statement.

d. In a separate schedule at the bottom of the statement.

Which of the following transactions would not be classified as a financing activity? a. Purchase of treasury stock b. Payment of dividends c. Issuance of bonds at a discount d. Purchase of a long-term investment in bonds

d. Purchase of a long-term investment in bonds

Financing activities involve a. lending money to other entities and collecting on those loans. b. cash receipts from sales of goods and services. c. acquiring and disposing of productive long-lived assets. d. long-term liability and owners' equity items

d. long-term liability and owners' equity items