Unit 7
All of the following appear on a corporation's balance sheet as fixed assets except A) inventory. B) real estate. C) furniture. D) computer equipment.
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.
If, during a given year, a company has net income of $1 million and pays out dividends of $800,000, its retained earnings will A) decrease by $200,000. B) increase by $200,000. C) increase by $1 million. D) decrease by $1 million.
B) increase by $200,000. Retained earnings represent the net income a company has retained and not paid out in dividends. If a company has net income of $1 million and pays out only $800,000 in dividends, its retained earnings will increase by $200,000.
A term used to describe the results of subtracting a corporation's liabilities from its assets is A) retained earnings. B) owners' equity. C) net income. D) operating income.
B) owners' equity. There are several terms used on the exam to express the results of the balance sheet formula. In most cases, it will be shown as assets minus liabilities equals net worth. Net worth can also be expressed as owners' equity or shareholders' equity. Income has nothing to do with assets and liabilities, and retained earnings is a component of owners' equity.
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 = stockholders' equity − liabilities C) Assets = liabilities + stockholders' equity D) Assets + liabilities = net worth
C) 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.
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
C) 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.
An analyst reviewing a company's financial statements would examine the footnotes to A) compute the net worth B) determine the average age of the receivables C) discover any pending legal action against the company D) identify the authors of quoted information
C) discover any pending legal action against the company Footnotes to the financial statements are used to convey "off-book" information such as pending lawsuits.
Which of the following statements about balance sheets are true? I. Balance sheets provide a snapshot of a company's financial position on a given date. II. Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity. III. Balance sheets provide a record of a company's earnings over a given period. A) I, II, and III B) II and III C) I and III D) I and II
D) I and II 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.
All of the following corporate actions would have the effect of increasing the firm's net worth except A) issuing convertible debentures. B) purchasing some of the corporation's outstanding bonds at a discount. C) issuing common stock. D) issuing convertible preferred stock.
A) 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.
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) $3 million B) $9 million C) $10 million D) $7 million
B) $9 million The ending retained earnings = beginning retained earnings + net income - dividend. That means $7 million + $3 million - $1 million = $9 million.
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 issued employee stock options. B) has significant long-term debt. C) has very little default risk. D) is in arrears on its cumulative preferred stock dividends.
B) 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.
On a balance sheet, dividends payable would fall under the category of A) stockholders' equity. B) fixed liabilities. C) assets. D) current liabilities.
D) 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.
When a company recognizes a sale only when payment is made, it is using which form of accounting? A) Cash B) Double entry C) Audited D) Accrual
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.
What is the term given to the item, typically found at the bottom of a corporation's balance sheet, that describes such things as significant accounting policies, commitments made by the company, and potential liabilities and potential losses? A) Footnotes B) Contingency statement C) Offline items D) Resource material
A) Footnotes Footnotes to the balance sheet, describing unusual items, are typically found at the bottom of the statement.
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 + stockholders' equity C) Assets = liabilities − net worth D) Assets = stockholders' equity − liabilities
B) 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.
Issuance of which of the following would most likely increase the leverage in a company's capital structure? A) Preferred stock B) Warrants C) Bonds D) Common stock
C) 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.
If a client has 100 shares of XYZ publicly traded stock and it undergoes a split, afterward, the client will have A) a greater role in the daily management of the company. B) no effective change in the value of the ownership share. C) a proportionately decreased interest in XYZ company. D) a proportionately increased 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.
