Q1. With respect to a corporation, select the statement that is correct.
a. Its organization requires an approved charter which is governed by state law.
b. Ownership rights to the corporation are transferable.
c. A corporation is a separate legal entity from its owners.
d. Stockholders have limited liability.
e. All of the above are correct.
Q2. Which of the following represents the shares currently in the hands of investors?
a. Authorized shares
b. Issued shares
c. Outstanding shares
d. Unissued shares
e. Treasury shares
Q3. The par value of common stock is the
a. average market price of the stock during the period in which it is sold.
b. ceiling (maximum) amount above which the stock may not be sold initially.
c. floor (minimum) amount below which the stock may not be sold initially.
d. selling price of the stock at the date it was issued by the corporation.
e. same as the market value for the stock on the date of issue.
Q4. Vaughan Company has one class of capital stock issued. It is
a. common stock.
b. preferred stock, voting.
c. preferred stock, noncumulative.
d. common stock, nonvoting.
e. None of the above is correct.
Q5. If Lynch Corporation sells and issues 100 shares of its $10 par value common stock at $11 per share, the entry to record the sale will not include a
a. Debit to Cash of $1,100.
b. Credit to Contributed capital in excess of par of $100.
c. Credit to Common stock of $1,000.
d. Credit to Retained earnings of $100.
e. All of the above would be included.
Q6. The conversion feature on convertible preferred stock enables the stockholder to convert it to
a. convertible bonds.
b. cash.
c. common stock.
d. products of the company.
e. dividends in arrears.
Q7. Choose the correct definition for par value from the following:
a. The amount that a corporation must pay when it exercises its right to convert shares of stock.
b. The equity of one share of outstanding stock in the issuing corporation's net assets as recorded in the corporation's accounts.
c. An arbitrary value placed on a share of stock at the time the stock is authorized in the corporate charter.
d. The costs of bringing a corporation into existence, such as legal fees, promotor's fees, and amounts paid to the state to secure a charter.
Q8. Guest Corporation issued (sold) 1,000 shares of its no par common stock for $110 per share. The bylaws established a stated value of $100 per share. The transaction is recorded as an increase in contributed capital of
a. $ 100,000.
b. $ 110,000.
c. $1,000,000.
d. $1,100,000.
e. None of the above is correct.
Q9. Which of the following statements is true?
a. An initial public offering (IPO) occurs when the company first offers their stock for sale to the public.
b. A seasoned new issue is the term used for any additional sales of new stock to the public after the IPO.
c. An underwriter, usually an investment banker, advises the corporation on matters concerning the sale of shares of stock and helps to market those shares for a fee.
d. A and B are true.
e. All of the above are true.
Q10. Shares of stock eligible for dividends are
a. the number of shares of authorized.
b. the number of shares issued.
c. the number of shares outstanding.
d. the number of treasury shares.
e. none of the above.
Q11. The declaration and payment of a cash dividend
a. reduces retained earnings and increases liabilities by the amount of the dividend.
b. reduces retained earnings and increases contributed capital by the same amount.
c. reduces assets and increases liabilities each by the amount of the dividend.
d. reduces assets and retained earnings each by the amount of the dividend.
e. None of the above is correct.
Q12. Retained earnings
a. is an asset.
b. has a debit balance for a successful corporation.
c. represents the future dividend liability of the company.
d. represents the income that has been earned by the company, less any dividends declared since the first day of operations.
e. is presented on the Statement of Cash Flows.
Q13. At the end of 20C, Allen Corporation reported a retained earnings credit balance of $50,000. During 20D, Allen reported the following amounts: Cash dividends declared and paid $15,000, net income of $35,000, and a $5,000 prior period adjustment (debit). The 20D ending balance of total retained earnings was
a. $75,000.
b. $70,000.
c. $65,000.
d. $60,000.
e. None of the above is correct.
Q14. Which of the following accounts would appear in the general ledger of a partnership?
a. Retained earnings account.
b. Dividends paid account.
c. Common stock accounts.
d. Drawings accounts.
e. None of the above.
Q15. The statement of cash flows reports directly on the
a. financial position of the business.
b. accrual basis in accordance with GAAP.
c. causes of the inflows and outflows of cash.
d. financial operating performance of the business.
e. None of the above is correct.
Q16. Which of the following transactions would not create a cash flow?
a. The company purchased some of its own stock from a stockholder.
b. Amortization of patent for the period.
c. Payment of a cash dividend.
d. Sale of equipment at book value (i.e. no gain or loss).
e. None of the above is correct.
Q17. Which of the following transactions is not a direct source of cash?
a. Disposal of inventory for cash.
b. Borrowing cash.
c. Sale and issuance of capital stock for cash.
d. Sale of services for cash.
e. All of the above are direct sources of cash.
Q18. Which of the following transactions is not a direct use of cash?
a. Acquisition of inventory for cash.
b. Exchanges of bonds payable for land.
c. Purchase of treasury stock with cash.
d. Cash dividend paid.
e. All of the above are direct uses of cash.
Q19. Which of the following transactions is not a source of cash?
a. Cash sales of merchandise.
b. Sale and issuance of capital stock for cash.
c. Short-term borrowing of cash.
d. Sale of operational assets for cash.
e. All of the above are typical sources of cash.
Q20. Common stockholders have the right to
a. sell their stock.
b. share in any dividends distributed to common stockholders.
c. have the first opportunity to purchase any additional shares of common stock issued by the corporation.
d. vote at stockholders' meetings.
e. All of the above are true.
Q21. Which of the following would not be a cash flow from investing activities?
a. Purchase of long-term investments.
b. Sale of a patent.
c. Collection of principal of a note receivable.
d. Collection of interest revenue on a long-term note.
e. None of the above is correct.
Q22. Which of the following would not be a cash flow from financing activities?
a. Issuance of common stock.
b. Borrowing on a long-term note payable.
c. Collection of a cash dividend.
d. Repayment of principal on a long-term note payable.
e. None of the above is correct.
Q23. Which of the following is a cash flow from operating activities?
a. Purchase of merchandise for resale.
b. Sale of a piece of land no longer used in operations.
c. Sale of long-term investments in common stock.
d. Payment of a note payable.
e. None of the above is correct.
Q24. A cash inflow from financing activities includes
a. proceeds from selling investments in equity securities of another company.
b. proceeds from selling equipment.
c. proceeds from issuance of bonds payable.
d. receipt of interest payments.
e. None of the above is correct.
Q25. The statement of cash flows (indirect method) reports depreciation expense as an addition to net income because depreciation
a. causes an inflow of funds for the replacement of assets.
b. reduces reported net income of the period but does not involve an outflow of cash for that period.
c. is a direct use of cash.
d. reduces reported net income and causes an inflow of cash.
e. None of the above is correct.
Q26. When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following are not provisions specified in the indenture?
a. Dates of interest payments.
b. Rate of interest to be paid.
c. Maturity date.
d. Cash to be received at the issue date.
e. All of the above are specified in the indenture.
Q27. Positive financial leverage occurs when
a. interest payments can be deducted for income tax purposes.
b. the company's after-tax return on total assets is less than the after-tax cost of borrowing.
c. the return to the owners is enhanced through the use of debt financing.
d. payment of resources to creditors is limited to the required interest payments while the return of the principal borrowed is not required.
e. None of the above is correct.
Q28. Bonds payable usually are classified on the balance sheet as
a. long-term liabilities.
b. current liabilities.
c. investments and funds.
d. current assets.
e. None of the above is correct.
Q29. The annual interest rate specified on a bond (which is based on the maturity amount of the bond) appropriately can be called the
a. stated rate.
b. nominal rate.
c. coupon rate.
d. contract rate.
e. A through D are all acceptable terms.
Q30. Which of the following statements is correct?
a. Bonds are always issued (sold) at their par value.
b. Bonds issued at more than par value are said to be issued at a discount.
c. Once bonds are issued, the bonds will trade in the bond market above or below par depending on changes in interest rates.
d. Bondholders must hold their bonds to maturity to receive cash for their investment.
e. None of the above is correct.
Q31. On July 1, 20A, Wilson Company issued $300,000, five-year, 9% bonds at 103. The reason Wilson issued the bonds at a premium was
a. the stated rate of interest was higher than the rate being paid on investments with comparable risk.
b. the stated rate of interest was the same as the rate being paid on investments with comparable risk.
c. the stated rate of interest was lower than the rate being paid on investments with comparable risk.
d. the bonds were callable.
e. None of the above is correct.
Q32. Deany Company issued $100,000 bonds. The stated rate of interest was 8% and the market rate 9%. Which of the following statements is true?
a. The bonds were issued at a premium.
b. Annual interest expense will exceed the company's actual cash payments for interest.
c. Annual interest expense will be $8,000.
d. Deany Company cannot issue bonds if the market rate is higher than the stated rate.
e. None of the above is correct.
Q33. If a bond is sold at 98, its stated rate of interest would be
a. higher than the market rate.
b. lower than the market rate.
c. equal to the market rate.
d. unrelated to the market rate.
e. None of the above is correct.
Q34. Ratios are most useful for analysis when
a. used alone.
b. compared with historical ratios of the same company.
c. compared with ratios for other companies in the industry.
d. Both B and C are correct.
e. All of the above are correct.
Q35. The base amount in preparing a common-size income statement is usually
a. cost of goods sold.
b. gross profit.
c. net income.
d. net sales.
e. All of the above are appropriate.
Q36. The Able Company had net income of $47,500 and earnings per share of $3.17 during 20B. On December 31, 20B, the stock had a market price of $18.50 per share. What is Able's price/earnings ratio?
a. 25.70.
b. 8.11.
c. 5.84.
d. 0.17.
e. None of the above is correct.
Q37. Perot Company had income before interest and taxes of $120,000. Interest expense for the period was $17,000 and income taxes amounted to $28,500. The average stockholders' equity was $680,000. What is Perot's return on equity?
a. 17.65%.
b. 15.15%.
c. 13.46%.
d. 10.96%.
e. None of the above is correct.
Q38. A business must maintain a sufficient amount of working capital to
a. meet current debts
b. carry adequate inventories
c. take advantage of cash discounts
d. to maintain liquidity.
e. All of the above are correct.
Q39. Crusader Company reported the following amounts in the 20A balance sheet
Total assets $330,000
Total liabilities $100,000
Common stock, par value $9 (no preferred stock) $90,000
The book value of the common stock was
a. $11.
b. $20.
c. $33.
d. $22.
e. None of the above is correct.
Q40. At the end of 20B, Storage Company reported outstanding common stock (par $20) of $300,000. Total liabilities were $440,000 and total assets were $860,000. The company had no preferred stock. The book value per share of common stock was
a. $29.00.
b. $13.90.
c. $28.00.
d. $14.00.
e. None of the above is correct.
Q41. Bailey Corporation reported the following information for 20A
Net income $10,000
Total assests $16,000
Total stockholders' equity $8,000
Morgan's debt/equity ratio was
a. .33 or 33%.
b. 1.25 or 125 %.
c. 1.0 or 100%.
d. 3.0 or 300%.
e. None of the above is correct.
Q42. Shore Company reported income before extraordinary items of $25,000, total liabilities of $150,000, and total stockholders' equity of $100,000. The return on assets was
a. 10%.
b. 25%.
c. 16.67%.
d. Cannot be determined from the data given.
e. None of the above is correct.
Q43. If the current (working capital) ratio is 2 to 1, the payment of a cash dividend, which was recorded as a liability on the date of declaration, will
a. increase the current ratio.
b. decrease the current ratio.
c. have no effect on the current ratio.
d. invalidate earnings per share.
e. None of the above is correct.
Q44. The records of ZZZZ Better Corporation include the following:
Average total assets $60,000
Average total liabilities $45,000
Total revenue $107,600
Total expense (including income tax) $104,000
The return on equity is (round to the nearest percent)
a. 13%.
b. 6%.
c. 24%.
d. 6%.
e. None of the above is correct.
Q45. An important measure of the average movement of goods "on and off the shelf" of a company is the
a. Profit margin.
b. Price/earnings ratio.
c. Inventory turnover ratio.
d. Gross inventory ratio.
e. None of the above is correct.
Q46. Book value per common share
a. usually is a good indicator of the market value of the common stock.
b. is a good measure of management performance.
c. is usually greater than the market value per share.
d. is a measure of liquidity.
e. is not widely used in assessing the future dividend potential of the corporation.
Q47. Which of the following ratios is NOT a test of liquidity?
a. Receivable turnover.
b. Cash ratio.
c. Current ratio.
d. Quick ratio.
e. All of the above are tests of liquidity.
Q48. Which of the following ratios is not a test of solvency?
a. Debt to equity ratio.
b. Owners' equity to total equity ratio.
c. Creditors' equity to total equity ratio.
d. Earnings per share ratio.
e. All of the above are tests of solvency.
Q49. Which of the following ratios is not an indicator of a company's short-term financial strength?
a. Price/earnings ratio.
b. Receivable turnover.
c. Working capital ratio.
d. Quick ratio.
e. All of the above are indicators of the current position.
Q50. Which of the following ratios usually is not considered to be a test of profitability?
a. Current ratio.
b. Profit margin.
c. Return on assets.
d. Earnings per share.
e. None of the above is correct.