BaiTapPTTC 1

Chapter 4
QN=01 Which of the following would rarely be classified as a current asset?

a. Prepaid insurance
b. Goodwill
c. Marketable Securities
d. Work-in-progress
QN=02 Which of the following would not be classified as a current asset?

a. Inventory
b. Accounts payable
c. Accounts receivable
d. Prepaid expenses
QN=03 An asset is considered to be liquid if:

a. it is readily converted into a current asset.
b. it is an intangible asset.
c. it is readily converted into cash.
d. it is part of retained earnings.
QN=04 Analysis of a company's assets will help evaluate its:

I. liquidity.
II. solvency.
III. operational capacity.
IV financing ability.
a. I, II, III and IV
b. I, II and IV
c. II, III and IV
d. I, II and III
QN=05 The use of LIFO rather than FIFO for inventory costing under normal economic
conditions results in:
I. lower net income.
II. higher total assets.
III. gher retained earnings.
IV. unchanged retained earnings.
a. II and III
b. I, II and IV
c. I only
d. I and IV
QN=06 Which of the following is not a common characteristic of a company choosing to
use LIFO rather than FIFO?
a. Larger inventory balances
b. Higher variability in inventory balances
c. Greater expected tax savings
d. Larger in size
QN=07 Which of the following steps are required to adjust LIFO to FIFO?
a. Inventory needs to be calculated as reported LIFO inventory plus LIFO reserve.
b. Increase deferred tax payable by LIFO reserve times Tax rate.
c. Retained earnings need to be calculated as reported retained earnings plus LIFO reserve
times (1 - Tax rate).
d. All of the above.
D
QN=08 One advantage of LIFO over FIFO under normal conditions is that:
a. it reports higher retained earnings.
b. it results in higher cash flows.
c. it results in higher current ratios.
d. it results in higher gross margins.
QN=09 Which of the following is not an effect of capitalization?

a. Capitalization usually reduces net income.
b. Capitalization usually yields a smoother net income.
c. Capitalization usually decreases the volatility of the return on investment.
d. Capitalization usually increases net income.
A
QN=10 A write-down in asset value is:
a. a very rare occurrence.
b. not allowed under GAAP.
c. results in a direct debit to stockholders' equity.
d. required if an asset is deemed to have permanent impairment of value.
D
QN=11 Which of the following is not considered an intangible asset?
a. Goodwill
b. Customer lists
c. Prepaid advertising expenses
d. Memberships
QN=12 Which of the following is incorrect with respect to recognized goodwill on the
balance sheet?
a. It should not be amortized over 30 years.
b. It arises when another company is purchased or when internally generated.
c. It should be written-down if the future benefits no longer exist.
d. It may be negative.
B
QN=13 Under current US GAAP, goodwill is:
I. amortized over a period not to exceed 40 years.
II. tested annually for impairment.
III. exclusive of separately identifiable intangible assets.
IV. recorded only upon purchase of another entity.
b. II, III and IV
c. I, II and III
d. II and IV
B
QN=14 LIFO liquidation occurs when:
a. a firm changes from LIFO to another inventory method.
b. a firm experiences an increase in cost of raw materials.
c. the LIFO reserves decline in value.
d. the quantity of goods sold is greater than the quantity produced.
D
QN=15 If a LIFO liquidation occurs during a period of rising prices, which of the following
statements about the effects on a firm's financial statements, all other things equal, is
generally true?
I. Cost of goods sold increases.
II. Gross profit margin increases.
III. Taxes decrease.
IV. Net income increases.
a. I only
b. II only
c. I and III only
d. II and IV only
D
QN=16 Which of the following statements about inventories is true?
a. U.S. generally accepted accounting principles (GAAP) require the use of lower-of-cost or
market-valuation basis for inventories.
b. Last-in, last-out (LIFO) inventory accounting makes management of income more
difficult than first-in, first-out (FIFO) accounting.
c. During inflation, LIFO inventory accounting tends to overstate the current ratio.
d. FIFO inventory balances generally contain old and outdated costs that have little or no
relationship to current costs.
A
QN=17 Depreciation is based on the principle of:
a. allocation.
b. appropriation.
c. estimation.
d. approbation.
A
QN=18 Which of the following is not an analysis issue arising with impairment?
a. Evaluating the appropriateness of the amount of the impairment.
b. Evaluating the appropriateness of the timing of the impairment.
c. Analyzing the effect of the impairment on asset.
d. Analyzing the effect of the impairment on income.
C
QN=19 Goodwill is:
a. the excess of the purchase price of net assets over the book value of net assets.
b. the excess of the appraised value of net assets over the book value of net assets.
c. the excess of the purchase price of net assets over the fair value of net assets.
d. the excess of the appraised value of net assets over the fair value of net assets.
C
QN=20 With respect to LIFO, which of the following is incorrect?
a. If a company uses LIFO for tax purposes it must use it for GAAP purposes.
b. If the LIFO reserve increases in a given year, the LIFO COGS is higher than it would
have been if FIFO had been used for that year.
c. LIFO results in better matching on the income statement than FIFO.
d. LIFO results in inventory levels on the balance sheet that are closer to current cost than
FIFO.
D
QN=21 Securitization through the use of a properly structured SPE may result in the
following benefits to the company:
I. Remove receivables from the balance sheet.
II. Remove debt from the balance sheet.
III. Lower financing costs.
IV. Recognize gains on the sale of assets to the SPE.
b. I, II and III
c. I and IV
d. II and III
A
QN=22 Solvency refers to the ability of a company to meet its short-term obligations.
a. TRUE
b. FALSE
B
QN=23 Prepaid expenses are usually classified as current assets.
a. TRUE
b. FALSE
A
QN=24 Accounts receivable are usually not classified as a current asset.
a. TRUE
b. FALSE
B
QN=25 The cash operating cycle is the amount of days between making a sale and
collecting money from customers.
a. TRUE
b. FALSE
B
QN=26 If management underestimates the allowance for non-collectible accounts, this will
cause net income for the period to be overstated.
a. TRUE
b. FALSE
A
QN=27 Forming a special purpose entity (SPE) is a common way companies securitize
receivables.
a. TRUE
b. FALSE
A
QN=28 If a company factors its accounts receivables, this will have the effect of making its
cash cycle appear shorter.
a. TRUE
b. FALSE
A
QN=29 Under GAAP, the choice of inventory costing method (LIFO, FIFO, etc.) must be
determined by the physical flow of the goods.
a. TRUE
b. FALSE
B
QN=30 The LIFO Conformity rule states that if a company uses LIFO for tax purposes it
must also use it for financial reporting purposes.
a. TRUE
b. FALSE
A
QN=31 LIFO provides a better match of current expenses to revenues on the income
statement, while FIFO provides a better ending inventory figure by more closely reflecting
current costs.
a. TRUE
b. FALSE
A
QN=32 Changes in inventory levels have been shown to be useful in predicting future sales
and earnings.
a. TRUE
b. FALSE
A
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QN=33 One advantage of FIFO over LIFO is that it minimizes the distortion caused by
inflation on net income.
a. TRUE
b. FALSE
B
QN=34 In a period of rising prices, using FIFO would produce a lower cost of goods sold
than using LIFO.
a. TRUE
b. FALSE
A
QN=35 An increasing accounts receivables balance is always a good sign as it means the
company has more current assets and is more liquid.
a. TRUE
b. FALSE
B
QN=36 Gains and losses from the sale of plant, property and equipment should be included
in cost of goods sold as in reality they reflect the cost of producing goods for sale.
a. TRUE
b. FALSE
B
QN=37 When the discounted amount of expected cash flows from an asset is greater than
the asset's book value, the asset is deemed to be impaired.
a. TRUE
b. FALSE
B
QN=38 Depreciation is a method for matching costs of long-lived assets to revenues
generated from their use.
a. TRUE
b. FALSE
A
QN=01 Financial Statements of ABC Corp. indicates that ending inventory levels in 2005
and 2006 were $200,000 and $350,000 respectively. Cost of Goods sold for 2005 and 2006
were $1,900,000 and $2,200,000 respectively. Purchases in 2006 were:
a. $1,950,000
b. $2,150,000
c. $2,350,000
d. $1,850,000
C
QN=02 Target Inc. has 30M shares outstanding and trades at $50 per share. Target has net
identifiable assets with a book value of $1,000M and a fair value of $1,200M. Acquirer
Corporation purchases all of Target Inc. stock for $60 per share. How much will Acquirer
record as goodwill upon acquiring Target?
a. 300M
b. 500M
c. 600M
d. 800M
C
QN=03 Look Good Corporation has current assets of $1.1M and current liabilities of $1M.
It is close to year-end and it would like to increase its current ratio. Which of the following
will achieve this?
a. Encourage customers to pay their bills more quickly.
b. Increase short-term borrowings by $0.1M.
c. Sold building for $0.2M in cash.
d. Liquidate some of its trading marketable securities.
C
QN=04 A Corporation wants to increase its current ratio from its present level of 1.2 before
it ends the fiscal year. The action having the desired effect is:
a. delaying the next payroll.
b. writing down impaired assets.
c. selling furniture for cash.
d. selling current marketable securities at cash for their book value.
C
QN=01 Which of the following would rarely be classified as a current asset?
a. Prepaid insurance
b. Goodwill
c. Marketable Securities
d. Work-in-progress
B
QN=02 Which of the following would not be classified as a current asset?
a. Inventory
b. Accounts payable
c. Accounts receivable
d. Prepaid expenses
B
QN=03 An asset is considered to be liquid if:
a. it is readily converted into a current asset.
b. it is an intangible asset.
c. it is readily converted into cash.
d. it is part of retained earnings.
C
QN=04 Analysis of a company's assets will help evaluate its:
I. liquidity.
II. solvency.
III. operational capacity.
IV financing ability.
b. I, II and IV
c. II, III and IV
d. I, II and III
D
QN=05 The use of LIFO rather than FIFO for inventory costing under normal economic
conditions results in:
I. lower net income.
II. higher total assets.
III. gher retained earnings.
IV. unchanged retained earnings.
a. II and III
b. I, II and IV
c. I only
d. I and IV
C
QN=06 Which of the following is not a common characteristic of a company choosing to
use LIFO rather than FIFO?
a. Larger inventory balances
b. Higher variability in inventory balances
c. Greater expected tax savings
d. Larger in size
B
QN=07 Which of the following steps are required to adjust LIFO to FIFO?
a. Inventory needs to be calculated as reported LIFO inventory plus LIFO reserve.
b. Increase deferred tax payable by LIFO reserve times Tax rate.
c. Retained earnings need to be calculated as reported retained earnings plus LIFO reserve
times (1 - Tax rate).
d. All of the above.
D
QN=08 One advantage of LIFO over FIFO under normal conditions is that:
a. it reports higher retained earnings.
b. it results in higher cash flows.
c. it results in higher current ratios.
d. it results in higher gross margins.
B
QN=09 Which of the following is not an effect of capitalization?
a. Capitalization usually reduces net income.
b. Capitalization usually yields a smoother net income.
c. Capitalization usually decreases the volatility of the return on investment.
d. Capitalization usually increases net income.
A
QN=10 A write-down in asset value is:
a. a very rare occurrence.
b. not allowed under GAAP.
c. results in a direct debit to stockholders' equity.
d. required if an asset is deemed to have permanent impairment of value.
D
QN=11 Which of the following is not considered an intangible asset?
a. Goodwill
b. Customer lists
c. Prepaid advertising expenses
d. Memberships
C
QN=12 Which of the following is incorrect with respect to recognized goodwill on the
balance sheet?
a. It should not be amortized over 30 years.
b. It arises when another company is purchased or when internally generated.
c. It should be written-down if the future benefits no longer exist.
d. It may be negative.
B
QN=13 Under current US GAAP, goodwill is:
I. amortized over a period not to exceed 40 years.
II. tested annually for impairment.
III. exclusive of separately identifiable intangible assets.
IV. recorded only upon purchase of another entity.
b. II, III and IV
c. I, II and III
d. II and IV
B
QN=14 LIFO liquidation occurs when:
a. a firm changes from LIFO to another inventory method.
b. a firm experiences an increase in cost of raw materials.
c. the LIFO reserves decline in value.
d. the quantity of goods sold is greater than the quantity produced.
D
QN=15 If a LIFO liquidation occurs during a period of rising prices, which of the following
statements about the effects on a firm's financial statements, all other things equal, is
generally true?
I. Cost of goods sold increases.
II. Gross profit margin increases.
III. Taxes decrease.
IV. Net income increases.
a. I only
b. II only
c. I and III only
d. II and IV only
D
QN=16 Which of the following statements about inventories is true?
a. U.S. generally accepted accounting principles (GAAP) require the use of lower-of-cost or
market-valuation basis for inventories.
b. Last-in, last-out (LIFO) inventory accounting makes management of income more
difficult than first-in, first-out (FIFO) accounting.
c. During inflation, LIFO inventory accounting tends to overstate the current ratio.
d. FIFO inventory balances generally contain old and outdated costs that have little or no
relationship to current costs.
A
QN=17 Depreciation is based on the principle of:
a. allocation.
b. appropriation.
c. estimation.
d. approbation.
A
QN=18 Which of the following is not an analysis issue arising with impairment?
a. Evaluating the appropriateness of the amount of the impairment.
b. Evaluating the appropriateness of the timing of the impairment.
c. Analyzing the effect of the impairment on asset.
d. Analyzing the effect of the impairment on income.
C
QN=19 Goodwill is:
a. the excess of the purchase price of net assets over the book value of net assets.
b. the excess of the appraised value of net assets over the book value of net assets.
c. the excess of the purchase price of net assets over the fair value of net assets.
d. the excess of the appraised value of net assets over the fair value of net assets.
C
QN=20 With respect to LIFO, which of the following is incorrect?
a. If a company uses LIFO for tax purposes it must use it for GAAP purposes.
b. If the LIFO reserve increases in a given year, the LIFO COGS is higher than it would
have been if FIFO had been used for that year.
c. LIFO results in better matching on the income statement than FIFO.
d. LIFO results in inventory levels on the balance sheet that are closer to current cost than
FIFO.
D
QN=21 Securitization through the use of a properly structured SPE may result in the
following benefits to the company:
I. Remove receivables from the balance sheet.
II. Remove debt from the balance sheet.
III. Lower financing costs.
IV. Recognize gains on the sale of assets to the SPE.
b. I, II and III
c. I and IV
d. II and III
A
QN=22 Solvency refers to the ability of a company to meet its short-term obligations.
a. TRUE
b. FALSE
B
QN=23 Prepaid expenses are usually classified as current assets.
a. TRUE
b. FALSE
A
QN=24 Accounts receivable are usually not classified as a current asset.
a. TRUE
b. FALSE
B
QN=25 The cash operating cycle is the amount of days between making a sale and
collecting money from customers.
a. TRUE
b. FALSE
B
QN=26 If management underestimates the allowance for non-collectible accounts, this will
cause net income for the period to be overstated.
a. TRUE
b. FALSE
A
QN=27 Forming a special purpose entity (SPE) is a common way companies securitize
receivables.
a. TRUE
b. FALSE
A
QN=28 If a company factors its accounts receivables, this will have the effect of making its
cash cycle appear shorter.
a. TRUE
b. FALSE
A
QN=29 Under GAAP, the choice of inventory costing method (LIFO, FIFO, etc.) must be
determined by the physical flow of the goods.
a. TRUE
b. FALSE
B
QN=30 The LIFO Conformity rule states that if a company uses LIFO for tax purposes it
must also use it for financial reporting purposes.
a. TRUE
b. FALSE
A
QN=31 LIFO provides a better match of current expenses to revenues on the income
statement, while FIFO provides a better ending inventory figure by more closely reflecting
current costs.
a. TRUE
b. FALSE
A
QN=32 Changes in inventory levels have been shown to be useful in predicting future sales
and earnings.
a. TRUE
b. FALSE
A
QN=33 One advantage of FIFO over LIFO is that it minimizes the distortion caused by
inflation on net income.
a. TRUE
b. FALSE
B
QN=34 In a period of rising prices, using FIFO would produce a lower cost of goods sold
than using LIFO.
a. TRUE
b. FALSE
A
QN=35 An increasing accounts receivables balance is always a good sign as it means the
company has more current assets and is more liquid.
a. TRUE
b. FALSE
B
QN=36 Gains and losses from the sale of plant, property and equipment should be included
in cost of goods sold as in reality they reflect the cost of producing goods for sale.
a. TRUE
b. FALSE
B
QN=37 When the discounted amount of expected cash flows from an asset is greater than
the asset's book value, the asset is deemed to be impaired.
a. TRUE
b. FALSE
B
QN=38 Depreciation is a method for matching costs of long-lived assets to revenues
generated from their use.
a. TRUE
b. FALSE
A
Chap 5
QN=01 Trading Marketable Securities:
a. are considered non-current assets.
b. are recorded at amortized cost.
c. are marked to the lower of cost or market each accounting period.
d. are marked to market each accounting period.
D
QN=02 The classification of marketable equity securities as trading or available-for-sale is
determined by:
a. management's intent regarding the disposition of the securities.
b. when the securities mature.
c. whether the current assets are greater or less than the current liabilities.
d. whether management wants to mark them to market or not.
A
QN=03 The reclassification of trading securities as available-for-sale would produce the
following effect:
a. The balance sheet would need to be adjusted to report the securities at fair market value
and there would be no effect on the income statement.
b. There would be no effect on either the balance sheet or the income statement.
c. The balance sheet would need to be adjusted to report the securities at fair market value
and unrealized gains or losses on the date of the transfer would be included in net income.
d. There would be no effect on the balance sheet and unrealized gains or losses on the date
of the transfer would be included in net income.
D
QN=04 The equity method of accounting for investments requires:
a. Investment should be marked to market each accounting period.
b. Pro-rata share of investee's earnings should be recorded as investment income.
c. Company should not have significant influence over investee.
d. Goodwill related to purchase of investee stock to be recorded separately on balance
sheet.
B
QN=05 Which of the following is incorrect? An analyst should be aware of the following
when analyzing a company that has significant investments recorded using the equity
method:
a. Cash flow received from investee may be substantially different from investment income
recorded.
b. As investee's liabilities are not recorded on the company's balance sheet, there may be
significant off-balance-sheet financing.
c. They must mark investment in investee to market even though there may be no ready
market in which they can sell their investment.
d. Company must record pro rata share of investee's earnings, which may not be well
correlated with changes in market value of investee.
C
QN=06 Agwen Corporation owns 25% of the shares of Bronwo Corporation, which traded
on the New York Stock Exchange. Which method is Agwen most likely to use to account
for this investment?
a. Cost method
b. Market method
c. Equity method
d. Consolidation method
C
QN=07 Compared to the equity method, the cost method of accounting for an investment in
a profitable company results in:
a. lower earnings, and lower cash flows.
b. higher earnings, and higher cash flows.
c. lower earnings, and no effect on cash flows.
d. higher earnings, and no effect on cash flows.
C
QN=08 Guido Inc. buys 2,000 shares of Weiner Company for $30 per share on January 1,
2006. At the end of 2006, Weiner shares are trading at $33 per share. Weiner has a total of
200,000 shares outstanding and reported net income of $3,000,000 and paid dividends of
$1,000,000 for fiscal 2006.Determine the amount Guido Inc. will record as investment
income in its income statement under the three scenarios: Weiner is considered trading
marketable equity security (MES), available for sale (AFS) MES or using cost method.
<8.jpg>
a. Choice A
b. Choice B
c. Choice C
d. Choice D
C
$1,000,000 for fiscal 2006.Determine the amount Guido Inc. will record as an investment
on its balance sheet under the three scenarios: Weiner is considered trading marketable
equity security (MES), available for sale (AFS) MES or using cost method.
<9.jpg>
a. Choice A
b. Choice B
c. Choice C
d. Choice D
D
QN=10 Company A acquires Company B. In preparing consolidated financial statements,
the two recognized accounting methods are:
a. Merger accounting and Acquisition accounting
b. Consolidation accounting and Acquisition accounting
c. Merger accounting and Purchase accounting
d. Pooling-of-interests accounting and Purchase accounting
D
QN=11 Company A acquires 40% of Company B in a stock-for-stock exchange. With
respect to preparing financial statements, which of the following statements is correct?
a. Company A will most likely use pooling-of-interest accounting for consolidation
purposes.
b. Company A will most likely use purchase accounting.
c. Company A will most likely use the cost method.
d. Company A will most likely use the equity method.
D
QN=12 Company ABC acquires company XYZ on 12/31/06 in a share-for-share
transaction worth $10M. On 12/31/06, XYZ financial statements reported the following:
<12.jpg>
At the time of acquisition, the fair value of XYZ's assets equals its book values, except for
plant, property and equipment which has a fair value $2M higher than its book value.
Goodwill is expected to be amortized over 10 years, and the average life of depreciable
assets is 10 years.If ABC uses pooling-of-interests to record the acquisition, the amount of
goodwill that will appear on its balance sheet as of 12/31/06 with respect to the acquisition
of XYZ will be:
a. $0
b. $2M
c. $4M
d. $6M
A
<12.jpg>
assets is 10 years.If ABC uses purchase accounting to record the acquisition, the amount of
of XYZ will be:
a. $0
b. $2M
c. $4M
d. $6M
C
QN=14 Which of the following statements concerning financial ratios is incorrect?
a. Accounting principles and methods used by a company will not affect financial ratios.
b. The informational value of a ratio in isolation is limited.
c. A ratio is one number expressed as a percentage or fraction of another number.
d. Calculation of financial ratios is not sufficient for a complete financial analysis of a
company.
A
QN=15 Which of the following ratios is not generally considered to be helpful in assessing
short-term liquidity?
a. Acid test ratio
b. Current ratio
c. Days to collect receivables
d. Days goodwill held
D
QN=16 Liquidity of a company is generally defined as a measure of:
a. the ability of a company to pay its employees in a timely manner.
b. the ability to pay interest and principal on all debt.
c. the ability to pay dividends.
d. the ability to pay current liabilities.
D
QN=17 Following is some financial information for Dell Inc.<17.jpg>
What is Dell's profit margin for 2005?

a. 6.27%
b. 6.18%
c. 6.38%
d. 6.86%
C

a. 6.27%
b. 6.18%
c. 6.38%
d. 6.86%
B
What is Dell's P/E ratio for 2006?

a. 27.63
b. 12.81
c. 23.65
d. 9.70
A
What is Dell's asset turnover for 2006?

a. 2.12
b. 3.58
c. 3.65
d. 2.31
D
QN=21 Given the following information, calculate the inventory turnover for ABC Co. for
2006 (pick closest number).<21.jpg>
a. 8.96
b. 7.22
c. 6.93
d. 6.18
D
QN=22 You have been provided the following information about Wert Inc.<22.jpg>
Return on Assets for 2006 is

a. 13.71%
b. 12.68%
c. 10.77%
d. 13.21%
B
QN=23 You have been provided the following information about High Inc.<23.jpg>
Working Capital for 2005 is:

a. $56,000
b. $20,000
c. $151,000
d. $207,000
A
Owner's Equity for 2006 is:

a. $20,000
b. $154,000
c. $174,000
d. $207,000
C
Current Ratio for 2005 is:

a. 1.55
b. 1.51
c. 1.50
d. 1.14
A
Return on Common Equity for 2006 is:

a. 15.46%
b. 24.14%
c. 16.79%
d. 22.04%
D
QN=27 Which of the following statements is correct?
a. The more efficiently a company utilizes its assets, the greater its return on investment, all
other things being equal.
b. If return on equity increases, the return on assets must have also increased.
c. If the number of days inventory is held increases, the return on assets will increase, all
d. If the gross margin decreases, the inventory turnover must have increased, all other
things being equal.
A
QN=28 Which of the following statistics would be the most useful in determining the
efficiency of a car rental company?
a. Inventory turnover
b. Number of employees per car rental
c. Average length of car rental
d. Number of days cars are rented as a percentage of number of days available for rent
D
QN=29 Which of the following ratios does not relate to market price of a company under
analysis?
a. Price-to-earnings
b. Earnings yield
c. Price-to-book
d. Return on common equity
D
QN=30 The semistrong efficiency of market implies that:
a. stock prices fully reflect all inside information.
b. stock prices do not reflect information contained in past trading volume.
c. stock prices fully reflect all information found in 10-K filing
d. stock prices fully reflect all information about future price changes.
C
QN=31 Which of the following statements is incorrect?
a. It is possible for some markets to be more efficient than others.
b. It is possible for markets to be efficient with respect to some information and inefficient
with respect to other information.
c. The market is likely to be more efficient with respect to companies where there is greater
analyst following.
d. The market is totally efficient with respect to companies providing regular dividends to
investors.
D
QN=32 Which of the following ratios would be considered useful in assessing operating
profitability?
a. Debt/Equity ratio
b. Acid test ratio
c. Gross profit margin
d. Return on equity
C
QN=33 How much would you be prepared to pay for a $500 bond which comes due in 5
years and pays $80 interest annually assuming your required rate of return is 8% (pick
closest answer)?
a. $740
b. $660
c. $608
d. $500
B
QN=34 Fluno Corporation has 1 million shares outstanding at the end of fiscal 2005. Its
stock is trading at $15 per share. It issued $0.6 million in dividends, and had net income of
$1million in fiscal 2005. At the end of 2005, its total assets, liabilities and retained earnings
were $25 million, $15 million and $7.5 million, respectively. Fluno's price to book ratio and
dividend yield ratios for 2005 are:<34.jpg>
a. Option A
b. Option B
c. Option C
d. Option D
C
QN=35 Which of the following statements regarding the intrinsic value of a company is
correct?
a. It can be calculated as book value plus the present value of future expected dividends,
discounted at the cost of equity capital.
b. It can be calculated as present value of future expected dividends, discounted at the cost
of debt.
c. It can be calculated as present value of future expected residual income, discounted at the
cost of equity capital.
d. It can be calculated as book value plus the present value of future expected residual
income, discounted at the cost of equity capital
D
QN=36 Two otherwise equal companies have significantly different dividend payout ratios.
Which of the following statements is most likely to be correct? The company with higher
the dividend payout ratio:
a. will have a higher inventory turnover ratio.
b. will have a lower inventory turnover ratio.
c. will have higher earnings growth.
d. will have lower earnings growth.
D
QN=37 On January 1, 2005, Systil Corporation issues $50M 10 year bonds with a coupon
rate of 10%. Interest is payable annually at the end of the year. If the required return on
bonds of similar risk at January 1, 2006 is 8%, what will be the price of the bonds be at this
date?
a. $56.71M
b. $56.25M
c. $44.24M
d. $43.86M
A
QN=38 Which of the following statements is most correct?
a. Technical analysis concerns itself with determining the intrinsic value of a stock.
b. Active investing is defined as buying and selling stock within six months.
c. Fundamental analysis attempts to value a company by examining the past prices patterns
of a company's stock.
d. Individuals who engage in technical analysis by definition do not subscribe to the weak
form of the efficient market hypothesis.
D
QN=39 <39.jpg>Net income is expected to increase by 10% for the next year, and dividend
payout ratio is expected to remain constant. After 2006, retained earnings are expected to
decrease to zero. Using the residual income method what is the value per share of Rivaz
stock as of 12/31/05?
a. $15.25
b. $15.16
c. $14.38
d. $13.77
A
QN=40 <39.jpg>Using the dividend discount model, assuming dividends grow at 10% per
year for the next two years and at 5% thereafter, what is the value per share of Rivaz
Corporation at 12/31/05?
a. $16.61
b. $16.51
c. $16.42
d. $14.87
C
QN=41 <39.jpg>Assuming total assets grew by $5,000 from 2004 to 2005, what is the
return on assets of Rivaz Corporation for 2005?
a. 9.23%
b. 8.57%
c. 10.00%
d. 6.15%
A
a. Current assets are expected to be converted into cash sooner than noncurrent assets.
b. Equity investors have unlimited downside exposure if the company declares bankruptcy.
c. Paid-in capital of company is not affected by the payment of dividends.
d. Retained earnings at the inception of a company equals zero.
B
QN=43 A company issues 12%, 10-year $1,000 bonds paying interest semi-annually.
Required return for bonds of this risk is 15%. At what price will the bond be sold (pick
closest answer)?
a. $663
b. $849
c. $ 847
d. $ 894
C
QN=44 You wish to compare the performance of two companies. Which of the following
statements is most likely to be incorrect?
a. If the companies operate in different industries, this will hinder comparability.
b. The use of different accounting methods will hinder comparability.
c. If the companies are of significantly different sizes, this will hinder comparability.
d. If companies have different auditors, this will hinder comparability.
D
QN=45 As of December 31, 2005, two otherwise identical companies in the same industry,
East Co. and West Co., have dividend payouts of 20% and 40%, respectively. Looking
forward one year, which outcomes are least likely?
I. East Co. requires debt financing.
II. West Co. increases its dividend payout.
III. West Co.'s share price is twice that of East Co.
IV. East Co. repurchases outstanding shares.
a. I and II
b. II and IV
c. I, II and III
d. II, III and IV
C
QN=46 Which of the following, if increased by 10%, results in a 10% higher stock price?
a. Dividend yield
b. Earnings yield
Net profit margin Net profit margin
d. None of the above
D
QN=47 Which of the following is not an equity valuation model?
a. Residual income model
b. Dividend discount model
c. Free cash flow to equity model
d. Terminal value model
D
QN=01 Trading Marketable Securities:
a. are considered non-current assets.
b. are recorded at amortized cost.
c. are marked to the lower of cost or market each accounting period.
d. are marked to market each accounting period.
D
QN=02 The classification of marketable equity securities as trading or available-for-sale is
determined by:
a. management's intent regarding the disposition of the securities.
b. when the securities mature.
c. whether the current assets are greater or less than the current liabilities.
d. whether management wants to mark them to market or not.
A
QN=03 The reclassification of trading securities as available-for-sale would produce the
following effect:
a. The balance sheet would need to be adjusted to report the securities at fair market value
and there would be no effect on the income statement.
b. There would be no effect on either the balance sheet or the income statement.
c. The balance sheet would need to be adjusted to report the securities at fair market value
and unrealized gains or losses on the date of the transfer would be included in net income.
d. There would be no effect on the balance sheet and unrealized gains or losses on the date
of the transfer would be included in net income.
D
QN=04 The equity method of accounting for investments requires:
a. Investment should be marked to market each accounting period.
b. Pro-rata share of investee's earnings should be recorded as investment income.
c. Company should not have significant influence over investee.
d. Goodwill related to purchase of investee stock to be recorded separately on balance
sheet.
B
QN=05 Which of the following is incorrect? An analyst should be aware of the following
when analyzing a company that has significant investments recorded using the equity
method:
a. Cash flow received from investee may be substantially different from investment income
recorded.
b. As investee's liabilities are not recorded on the company's balance sheet, there may be
significant off-balance-sheet financing.
c. They must mark investment in investee to market even though there may be no ready
market in which they can sell their investment.
d. Company must record pro rata share of investee's earnings, which may not be well
correlated with changes in market value of investee.
C
QN=06 Agwen Corporation owns 25% of the shares of Bronwo Corporation, which traded
on the New York Stock Exchange. Which method is Agwen most likely to use to account
for this investment?
a. Cost method
b. Market method
c. Equity method
d. Consolidation method
C
QN=07 Compared to the equity method, the cost method of accounting for an investment in
a profitable company results in:
a. lower earnings, and lower cash flows.
b. higher earnings, and higher cash flows.
c. lower earnings, and no effect on cash flows.
d. higher earnings, and no effect on cash flows.
C
$1,000,000 for fiscal 2006.Determine the amount Guido Inc. will record as investment
income in its income statement under the three scenarios: Weiner is considered trading
marketable equity security (MES), available for sale (AFS) MES or using cost method.
<8.jpg>
a. Choice A
b. Choice B
c. Choice C
d. Choice D
C
$1,000,000 for fiscal 2006.Determine the amount Guido Inc. will record as an investment
on its balance sheet under the three scenarios: Weiner is considered trading marketable
equity security (MES), available for sale (AFS) MES or using cost method.
<9.jpg>
a. Choice A
b. Choice B
c. Choice C
d. Choice D
D
QN=10 Company A acquires Company B. In preparing consolidated financial statements,
the two recognized accounting methods are:
a. Merger accounting and Acquisition accounting
b. Consolidation accounting and Acquisition accounting
c. Merger accounting and Purchase accounting
d. Pooling-of-interests accounting and Purchase accounting
D
QN=11 Company A acquires 40% of Company B in a stock-for-stock exchange. With
respect to preparing financial statements, which of the following statements is correct?
a. Company A will most likely use pooling-of-interest accounting for consolidation
purposes.
b. Company A will most likely use purchase accounting.
c. Company A will most likely use the cost method.
d. Company A will most likely use the equity method.
D
<12.jpg>
assets is 10 years.If ABC uses pooling-of-interests to record the acquisition, the amount of
of XYZ will be:
a. $0
b. $2M
c. $4M
d. $6M
A
<12.jpg>
assets is 10 years.If ABC uses purchase accounting to record the acquisition, the amount of
of XYZ will be:
a. $0
b. $2M
c. $4M
d. $6M
C
QN=14 Which of the following statements concerning financial ratios is incorrect?
a. Accounting principles and methods used by a company will not affect financial ratios.
b. The informational value of a ratio in isolation is limited.
c. A ratio is one number expressed as a percentage or fraction of another number.
d. Calculation of financial ratios is not sufficient for a complete financial analysis of a
company.
A
QN=15 Which of the following ratios is not generally considered to be helpful in assessing
short-term liquidity?
a. Acid test ratio
b. Current ratio
c. Days to collect receivables
d. Days goodwill held
D
QN=16 Liquidity of a company is generally defined as a measure of:
a. the ability of a company to pay its employees in a timely manner.
b. the ability to pay interest and principal on all debt.
c. the ability to pay dividends.
d. the ability to pay current liabilities.
D

a. 6.27%
b. 6.18%
c. 6.38%
d. 6.86%
C

a. 6.27%
b. 6.18%
c. 6.38%
d. 6.86%
B
What is Dell's P/E ratio for 2006?

a. 27.63
b. 12.81
c. 23.65
d. 9.70
A
What is Dell's asset turnover for 2006?

a. 2.12
b. 3.58
c. 3.65
d. 2.31
D
QN=21 Given the following information, calculate the inventory turnover for ABC Co. for
2006 (pick closest number).<21.jpg>
a. 8.96
b. 7.22
c. 6.93
d. 6.18
D
QN=22 You have been provided the following information about Wert Inc.<22.jpg>
Return on Assets for 2006 is

a. 13.71%
b. 12.68%
c. 10.77%
d. 13.21%
B
Working Capital for 2005 is:

a. $56,000
b. $20,000
c. $151,000
d. $207,000
A
Owner's Equity for 2006 is:

a. $20,000
b. $154,000
c. $174,000
d. $207,000
C
Current Ratio for 2005 is:

a. 1.55
b. 1.51
c. 1.50
d. 1.14
A
Return on Common Equity for 2006 is:

a. 15.46%
b. 24.14%
c. 16.79%
d. 22.04%
D
a. The more efficiently a company utilizes its assets, the greater its return on investment, all
b. If return on equity increases, the return on assets must have also increased.
c. If the number of days inventory is held increases, the return on assets will increase, all
d. If the gross margin decreases, the inventory turnover must have increased, all other
things being equal.
A
QN=28 Which of the following statistics would be the most useful in determining the
efficiency of a car rental company?
a. Inventory turnover
b. Number of employees per car rental
c. Average length of car rental
d. Number of days cars are rented as a percentage of number of days available for rent
D
QN=29 Which of the following ratios does not relate to market price of a company under
analysis?
a. Price-to-earnings
b. Earnings yield
c. Price-to-book
d. Return on common equity
D
QN=30 The semistrong efficiency of market implies that:
a. stock prices fully reflect all inside information.
b. stock prices do not reflect information contained in past trading volume.
c. stock prices fully reflect all information found in 10-K filing
d. stock prices fully reflect all information about future price changes.
C
a. It is possible for some markets to be more efficient than others.
b. It is possible for markets to be efficient with respect to some information and inefficient
with respect to other information.
c. The market is likely to be more efficient with respect to companies where there is greater
analyst following.
d. The market is totally efficient with respect to companies providing regular dividends to
investors.
D
QN=32 Which of the following ratios would be considered useful in assessing operating
profitability?
a. Debt/Equity ratio
b. Acid test ratio
c. Gross profit margin
d. Return on equity
C
QN=33 How much would you be prepared to pay for a $500 bond which comes due in 5
years and pays $80 interest annually assuming your required rate of return is 8% (pick
closest answer)?
a. $740
b. $660
c. $608
d. $500
B
QN=34 Fluno Corporation has 1 million shares outstanding at the end of fiscal 2005. Its
stock is trading at $15 per share. It issued $0.6 million in dividends, and had net income of
$1million in fiscal 2005. At the end of 2005, its total assets, liabilities and retained earnings
were $25 million, $15 million and $7.5 million, respectively. Fluno's price to book ratio and
dividend yield ratios for 2005 are:<34.jpg>
a. Option A
b. Option B
c. Option C
d. Option D
C
QN=35 Which of the following statements regarding the intrinsic value of a company is
correct?
a. It can be calculated as book value plus the present value of future expected dividends,
discounted at the cost of equity capital.
b. It can be calculated as present value of future expected dividends, discounted at the cost
of debt.
c. It can be calculated as present value of future expected residual income, discounted at the
cost of equity capital.
d. It can be calculated as book value plus the present value of future expected residual
income, discounted at the cost of equity capital
D
QN=36 Two otherwise equal companies have significantly different dividend payout ratios.
Which of the following statements is most likely to be correct? The company with higher
the dividend payout ratio:
a. will have a higher inventory turnover ratio.
b. will have a lower inventory turnover ratio.
c. will have higher earnings growth.
d. will have lower earnings growth.
D
QN=37 On January 1, 2005, Systil Corporation issues $50M 10 year bonds with a coupon
rate of 10%. Interest is payable annually at the end of the year. If the required return on
bonds of similar risk at January 1, 2006 is 8%, what will be the price of the bonds be at this
date?
a. $56.71M
b. $56.25M
c. $44.24M
d. $43.86M
A
a. Technical analysis concerns itself with determining the intrinsic value of a stock.
b. Active investing is defined as buying and selling stock within six months.
c. Fundamental analysis attempts to value a company by examining the past prices patterns
of a company's stock.
d. Individuals who engage in technical analysis by definition do not subscribe to the weak
form of the efficient market hypothesis.
D
QN=39 <39.jpg>Net income is expected to increase by 10% for the next year, and dividend
payout ratio is expected to remain constant. After 2006, retained earnings are expected to
decrease to zero. Using the residual income method what is the value per share of Rivaz
stock as of 12/31/05?
a. $15.25
b. $15.16
c. $14.38
d. $13.77
A
QN=40 <39.jpg>Using the dividend discount model, assuming dividends grow at 10% per
year for the next two years and at 5% thereafter, what is the value per share of Rivaz
Corporation at 12/31/05?
a. $16.61
b. $16.51
c. $16.42
d. $14.87
C
QN=41 <39.jpg>Assuming total assets grew by $5,000 from 2004 to 2005, what is the
return on assets of Rivaz Corporation for 2005?
a. 9.23%
b. 8.57%
c. 10.00%
d. 6.15%
A
a. Current assets are expected to be converted into cash sooner than noncurrent assets.
b. Equity investors have unlimited downside exposure if the company declares bankruptcy.
c. Paid-in capital of company is not affected by the payment of dividends.
d. Retained earnings at the inception of a company equals zero.
B
QN=43 A company issues 12%, 10-year $1,000 bonds paying interest semi-annually.
Required return for bonds of this risk is 15%. At what price will the bond be sold (pick
closest answer)?
a. $663
b. $849
c. $ 847
d. $ 894
C
QN=44 You wish to compare the performance of two companies. Which of the following
statements is most likely to be incorrect?
a. If the companies operate in different industries, this will hinder comparability.
b. The use of different accounting methods will hinder comparability.
c. If the companies are of significantly different sizes, this will hinder comparability.
d. If companies have different auditors, this will hinder comparability.
D
QN=45 As of December 31, 2005, two otherwise identical companies in the same industry,
East Co. and West Co., have dividend payouts of 20% and 40%, respectively. Looking
forward one year, which outcomes are least likely?
I. East Co. requires debt financing.
II. West Co. increases its dividend payout.
III. West Co.'s share price is twice that of East Co.
IV. East Co. repurchases outstanding shares.
a. I and II
b. II and IV
c. I, II and III
d. II, III and IV
C
QN=46 Which of the following, if increased by 10%, results in a 10% higher stock price?
a. Dividend yield
b. Earnings yield
Net profit margin Net profit margin
D
QN=47 Which of the following is not an equity valuation model?
a. Residual income model
b. Dividend discount model
c. Free cash flow to equity model
d. Terminal value model
D
Chap 6
QN=01 Smythe Corporation is in the real estate development business. If they sell a piece
of land for $50,000 that they had previously purchased for $45,000, they should record a
loss of $5,000.
a. TRUE
b. FALSE
B
QN=01 Which of the following is not a reason for economic income and accounting income
to differ?
a. Transaction basis
b. The monetary assumption
c. Conservatism
d. Earnings management
B
QN=02 As a general rule, revenue is normally recognized when it is:
a. measurable and earned.
b. measurable and received.
c. realizable and earned.
d. realizable.
C
QN=03 Which of the following measures of accounting income is typically reported in an
income statement?
a. Net income
b. Comprehensive income
c. Continuing income
d. All of the above
D
QN=04 Which of the following are correct?
I. If a company uses straight-line depreciation for financial reporting purposes, it is very
likely they have a deferred tax liability with respect to its depreciable assets.
II. Straight line depreciation yields an increasing rate of return on book value over the life
of asset.
III. Straight line depreciation results in lower tax payments than accelerated depreciation
methods over the life of an asset.
IV. If a company revises its estimate of the useful life of an asset upwards this will decrease
annual depreciation expense.
b. I, II and IV
c. I, II and III
d. I and IV
B
QN=05 Compared with companies that expense costs, firms that capitalize costs can be
expected to report:
a. higher asset levels and lower equity levels.
b. higher asset levels and higher equity levels.
c. lower asset levels and higher equity levels.
d. lower asset levels and lower equity levels.
B
QN=06 Two growing firms are identical except that one firm capitalizes whereas the other
firm expenses costs for long-lived resources over time. For these two firms, which of the
following statements is generally true?
I. The expensing firm will show a more volatile pattern of reported income than capitalizing
firm.
II. The expensing firm will show a less volatile pattern of return on assets than the
capitalizing firm.
III. The expensing firm will show lower cash flows from operations than the capitalizing
firm.
a. I only
b. II only
c. I and III only
d. II and III only
C
QN=07 The capitalization of interest cost during construction:
a. increases future net income.
b. decreases future depreciation expense.
c. increases net income during construction phase.
d. decreases assets during construction phase.
C
QN=08 If a company changes the useful life of its assets from 10 years to 12 years, this will
be recorded as:
a. a non-recurring gain.
b. an extraordinary item.
c. a change in accounting principle.
D
QN=09 A company changes its depreciation method from an accelerated system to straight
line. Which of the following would normally be true?
I. The change would be discussed in the auditor's letter.
II. The cumulative effect of the change would appear net of tax on the income statement.
III. The change would appear in cash flow from operations as a cash inflow.
IV. The change would be mentioned in the footnotes.
b. I, II and III
c. II and IV
d. I, II and IV
D
QN=10 Which of the following is true with respect to extraordinary items?
I. Extraordinary items are recorded net of tax in income statement.
II. Extraordinary items, by definition, are probable and unusual in nature.
III. By definition, gains and losses from strikes are always extraordinary.
IV. By definition, gains and losses from sale of plant, property and equipment are never
extraordinary.
a. I and IV
b. I, III and IV
c. II and IV
d. I, II and III
A
QN=11 Which of the following would be considered an extraordinary item?
I. Write-down of receivables
II. Gains on disposal of a business segment
III. Loss of inventory resulting from a fire
IV. Loss resulting from a strike
a. I and IV
b. I, III and IV
c. III only
d. I, II and III
C
QN=12 Which of the following items is not included in the calculation of net income but is
included in the calculation of comprehensive income?
a. Unrealized holding gain on available-for-sale marketable securities.
b. Unrealized holding gain on trading marketable securities.
c. Gain from early extinguishments of bonds.
d. Gain arising from sale of available-for-sale marketable securities.
A
QN=13 Which of the following statements is true? Under GAAP, comprehensive income:
a. may be reported in addition to net income.
b. must be reported in addition to net income.
c. may be reported instead of net income.
d. must be reported instead of net income.
B
QN=14 Which of the following is not an extraordinary item?
I. Loss on abandonment of property
II. Gain on disposal of a business segment
III. Effect of a strike against a key supplier
IV. Write-down of deferred research and development costs
a. I and III
b. II and IV
c. I, II and III
d. I, II, III and IV
D
QN=15 When comparing expensing or capitalizing (with straight-line depreciation)
software, return on assets
a. will decrease over time using capitalization.
b. will increase over time using capitalization.
c. will be constant using expensing.
d. will initially be higher under expensing.
B
QN=16 Economic income and accounting income are always the same.
a. TRUE
b. FALSE
B
QN=17 The matching principle in accounting prescribes that costs must be recognized in
the same period when the related revenues are recognized.
a. TRUE
b. FALSE
A
QN=18 If two firms are identical except that one firm uses percentage-of-completion
accounting and the other uses completed contract accounting for revenue recognition, the
cash flows of the firms will be identical.
a. TRUE
b. FALSE
A
QN=19 Generally revenue should be recorded when it is probable and reasonably
estimable.
a. TRUE
b. FALSE
B
QN=20 Revenues are earned inflows that arise from the company's ongoing business
activities.
a. TRUE
b. FALSE
A
QN=21 Gains are earned inflows that arise from the company's ongoing business activities.
a. TRUE
b. FALSE
B
QN=22 For item to be considered extraordinary, it should be either unusual in nature or
infrequent in occurrence.
a. TRUE
b. FALSE
B
QN=23 For item to be considered a special item, it should be either unusual in nature or
infrequent in occurrence but not both.
a. TRUE
b. FALSE
A
QN=24 Accounting changes are usually cosmetic and do not yield cash flow consequences.
a. TRUE
b. FALSE
A
QN=25 A long term asset is said to be impaired when its fair value is below its book value.
a. TRUE
b. FALSE
A
QN=26 Software costs may be capitalized once a company can show that the product is
technologically feasible.
a. TRUE
b. FALSE
A
QN=27 Extraordinary items are defined as those that are both unusual in nature and
infrequent in occurrence. These items are disclosed, net of tax in the income statement.
a. TRUE
b. FALSE
A
QN=28 When a company disposes of a segment of its business, it must restate all prior year
financial statements as if it had never owned that segment of the business.
a. TRUE
b. FALSE
B
QN=29 R&D expenses for tangible assets that have alternative future uses qualify as
deferred charges.
a. TRUE
b. FALSE
A
Chap 7
QN=01 Which of the following would require an adjustment in the computation of cash
flow from operations using the indirect method?
I. Sale of machinery for $50,000 with a net book value of $35,000
II. Purchase of supplies for cash
III. Remittance by customer in payment of goods purchased this accounting period
IV. Acquisition of land with simultaneous issuance of long-term note
a. I
b. I and II
c. I and III
d. IV
C
QN=02 Beginning and ending accounts receivable are $76,000 and $42,000, respectively.
Sales for the period total $384,000, of which $40,000 was directly for cash. How much cash
was collected from making sales and collecting accounts receivable?
a. $344,000
b. $418,000
c. $378,000
d. $376,000
B
QN=03 Beginning accounts receivable are $76,000. Sales for the period total $384,000, of
which $40,000 was directly for cash. $418,000 was collected from making sales and
collecting accounts receivable. What is the ending balance for accounts receivable?
a. $42,000
b. $2,000
c. $82,000
d. $68,000
A
QN=04 A firm has net sales of $6,000, cash expenses (including taxes) of $2,800, and
depreciation of $1,000. If accounts receivable increased in the period by $800, cash flows
from operations equal
a. $2,400
b. $3,200
c. $3,400
d. $4,200
A
QN=05 Beginning and ending plant assets are, respectively, $325,000 and $370,000.
Beginning and ending accumulated depreciation is, respectively, $82,800 and $95,000.
Depreciation expense for the period was $30,000, and new assets of $76,000 were
purchased. Plant assets were sold at a $10,500 loss. What were the cash proceeds from the
sale?
a. $17,800
b. $3,100
c. $2,700
d. $31,000
C
QN=06 Beginning and ending prepaid insurance is, respectively, $36,000 and $26,500.
During the period, $30,500 of insurance expense was recorded. How much new insurance
was purchased?
a. $2,500
b. $15,600
c. $49,000
d. $21,000
D
QN=07 The balance for supplies is $41,000 and $27,000 for 12/31/05 and 12/31/06,
respectively. During the 2006, the company recorded $30,500 of supplies expense was
recorded. How much new supplies were purchased?
a. $44,500
b. $16,500
c. $14,000
d. $30,500
B
QN=01 Under the accrual basis of accounting, which of the following statements is true?
I. Reported net income provides a measure of operating performance
II. Revenue is recognized when cash is received, and expenses are recognized when
payment is made
III. Cash inflows are recognized when they are received, and cash outflows are recognized
when they are made
a. I only
b. III only
c. I and III
d. I, II and III
C
QN=02 Which of the following would require an adjustment in the computation of cash
flow from operations using the indirect method?
I. Depreciation expense
II. Loss on sale of asset
III. Sale of services to customers for cash
IV. Utility bill received and paid in cash
a. I
b. I and II
c. I and III
d. IV
B
QN=03 Which of the following represents an investing activity in the statement of cash
flows
a. depreciation of plant assets
b. sale of plant assets at a loss
c. stock dividend
d. purchase of inventory
B
QN=04 Which of the following is not a financing activity in the statement of cash flows?
a. cash dividend
b. repurchase of common stock
c. payment of interest on debt
d. issuance of new debt
C
QN=05 On a statement of cash flows that uses the indirect approach, calculation of cash
flow from operations treats depreciation as an adjustment to reported net income because:
a. depreciation is a direct source of cash
b. depreciation is an outflow of cash to a reserve account for the replacement of assets
c. depreciation reduces net income and involves an outflow of cash
d. depreciation reduces net income but does not involve an outflow of cash
D
QN=06 Which of the following statements are correct?
I. A company's choice of accounting principles for financial reporting purposes does not
affect net cash flow for the accounting period
II. A company's choice of accounting principles for financial reporting purposes does not
affect operating cash flow
III. If a company sells its receivables this will increase operating cash flow
IV. If a company sells its receivables this will increase financing cash flow
a. I and III
b. I, II and III
c. II and IV
d. I and IV
A
QN=07 An increase in accounts payable would be considered:
a. a source of cash
b. a use of cash
c. an adjusting entry
d. a noncash charge to income
A
QN=08 The management of a company wishes to window-dress its cash flow from
operations. Which of the following will improve cash flow from operations?
I. factoring accounts receivable
II. paying suppliers more quickly
III. selling of some excess marketable securities
IV. deferring payment of taxes
a. IV only
b. III and IV
c. II, III and IV
d. I and IV
D
QN=09 Which of the following items is deducted from net income to arrive at cash flow
from operations when using the indirect method?
a. depreciation expense
b. amortization expense
c. decrease in accounts receivable
d. decrease in accounts payable
D
QN=10 Firms report payments for capital leases in the cash flow statement:
a. only as financing cash flows
b. only as investing cash flows
c. partly as operating cash flows and partly as investing cash flows
d. partly as operating cash flows and partly as financing cash flows
D
QN=11 Compared with firms with capital leases, firms with operating leases generally
report:
a. higher cash flow from operations
b. lower cash flow from operations
c. identical cash flow from operations
d. lower or higher cash flow from operations depending upon market interest rates
B
QN=12 Which of the following would affect cash flow from operations?
a. Sale of land for a gain
b. Payment of dividends
c. Depreciation of fixed assets
d. Capitalizing costs that were previously expensed
D
QN=13 Which of the following is true? The choice of LIFO versus FIFO will:
a. not affect net income or cash flow from operations
b. not affect net income but will affect cash flow from operations
c. affect both net income and cash flow from operations
d. affect net income but will not affect cash flow from operations
C
QN=14 Which of the following would be considered a use of cash?
a. depreciation
b. an increase in working capital
c. sale of bonds
d. an increase in wages payable
B
QN=15 The cash flow adequacy ratio
a. Measures a company's ability to generate sufficient cash flow from investing to cover
debt repayments
b. Measures a company's ability to generate sufficient cash flows from operations to cover
capital expenditures and debt repayment
c. Measures a company's ability to generate sufficient cash flows from operations to cover
capital expenditures, inventory additions and dividends
d. Measures a company's ability to generate sufficient cash flows from operations to cover
capital expenditures, debt repayment and dividends
C
QN=16 A cash flow adequacy ratio, when measured over the last several years, of less than
one:
a. Indicates that a company's net income is too low relative to its sales level
b. Indicates that a company should decrease its dividend payout ratio
c. Indicates that a company needs to pay down its debt to decrease interest costs
d. Indicates that a company's internally generated cash flows have not been sufficient to
cover dividend payments and support past growth levels
D
QN=17 Cash flow from operations is usually less volatile than net income.
a. TRUE
b. FALSE
B
QN=18 The only time a company experiences a negative cash flow from operations is when
they are in trouble.
a. TRUE
b. FALSE
B
QN=19 Cash flow from operations will often be negative for companies experiencing
tremendous growth.
a. TRUE
b. FALSE
A
QN=20 Cash flow from investing when averaged over an extended period of time would
normally be expected to be negative (i.e. net outflow).
a. TRUE
b. FALSE
A
QN=21 Cash flow from financing is normally negative during the start-up phase for a
company.
a. TRUE
b. FALSE
B
QN=22 Over an extended period of time average cash flow from operations would be
expected to be higher than average net income.
a. TRUE
b. FALSE
A
QN=23 Amortization of goodwill reduces net income and is a cash outflow.
a. TRUE
b. FALSE
B
QN=24 Payment of a 5% stock dividend will not appear in the statement of cash flows.
a. TRUE
b. FALSE
A
QN=25 A gain on sale of an asset would require adjusting net income if preparing the
statement of cash flows using the indirect method.
a. TRUE
b. FALSE
A
QN=26 An increase in assets would usually show as an outflow in the statement of cash
flows.
a. TRUE
b. FALSE
A
QN=27 A decrease in liabilities would usually show as an outflow in the statement of cash
flows
a. TRUE
b. FALSE
A
QN=28 Increases in working capital are a source of funds.
a. TRUE
b. FALSE
B
QN=29 Net cash flow is not affected by a company's choice of accounting principles for
financial reporting purposes.
a. TRUE
b. FALSE
A
Chapter 8
QN=01 Err Company has a major lawsuit against them for unsafe products. It recognizes a
huge liability in 2004 of $300M. The effect of this liability is to decrease stockholders'
equity by 50%. In 2005, the effect of recognizing this liability, all else equal, is:
a. Return on net operating assets will increase dramatically
b. Return on net operating assets will decrease dramatically
c. Return on equity will increase dramatically
d. Return on equity will decrease dramatically
C
QN=02 Eyster Corporation reported $10M in earnings and paid dividends of $3M for fiscal
2005.Return on equity and dividend payout are expected to remain constant for the
foreseeable future. Net book value at the end of fiscal 2004 was 100M. Cost of equity is
10%. Using the residual income method, the intrinsic value of Eyster's stock at the end of
2005 should be:
a. $110M
b. $107M
c. $100M
d. not determinable
B
QN=01 Which of the following ratios best measures the profitability of a company?
a. Return on equity
b. Gross margin
c. Current ratio
d. Net operating asset turnover
A
a. Net operating profit margin divided by net operating asset turnover equals return on net
operating assets
b. Return on net operating assets can be disaggregated into net operating profit margin and
leverage
c. Return on equity equals return on net operating assets less interest, net of tax
d. Return on equity can be disaggregated into net operating profit margin, net operating
asset turnover and leverage
D
QN=03 Which of the following could explain a decrease in net operating asset turnover for
a company?
a. Switching from straight line to accelerated depreciation for financial reporting purposes
b. An increase in the financial leverage of the company
c. Addition of a new plant for production purposes
d. Decrease cost of production inputs
C
QN=04 Which of the following could cause return on net operating assets to increase, all
things other equal?
a. A decrease in interest rate on debt
b. Increase in days accounts receivable are outstanding
c. Increase in inventory turnover
d. Decrease in gross margin
C
QN=05 Which of the following will increase the sustainable equity growth of a company,
all other things equal?
a. Increase dividend payout
b. Pay suppliers more quickly
c. Pay suppliers more slowly
d. Decrease dividend payout
D
QN=06 An increase in net operating income (NOPAT) will cause which of the following?
a. Increase in the return on net operating assets
b. Decrease in the return on net operating assets
c. No change in the return on net operating assets
d. The change in the return on net operating assets is unclear, there is not sufficient
information
D
QN=07 Which of the following would explain an observed decrease in return on equity, all
else equal?
a. Decrease in tax rate
b. Increase in interest rate on debt
c. Stock split
d. Stock dividend
B
QN=08 Which of the following is the best measure of operating efficiency?
a. Return on net operating assets
b. Return on equity
c. Return on sales
d. Return on inventory
A
QN=09 Return on operating assets is a measure of which of the following?
a. Profitability
b. Efficiency
c. Solvency
d. Liquidity
B
QN=10 Cost of goods sold divided by inventory provides information about (choose one
answer):
a. profitability
b. capital structure
c. management of working capital
d. gross profit margin
C
QN=11 When considering the difference between return on net operating assets (RNOA)
and return on common shareholders' equity (ROCE), which of the following statements is
incorrect?
a. Preferred dividends are deducted from the numerator when calculating ROCE but not
when calculating RNOA
b. RNOA is a pre-interest measure but ROCE is not
c. RNOA is a post-interest measure but ROCE is not
d. RNOA is independent of the form of financing, but ROCE is not.
C
QN=12 Purchases divided by accounts payable provides information about:
a. capital structure
b. management of working capital
c. gross profit margin
d. profitability
B
QN=13 Which of the following statements about the relationship between RNOA and
ROCE is correct?
a. ROCE is always greater than RNOA
b. ROCE is greater than RNOA if RNOA is greater than after-tax cost of dividends
c. ROCE is greater than RNOA if RNOA is greater than cost of debt
d. ROCE is greater than RNOA if RNOA is greater than after-tax cost of debt
D
QN=14 Which of the following statements about the equity growth rate is correct?
I. the higher the ROCE the higher equity growth rate, all other things equal
II. the higher the dividend payout the higher the equity growth rate
III. the equity growth rate is unaffected by the cost of debt
IV. the equity growth rate indicates the expected growth in stock price each period
b. I, II and III
c. I and III
d. I only
D
QN=15 Which of the following statements about the return on shareholders' investment
(ROSI) is correct?
a. If book value of equity is less than market value, ROSI is greater than ROCE
b. ROSI will be higher the greater the dividend payout ratio
c. ROSI is likely to be more volatile than ROCE
d. ROSI normally equals ROCE
C
QN=16 Which of the following situations is most likely to explain an accounts receivable
turnover that is lower than the industry norm?
a. The company makes less credit sales than industry
b. The company gives customers less time to pay than its competitors
c. The company has been selling inferior products to competitors
d. The company is systematically over-estimating bad debts
C
QN=17 Which of the following situations is most likely to explain a net operating asset
turnover that is higher than the industry norm?
a. The company has more recently purchased fixed assets
b. The company uses FIFO while competitors use LIFO
c. The company uses accelerated depreciation method while competitors use straight line
d. The company extends more credit to customers than competitors
C
QN=18 A company that operates in a highly competitive industry with low barriers to entry
is likely to have low net operating profit margins compared to companies that operate in
less competitive industries.
a. TRUE
b. FALSE
A
QN=19 Companies that have low net operating profit margins generally only earn a
reasonable return on net operating assets if they can utilize their net operating assets very
efficiently.
a. TRUE
b. FALSE
A
QN=20 The two components of RNOA, net operating profit margin and NOA turnover, are
independent of each other.
a. TRUE
b. FALSE
B
QN=21 If a company has rapidly growing earnings per share, their return on net operating
assets must be increasing too.
a. TRUE
b. FALSE
B
QN=22 When calculating return on equity minority interest is added to the numerator as it
has been deducted in arriving at net income.
a. TRUE
b. FALSE
B
QN=23 Return on equity is the return stockholders have received during the past year.
a. TRUE
b. FALSE
B
QN=24 The relation between a company's return on common equity (ROCE) and return on
net operating assets (RNOA) reveals information about the company's success with
financial leverage.
a. TRUE
b. FALSE
A
QN=25 A decrease in net operating profit margin will cause both return on net operating
assets and return on equity to decrease, all other things being equal.
a. TRUE
b. FALSE
A
QN=26 Return on net operating assets will always be greater than or equal to the pre-tax
return on equity.
a. TRUE
b. FALSE
B
QN=27 When calculating return on total equity it is normal to add back preferred dividends
to net income.
a. TRUE
b. FALSE
B
QN=28 It is possible to have an increasing return on net operating assets while net
operating profit margin is decreasing.
a. TRUE
b. FALSE
A
QN=29 Return on invested capital is a better measure of profitability than earnings as
earnings numbers fail to reflect the capital needed to generate those earnings.
a. TRUE
b. FALSE
A
QN=30 If two companies both increase their net income by 25% over the prior year this
means they have both been equally profitable this year.
a. TRUE
b. FALSE
B
QN=31 If future expected return on common stockholders' equity is less than expected
required return by equity holders then the market value of a company's stock should be less
than book
value.
a. TRUE
b. FALSE
A
Chapter 9
QN=01 Gupta Corporation has forecasted its need for external funding in the following
year. It needs to raise $2M in either debt or equity. It would like to minimize its need for
external funding without decreasing its projected growth. Which of the following would
reduce its need for additional funding?
a. An increase in the dividend payout ratio
b. An increase in days sales outstanding
c. An increase in accounts payable
d. A decrease in inventory turnover
C
QN=01 When preparing a projected income statement, which of the following additional
information, other then the financial statements would probably not be relevant?
a. The competitive environment
b. New versus old store mix
c. Expected capital expenditure
d. Expected level of macroeconomic activity
C
QN=02 The reliability of a short-term cash forecast depends most heavily on the quality of:
a. Cost of goods sold forecast
b. Current ratio forecast
c. Sales forecast
d. Shares outstanding forecast
C
QN=03 What is the correct order of the following steps in preparing a projected income
statement (not all steps may be shown)?
I. Project future net sales
II. Project future net income
III. Project future cost of goods sold
IV. Project future interest expense
a. I, II, III, IV
b. II, IV, III, I
c. I, III, II, IV
d. I, III, IV, II
D
QN=04 What is the correct order of the following steps in preparing a projected balance
sheet (not all steps may be shown)?
I. Project future cash
II. Project future accounts receivable
III. Project future accounts payable
IV. Project future property plant and equipment
a. Project future cash
b. Project future accounts receivable
c. Project future accounts payable
d. Project future property plant and equipment
B
QN=05 If a company's cost of capital increases unexpectedly, which of the following
actions will help it maintain or increase its stock price:
I. Decrease its asset turnover
II. Increase its inventory
III. Increase its Gross margin
IV. Issue a stock dividend
a. I and IV
b. II and III
c. III
d. I
C
QN=06 Which of the following is the most useful in assessing short-term liquidity of a
company?
a. Taxes payable
b. Working Capital
c. Next period's sales
d. Prospective cash flows
D
QN=07 The residual income model defines stock price as book value plus the present value
of residual income. What is the effect on stock price in a given period if the firm's cost of
capital is greater than its return on equity?
a. Cannot be determined
b. No effect
c. Stock price increases
d. Stock price decreases
D
QN=08 Over time, what observation(s) best characterizes how ROE for a given firm should
behave?I. ROE will increase, because the firm becomes more efficient
II. ROE will decrease, because competition will erode profitability
III. The answer depends on how conservative the firm's accounting policies are, which
affects its reported earnings.
a. I and III
b. II and III
c. I, II, and III are all possibilities
d. None of the above.
C
QN=09 Which of the following would be considered the most discretionary of the
following cash outflows?
a. Interest payment
b. Payment to suppliers
c. Repurchase of stock
d. Dividend payments
C
QN=10 The reasonableness and feasibility of short-term cash forecasts can be evaluated by
preparing
a. A bank reconciliation
b. Pro forma financial statements
c. A Statement of Cash Flows
d. Interest coverage computations
B
QN=11 If a company is to successfully remain in business over the long haul, which of the
following statements is most correct?
a. Total cash flow from operations, measured over an extended period, must be greater than
zero
b. Total cash flow from investing, measured over an extended period, must be positive
c. Total cash flow from financing, measured over an extended period, should be negative
d. Total cash flow from financing plus total cash flow from investing, measured over an
extended period, must be positive
A
QN=12 When a company is experiencing rapid growth, which of the following statements
is the most correct?
a. Cash flow from operations will be greater than cash flow from investing
b. The company will likely need more outside financing than if growth was slower
c. Cash flow from operations will be high due to rapid growth allowing company to pay
down debt.
d. Rapid growth will increase internally generated funds allowing higher dividend payments
in periods of rapid growth
B
a. The quicker a company collects money from its customers the greater its liquidity, all
else equal
b. The more quickly a company turns over its inventory, the greater its liquidity, all else
equal
c. The lower a company's depreciation the greater its liquidity, all else equal.
d. The greater a company's profit margin the greater its liquidity, all else equal.
C
a. It is possible for a profitable company to go out of business because of short-term
liquidity problems
b. If a company has a current ratio greater than 2, it will never go out of business because of
liquidity problems
c. The current ratio is always greater than or equal to the quick ratio
d. The accuracy of a cash flow forecast is inversely related to the forecast horizon.
B
a. Common Size financial income statements provide information about major sources and
uses of cash
b. Companies with the highest sales growth will have the fewest liquidity problems
c. Pro forma statements are the same as common size statements
d. The more efficiently a company manages its working capital the greater its liquidity, all
else equal
D
a. The cheapest form of capital is equity
b. Companies with the highest current ratios have the most liquidity
c. The best indicator of short term financing needs is the cash flow adequacy ratio
d. A faster growing company is more likely to need external financing than a slower
growing company
D
QN=17 Prospective analysis can only be conducted after historical financial statements
have been adjusted.
a. TRUE
b. FALSE
A
QN=18 The assumptions made about future changes in the company have a great effect on
the quality of the projected financial statements.
a. TRUE
b. FALSE
A
QN=19 Sensitivity analysis is used to examine the assumptions used in the preparation of
projected financial statements.
a. TRUE
b. FALSE
A
QN=20 It is possible for a profitable company to go out of business because of severe short-
term liquidity problems.
a. TRUE
b. FALSE
A
QN=21 If a company takes longer to pay its suppliers than before, all other things being
equal, this means that suppliers are providing more financing for the company.
a. TRUE
b. FALSE
A
QN=22 Cyclical companies often like to retain extra cash/marketable securities during the
"good" times in order to ensure that they have sufficient liquidity when the inevitable
downturn in the business cycle arrives.
a. TRUE
b. FALSE
A
QN=23 As cash is the most liquid of all assets and liquidity is crucial to a company, all
companies should hold as much cash as possible.
a. TRUE
b. FALSE
B
QN=24 If a company has excess cash it wishes to return to shareholders it can do this by
either distributing extra dividends or repurchasing stock.
a. TRUE
b. FALSE
A
QN=25 You construct a pro forma income statement and balance sheet in order to estimate
the amount a company needs to borrow in the forthcoming period. If assets are greater than
liabilities plus equity this means the company needs to borrow money.
a. TRUE
b. FALSE
A
QN=26 When analyzing the liquidity of a company the current ratio is a better indicator of
liquidity than short-term cash forecasts.
a. TRUE
b. FALSE
B
QN=27 When analyzing the liquidity of a company the current ratio is a better indicator of
liquidity than short-term cash forecasts.
a. TRUE
b. FALSE
B
QN=28 The major use of cash for rapidly growing companies is sale of investments.
a. TRUE
b. FALSE
B

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Chapter 4

QN=01 Which of the following would rarely be classified as a current asset?

QN=02 Which of the following would not be classified as a current asset?

QN=03 An asset is considered to be liquid if:

QN=04 Analysis of a company's assets will help evaluate its:

QN=09 Which of the following is not an effect of capitalization?

What is Dell's profit margin for 2005?

What is Dell's profit margin for 2006?

What is Dell's P/E ratio for 2006?

What is Dell's asset turnover for 2006?

Return on Assets for 2006 is

Working Capital for 2005 is:

Owner's Equity for 2006 is:

Current Ratio for 2005 is:

Return on Common Equity for 2006 is:

What is Dell's profit margin for 2005?

What is Dell's profit margin for 2006?

What is Dell's P/E ratio for 2006?

What is Dell's asset turnover for 2006?

Return on Assets for 2006 is

Working Capital for 2005 is:

Owner's Equity for 2006 is:

Current Ratio for 2005 is:

Return on Common Equity for 2006 is:

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