Multiple Choice Answers

1. Obligations due to be paid within one year or within the company’s operating cycle, whichever is longer, are:
Current assets
Current liabilities
Earned revenues
Operating cycle liabilities

2. A special bank account used solely for the purpose of paying employees, is created by depositing the amount of each employees’ net pay into the account every pay period. This account is referred to as a(n):
Federal depository bank account
Employee’s Individual Earnings account
Employees’ bank account
Payroll register account
Payroll bank account

3. On October 10, 2010, Printfast Company sells a commercial printer for $2,350 with a one year warranty that covers parts. Warranty expense is project to be 4% of sales. On February 28, 2011, the printer requires repairs. The cost of the parts for the repair is $80 and Printfast pays their technician $150 to perform the repair. What is the warranty liability at the end of 2010?
$0, there is no liability at the end of 2010

4. A method of estimating bad debts expense that involves a detailed examination of outstanding accounts and their length of time past due is the:
Direct write-off method
Aging of accounts receivable method
Percentage of sales method
Aging of investments method
Percent of accounts receivable method

5. A contingent liability:
Is always of a specific amount
Is a potential obligation that depends on a future event arising out of a past transaction or event
Is an obligation not requiring future payment
Is an obligation arising from the purchase of goods or services on credit
Is an obligation arising from a future event

6. Sales taxes payable:
Is an estimated liability
Is a contingent liability
Is a current liability for retailers
Is a business expense
Is a long-term liability

7. A promissory note received from a customer in exchange for an account receivable:
Is a cash equivalent for the recipient
Is an account receivable for the recipient
Is a note receivable for the recipient
Is a short-term investment for the recipient
Is a note payable for the recipient

8. Many companies use accelerated depreciation in computing taxable income because:
It is required by the tax rules
It is required by financial reporting rules
It postpones tax payments until later years and the company can use the resources now to earn additional income before payment is due
Using it causes a company to use higher income in the early years of the asset’s useful life
The results are identical to straight-line depreciation

9. If the times interest ratio:
Increases, then risk increases
Increases, then risk decreases
Is greater than 1.5, then the company is in default
Is less than 1.5, the company is carrying too little debt

10. If a company had net income of $2,379,600, interest expense of 234,000, a tax rate of 40%, and operating income of 4,200,000, what would the times interest earned ratio be for the company?

11. Most employees and employers are required to pay:
Local payroll taxes
State payroll taxes
Federal payroll taxes
Both B and C only
Local, state and federal payroll taxes

12. A company had a fixed interest expense of $6,000, its income before interest expense and any income taxes was $18,000 and its net income was $8,400. The company’s times interest earned ratio is equals to

13. The matching principle requires:
That expenses be ignored if their effect on the financial statements are less important than revenues to the financial statement user
The use of the direct write-off method for bad debts
The use of the allowance method of accounting for bad debts
That bad debts be disclosed in the financial statements
That bad debts not be written off

14. Plant assets are:
Tangible assets used in the operation of a business that have a useful life of more than one accounting period
Current assets
Held for sale
Intangible assets used in the operations of a business that have a useful life of more than one accounting period
Tangible assets used in the operation of business that have a useful life of less than one accounting period

15. Amounts received in advance from customers for future products or services:
Are revenues
Increase income
Are liabilities
Are not allowed under GAAP
Require an outlay of cash in the future

16. A company issues at 9% bonds at par with a par value of $100,000 on April 1, which is 4 months after the most recent interest date. How much total cash interest is received on April 1 by the bond issuer?

17. Bonds that mature at different dates and end up with the total principal repaid gradually over a number of periods are referred to as:
Registered bonds
Bearer bonds
Callable bonds
Sinking fund bonds
Serial bonds

18. A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 9%. The amount of interest owed to the bondholders for each semiannual interest payment is.

19. A premium on common stock:
Is the amount paid in excess of par by purchasers of newly issued stock
Is the difference between par value and issue price when the amount paid is below par
Represents profit from issuing stock
Represents capital gain on sale of stock
Is prohibited in most states

20. A company borrowed $50,000 cash from the bank and signed a 6-year note at 7%. The present value factor for an annuity for 6 years at 7% is 4.7665. The annual annuity payments equal $10,490. The present value of the loan is:

21. A bond traded at 102 ½ means that:
The bond pays 2.5% interest
The bond traded at $1,025 per $1,000 bond
The market rate of interest is 2.5%
The bonds were retired at $1,025 each

22. The date the board of directors votes to pay a dividend is called the:
Date of stockholders’ meeting
Date of declaration
Date of record
Date of payment
Liquidating date

23. The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties is called a(n):
Bond indenture
Installment note
Mortgage contract

24. Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:
Discounted notes
Installment notes
Investment notes

25. A corporation’s distribution of additional shares of its own stock to its stockholders without the receipt of any payment in return is called a:
Stock dividend
Stock subscription
Premium on stock
Discount on stock
Treasury stock

26. A company must repay the bank $10,000 cash in 3 years for a loan. The loan agreement specifies 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938. The present value of the loan is:

27. The carrying value of a long-term note payable:
Is computed as the future value of all remaining future payments, using the market rate as interest
Is the face value of the long-term note less the total of all future interest payments
Is computed as the present value of all remaining future payments, discounted using the market rate of interest at the time of issuance
Is computed as the present value of all remaining interest payments, discounted using the note’s rate of interest
Decreases each time period the discount on the note is amortized

28. A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value factor for an annuity for 7 years at 9% is 5.0330. The present value of the loan is:

29. A company has net income of $850,000. It also has 125,000 weighted-average common shares outstanding and a market value per share of $115. The company’s price-earnings ratio is equal to:

30. Sinking fund bonds:
Require the issuer to set aside assets in order retire the bonds at maturity
Require equal payments of both principal and interest over the life of the bond issue
Decline in value over time
Are registered bonds

31. A company had net cash flows from operations of $120,000, total cash flows of $500,000 and average total assets of $2,500,000. The cash flow on total assets ratio equals:

32. A company has a profit margin of 12%. If net income is equal to $450,000 and average total asset is equal to $600,500, how much are sales?

33. One of several ratios that reflects solvency includes the:
Acid-test ratio
Current ratio
Times interest earned ratio
Total asset turnover
Days’ sales in inventory

34. Financial statements with data for two or more successive accounting periods placed in columns side by side, sometimes with changes shown in dollar amounts and percents, are referred to as:
Period-to-period statements
Controlling statements
Successive statements
Comparative statements
Serial statements

35. The statement of cash flows reports:
Assets, liabilities and equity
Revenues, gains, expenses and losses
Cash inflows and outflows for an accounting period
Equity, net income and dividends
Changes in equity

36. The first line item in the operating activities section of a spreadsheet for a statement of cash flows prepared using the indirect method is:
Cash received from customers
Increase (decrease) in accounts receivable
Net income
Adjustments to net income

37. Trend analysis is also called:
Financial analysis
Ratio analysis
Index number trend analysis
Industry analysis

38. The comparison of a company’s financial condition and performance across time is known as:
Horizontal analysis
Vertical analysis
Political analysis
Financial reporting
Investment analysis

39. A company has a profit margin of 5%. If net income is equal to $83,000 and average total assets is equal to $45,000, how much are net sales?

40. A company has sales of $5,417,000, a gross profit ratio of 35%, ending merchandise inventory of $201,425, and total current assets of $1,539,600. What is the days sales’ in inventory ratio for the year?

41. External users of financial information:
Are those individuals involved in managing and operating the company
Include internal auditors and consultants
Are not directly involved in operating the company
Make strategic decisions for a company
Make operating decisions for a company

42. A machine with a cost of $130,000 and accumulated depreciation of $85,000 is sold for $50,000 cash. The amount that should be reported as a source of cash under cash flows from investing activities is:
Zero. This is an operating activity
Zero. This is a financing activity

43. Net sales divided by average accounts receivable is equal to the:
Days’ sales uncollected
Average accounts receivable ratio
Current ratio
Profit margin
Accounts receivable turnover ratio

44. A company’s transactions with its creditors to borrow money and/or to repay the principal amounts of loans are reported as cash flows from:
Operating activities
Investing activities
Financing activities
Direct activities
Indirect activities

45. The indirect method for the preparation of the operating activities section of the statement of cash flows:
Separately lists each major item of operating cash receipts
Separately lists each major item of operating cash payments
Reports net income and then adjusts it for items necessary to determine net cash provided or used by operating activities
Is required if the company is a merchandiser

46. The ability to generate future revenues and meet long-term obligations is referred to as:
Liquidity and efficiency
Market prospects

47. A company had a market price of $83.12 per share, earnings per share of $4.87 and dividends per share of $5.40. Its price-earnings ratio is equal to:

48. The ability to provide financial rewards sufficient to attract and retain financing is called:
Liquidity and efficiency
Market prospects

49. The average number of times a company’s inventory is sold during an accounting period, calculated by dividing cost of goods sold by the average inventory balance is equal to the:
Accounts receivable turnover
Inventory turnover
Days’ sales uncollected
Current ratio

50. The measurement of key relations among financial statement items is known as:
Financial reporting
Horizontal analysis
Investment analysis
Ratio analysis
Risk analysis