Deck 3: The Financial System and the Level of Interest Rates

Question 1

The cost principle assumes that the parties to a transaction are economically rational and are free to act independently of each other.

Answer 1

False

Question 2

Generally accepted accounting principles determine the rules for how a company can issue stocks to raise money.

Answer 2

False

Question 3

Cash flows from operating activities involve buying and selling of long-term assets.

Answer 3

False

Question 4

Depreciation and amortization are examples of prepaid expenses.

Question 5

Generally accepted accounting principles (GAAP) are a set of authoritative guidelines that define accounting practice at a particular point in time.

Question 6

Typical financing activities include cash payments on the principal of long-term debt, cash payments of dividends to shareholders, and cash purchases of treasury stock.

Question 7

During rising prices, a company using the FIFO method will sell its newest, highest-cost inventory first.

Question 8

The net cash provided by operating activities is another term used for net income.

Question 9

Book value is the amount a firm paid for its assets at the time of purchase.

Question 10

Preparing a marked-to-market balance sheet is rather straightforward because it is easy to obtain market values for all assets and liabilities.

Question 11

Cash flows from operations are the net cash flows that support a firm's principal business activities.

Question 12

In a balance sheet, assets are listed in order of their liquidity.

Question 13

The income statement identifies the major sources of revenues generated by the firm and the corresponding expenses that were needed to generate those revenues.

Question 14

During rising prices, a company using the LIFO method assumes that the sale is from the newest, highest-cost inventory.

Question 15

The balance sheet identity can be stated as: Total assets = Total liabilities + Total stockholders' equity.

Question 16

The net book value of an asset is the historical cost less the accumulated depreciation.

Question 17

The current market value of an asset is the amount that a firm would receive for the asset if it were sold on the open market.

Question 18

Making and collecting loans, issuing and paying out on insurance contracts, and buying and selling debt or equity instruments of other firms are examples of financing activities.

Question 19

The going concern assumption states that a business will be shutting down its operation in the near future.

Question 20

The balance sheet identifies the productive resources (assets) that a firm uses to generate income, as well as the sources of funding from creditors (liabilities) and owners (shareholders' equity) that were used to buy the assets.

Question 21

According to the realization principle, revenue from a sale of a firm's products are recognized:

A) when the products are shipped to the buyer.
B) when the buyer orders the goods.
C) when cash is realized from the sale of the products.
D) at the time of the sale whether or not cash is actually received.

Question 22

Annual reports are prepared by a firm's management to:

A) communicate to its shareholders the firm's failures in the previous year.
B) provide a good overview of the firm's financial and operating performance.
C) highlight the performance of its chief competitors.
D) provide a forecast of the economy in the coming years.

Question 23

The assumption of arm's-length transaction states that:

A) both parties to a transaction can act independently of each other and make economically rational decisions.
B) both parties to a transaction must have had previous transactions.
C) one of the parties to the transaction is a bank that has full knowledge of the firm's creditworthiness.
D) None of the above.

Question 24

The cost principle states that an asset should be recognized on the balance sheet:

A) at the market value of the asset.
B) at the market value less the accumulated depreciation on the asset.
C) at its historical cost.
D) at its historical cost plus the accumulated depreciation on the asset.

Question 25

When prices are falling, valuing inventory using the LIFO method rather than FIFO gives:

A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.

Question 26

On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on:

A) June 23, 2008.
B) July 2, 2008.
C) September 20, 2008.
D) None of the above

Question 27

When prices are rising, valuing ending inventory using the FIFO method rather than LIFO gives:

A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.

Question 28

Which of the following sections do annual reports typically contain?

A) Financial summary related to the past year's performance
B) Information about the company, its products, and its activities
C) Audited financial statements, including limited historical financial data
D) All three of the above sections are included in the annual report.

Question 29

The matching principle calls for the accountant of a firm to:

A) identify an asset with each liability of the firm.
B) associate the revenue generated from a sale to the costs or expenses incurred to produce the product.
C) match each item of inventory with the historical cost at which it was acquired.
D) None of the above.

Question 30

Accounting standards prescribed by generally accepted accounting principles (GAAP) are important because:

A) they make the financial statements of all firms standardized.
B) they allow one to examine a firm's performance with ease over a period of time.
C) they make it possible for management or analysts to compare a firm's performance with that of other competitors.
D) All of the above.

Question 31

The conventional way of preparing a balance sheet is to list all assets in the order of their:

A) market value.
B) risk.
C) liquidity.
D) historical cost.

Question 32

The average tax rate is the total taxes divided by the taxable income.

Question 33

Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders?

A) Current assets, goodwill, and plant and equipment.
B) Current assets, plant and equipment, and goodwill.
C) Goodwill is not an asset and is not listed here.
D) None of the above.

Question 34

The generally accepted accounting principles (GAAP) are:

A) rules that outline how a firm can operate ethically.
B) rules on how the firm will be valued in the event of a merger.
C) rules and procedures that define how companies are to maintain financial records and prepare financial statements.
D) rules for how a company can issue stock to raise money.

Question 35

The going concern assumption implies that:

A) a firm will continue to be in business for the foreseeable future.
B) a firm will be going out of business in the near future.
C) a firm will continue to operate in the near future, but only after being acquired by another firm.
D) None of the above.

Question 36

Rent and insurance are examples of depletion expenses.

Question 37

Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of $2.3 million, and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its market value on December 31, 2008 is $1.75 million. The firm's accountant is preparing its financial statement for the fiscal year end on December 31, 2008. The net value of the asset that should be reported on the balance sheet is:

A) $2.3 million.
B) $1.61 million.
C) $230,000.
D) $1.75 million.

Question 38

The key financial statement that ties the other three statements together is the statement of cash flows, which summarizes changes in the balance sheet from the beginning of the year to the end.

Question 39

Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced during the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate:

A) the inventory acquired on July 2 with the products sold.
B) the inventory acquired on April 23 with the products sold.
C) neither of these dates is valid because the products were sold in July.
D) None of the above.

Question 40

Your uncle, who has a second home in Bethany Beach, Delaware, is planning to sell it in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of:

A) the cost principle.
B) the assumption of arm's-length transactions.
C) the realization principle.
D) the going concern assumption.

Question 41

Teakap, Inc., has current assets of $1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. How much long-term debt does the firm have?

A) $1,844,022
B) $2,303,010
C) $2,123,612
D) $803,010

Question 42

Chandler Sporting Goods produces baseball and football equipment and lines of clothing. This year the company had cash and marketable securities worth $335,485, accounts payables worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes payable worth $313,663, and other current assets of $121,427. What is the company's net working capital?

A) $3,596,632
B) $1,801,784
C) $2,123,612
D) $1,673,421

Question 43

Maddux, Inc., has completed its fiscal year and reported the following information. The company had current assets of $153,413, net fixed assets of $412,331, and other assets of $7,822. The firm also has current liabilities worth $65,314, long-term debt of $178,334, and common stock of $162,000. Calculate the amount of retained earnings.

A) $405,648
B) $243,648
C) $167,918
D) $573,566

Question 44

Triumph Trading Company provided the following information to its auditors. For the year ended March 31, 2008, the company had revenues of $1,122,878, operating expenses (excluding depreciation and leasing expenses) of $612,663, depreciation expenses of $231,415, leasing expenses of $126,193, and interest expenses of $87,125. If the company's average tax rate was 34 percent, what is its net income after taxes? Round your final answer to the nearest dollar.

A) $43,218
B) $65,482
C) $152,607
D) None of the above.

Question 45

The major disadvantages of market-value accounting include:

A) the difficulty in estimating the current value for some assets.
B) the difficulty in applying some of the valuation models used to estimate market values.
C) the resulting numbers are potentially open to abuse.
D) All of the above are disadvantages of market-value accounting.

Question 46

Which of the following is an income statement item?

A) Accounts payable
B) Accrued taxes
C) Retained earnings
D) Selling and administrative expenses

Question 47

Arco Steel, Inc. generated total sales of $45,565,200 during fiscal 2010. Depreciation and amortization for the year totaled $2,278,260, and cost of goods sold was $27,339,120. Interest expense for the year was $9,641,300 and selling, general, and administrative expenses totaled $4,556,520 for the year. What is Arco's EBIT for 2010?

A) $9,641,300
B) $11,391,300
C) $13,275,030
D) $18,490,000

Question 48

Which of the following is NOT true about goodwill?

A) It is an intangible asset.
B) It represents the value of all unrecorded assets acquired in a merger.
C) It equals the premium paid over the fair market value of the assets acquired in a merger.
D) When goodwill appears on a firm's balance sheet, it reduces the firm's net worth by that amount.

Question 49

Galan Associates prepared its financial statement for 2008 based on the information given here. The company had cash worth $1,234, inventory worth $13,480, and accounts receivables worth $7,789. The company's net fixed assets are $42,331, and other assets are $1,822. It had accounts payables of $9,558, notes payables of $2,756, common stock of $22,000, and retained earnings of $14,008. How much long-term debt does the firm have?

A) $54,342
B) $76,342
C) $12,314
D) $18,334

Question 50

Which of the following is the best example of how a market-value balance sheet item differs from the firm's book-value balance sheet item?

A) A firm issued long-term bonds five-years ago that currently sell for par value.
B) A firm sold common stock twenty-years ago for $20.00 a share. The firm's common stock is currently selling for $96.50 per share.
C) A firm has $5 million of accrued liabilities on the books.
D) A firm issued preferred stock ten-years ago. These shares of preferred stock currently are selling for par value.

Question 51

Centennial Brewery produced revenues of $1,145,227 in 2008. It has expenses (excluding depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays an average tax rate of 34 percent. What is the firm's net income after taxes? Round your final answer to the nearest dollar.

A) $120,140
B) $248,475
C) $79,292
D) $40,848

Question 52

Spartan, Inc., is a manufacturer of automobile parts located in Greenville, South Carolina. At the end of the current fiscal year, the company had net working capital of $157,903. The company showed accounts payables of $94,233, accounts receivables of $83,112, inventory of $171,284, and cash and marketable securities of $12,311. Calculate the amount of notes payables. (Assume that notes payable and accounts payable are the only two current liabilities of the company.)

A) $14,571
B) $26,882
C) $15,471
D) None of the above

Question 53

Which of the following statements is NOT a limitation associated with market valuation of balance sheet accounts?

A) It can be difficult to identify the market value of an asset, particularly if there are few transactions involving comparable assets.
B) The estimates of market value can involve complex financial modeling, and the resulting numbers can be open to manipulation and abuse.
C) Marking to market provides decision makers with a better chance of making the correct economic decision, given the information available.
D) Mark-to-market accounting can become inaccurate if market prices deviate from the "fundamental" values of assets and liabilities.

Question 54

Simplex Healthcare had net income of $5,411,623 after paying taxes at 34 percent. The firm had revenues of $20,433,770.Its interest expense for the year was $1,122,376, while depreciation expense was $2,079,112. What was the firm's operating expenses excluding depreciation? Round your intermediate calculations and final answer to the nearest dollar.

A) $8,199,429
B) $9,032,853
C) $9,321,805
D) None of the above

Question 55

Parrino Corporation has announced that its net income for the year ended June 30, 2008, is $1,824,214. The company had an EBITDA of $5,174,366, and its depreciation and amortization expense was equal to $1,241,790. The company's average tax rate is 34 percent. What is the amount of interest expense for the firm?

A) $2,763,961
B) $939,747
C) $1,187,720
D) $1,168,615

Question 56

Which of the following does NOT belong to an income statement?

A) Depreciation expense
B) Goodwill
C) Extraordinary items
D) Amortization expense

Question 57

Which of the following is NOT true about treasury stock?

A) It is a firm's own shares repurchased in the market by the firm.
B) It can be reissued under stock option and other employee benefit plans.
C) It lowers the value of the company.
D) It increases the net worth of the company.

Question 58

Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to its accountant. The company had current assets of $145,332, net fixed assets of $356,190, and other assets of $4,176. The firm has long-term debt of $76,445, common stock of $200,000, and retained earnings of $134,461. What amount of current liabilities does this firm have?

A) $94,792
B) $505,678
C) $171,217
D) None of the above.

Question 59

Which of the following is NOT a noncash item?

A) Depreciation
B) Taxes
C) Prepaid expenses
D) Prepaid taxes

Question 60

Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the company had accounts receivables of $47,199, inventory of $63,781, and cash of $21,461. It also had accounts payables of $51,369, short-term notes payables of $11,417, and accrued taxes of $6,145. The net working capital of the firm is

A) $68,931.
B) $63,510.
C) $69,655.
D) None of the above

Question 61

What are the advantages and disadvantages of using market-value accounting?

Question 62

What is the firm's net cash flow from operating activities?

A) $304,322
B) $299,176
C) $192,602
D) None of the above.

Question 63

Which of the following presents a summary of the changes in a firm's balance sheet from the beginning of an accounting period to the ending of an accounting period?

A) The statement of retained earnings
B) The statement of working capital
C) The statement of cash flows
D) The statement of net worth

Question 64

Which of the following statements is true?

A) Only 20 percent of interest income is taxable for a corporation.
B) Dividend income is fully taxable.
C) Interest paid on debt obligations is a tax-deductible business expense.
D) Dividends paid to stockholders are a tax-deductible business expense.

Question 65

During 2008, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed assets acquisition by $109,455, and had marketable securities of $14,215 mature. What is the net cash provided by (used in) investing activities?

A) $132,085
B) $145,940
C) -$132,085
D) -$145,940

Question 66

Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of 32 percent this year. It is planning to construct a new recording studio next year. The appropriate tax rate to be applied on the income generated from the new studio is:

A) the average tax rate.
B) the marginal tax rate.
C) either one.
D) None of the above.

Question 67

United Brands Corp. just completed their latest fiscal year. The firm had sales of $16,650,000. Depreciation and amortization was $832,500, interest expense for the year was $825,000, and selling general and administrative expenses totaled $1,665,000 for the year, and cost of goods sold was $9,990,000 for the year. Assuming a federal income tax rate of 34%, what was the United Brands net income after-tax?

A) $2,202,750
B) $1,745,325
C) $3,505,100
D) $2,813,000

Question 68

Identify and explain the five fundamental principles that form the basis of accounting standards in United States.

Question 69

Identify the noncash items that a firm may have on its financial statements and explain their impact on the shareholders of the firm.

Question 70

Trident Manufacturing Company's treasurer identified the following cash flows during this year as significant. The company repaid existing debt of $425,110, while raising additional debt capital of $750,000. It also repurchased stock in the open markets for a total of $63,250 and paid $233,144 in dividends to its shareholders. What is the net cash provided by (used in) financing activities?

A) $28,496
B) $91,746
C) -$28,496
D) -$91,746

Question 71

Trident Corporation had the following cash flows in the current year. Which of the following will be categorized under the financing activities section of the statement of cash flows?

A) Rent on a warehouse amounting to $1.1 million
B) Purchase of $125,000 worth of five-year bonds issued by Towson Utilities
C) Preferred dividends of $330,000 paid to shareholders
D) Lease income received on a piece of land

Question 72

Cash flows from financing activities include all but one of the following:

A) Cash payments on the principal of long-term debt
B) Buying and selling bonds or stock of other firms
C) Cash purchases of treasury stock
D) Cash proceeds from a bank loan

Question 73

What is the firm's net cash flow from (used in) investing activities?

A) $0
B) $46,124
C) -$46,124
D) None of the above

Question 74

Which of the following best represents cash flows to investors?

A) Cash flow from operating activity, plus cash flow generated from net working capital
B) Earnings before interest and taxes times 1 minus the firm's tax rate
C) Net income minus dividends paid to preferred stockholders.
D) Cash flow from operating activity minus cash flow invested in net working capital minus cash flow invested in long-term assets.

Question 75

Natural Lite, Inc. reported the following items during fiscal 2010. The firm purchased marketable securities of $87,500, paid down a long-term loan in the amount of $650,000, purchased $4,250,000 of new equipment. The firm also issued $6,250,000 of common stock, paid $350,225 in dividends to its common shareholders, and repurchased $1,250,000 of common stock in the open market. What is the net cash provided by financing activities?

A) $4,575,210
B) $1,733,285
C) $3,999,775
D) $2,467,915

Question 76

Which of the following is a cash flow from investing activities?

A) Cash payment of dividends to shareholders
B) Cash from sale of products
C) Purchase of plant and equipment
D) Rent received from industrial property owned

Question 77

What is the firm's cash flow from financing activities?

A) -$66,405
B) $61,656
C) -$61,656
D) −$182,057

Question 78

Which of the following is NOT a cash flow from operating activities?

A) Cash payments on the principal of long-term debt
B) Payments for utilities and rent
C) Payments to purchase raw materials
D) Cash receipts from selling goods and services

Question 79

Which of the following is NOT a cash flow from investing activities?

A) Buying and selling bonds of other firms
B) Buying or selling of land, buildings, and plant and equipment
C) Cash payments of dividends to shareholders
D) Buying and selling stocks of other firms

Question 80

Explain the differences while using FIFO versus LIFO method of valuation in accounting for inventory.