Deck 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes

Question 1

The accounting matching principle dictates that we:

A) match expenses up with the employees that incur them.
B) prorate the cost of an asset over its expected economic life.
C) invoice the customer as soon as the merchandise is produced.
D) All of the above

Answer 1

B

Question 2

EBIT is also called:

A) net profit.
B) operating profit.
C) pretax profit.
D) gross profit.

Answer 2

B

Question 3

Differences between net income and cash flow come from:

A) accounts receivable.
B) depreciation.
C) short term securities.
D) a and b

Answer 3

D

Question 4

Which of the following appears on the income statement?

A) Accounts receivable
B) Accumulated depreciation
C) Depreciation expense
D) Long-term debt

Question 5

The process of totaling all of the transactions for a recent period and bringing a company's records up to date is referred to as:

A) closing the books.
B) double entry.
C) ending the period.
D) starting over.

Question 6

Holding all other variables constant, an increase in net income can be caused by a decrease in:

A) depreciation expense.
B) the cost ratio.
C) the tax rate.
D) Both a and c
E) a, b, and c are correct.

Question 7

The income statement line item that shows the performance of operating activities without consideration of financing is:

A) net income.
B) EBIT.
C) EBT.
D) total assets.

Question 8

Which of the following does not appear on the income statement?

A) Cost of Goods Sold
B) Depreciation Expense
C) Accumulated Depreciation
D) Earnings Before Interest and Tax
E) Gross Margin

Question 9

Holding all other variables constant, an increase in COGS will lead to:

A) a decreased cost ratio.
B) a higher gross margin.
C) lower net income.
D) paying more in taxes.

Question 10

Which of the following is not included in the calculation of current assets?

A) Accruals
B) Accounts Receivable
C) Allowance for Doubtful Accounts
D) Cash
E) Inventory

Question 11

Which of the following does not appear on the right hand side of the balance sheet?

A) Current Liabilities
B) Accounts Receivable
C) Retained Earnings
D) Long Term Debt
E) Total Equity

Question 12

Net working capital can be referred to as:

A) total assets minus current liabilities.
B) current assets minus total liabilities.
C) cash minus current liabilities.
D) current assets minus current liabilities.

Question 13

Depreciation, from an accounting viewpoint, can best be thought of as:

A) accounting for the physical deterioration of an asset.
B) writing off assets like patents, trademarks, and copyrights.
C) matching the carrying value of the asset with the estimated net realizable value of the asset.
D) allocating the cost of the asset to the periods in which it gives service.

Question 14

Which of the following causes net income to differ from cash flow?

A) Depreciation
B) The purchase of inventory on credit
C) The sale of merchandise on credit
D) All of the above

Question 15

Managers whose bonuses are based on the income of the firm tend to overstate the value of accounts receivable and inventory with the following result:

A) the firm's value is less than it is held out to be.
B) profit is more than it is held out to be.
C) the firm's value is more than it is held out to be.
D) liabilities are less than they are held out to be.

Question 16

Which of the following equations is correct?

A) Dividends = Net income - Change in Retained Earnings
B) Dividends = Net income + Change in Retained Earnings
C) Dividends = Change in Retained earnings - Net income
D) None of the above

Question 17

Which of the following does not cause accounting profit and cash flow to differ?

A) Depreciation
B) Sales made on credit
C) Payroll expense
D) Inventory purchased, but not yet sold

Question 18

Which of the following causes accounting profit and cash flow to differ?

A) Payroll expense
B) Cash sales
C) Depreciation
D) Inventory purchased and sold

Question 19

The income statement is intended to inform the reader of:

A) the overall financial condition of the firm at a point in time.
B) how much the firm has earned during an accounting period.
C) how much income has been distributed to shareholders.
D) the cash flow generated by the firm over a period of time.

Question 20

When an account is determined to be uncollectible, "writing off" the bad debt usually involves:

A) reducing the receivables balance and the bad debt reserve by the amount of the account.
B) writing a letter to the customer demanding payment.
C) "expensing" the amount deemed uncollectible.
D) All of the above

Question 21

The tax schedule for married couples filing jointly:

A) Results in less tax than would be paid by a single person if only one spouse works.
B) Saves on taxes regardless of whether one or both spouses work.
C) Results in most two income families paying more tax than if they were single.
D) a and c

Question 22

Inventory in a manufacturing firm differs from that in a retailing company because it includes:

A) an additional category referred to as materials.
B) finished goods inventory.
C) "work in process" inventory.
D) All of the above

Question 23

Uncollected receivables are normally:

A) depreciated.
B) expensed.
C) not reported.
D) written off.

Question 24

Which of the following is correct?

A) Beginning equity + Net income - Dividends - Stock = Ending equity
B) Beginning equity + Net income - Dividends + Stock = Ending equity
C) Net income - Dividends - Stock = Ending equity
D) Beginning equity - Net income - Dividends + Stock = Ending equity

Question 25

In order to compare the yields on municipal and corporate bonds the investor must restate the yield of either the taxable corporate bond to an after tax basis or the municipal bond to a pretax equivalent because:

A) corporate bonds are tax free.
B) municipal bonds are tax free and investors must compare rates on an equal basis.
C) a municipal bond is typically safer than a taxable corporate bond.
D) such restatements are not necessary for most taxpayers.

Question 26

Accounting accruals are important in:

A) accounting for depreciation.
B) providing for unpaid payroll, rent, interest, and other expenses that relate to the current accounting period.
C) drawing checks on the last day of the current accounting period to properly reflect expense in that period.
D) providing for bad debts that may eventually be deemed uncollectible.

Question 27

Inventory reserve is conceptually similar to:

A) bad debt expense.
B) work in process.
C) allowance for doubtful accounts.
D) None of the above

Question 28

Management is prone to overstate:

A) accounts receivable and inventory.
B) accounts receivable, but not inventory.
C) inventory, but not accounts receivable.
D) neither accounts receivable nor inventory.

Question 29

Which of the following types of inventory will be held by a retail company?

A) Supplies
B) Finished goods
C) Work in process
D) Raw materials

Question 30

The net book value of an asset is:

A) original cost less the current year's depreciation expense.
B) original cost less accumulated depreciation.
C) current market value of the asset less associated selling expense.
D) current market value of the asset.

Question 31

During the last year Alpha Co had Net Income of $150, paid $20 in dividends, and sold new stock for $40. Beginning equity for the year was $700. Ending Equity was:

A) $830.
B) $840.
C) $850.
D) $870.

Question 32

Which of the following will increase equity?

A) An increase in dividends paid
B) Issuance of new stock
C) An increase in retained earnings from net income
D) Both b & c
E) All of the above

Question 33

Which of the following is a current asset?

A) Accounts payable
B) Accounts receivable
C) Revenue
D) Accumulated depreciation

Question 34

The matching principle says:

A) assets costs should be recorded in the period in which they are purchased.
B) recognition of an asset's cost should match its service life.
C) the customer should be invoiced as soon as merchandise is produced.
D) only cash transactions should be recorded in the accounting records.

Question 35

Which of the following is a consumption tax?

A) Ad valorem tax
B) Real estate tax
C) Excise tax
D) Personal property tax

Question 36

Which of the following would cause a decrease in cash?

A) Lengthening the time it takes to collect receivables from 15 to 30 days
B) Selling fixed assets for more than book value
C) An increase in accrued salaries expense
D) Paying suppliers in 60 days versus 45 days

Question 37

The two forms of equity infusion are:

A) long term debt and common stock.
B) direct investment in the company's stock and the retention of earnings.
C) net working capital and accumulated depreciation.
D) preferred stock and long-term debt.
E) dividends and retained earnings.

Question 38

When a receivable is written off as uncollectible, entries will usually be made into which accounts?

A) Bad debt reserve
B) Bad debt expenses
C) Accounts receivable
D) Both a and b
E) Both a and c

Question 39

The procedure for a payroll accrual requires identifying the portion of the payroll that falls after the payday but within the accounting period, and:

A) paying employees that amount.
B) recording the amount as an unusual cost.
C) providing for both the expense and the liability for the unpaid payroll with an accrual entry when the books a closed.
D) preparing a supporting note on the financial statement as to the amount of the unpaid payroll.

Question 40

If their bonuses are based on net income, managers may:

A) postpone writing off bad debts.
B) increase depreciation.
C) postpone dividend payments.
D) hold more inventory.

Question 41

Taxable income is:

A) total income excluding exempt items less deductions and exemptions.
B) gross income less deductions.
C) the sum of everything a person makes.
D) gross income less state taxes, mortgage interest, and charitable contributions.

Question 42

The following items are components of a firm's balance sheet. How much is the firm's working capital (net working capital)? $\begin{array}{lr}\text {Cash }&\$ 2,000 \\\text {Long-term debt }&10,000\\\text {Inventory }&12,000\\\text {Owners' equity }&62,000\\\text {Accounts payable }&8,000\\\text {Accruals }&1,500\\\text {Accumulated depreciation }&6,000\\\text {Accounts receivable }&14,000\\\end{array}$

A) $14,500
B) $ 2,500
C) $18,500
D) $12,500

Question 43

Three years ago a piece of equipment was purchased for $10,000. Assuming an eight-year life and straight-line depreciation, financial statements for the third year will show:

A) depreciation expense of $3,000 on the income statement, and accumulated depreciation of $3,000 on the balance sheet.
B) depreciation expense of $1,250 on the income statement, and accumulated depreciation of $3,000 on the balance sheet.
C) depreciation expense of $1,250 on the income statement, and accumulated depreciation of $3,750 on the balance sheet.
D) depreciation expense of $1,250 on the income statement, and accumulated depreciation of $1,250 on the balance sheet.

Question 44

Albert Corp. bought a machine for $10,000 thirteen years ago. It has been depreciated on a straight line basis over a 20 year life with no salvage value. The firm just sold the machine for $6,000. How much gain/loss should be reported on the sale?

A) $4,000 loss
B) $2,500 loss
C) No gain or loss should be recorded.
D) $2,500 gain
E) $4,000 gain

Question 45

The relevant tax rate for investment decisions is the:

A) average rate.
B) lowest rate.
C) marginal rate.
D) effective rate.

Question 46

Which of the following best describes how corporations are taxed on dividend income?

A) Like individuals, corporations are taxed on all dividends received.
B) Fifty percent of dividend income received by corporations is tax exempt.
C) Varying amounts of dividend income received by corporations are tax exempt, depending on the percent of the paying corporation that the receiving corporation owns.
D) In order to avoid triple taxation of earnings, dividend income received by one corporation from another in which it owns twenty percent stock is 100% tax exempt.

Question 47

The following items are components of a traditional balance sheet. How much is the total equity of the firm? $\begin{array}{lc}\text { Long-term debt } & \$ 12,000 \\\text { Common stock } & 15,000 \\\text { Accounts payable } & 8,000 \\\text { Paid in excess } & 6,000 \\\text { Accrued interest payable } & 1,500 \\\text { Plant and equipment } & 60,000 \\\text { Retained earnings } & 28,000 \\\text { Accountsreceivable } & 22,000\end{array}$

A) $62,500
B) $49,000
C) $93,000
D) $97,000

Question 48

The marriage penalty refers to the fact that:

A) married people have less freedom than their single friends.
B) it generally costs more money to support a family than two single people.
C) two-income married couples generally pay more taxes than they would if they were single and had the same two incomes.
D) married people generally work harder than single people.

Question 49

Selected accounts are listed below. How much is the firm's operating income? $\begin{array}{ll}\text { Accrued payroll } & \$ 2,000 \\\text { Sales } & 45,000 \\\text { Cost of goods sold } & 26,000 \\\text { Interest expense } & 1,000 \\\text { Expenses (other than interest) } & 8,000\end{array}$

A) $8,000
B) $10,000
C) $9,000
D) $11,000

Question 50

Three years ago a machine was purchased for $5,000. Assuming a ten-year life and straight line depreciation with a no salvage value, which of the following will appear on the income statement and balance sheet respectively after four years?

A) Depreciation expense of $2,000, accumulated depreciation of $2,000.
B) Depreciation expense of $500, accumulated depreciation of $2,000.
C) Accumulated depreciation of $2,000, depreciation expense of $500.
D) Accumulated depreciation of $500, depreciation expense of $2,000.
E) Depreciation expense of $1,500, accumulated depreciation of $500.

Question 51

In addition to raising money, the government uses the tax system to:

A) promote a larger and more comprehensive government authority.
B) incentivize desirable behavior on the part of taxpayers.
C) support our position as the world's strongest nation.
D) keep the nation growing as rapidly as possible.

Question 52

Gowen, Inc. began the year with equity of $1,000,000 and 100,000 shares of stock outstanding. During the year the firm paid a dividend of $1.50 per share. Year-end equity was $1,100,000. Assuming no other factors impacted equity, what was Gowen, Inc.'s net income for the year?

A) $100,000
B) $150,000
C) $200,000
D) $250,000
E) $300,000

Question 53

Investors pay federal income taxes on the interest earned on bonds issued by:

A) cities.
B) counties.
C) states.
D) the federal government.

Question 54

Wessel Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 each. Cost of goods sold will be 40% of the sale price. Depreciation expense will be $3,000, interest expense $2,500, and other expenses will be $4,000. Wessel's tax rate is 20%. What will Wessel Corp's net income be for 2005?

A) $ 3,500
B) $ 6,800
C) $14,000
D) $16,400
E) $28,400

Question 55

Deductions are expenditures that can be subtracted in calculating taxable income. Which of the following is a deduction?

A) Dependency exemption
B) Credit card interest
C) Interest on municipal bonds
D) Donations to charities

Question 56

The following items are components of a traditional balance sheet. How much are the total assets of the firm? $\begin{array}{lc}\text { Plant and equipment } & \$ 42,000 \\\text { Common stock } & 15,000 \\\text { Cash } & 8,000 \\\text { Inventory } & 21,000 \\\text { Bad debt reserve } & 6,000 \\\text { Paid in excess } & 6,000 \\\text { Accumulated depreciation } & 28,000 \\\text { Accountsreceivable } & 22,000\end{array}$

A) $87,000
B) $65,000
C) $59,000
D) $93,000

Question 57

If a firm that's doing very well pays the same return to equity and debt shareholders, and needs to raise more money, it may be wise to use debt because:

A) interest is tax deductible resulting in a lower cost to the firm.
B) Equity is the less desirable source of capital.
C) borrowing is always less of an effort than raising additional equity capital.
D) All of the above

Question 58

Belvedere, Inc. has an annual payroll of $250,000. The firm pays employees every two weeks on Friday afternoon. Last month, the books were closed on the Thursday after payday. How much is the payroll accrual at the end of the month? (Round to nearest $)

A) $2,852
B) $3,846
C) $4,780
D) $5,119

Question 59

The corporate tax schedule seems not to be progressive. Which statement is correct?

A) The idea of progressive taxes refers only to individuals, the corporate schedule is intentionally not progressive.
B) The corporate schedule is indeed not progressive because the rates do not increase steadily as income increases.
C) Corporate Taxes are progressive because the more money a corporation makes, the more taxes it pays.
D) Corporate taxes are conceptually progressive. The ups and downs in the schedule are designed to take away the benefit of low early rates for companies with large incomes.

Question 60

The federal tax system allows firms that have a tax loss in a year to apply the loss against past and future earnings. The process is referred to as loss carrybacks and carryforwards and permits the loss to be:

A) carried forward for 20 years after having been carried back evenly over the past two years.
B) carried back or forward for as many as 20 years.
C) spread evenly over the last two years and evenly over the next 20 years.
D) carried back two years and forward as many as 20 years.

Question 61

The following is a listing of tax considerations for a family. How much is the their taxable income? $\begin{array}{lll}2 \text { exemptions } & \$ 3,050 & \text { per exemption } \\\text { Salary income of husband } & 40,000 \\\text { Real estate taxes } & 4,000 \\\text { Interest from savings account } & 800 \\\text { Interest on mortgage } & 2,800 \\\text { Contributionsto church } & 600\end{array}$

A) $36,800
B) $23,200
C) $27,300
D) $24,800

Question 62

The following tax schedule applies to an individual. Her taxable income is $40,000. How much is her total tax? 10% of the first $10,000
15% of the next $15,000
25% of the next $10,000
35% of the next $20,000

A) $8,500
B) $10,000
C) $7,500
D) $7,000

Question 63

Exxon Corp. bought an oil rig exactly 6 years ago for $100,000,000. Exxon depreciates oil rigs straight line over 10 years assuming no salvage value. The rig was just sold to British Petroleum for $30,000,000. What Capital Gain/Loss will Exxon report on this transaction?

A) Gain of $30,000,000
B) Gain of $10,000,000
C) Loss of $10,000,000
D) Loss of $30,000,000

Question 64

Selected financial statement accounts are as follows. How much is the firm's ending equity? $\begin{array}{lr}\text {Income for the year }&\$ 25,000\\\text {Dividends paid }&6,000\\\text {Beginning equity for the year }&56,000\\\text {Adclitional stock sold }&22,000\\\end{array}$

A) $103,000
B) $97,000
C) $19,000
D) $85,000

Question 65

Assume a municipal bond is issued by the State of New York. Its yield is stated at 6%. A taxable corporate bond of equivalent quality is yielding 9%. You are in the 35% tax bracket and your son is in the 10% tax bracket. Which would be the correct investment strategy for both you and your son?

A) You and your son should acquire the municipal bond.
B) Your son should acquire the municipal bond, but you should acquire the corporate bond.
C) You and your son should acquire the corporate bond.
D) Your son should acquire the corporate bond, but you should acquire the municipal bond.

Question 66

A corporate bond is yielding 9%. You are in the 35% tax bracket. What is the after tax yield on the bond?

A) 5.85%
B) 8.10%
C) 3.90%
D) 12.15%

Question 67

The following is a listing of tax considerations for a family. How much is the family's taxable income? $\begin{array}{ll}B \text { exemptions }&\$3,050&\text { per exemption }\\\text { Salary } & 45,000 \\\text { Real estate taxes } & 5,000 \\\text { Interest from savings ac count } & 1,500 \\\text { Interest from municipal bond } & 2,000 \\\text { Interest on mortgage } & 3,000 \\\text { Contributions to church } & 1,500 \\\text { Loss on sale of stock held for 3 vears } & 6,000\end{array}$

A) $25,800
B) $24,850
C) $30,800
D) $24,300

Question 68

When must a vendor be paid in full under the terms of 2/10, n. 30?

A) 10 days from today
B) On February 10th
C) On the 30th of the current month
D) 30 days from today

Question 69

A firm had a piece of machinery that cost $7,000 when new and has accumulated $4,500 in depreciation. If the machine is sold for $4,000, which of the following is true?

A) The firm has a taxable gain of $4,000 on the sale of the machine
B) The firm has a taxable gain of $1,500 on the sale of the machine
C) The firm has a deductible loss of $3,000 on the sale of the machine
D) The firm has a taxable gain of $7,000 on the sale of the machine

Question 70

Which of the following is not part of working capital?

A) Accumulated depreciation
B) Accounts Payable
C) Accounts Receivable
D) Inventory

Question 71

Ben bought an ice cream machine 2 years ago for $8,000. The depreciation life for ice cream machines is 4 years. Ben uses straight line depreciation and a convention of taking one-half year's depreciation in the first year. Ben just sold his machine to Jerry for $6,000. What will be Ben's Capital Gain/(Loss) on this transaction?

A) $1,000
B) $2,000
C) $5,000
D) ($2,000)

Question 72

Assume Corporation A owns 51% of Corporation

A) $510,000
B) $800,000
B) If Corporation A received $1,000,000 in dividends from Corporation B, how much would be taxable to Corporation A?
C) $200,000
D) $0

Question 73

An accrual is best defined as:

A) a completed transaction that results in a liability.
B) an accumulation of a liability in regard to an incomplete transaction.
C) a completed transaction that results in an asset.
D) an expense paid in advance.

Question 74

Which is equivalent to EBIT assuming the firm has no leverage?

A) EBT
B) Net income
C) Net income + Depreciation
D) Gross Margin + Depreciation

Question 75

The Tappan family has taxable income of $50,000. Tax tables indicate that the first $20,000 of income will be taxed at 24% and all income above $20,000 will be taxed at 30%. What are the Tappan's marginal and average tax rates?

A) Marginal = 29.8%; Average = 30.0%
B) Marginal = 28.2%; Average = 27.6%
C) Marginal = 30.0%; Average = 30.0%
D) Marginal = 30.0%; Average = 27.6%
E) Marginal = 24.0%; Average = 30.0%

Question 76

Depreciation expense of $2,000.00 will cause:

A) accounts receivable to be reduced by $2,000.00.
B) cash to be reduced by $2,000.00.
C) accumulated Depreciation to increase by $2,000.00.
D) accounts Payable to increase by $2,000.00.

Question 77

The Johnson Company bought a truck costing $60,000 two years ago. The truck's estimated life was six years at the time of purchase. It was accounted for by using straight line depreciation with zero salvage value. If the truck was sold yesterday for $65,000, what is the capital gain that must be reported on the sale of the truck?

A) $20,000
B) $25,000
C) $30,000
D) $35,000
E) $40,000

Question 78

Which of the following is a tax deductible expense?

A) Repayment of the principle portion of a loan
B) Dividends
C) The purchase of inventory
D) Depreciation

Question 79

Toys For U, Inc. just purchased a new asset costing $500,000. The machine will be depreciated straight-line over a 10-year period using the convention of taking a half year's depreciation in the first year. Given the following information about old assets the firm already had, calculate net fixed assets at year end. $\begin{array}{lr}\text {Gross Fixed Assets }&\$ 2,000,000\\\text {Accumulated. Depreciation }&\$ 960,000\\\text {Continuing Anumal Depreciation Expense }& \$ 240,000\\\end{array}$

A) $765,000
B) $925,000
C) $1,275,000
D) $1,600,000

Question 80

Grass Enterprises just closed a good year. It had Sales of $10 million, EBIT of $1 million and Net Income of $500,000. The firm also paid dividends of $150,000 during the year. If Grass started the year with equity of $900,000, what will its year ending equity be?

A) $1,900,000
B) $1,400,000
C) $1,250,000
D) $850,000