Series 66 Unit 7 Checkpoint Exam - Financial Statements

All of the following appear on a corporations balance sheet as fixed assets except A) inventory B) furniture C) computer equipment D) real estate

A) Inventory Inventory is considered a current asset, not a fixed asset, because the company expects to convert its inventory into cash within a short period. The other choices are fixed assets and cannot be liquidated easily.

When a company recognizes a sale only when payment is made, it is using which form of accounting? A) cash B) audited C) accrual D) double entry

A) Cash Cash and accrual are the two major forms of accounting. In the cash method, sales and expenses are recognized when the money changes hands. With accrual accounting, it is the date of the transaction that is used.

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

B) issuing convertible debentures Issuing a debt security, such as a debenture, will bring in cash (an asset) but will be offset by an equal amount: the debt. Therefore, the net worth will remain the same. Issuing any equity security, preferred or common, increases the owners' equity (net worth), while being able to pay off a debt at a discount means that the current asset (cash) went down less than the long-term liability (the bond) resulting in an increase to net worth.

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

D) Assets = liabilities + stockholders' equity The stockholders' equity, sometimes referred to as net worth, equals the difference between the company's assets and its liabilities (assets − liabilities = stockholders' equity). This formula is often restated as assets = liabilities + stockholders' equity.

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

D) discover any pending legal action against the company Footnotes to the financial statements are used to convey "off-book" information such as pending lawsuits.

If a client has 100 shares of XYZ publicly traded stock and it undergoes a split, afterward, the client will have A) a proportionately increased 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 decreased interest in XYZ company

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

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

C) has significant long-term debt When describing a corporation's capital structure, leverage refers to the amount of long-term debt capital. Highly leveraged means the debt capital is generally more than 50% of the total capital and increases rather than decreases the default risk. Employee stock options and preferred stock dividends have nothing to do with leverage.