Deck 3: Accounting and Finance

Question 1

A balance sheet portrays the value of a firm's assets and liabilities:

A)Over an annual period
B)Over any stated period of time
C)At any stated point in time
D)At the end of the calendar year

Answer 1

At any stated point in time

Question 2

What balancing entry is most likely to be called for if previously excluded intangible assets were added to a firm's balance sheet?

A)Increase accumulated depreciation
B)Decrease long-term debt
C)Increase shareholders' equity
D)Decrease current assets

Answer 2

Increase shareholders' equity

Question 3

According to GAAP, assets and liabilities are typically recorded on the balance sheet at:

A)Historical cost
B)Market value
C)Salvage value
D)Historical cost less depreciation

Answer 3

Historical cost less depreciation

Question 4

Which of the following is correct for a fully depreciated asset?

A)Market value is zero
B)Market value is greater than book value
C)Book value is greater than market value
D)The relationship between market and book values is indeterminable

Question 5

When subtracting an asset's accumulated depreciation from its historic cost, the resulting value is termed the:

A)Book value of the asset
B)Market value of the asset
C)Depreciation expense
D)Current asset value

Question 6

In general, what is changing as you read down the left hand side of a balance sheet?

A)The assets are more fully depreciated
B)The assets are growing in value
C)The assets are increasing in maturity
D)The assets are becoming less liquid

Question 7

If market interest rates have increased since a company last borrowed long-term funds, the market value of these long-term funds will likely be:

A)greater than their book value
B)less than their book value
C)Equal to their book value
D)Unknown without knowing the maturity of the debt

Question 8

Which of the following values would most likely interest a shareholder?

A)Book value of equity
B)Market value of equity
C)Historical cost of equity
D)Retained earnings component of equity

Question 9

Net working capital is calculated by taking the difference between:

A)Total assets and total liabilities
B)Inventory and accounts payable
C)Current assets and current liabilities
D)Cash and long-term debt

Question 10

If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders' equity, then the firm has:

A)no retained earnings
B)Long-term debt
C)No accumulated depreciation
D)Current assets

Question 11

If the value of a firm's net fixed assets equals the value of the accumulated depreciation, then, from an accounting context, the fixed assets are:

A)New
B)Fully depreciated
C)One-half depreciated
D)Equal in value to the firm's current assets

Question 12

Net working capital is a measure of the company's:

A)Goodwill
B)Short-term liabilities
C)Estimated liquidity
D)Shareholders' equity

Question 13

Which of the following assets is likely to be considered the most liquid?

A)Marketable securities
B)Net fixed assets
C)Accounts payable
D)Inventories

Question 14

What happens to a firm's net worth as it uses cash to repay accounts payable?

A)Net worth increases
B)Net worth decreases
C)Net worth remains constant
D)Net worth decreases temporarily, until cash is replenished

Question 15

Depreciation expense is used to:

A)Allocate costs to all departments of the firm
B)Determine when an asset is fully paid off
C)Allocate historical cost over the life of an asset
D)Equate the historical cost and market values of an asset

Question 16

Accumulated Depreciation is used to reduce what type of account on the balance sheet?

A)Current Asset
B)Capital Assets or Fixed Assets
C)Liability
D)Owners Equity

Question 17

ABC Corp.'s balance sheet shows their long-term debt to be $10 million.The debt was issued with a 10 percent interest rate, and the current interest rate is 7 percent.Based on this information, the market value of this debt would be:

A)Less than $20 million
B)More than $20 million
C)Equal to $20 million
D)Unknown without knowing the maturity of the debt

Question 18

What happens to the market value of a firm's equity as the book value of the firm's equity increases?

A)It increases by the same amount
B)It decreases by the same amount
C)It remains constant
D)There is no set relationship to determine this outcome

Question 19

Which of the following items should not be included in a listing of current assets?

A)Marketable securities
B)Accounts payable
C)Accounts receivable
D)Inventories

Question 20

If a payment of principal is due in seven months on a long-term liability, that payment will appear on the current balance sheet now as a(n):

A)Current liability
B)Long-term debt
C)Cash
D)Interest expense

Question 21

Which of the following is more likely to be correct if market value of equity is less than book value of equity?

A)Investors anticipate excellent earning potential
B)Investors anticipate low earning potential
C)Assets have been fully depreciated
D)The company is bankrupt

Question 22

Which of the following statements about depreciation is correct?

A)Depreciation is subtracted from cost of goods sold to calculate net income
B)When depreciation expense is incurred, cash balances are reduced
C)Depreciation expense does not affect net income
D)Depreciation reduces the book value of assets

Question 23

Which of the following will occur in a statement of cash flows as a result of paying cash dividends?

A)Cash flows from operations will increase
B)Cash flows from investments will decrease
C)Cash flows from financing will decrease
D)Cash balances will not be affected

Question 24

Net earnings result from:

A)The sale of additional shares of stock to investors
B)Income not paid to shareholders in the form of cash dividends
C)An excess of assets over liabilities
D)Market values that exceed book values

Question 25

What is the most likely conclusion for a firm whose statement of cash flows shows an increase in cash balances and has negative cash flows from both operations and financing?

A)The firm has low depreciation expense
B)The firm did not pay any dividends
C)The firm sold more equipment than it purchased
D)The firm has a low interest rate on its debt

Question 26

Current period depreciation expense is listed on:

A)The balance sheet
B)The investment section of the cash flow statement
C)The income statement
D)Neither the balance sheet nor the income statement; it is a noncash expense

Question 27

Which of the following changes in working capital will result in an increase in cash flows?

A)Increase in accounts payable
B)Increase in inventories
C)Increase in accounts receivable
D)Decrease in other current liabilities

Question 28

According to accrual accounting, when goods are not sold until the period after they were produced, then the cost of goods sold:

A)Will be recognized in the first period
B)Will be recognized in the second period
C)Will be recognized when payment is received
D)Will be split between both periods

Question 29

If a firm generates $2,000 in sales and has a $500 increase in accounts receivable during an accounting period, then, based on these two categories, cash flow will increase by:

A)$2,500
B)$2,000
C)$1,500
D)$500

Question 30

Market-value balance sheets differ from book-value balance sheets in that market values:

A)Are higher than book values
B)Are lower than book values
C)Conform more to GAAP accounting
D)Conform to investors' expectations

Question 31

The Net Income figure on an income statement is calculated before deducting:

A)Interest expense
B)Depreciation expense
C)Cash dividends
D)Tax liability

Question 32

Which of the following is not a typical reason for differences between profit and cash flow?

A)Depreciation expense
B)Income taxes
C)Changing levels of accounts receivable
D)Accrual accounting practices

Question 33

Which of the following statements is true for a corporation with $1 million market value of equity, $2 million market value of assets, and 1,000 shares of outstanding stock?

A)Market value of liabilities exceeds book value of liabilities
B)Market value of liabilities equals $1 million
C)Market value per share equals $1,000
D)Market value per share equals $2,000

Question 34

In a statement of cash flows, which category includes depreciation expense?

A)Operations
B)Investments
C)Financing
D)None of the above; depreciation is a non-cash expense.

Question 35

An increase in depreciation expense will (other things equal):

A)Increase net income
B)Decrease net income
C)Increase cash flow
D)Decrease the market value of assets

Question 36

Which of the following best explains the combination of a high level of sales combined with a low cash flow during an accounting period?

A)High depreciation expense
B)Reduction of inventory levels
C)Acquisition of equipment
D)Increase in accounts payable

Question 37

If a firm's net income is positive and its non-cash expenses are positive, which of the following could account for a negative amount of cash provided by operations?

A)Current assets decrease more than current liabilities decrease
B)Current assets increase more than current liabilities increase
C)Current assets decrease more than current liabilities increase
D)A large addition is made to plant and equipment

Question 38

Calculate the EBIT for a firm with $4 million total revenues, $3.5 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense.

A)$500,000
B)$380,000
C)$0
D)($120,000)

Question 39

Which of the following statements is more likely if cash and marketable securities increase by $5,000 during a period in which cash provided by operations increases by $1,000 and cash used by investments decreases by $500?

A)Cash provided by financing increases by $3,500
B)Cash used by financing decreases by $1,000
C)Debt increased by more than cash dividends paid
D)Debt was reduced by more than cash dividends paid

Question 40

The gathering of related revenues and expenses into the same period, regardless of when they were incurred, is:

A)Cash basis accounting
B)Market value accounting
C)Book value accounting
D)Accrual accounting

Question 41

Which of the following statements about net working capital (NWC) is correct?

A)NWC is positive for all firms
B)As NWC decreases, potential liquidity increases
C)NWC excludes inventory, which is deemed illiquid
D)Decreases in NWC can increase the firm's risk

Question 42

Who pays the taxes on earnings distributed as dividends?

A)The corporation
B)The investor receiving the dividend
C)Both the corporation and the investor
D)Neither the corporation nor the investor

Question 43

Which of the following information is reported on the income statement?

A)Accounts Payable
B)Revenues, Expenses, and Net Income or Net Loss
C)Current liabilities
D)Current portion of long-term debt

Question 44

A balance sheet may be considered "backward looking," from the perspective that:

A)It works backward, starting with net income
B)It records historic, not current values
C)It cannot forecast the future
D)It records costs over many previous periods

Question 45

Which of the firm's financial statements most clearly recognizes the payment for new equipment?

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

Question 46

What is the marginal tax rate for a corporation with $60,000 taxable income and an average tax rate of 16.67 percent if the next-lowest marginal tax rate of 15 percent covers taxable incomes up to $50,000?

A)15.00 percent
B)16.67 percent
C)18.34 percent
D)25.00 percent $60,000 taxable income
X )1667 average tax rate
= $10,000 tax liability

Question 47

Which of the following categories of a statement of cash flows is affected by the payment of interest expense?

A)Cash flows from operations
B)Cash flows from non-cash expenses
C)Cash flows from investments
D)Cash flows from financing

Question 48

What is the marginal impact on taxes for a profitable corporation in the 35 percent marginal tax bracket that incurs an additional dollar of depreciation expense?

A)A decrease of 65 cents
B)A decrease of 35 cents
C)An increase of 65 cents
D)Zero impact

Question 49

For all Canadian corporations except those in the lowest and highest tax brackets, it is the case that their:

A)Marginal tax rate exceeds their average tax rate
B)Average tax rate exceeds their marginal tax rate
C)Marginal tax rate equals their average tax rate
D)Marginal tax rate equals 15 percent

Question 50

According to the statement of cash flows, cash flows from financing could be positive if:

A)The firm repaid more debt than it added
B)The firm added more debt than it repaid
C)Interest rates were low on outstanding debt
D)The firm sold portions of its plant and equipment

Question 51

Which of the following statements correctly compares international accounting standards?

A)The standards are becoming less similar over time
B)The standards are typically more lenient in Canada and the U.S.
C)The standards are typically stricter in Canada and the U.S.
D)Balance sheets differ, but income statements are similar in all countries

Question 52

What happens when moving from net income to cash flows as the result of an increase in inventory balances?

A)Cash flows increase
B)Cash flows decrease
C)Cash flows are unchanged
D)The change in cash flows cannot be determined

Question 53

Which of the following represents a recent trend in financial statements?

A)Dividends are appearing on the balance sheet
B)Income statements no longer record depreciation expense
C)Statements of cash flow are considered obsolete
D)Balance sheets record market values rather than historic costs

Question 54

Which of the following forms of income can individuals defer from taxation?

A)Dividends
B)Interest
C)Realized capital gains
D)Unrealized capital gains

Question 55

Marginal tax rates are based on:

A)Net income
B)Total income
C)An additional dollar of income
D)Earnings before interest and taxes

Question 56

Which one of the following expenses cannot be used to reduce taxable corporate income?

A)Cash dividends
B)Depreciation expense
C)Interest expense
D)Administrative expenses

Question 57

If market values of equity exceed book values of equity, then:

A)Equity has been depreciated too rapidly
B)The firm uses accrual-based accounting
C)Profit potential is expected to be attractive
D)The firm is holding too much cash

Question 58

Which statement is correct about the tax treatment of dividend income and capital gains received inside pension funds?

A)Dividends are taxable while capital gains are not taxable
B)Capital gains are taxable while dividends are not taxable
C)Both dividends and capital gains are taxable
D)Neither dividends nor capital gains are taxable

Question 59

What is the tax liability for an individual with $52,000 of income, which includes $2,000 of dividends, if the tax rate is 15 percent on income up to $25,350 and 28 percent on income over $25,350?

A)$11,704.50
B)$11,264.50
C)$14,000.00
D)$14,560.00

Question 60

CumChan Corporation had operating income (EBIT) of $2,500,000 in 2005, depreciation expenses of $500,000, and dividends paid of $400,000.What is CumChan's operating cash flow (EBITDA) for 2005?

A)$3,000,000
B)$6,000,000
C)300 percent
D)$3,300,000

Question 61

Foreign corporations may be more likely in the future to develop their financial statements according to GAAP so that:

A)They can reduce or avoid the payment of income taxes
B)Maintain reserves that are hidden from shareholders
C)They can adhere to less stringent accounting standards
D)Their stock qualifies for listing on U.S.exchanges

Question 62

Calculate the EBIT (Earnings Before Interest and Taxes) for a firm with $4 million total revenues, $3.5 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense.

A)$500,000
B)$380,000
C)$0
D)$120,000

Question 63

Accrual accounting, which attempts to match sales revenues and the expenses associated with the production of the goods, is conducted in an attempt to:

A)Reduce income-tax liability
B)Reduce bias in reported profitability measures
C)Speed up the receipt of accounts receivable
D)Reduce the time necessary to depreciate assets

Question 64

According to the current Canadian federal income tax structure, the marginal tax rate for personal taxpayers in the highest levels of income is:

A)15.0 percent
B)25.0 percent
C)29 percent
D)39.6 percent

Question 65

Calculate the cash flow due to production of goods and cash flow from sales if sales were $500, cost of goods sold were $180, accounts receivable increased by $20, and inventory decreased by $18.

A) $480 and -$162
B) $550 and -$120
C) -$925 and -$480
D) -$150 and -$162

Question 66

An individual's income for the year includes both dividend and interest payments.Which of the following statements will be correct concerning that individual's tax liability?

A)Dividends are taxed; tax on interest payments is paid at the corporate level
B)Interest is taxed; tax on dividend payments is paid at the corporate level
C)Both dividend and interest payments are taxed at the personal level
D)All taxes on dividend and interest payments are paid at the corporate level

Question 67

One of the stronger motivations for a continuing standardization in international accounting standards is to:

A)Allow foreign countries to escape the wrath of the U.S.government
B)Provide additional work for accountants
C)Force financial statements to be prepared in English
D)Develop international sources of capital for firms

Question 68

For a corporation in the 25 percent marginal tax bracket that incurs $70.00 in labour and materials expense, plus $15.00 in depreciation expense while generating an incremental revenue of $100, tax liability will increase by:

A)$3.75
B)$7.50
C)$13.75
D)$25.00

Question 69

Interest expense appears in the operations section of the cash-flows statement because:

A)Firms cannot operate without incurring interest expense
B)Its payment is not within managerial discretion
C)It is paid to finance a firm's inventory
D)False statement; interest expense appears in the financing section of the cash-flows statement

Question 70

When an accountant does not report all of the potentially relevant financial information on the firm's financial statements, the accountant is most likely:

A)Hiding transactions from the shareholders
B)Using the discretion that is built into GAAP
C)Not following GAAP
D)Not licensed to practice accounting

Question 71

If a firm's cash-flow statement shows that cash was used for investments, which of the following would seem most likely?

A)The inventory balance increased
B)Common stock was repurchased
C)New machines were acquired
D)Cash dividends were paid

Question 72

Which of the following statements is correct for an individual with a net income of $50,000, a tax liability of $10,704.50, and a 28 percent marginal tax rate?

A)The average tax rate is 21.41 percent
B)The average tax rate is 28.00 percent
C)The average tax rate is unknown, but less than the marginal tax rate
D)The average tax rate is unknown, but greater than the marginal tax rate

Question 73

Perhaps the best method for estimating the market value of shareholders' equity is to:

A)Read from the firm's balance sheet
B)Read from the firm's income statement
C)Multiply number of shares outstanding by the price of each share
D)Add the retained earnings plus total liabilities

Question 74

Which of the following statements appears correct for a corporation with a negative net income in both the present and the last fiscal year?

A)This year's loss can be carried back, but last year's loss cannot be used
B)Neither of the losses can be used to reduce taxes
C)Both losses can be carried forward but not backward
D)Both losses can be carried forward and backward, within certain time limits

Question 75

Which of the following cash outflows does not reduce a firm's net income?

A)Income taxes
B)Interest expense
C)Dividends
D)Depreciation expense

Question 76

In which of the following asset accounts are you least likely to find a difference between market value and book value?

A)Cash
B)Inventory
C)Land
D)Shareholders' equity

Question 77

What occurs when the value of a firm's debt exceeds the value of shareholders' equity?

A)The firm is bankrupt
B)The firm is very risky
C)A high rate of interest is being paid on the debt
D)The firm is financed more through debt than through equity

Question 78

Which of the following could account for a firm that has a negative net income, yet has a positive amount of cash provided by operations?

A)The net loss was greater than the amount of depreciation expense
B)Inventory increased significantly more than accounts payable
C)Accounts receivable decreased by significantly more than accounts payable
D)Cash balances declined to the desired amount

Question 79

The existence of "goodwill" on a corporate balance sheet indicates that the corporation has:

A)Been profitable in the past
B)depreciated its tangible assets
C)Intangible assets from past acquisitions
D)Retained earnings resulting from past income

Question 80

Which of the following expense categories is subtracted from total revenues to arrive at a firm's EBIT?

A)Cash dividends
B)Depreciation expense
C)Interest expense
D)Tax liability