Multiple Choice Questions

1. The majority of financing for most companies comes from which of the following sources?

A. Owners and customers
B. Creditors and customers
C. Owners and managers
D. Creditors and owners

2. Which of the following would not be found listed as a liability on a company's balance sheet?

A. Operating lease obligations
B. Capital lease obligations
C. Bonds payable
D. Taxes payable

3. Which of the following would be found listed as a liability on a company's balance sheet?

A. Operating lease obligations
B. Projected benefit obligation
C. Purchase Commitment obligation
D. Postretirement benefits other than pension obligation

4. Which of the following is not a criterion for defining a lease as a capital lease?

A. Ownership is transferred by the end of the lease agreement.
B. The lease contains an option to purchase the asset at a bargain price.
C. The present value of the lease payments at the beginning of the lease is 75% or more than the value of the asset.
D. The lease term is at least 75% of the economic life of the asset.

5. Which of the following is true concerning bond covenants?

A. Bond covenants are restrictions placed on bondholders to protect rights of equity holders.
B. Violation of a bond covenant requires that a company declares bankruptcy.
C. If a company violates a bond covenant, it means it has failed to make interest or principal repayments on debt in a timely manner.
D. Bond covenants are legal restrictions placed in order to minimize the risk of default on bonds.

6. Recording a long-term lease as an operating lease, as opposed to a capital lease, for a lessee will cause the following ratios to be:

A. Option A
B. Option B
C. Option C
D. Option D

7. If a company leases equipment to other companies and records these leases as operating leases rather than capital leases, its:

I. recorded liabilities will be lower.
II. recorded assets will be higher.
III. total cash flows will be higher.
IV. leverage ratios will be higher.

A. I and III
B. II and IV
C. I only
D. II, III and IV

8. If a company that leases equipment from another company records these leases as operating leases rather than capital leases, its:

I. recorded liabilities will be lower.
II. recorded assets will be higher.
III. total cash flows will be higher.
IV. leverage ratios will be higher.

A. I and III
B. II and IV
C. I only
D. II, III and IV

9. Which one of the following statements is false?

A. Short-term obligations may be classified as long term if the company intends to refinance them on a long-term basis and can demonstrate the ability to do so.
B. Violation of a long-term debt covenant automatically means the company must reclassify the debt as current.
C. Current liabilities are recorded at their maturity value, and not their present value.
D. If a bond is issued at a discount, the effective interest rate is greater than the coupon rate.

10. When considering defined benefit pension plans, which of the following will not increase the projected benefit obligation (PBO)?

A. A decrease in the discount rate.
B. An increase in estimated compensation growth.
C. An increase in expected average length of lives of employees.
D. A decrease in the expected rate of return on plan assets.

11. With respect to pension liabilities, which of the following statements are true?

I. The projected benefit obligation (PBO) is always greater than or equal to the accumulated benefit obligation (ABO).
II. The vested benefit obligation (VBO) is always as least as or as big as the accumulated benefit obligation (ABO).
III. If the PBO is greater than the plan assets, the plan is said to be overfunded.
IV. If the weighted-average assumed discount rate is increased, the PBO will decrease.

A. I, III and IV
B. I and III
C. II and IV
D. I and IV

12. The difference between the accumulated benefit obligation (ABO) and the projected benefit obligation (PBO) is:

A. the PBO considers non-vested obligations and the ABO does not.
B. the PBO takes into account the time value of money and the ABO does not.
C. the PBO takes into account future pay increases and the ABO does not.
D. the PBO takes into account mortality rates of employees and the ABO does not.

13. Hert Corporation acquired a capital lease that is carried on its books at a present value of $100,000 (discounted at 12%). Its annual rental payment is $15,000. What is the amount of interest expense from this lease?

A. Option A
B. Option B
C. Option C
D. Option D

14. Which of the following might give rise to off-balance sheet financing?

I. Long-term operating leases
II. Sale of receivables without recourse
III.Through-put agreements
IV. Purchase commitments

A. I, II, III and IV
B. I, II and IV
C. II, III and IV
D. I, III and IV

15. Which of the following is an example of off-balance sheet financing?

A. Operating leases
B. Capital leases
C. Issuance of convertible bonds
D. Issuance of common stock

16. If a company engages in off-balance sheet financing, generally the effect is:

I. to cause assets to be understated.
II. to increase leverage ratios.
III. to increase cash flows.
IV. to cause liabilities to be understated.

A. I, II, III and IV
B. I, III and IV
C. I and IV
D. IV only

17. Minority interest appears on the balance sheet of some companies. Minority interest:

A. is classified as a liability.
B. is classified as an equity.
C. arises when a company records investments using the equity method.
D. arises when a company owns controlling interest in another company, but less than 100%.

18. A lessee must account for a lease as a capital lease if:

I. lease transfers ownership to lessee at the end of the lease.
II. lease contains option to purchase the asset at the end of the lease at a bargain price.
III. lease is longer than 20 years.
IV. present value of lease is greater than 10% of lessee's assets.

A. I and II
B. I, II and III
C. I, III and IV
D. I, II and IV

19. Dylan Corporation issues a zero-coupon bond with $100,000 face value, with a 5-year maturity, and the market rate is 7%. Interest on corporate bonds is normally paid semiannually. In the liability section of Dylan's balance sheet, the proceeds from selling the zero-coupon immediately after issuance will be closest to:

A. $70,892.
B. $71,299.
C. $70,000.
D. $100,000.

20. Which of the following statements about stock dividends is true?

A. Stock dividends increase the number of shares outstanding.
B. Stock dividends are more valuable than stock splits.
C. Stock dividends are recorded as a reduction in cash.
D. Stock dividends are dividends given in the form of stock from another company.

21. Treasury stock is:

A. investments in government securities.
B. retained earnings that have been appropriated to make equity investments.
C. a company's own stock that it has repurchased.
D. assets held for safekeeping in company's vaults.

Reling Company reports the following information as of 12/31/05

22. The book value per share of common stock is: (230+350+40-10%*100)/40

A. $12.20
B. $12.40
C. $15.25
D. $15.50

23. The book value per share of preferred stock is: (100+10)/10

A. $ 22
B. $ 20
C. $ 11
D. $ 10

24. Which of the following statements concerning contingencies is correct?

I. Gain contingencies are recorded if they are probable and reasonably estimable.
II. Unredeemed frequent flyer mileage is an example of a loss contingency.
III. A loss contingency is a form of off-balance sheet financing.
IV. Loss contingencies are not recognized unless there is a greater than 95% chance they will be realized.

A. I, II, III and IV
B. II, III, and IV
C. II and III
D. II only

25. Many of the postretirement health benefit plans offered by companies to their employees are unfunded, while all of their pension plans have some degree of funding. Which of the following statements is false?

A. There is no legal requirement to fund postretirement health benefits, but there are legal requirements covering pension funding.
B. Contributions to pension plans are normally tax deductible, but contributions to postretirement health plans are not tax deductible.
C. Funds contributed to a pension plan can be withdrawn at any time, but funds contributed to a postretirement health plan cannot be withdrawn by law.
D. Taxes do not have to be paid on investment income earned by assets in pension plan, but they do normally have to be paid on postretirement health plans.

26. One way for a company to increase its book value per share is to:

A. issue long-term debt.
B. retire long-term debt.
C. increase dividend payout ratio.
D. buy back shares at market prices below their book value.

27. A company's current ratio is 1.5. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio and return on assets ratio?

A. Current Ratio: Increase; Return on Assets: Increase
B. Current Ratio: Increase; Return on Assets: Decrease
C. Current Ratio: Decrease; Return on Assets: Increase
D. Current Ratio: Decrease; Return on Assets: Decrease

28. An analyst should consider whether a company acquired assets through a capital lease or an operating lease because a company may structure:

A. leases to be treated like capital leases to enhance its leverage ratios.
B. leases to be treated like capital leases to enhance its cash flow.
C. leases to be treated like operating leases to enhance (improve) its leverage ratios.
D. leases to be treated like operating leases to enhance its cash flow.

29. Which of the following lease provisions would cause a lease to be classified as an operating lease?

A. The lease contains a bargain purchase option.
B. The collectibility of lease payments by the lessor is unpredictable.
C. The term of the lease is more than 75 percent of the estimated economic life of the leased property.
D. The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property.

30. On January 1, a company entered into a capital lease resulting in an obligation of $20,000 being recorded on the balance sheet. The lessor's implicit interest was 10 percent. At the end of the first year of the lease, the cash flow from financing activities section of the lessee's statement of cash flows showed a use of cash of $2,200 applicable to the lease. How much did the company pay the lessor in the first year of the lease?

A. $2,000
B. $2,200
C. $4,200
D. $20,000

31. Which of the following is not a component of recognized OPEB cost?

A. Service cost
B. Amortization of prior service costs
C. Interest cost
D. Amortization of prior interest costs

32. Which of the following is reported in the equity section of the balance sheet?

A. Redeemable Preferred stock
B. Treasury stock
C. Investment in affiliates
D. Debentures

33. Which of the following is not a component of pension expense?

A. Service cost
B. Interest cost
C. Actual return on plan assets
D. Expected return on plan assets

34. If a company increases its expected return on plan assets this year, the effect would be to:

I. increase plan assets.
II. decrease PBO.
III. decrease pension expense.
IV. decrease minimum liability.

A. I, II and IV
B. I and IV
C. III and IV
D. III only

Harms Inc. reported in its 2006 annual report the following information:

35. Funded status at the end of 2006 was:

A. $15M.
B. $12M.
C. $10M.
D. $0M.

36. If Harms had decreased its compensation growth rate to 4.5% in 2006, the effect would have been:

A. an increased ABO.
B. an increased PBO.
C. a decreased ABO.
D. a decreased PBO.

37. The estimated interest cost for 2007 is:

A. 7.95M.
B. 7.60M.
C. 7.36M.
D. 7.20M.

38. Synthetic leases may achieve all of the following benefits to the borrower except:

A. window dress the balance sheet.
B. increase cash flow.
C. reduce tax expense on the income statement.
D. increase net income.

39. The plan is said to be underfunded, if:

A. the pension obligation is more than the asset value.
B. the pension obligation is less than the asset value.
C. the pension obligation is equal to the asset value.
D. none of the above.