Deck 2: Review of Accounting

Question 1

Accumulated amortization shows up in the income statement.

Answer 1

False

Question 2

Amortization is an accounting entry and does not involve a cash expense.

Answer 2

True

Question 3

The income statement measures the increase in the assets of a firm over a period of time.

Answer 3

False

Question 4

Shareholders' equity is equal to assets minus liabilities.

Question 5

The change in accumulated amortization should always be equal to the amortization expense charged in the income statement.

Question 6

Book value per share and market value per share are usually the same dollar amount.

Question 7

The income statement is the major device for measuring the profitability of a firm over a period of time.

Question 8

Book value is equal to net worth.

Question 9

Book value per share is of greater concern to the financial manager than market value per share.

Question 10

Asset accounts are listed in order of their liquidity.

Question 11

An advantage of the net working capital approach over the cash approach is that it looks at the changes of every account of the statement of cash flows.

Question 12

Net working capital is the difference between current assets and current liabilities.

Question 13

Equity is a measure of the monetary contributions that have been made directly or indirectly on behalf of the shareholders of the company.

Question 14

Shareholders' equity is equal to liabilities plus assets.

Question 15

Cash flow is equal to earnings before taxes minus amortization.

Question 16

The corporate tax rate is 25% on the first $200,000 of income and 50% on any amount over $200,000.

Question 17

The statement of cash flows helps measure how the changes in a balance sheet are financed between two time periods.

Question 18

Accounting income is based on verifiably completed transactions.

Question 19

Shareholders' equity minus preferred stock is the same thing as what is sometimes called net worth or book value.

Question 20

An increase in an asset represents a source of funds.

Question 21

Preferred stock is excluded from shareholders' equity because it is a hybrid security and does not have full voting rights.

Question 22

An increase in accounts receivable represents a reduction in cash flows from operations.

Question 23

The investments account includes marketable securities.

Question 24

The purchase of a new factory would reduce the cash flows from investing activities.

Question 25

The net working capital approach to funds flow analysis looks at the difference between total assets and total liabilities.

Question 26

The sale of corporate bonds held by the firm as a long-term investment would increase cash flows from investing activities.

Question 27

Total assets of a firm are financed with liabilities and shareholders' equity.

Question 28

Preferred stock dividends are paid out before income taxes.

Question 29

The statement of cash flows includes the effects of dividends paid and amortization expense.

Question 30

Paying dividends to common shareholders will not affect cash flows from financing activities.

Question 31

Retained earnings shown on the balance sheet represents available cash on hand generated from prior year's earnings but not paid out in dividends.

Question 32

The investments account represents a commitment of funds of at least one year.

Question 33

Interest expense is deductible before taxes and therefore has an aftertax cost equal to the interest paid times (1 - tax rate).

Question 34

A $125,000 credit sale could be a part of a firm's cash flow from operations if paid off within a firm's fiscal year.

Question 35

The marginal corporate tax rate for incomes over $1,000,000 is 50%.

Question 36

Current cost accounting adjusts financial statements by using the consumer price index.

Question 37

It is not possible for a company with a high profit margin to have a low operating profit.

Question 38

An increase in a liability account represents a source of funds.

Question 39

An increase in accounts payable represents a reduction in cash flows from operations.

Question 40

Current cost accounting undervalues plant and equipment because it does not adjust for inflation.

Question 41

Marketable securities are temporary investments of excess cash and are carried at the lower of cost or market.

Question 42

The investments account does not directly affect cash and cash equivalents.

Question 43

Free cash flow is equal to cash flow from operating activities minus necessary capital expenditures and normal dividend payments.

Question 44

When a firm has a sharp drop off in earnings, its P/E ratio may be artificially high.

Question 45

Retained earnings represent the firm's cumulative earnings since inception, minus dividends and other adjustments.

Question 46

Sales less cost of goods sold is equal to gross profit.

Question 47

The P/E ratio is strongly related to the past performance of the firm.

Question 48

Amortization expense is charged in the income statement.

Question 49

The real value of a firm is the same in an economic and accounting sense.

Question 50

Sales less cost of goods sold is equal to earnings before taxes.

Question 51

The use of amortization is an attempt to allocate the past and future costs of an asset over its useful life.

Question 52

Cash flow consists of illiquid cash equivalents which are difficult to convert to cash within 90 days.

Question 53

A balance sheet represents the assets, liabilities, and shareholders' equity of a company at a given point in time.

Question 54

Taxes on individuals have traditionally been progressive, meaning that the more taxable income you have, the higher your marginal tax rate.

Question 55

The sale of a firm's securities is a source of funds, whereas the payment of dividends is a use of funds.

Question 56

An increase in a liability represents a source of funds.

Question 57

Balance sheet items are usually adjusted for inflation.

Question 58

Free cash flow is equal to cash flow from operating activities plus amortization.

Question 59

The P/E ratio provides no indication of investors' expectations about the future of a company.

Question 60

Operating profit is essentially a measure of how efficient management is in generating revenues and controlling expenses.

Question 61

Which of the following would not be classified as a current asset?

A) Marketable securities
B) Investments
C) Prepaid expenses
D) Inventory

Question 62

The residual income of the firm belongs to

A) creditors.
B) preferred shareholders.
C) common shareholders.
D) bondholders.

Question 63

Inflation has its major impact on balance sheets in which of the following areas?

A) Inventory and accounts payable
B) Plant and equipment and long-term debt
C) Plant and equipment and inventory
D) Interest expense and earnings per share

Question 64

An increase in inventory represents a source of funds.

Question 65

Which of the following is an inflow of cash?

A) funds spent in normal business operations
B) the purchase of a new factory
C) the sale of the firm's bonds
D) the retirement of the firm's bonds

Question 66

Which of the following is not one of the three basic financial statements required by Generally Accepted Accounting Principles (GAAP)?

A) Income Statement
B) Statement of Retained Earnings
C) Statement of Cash Flows
D) Balance Sheet

Question 67

Assuming a tax rate of 35%, amortization expenses of $400,000 will

A) reduce income by $140,000.
B) reduce taxes by $140,000.
C) reduce taxes by $400,000.
D) have no effect on income or taxes, since amortization is not a cash expense.

Question 68

A firm has $2,000,000 in its common stock account and $20,000,000 in its retained earnings account. The firm issued 500,000 shares of common stock. What are accumulated earnings per share?

A) $4 per share
B) $44 per share
C) $40 per share
D) $5 per share

Question 69

"Inventory profits" are most likely to occur in an inflationary economy under which of the following inventory cost assumptions?

A) Weighted average
B) LIFO
C) FIFO
D) Lower of cost or market

Question 70

Which of the following is an outflow of cash?

A) profitable operations
B) the sale of equipment
C) the sale of the company's common stock
D) the payment of cash dividends

Question 71

A firm with earnings per share of $5 and a price-earnings ratio of 15 will have a share price of

A) $20.00
B) $75.00
C) $3.00
D) the market assigns a stock price independent of EPS and the P/E ratio.

Question 72

The major limitation of financial statements is

A) in their complexity.
B) in their lack of comparability.
C) in their use of historical cost accounting.
D) in their lack of detail.

Question 73

Which account represents the cumulative earnings of the firm since its formation, minus dividends paid?

A) Share price
B) Common stock
C) Retained earnings
D) Accumulated amortization

Question 74

Amortization is a source of cash inflow because

A) it is a tax-deductible noncash expense.
B) it supplies cash for future asset purchases.
C) it is a tax-deductible cash expense.
D) it is a taxable expense.

Question 75

The best indication of the operational efficiency of management is

A) net income.
B) earnings per share.
C) earnings before interest and taxes (EBIT).
D) gross profit.

Question 76

Earnings per share is

A) operating profit divided by number of shares outstanding.
B) net income divided by number of shares outstanding.
C) net income divided by shareholders' equity.
D) net income minus preferred dividends divided by number of shares outstanding.

Question 77

The orientation of book value per share is __________, while the orientation of market value per share is ___________.

A) short term, long term
B) future, historical
C) historical, future
D) long term, short term

Question 78

A firm has $3,500,000 in its common stock account and $2,500,000 in its retained earnings account. The firm issued 100,000 shares of common stock. What was the original issue price if only one stock issue has ever been sold?

A) $35 per share
B) $25 per share
C) $60 per share
D) Not enough information to tell

Question 79

Which of the following is not a primary source of capital to the firm?

A) assets
B) common stock
C) preferred stock
D) bonds

Question 80

An item that may be converted to cash within one year or one operating cycle of the firm is classified as a

A) current liability.
B) long-term asset.
C) current asset.
D) long-term liability.