Series 65 Unit 9

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) relocation of wholly owned subsidiary B) a change in top management C) a change in external CPA firm engaged to perform the annual audit D) acquisition of a major asset

A. The Form 8-K is used to report significant events that could affect the price of the company's stock, this is not one of them.

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

C. Operating income is found on income statement and is neither an asset nor liability.

Which of the following would appear as assets on a corporation's balance sheet? Prepaid expenses Deferred tax credits Notes payable Notes receivable A) I, II, and IV B) II and III C) I and IV D) I and III

C. receivables are assets payables are liabilities, defered tax credit is a liability

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? Tax rate Cash dividend Interest charged on bank loans A) I and II B) II only C) I only D) I and III

D. 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.

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 A) the annual report B) the balance sheet C) the investor's brochure D) the Form 10-K

A.

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

A.

The owners' equity portion of a corporation's balance sheet would contain all of the following except A) net income. B) preferred stock. C) Treasury stock. D) paid-in capital.

A. Hence the word income, this is found on the income statement not the balance sheet!

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? Working capital is increased. Working capital is reduced. Net worth is increased. Net worth is reduced. A) II and III B) II and IV C) I and IV D) I and III

A. 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.

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. A) II and III B) I and II C) I and III D) I, II, and III

B. 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.

When viewing a corporation's balance sheet, you would expect to see all of the following included in owner's equity except A) retained earnings. B) preferred stock. C) cash. D) paid-in capital.

C.

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) the net change in the cash position of the firm for the reporting period B) reported as a separate line item on the balance sheet C) reported as cash income on the income statement D) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles

A. 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.

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) Qualified opinion B) Unqualified opinion C) Adverse opinion D) Disclaimer of opinion

B. 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.

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

D. Cash flow from operations is computed by adding the year's depreciation deduction to the net income.

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 sale of XYZ Lathe Manufacturing bonds B) The purchase of a new building to store inventory C) The purchase of a new computer-driven lathe D) Payment of cash dividends

D. All the other choices are investing activities.

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

D. 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.

Which items change when a company pays a cash dividend? Working capital Total assets Total liabilities Shareholders' equity A) II, III, and IV B) I and IV C) I, II, and III D) II and III

D. When a dividend is paid, total assets, specifically cash, are decreased as are total liabilities. The current 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. Because assets and liabilitiies are changed by an identical amount, there is no change to shareholders' equity (net worth).