Deck 8: Financial Analysis: the Big Picture

Question 1

A company whose current liabilities exceed its current assets may have a liquidity problem.

Answer 1

True

Question 2

Notes payable are often used instead of accounts payable.

Answer 2

True

Question 3

A current liability must be paid out of current earnings.

Answer 3

False

Question 4

With an interest-bearing note the amount of cash received upon issuance of the note generally exceeds the note's face value.

Question 5

Most notes are not interest bearing.

Question 6

If any portion of a long-term debt is to be paid in the next year the entire debt should be classified as a current liability.

Question 7

A note payable must always be paid before an account payable.

Question 8

Current liabilities are expected to be paid within one year or the operating cycle whichever is longer.

Question 9

Notes payable usually require the borrower to pay interest.

Question 10

A $20000 8% 9-month note payable requires an interest payment of $1200 at maturity.

Question 11

When a business sells an item and collects a state sales tax on it a current liability arises.

Question 12

Interest expense is reported under Other Expenses and Losses in the income statement.

Question 13

Payroll taxes include the employer's share of Social Security taxes as well as state and federal unemployment taxes.

Question 14

Unearned revenues should be classified as Other Revenues and Gains on the income statement.

Question 15

If a retailer sells goods for a total price of $200 which includes a 5% sales tax the amount of the sales tax is $9.52.

Question 16

Interest expense on a note payable is only recorded at maturity.

Question 17

During the month a company sells goods for a total of $106000 which includes sales taxes of $6000; therefore the company should recognize $100000 in Sales Revenue and $6000 in Sales Tax Expense.

Question 18

Unearned revenues are received before goods are delivered or services are rendered.

Question 19

The higher the sales tax rate the more profit a retailer can earn.

Question 20

Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.

Question 21

The calculation of interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance.

Question 22

If bonds are issued at a premium the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

Question 23

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium.

Question 24

If a bond has a stated value of $1000 and a contractual interest rate of 6 percent then the interest paid annually will be $60.

Question 25

If the market rate of interest at the date of issuance of a bond is greater than the stated interest rate the bond will be issued at a premium.

Question 26

If bonds are issued at a discount the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Question 27

Metropolitan Symphony sells 200 season tickets for $40000 that includes a five-concert season.The amount of Unearned Ticket Revenue after the third concert is $24000.

Question 28

The face value is the amount of principal and interest due at the maturity date.

Question 29

If the market rate of interest is greater than the contractual rate of interest bonds will sell at a discount.

Question 30

If $180000 6% bonds are issued on January 1 and pay interest annually the amount of interest paid will be $10800.

Question 31

If a corporation issued bonds at an amount less than face value it indicates that the corporation has a weak credit rating.

Question 32

A $150000 bond with a quoted priced of 102 ¼ is sold for $153375.

Question 33

If bonds sell at a premium the interest expense recognized each year will be greater than the bond interest paid.

Question 34

If $150000 face value bonds are issued at 102 the proceeds received will be $102000.

Question 35

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments added to the premium.

Question 36

A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market rate of interest.

Question 37

The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued.

Question 38

A stockholder has the right to vote in the election of the board of directors.

Question 39

The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

Question 40

When no-par value stock does not have a stated value the entire proceeds from the issuance of the stock become legal capital.

Question 41

Treasury stock is reported as an asset on the balance sheet because treasury stock may later be resold.

Question 42

When preferred stock is cumulative preferred dividends not declared in a given period are called dividends in arrears.

Question 43

The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders' equity.

Question 44

The acquisition of treasury stock by a corporation increases total assets and total stockholders' equity.

Question 45

Treasury stock should not be classified as a current asset.

Question 46

The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

Question 47

Paid-in capital is the amount paid in to the corporation by stockholders in exchange for shares of ownership.

Question 48

Cash dividends are not a liability of the corporation until they are declared by the board of directors.

Question 49

When no-par common stock with a stated value is issued for cash the Common Stock account is increased for an amount equal to the cash proceeds.

Question 50

The recording of the purchase of treasury stock will cause total stockholders' equity to decrease by the amount of the cost of the treasury stock.

Question 51

Preferred stock has contractual preference over common stock in certain areas.

Question 52

Return on common stockholders' equity is computed by dividing net income by ending stockholders' equity.

Question 53

Treasury stock is a contra stockholders' equity account.

Question 54

For accounting purposes stated value is treated the same way as par value.

Question 55

The payout ratio is computed by dividing total cash dividends paid on common stock by retained earnings.

Question 56

The par value of common stock must always be equal to its market value on the date the stock is issued.

Question 57

Preferred stockholders generally do not have the right to vote for the board of directors.

Question 58

The issuance of common stock affects both paid-in capital and retained earnings.

Question 59

Dividends may be declared and paid in cash or stock.

Question 60

The number of common shares outstanding can never be greater than the number of shares issued.

Question 61

On October 1 Sam's Painting Service borrows $150000 from National Bank on a 3-month $150000 4% note.The payment of the note and accrued interest on January 1 by Sam's Painting Service includes a(n)

A)Decrease to Notes Payable and to Cash for $151500.
B)Decrease to Notes Payable for $150000 decrease to Interest Payable for $1500 and a decrease to Cash for $151500.
C)Decrease to Notes Payable for $150000 and a decrease to Interest Payable for $6000 and a decrease to Cash for $156000.
D)Decrease to Notes Payable for $150000 an increase to Interest Expense for $1500 and a decrease to Cash for $151500.

Question 62

A current liability is a debt that can reasonably be expected to be paid

A)within one year or the operating cycle whichever is longer.
B)between 6 months and 18 months.
C)out of currently recognized revenues.
D)out of cash currently on hand.

Question 63

Failure to record a liability will probably

A)result in an overstated net income.
B)result in overstated total liabilities and owner's equity.
C)have no effect on net income.
D)result in understated total assets.

Question 64

The interest charged on a $300000 note payable at the rate of 6% on a 90-day note would be

A)$18000.
B)$9000.
C)$4500.
D)$1500.

Question 65

On October 1 Sam's Painting Service borrows $150000 from National Bank on a 3-month $150000 4% note.Sam's Painting Service's adjustment on December 31 before financial statements are prepared includes a(n)

A)Decrease to Interest Payable and a decrease to Interest Expense for $1500.
B)Increase to Interest Expense and an increase to Interest Payable for $6000.
C)Increase to Interest Expense and an increase to Interest Payable for $1500.
D)Increase to Interest Expense and an increase to Notes Payable for $1500.

Question 66

Liabilities are classified as current or long-term based on their

A)description.
B)payment terms.
C)due date.
D)amount.

Question 67

Moss County Bank agrees to lend the Sadowski Brick Company $500000 on January 1.Sadowski Brick Company signs a $500000 6% 9-month note.The adjustment required if Sadowski Brick Company prepares financial statements on June 30 includes a(n)

A)Increase to Interest Expense and to Interest Payable for $15000.
B)Increase to Interest Expense and a decrease to Cash for $15000.
C)Decrease to Interest Payable and to Cash for $15000.
D)Decrease to Interest Payable and to Interest Expense for $15000.

Question 68

Liabilities are classified on the balance sheet as current or

A)deferred.
B)unearned.
C)long-term.
D)accrued.

Question 69

West County Bank agrees to lend Drake Builders Company $400000 on January 1.Drake Builders Company signs a $400000 6% 6-month note.The adjustment required if Drake Builders Company prepares financial statements on March 31 includes a(n)

A)Increase to Interest Expense and to Interest Payable for $12000.
B)Decrease to Interest Expense and to Cash for $12000.
C)Increase to Interest Expense and to Interest Payable for $6000.
D)Decrease to Interest Payable and to Interest Expense for $6000.

Question 70

West County Bank agrees to lend Drake Builders Company $400000 on January 1.Drake Builders Company signs a $400000 6% 6-month note.Recording the proceeds and issuance of the note by Drake Builders Company on January 1 includes a(n)

A)Increase to Interest Expense for $6000 increase to Cash for $194000 and an increase to Notes Payable for $400000.
B)Increase to Cash and to Notes Payable for $400000.
C)Increase to Cash for $400000 increase to Interest Expense for $12000 and an increase to Notes Payable for $412000.
D)Increase to Cash for $400000 increase to Interest Expense for $12000 increase to Notes Payable for $400000 and an increase to Interest Payable for $12000.

Question 71

Which of the following most likely would be classified as a current liability?

A)Dividends payable
B)Bonds payable in 5 years
C)Three-year notes payable
D)Mortgage payable as a single payment in 10 years

Question 72

With an interest-bearing note the amount of assets received upon issuance of the note is generally

A)equal to the note's face value.
B)greater than the note's face value.
C)less than the note's face value.
D)equal to the note's maturity value.

Question 73

West County Bank agrees to lend Drake Builders Company $400000 on January 1.Drake Builders Company signs a $400000 6% 6-month note.Recording the pay off of the note and interest at maturity assuming that interest has been accrued to June 30 includes a(n)

A)Decrease to Notes Payable and to Cash for $412000.
B)Decrease to Notes Payable for $400000 decrease to Interest Payable for $12000 and a decrease to Cash for $412000.
C)Increase to Interest Expense for $12000 decrease to Notes Payable for $400000 and a decrease to Cash for $412000.
D)Decrease to Interest Payable for $6000 decrease to Notes Payable for $400000 increase to Interest Expense for $6000 and a decrease to Cash for $412000.

Question 74

Very often failure to record a liability means failure to record a(n)

A)revenue.
B)asset conversion.
C)footnote.
D)expense.

Question 75

Current liabilities are due

A)but not receivable for more than one year.
B)but not payable for more than one year.
C)and receivable within one year.
D)and payable within one year.

Question 76

Which of the following is not a current liability on December 31 2021?

A)A Note Payable due December 31 2022
B)An Accounts Payable due January 31 2022
C)A lawsuit judgment to be decided on January 10 2022
D)Accrued salaries payable from 2021

Question 77

Most companies pay current liabilities

A)out of current assets.
B)by issuing interest-bearing notes payable.
C)by issuing stock.
D)by creating long-term liabilities.

Question 78

Moss County Bank agrees to lend the Sadowski Brick Company $500000 on January 1.Sadowski Brick Company signs a $500000 6% 9-month note.Recording the pay off of the note and interest at maturity assuming that interest has been accrued to September 30 includes a(n)

A)Decrease to Notes Payable and to Cash for $522500.
B)Decrease to Notes Payable for $500000 decrease to Interest Payable for $22500 and a decrease to Cash for $522500.
C)Increase to Interest Expense for $22500 decrease to Notes Payable for $500000 and a decrease to Cash for $522500.
D)Decrease to Interest Payable for $15000 decrease to Notes Payable for $500000 increase to Interest Expense for $7500 and a decrease to Cash for $522500.

Question 79

Moss County Bank agrees to lend the Sadowski Brick Company $500000 on January 1.Sadowski Brick Company signs a $500000 6% 9-month note.Recording the proceeds and issuance of the note by Sadowski Brick Company on January 1 includes a(n)

A)Increase to Interest Expense for $22500 increase to Cash for $477500 and an increase to Notes Payable for $500000.
B)Increase to Cash and to Notes Payable for $500000.
C)Increase to Cash for $500000 increase to Interest Expense for $22500 and an increase to Notes Payable for $522500.
D)Increase to Cash for $500000 increase to Interest Expense for $22500 increase to Notes Payable for $500000 and an increase to Interest Payable for $22500.

Question 80

As interest is recorded on an interest-bearing note the Interest Expense account is

A)increased; the Notes Payable account is increased.
B)increased; the Notes Payable account is decreased.
C)increased; the Interest Payable account is increased.
D)decreased; the Interest Payable account is increased.