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TEST THREE
BADM 728T - FINANCIAL ACCOUNTING
FALL 1996
INSTRUCTIONS/INFORMATION:
1. WRITE YOUR NAME ON THE ANSWER SHEET. WRITE YOUR 9-DIGIT SOCIAL SECURITY
NUMBER ON THE ANSWER SHEET AND MARK THE CORRESPONDING CELLS.
2. THERE ARE 50 MULTIPLE-CHOICE QUESTIONS. EACH QUESTION IS WORTH 2
POINTS. ANSWER THE EASY QUESTIONS FIRST. YOU HAVE 135 MINUTES TO
COMPLETE THE EXAM.
3. READ EACH QUESTION CAREFULLY.
4. SELECT THE ONE BEST ANSWER FOR EACH QUESTION AND MARK THE CORRESPONDING
CELL ON THE ANSWER SHEET.
5. USE THE TABLES PROVIDED IN ANSWERING QUESTIONS THAT REQUIRE THE USE OF
TABLES.
6. GOOD LUCK!
7. YOU MAY KEEP THE EXAM.
8. SCRATCH PAPER IS ATTACHED.
*********************************************
TEST QUESTIONS:
1. Match the type of accounting information to the term that best
describes it.
Information prepared for Information prepared for
external decision makers internal decision makers
1. managerial accounting financial accounting
2. managerial accounting managerial accounting
3. financial accounting financial accounting
4. financial accounting managerial accounting
2. The Roosevelt Company purchased a new delivery truck by making a cash
down payment and signing a note payable for the balance. How will
assets, liabilities, and owner's equity be affected by this
transaction?
Assets Liabilities Equity
1. decreased increased no change
2. increased increased no change
3. increased decreased increased
4. no change increased decreased
5. no change decreased increased
3. A Howard Company salesperson has just called on a large client and has
made a sizable sale. Information about this economic event will first
be recorded:
1. on a financial statement.
2. in the ledger.
3. in the journal.
4. on a source document.
4. The operating cycle of the business is:
1. one year.
2. the time necessary to acquire inventory, sell it, and collect the
resulting cash.
3. any convenient time period as established by management.
4. roughly equal to the normal business cycle as experienced by the
economy of the country.
5. The statement of cash flows is designed to report:
1. how the previous period's income statement relates to the current
period's income statement.
2. only the sources and uses of cash during the current period.
3. the operating, financing and investing activities of the firm
during the current period.
4. the effects of the current period's income statement on the
current period's balance sheet.
6. On July 1, 19A, a tenant walked into the office at the Pig-Stye
Apartments and prepaid his rent for the next twelve months. The
bookkeeper for Pig-Stye should record a(n):
1. accrued revenue.
2. accrued expense.
3. deferred revenue.
4. deferred expense.
7. On which format(s) of the statement of cash flows would you expect to
find a line titled "Net Cash Flow From Operating Activities"?
Indirect Method Direct Method
Format? Format?
1. Yes Yes
2. Yes No
3. No Yes
4. No No
8. The accounting firm of Stumble and Fall has just completed its annual
independent audit of High-Five, Incorporated and has issued an
unqualified audit report. Which of the following terms is most closely
related to the events described above?
1. Articulation
2. Matriculation
3. Attestation
4. Reconciliation
9. The independent audit of Herstamm Company has just been completed by
the outside firm of Prestigious and Noble. The accounting firm is
known for employing only the most highly talented and experienced
auditors available. The type of audit opinion that Prestigious and
Noble rendered on this audit is:
1. qualified.
2. unqualified.
3. disclaimer.
4. not determinable from the information given.
10. Tender Care Dental Clinic is considering acquisition of sophisticated
new x-ray equipment costing $50,000. The present value of expected net
cash flows (except for purchase cost) from this equipment is $55,000
when discounted at 13%. From this information we can conclude that
the:
1. company should reject this investment.
2. expected rate of return is greater than 13%.
3. life of the equipment is less than 6 years.
4. net cash flows will occur evenly over the equipment's life.
11. Ye Olde Golfe Shoppe is for sale at an asking price of $400,000. The
audited financial statements show that the business generates
approximately $43,000 per year in net cash flow. You believe you could
operate the business for 3 years and sell it for $500,000. What is the
maximum amount you would be willing to pay for the business if you wish
to earn at least a 16% return on your investment?
1. $263,008
2. $357,033
3. $413,580
4. $417,078
12. Marble, Inc. is a prosperous company whose earnings are growing about
3% per year. Most recently, it earned $4 per share. If this earnings
growth continues indefinitely and you require a return of 12%, what is
the maximum price you would be willing to pay to acquire shares of this
stock?
1. $18.67
2. $26.67
3. $33.33
4. $44.44
13. Harmon Company issued convertible bonds for a total price of $150
million. Later, when the bonds had a market value of only $120
million, they were converted to shares of common stock worth
approximately $135 million. For Harmon Company, which of the following
would increase as a result of this transaction?
Contributed capital Retained earnings
1. Yes Yes
2. Yes No
3. No Yes
4. No No
14. The issuance of a common stock dividend:
1. reduces a company's retained earnings balance.
2. brings new owners into a corporation.
3. increases the number of shares of outstanding stock.
4. both 1 and 3
15. The term "cumulative" is used to describe a feature of which of the
following?
1. Preferred stock.
2. Common stock.
3. Stock dividends.
4. Stock splits.
16. Financial leverage can:
Result in the return to Result in the return to
stockholders begin more than stockholders being less than
the return to bondholders the return to bondholders
1. Yes Yes
2. Yes No
3. No Yes
4. No No
17. The Dalmatian Puppy Farm must raise $300,000 to finance expansion of
its Cruella DeVille line. Preferred stock with a par of $100 and a
dividend of $7 can be sold or 9% bonds payable can be sold. Assume the
firm will pay the required cash return each year as required and that
the firm has a 40% income tax rate. Which financing option will be
least costly for the firm and what will the after-tax cost of that
option?
Financing Option After-Tax Cost
1. bonds payable $27,000
2. bonds payable $16,200
3. preferred stock $21,000
4. preferred stock $12,600
18. Montvale Company reports the following information in its financial
statements at the end of its first year in business.
Net income $156,000
Net cash inflow from operations 233,000
Preferred dividends paid (all cash) 12,000
The amounts of net income and cash flow available to common
stockholders are as follows:
Net Income Cash Flow
1. $144,000 $233,000
2. $156,000 $221,000
3. $156,000 $233,000
4. $144,000 $221,000
19. Bony-Maroney Enterprises has bonds payable, preferred stock and common
stock outstanding. Which of the following can result in bankruptcy for
the firm?
Failure to make Failure to
interest payments pay dividends
1. Yes Yes
2. Yes No
3. No Yes
4. No No
20. On July 12, 19A, Toyota Corporation issued 1,000 new shares of its own
common stock to Omar Investment Company. On Thursday, October 22, 19D
Omar sold 400 of these shares to the Bradley National Bank. Which of
the following terms is related to which transaction?
July 12, 19A October 22, 19D
1. primary market primary market
2. primary market secondary market
3. secondary market primary market
4. secondary market secondary market
21. You have computed a firm's dividend payout ratio for the past seven
` years as follows (19G is the most recent year).
19G 19F 19E 19D 19C 19B 19A
63.2% 65.1% 57.9% 48.2% 55.1% 37.4% 25.2%
One possible explanation for this situation is that the firm:
1. is in a high technology industry and is earning very high profits.
2. has few profitable opportunities in which to reinvest profits.
3. is using more and more of its capital to finance foreign
operations.
4. has resold all its treasury stock holdings over the period shown.
22. The dividend payout ratio indicates:
1. the degree of financial leverage used by the firm.
2. the return on investment earned by the investor this period.
3. whether more shares should be purchased in the future.
4. the portion of current earnings paid out in dividends.
23. The equity method of accounting should be used to account for:
Certain short-term Certain long-term
investments investments
1. Yes Yes
2. Yes No
3. No Yes
4. No No
24. The Artistic Tile Company uses the equity method for its investment in
Design Corporation. This year, Design Corp. earned $50,000 and paid
$4,000 in dividends. Upon receipt of the cash dividend, Artistic's
accountant recorded Investment Revenue. This procedure:
1. is correct.
2. will cause an overstatement of net income.
3. will cause an understatement of net income.
4. is incorrect according to GAAP, but will not cause any errors on
the financial statements.
25. Two years ago, Graceland Enterprises made an investment in River
Company. When looking at the firm's current annual report you see a
line on the balance sheet labeled "Minority Interest in River Company."
This tells you that:
1. only a small investment was made in River Company.
2. Graceland has prepared a consolidated balance sheet.
3. the investment is being accounted for by the equity method.
4. River's plant assets exceed its amount of current liabilities.
26. Gonzo Company purchased 100% of Bean Corporation for $300,000 cash.
Book value of Bean's net assets was $250,000 at the time and the fair
market value was $290,000. Which of the following will be recorded on
Gonzo's books for this event?
1. Assets of Bean Company, $300,000
2. Assets of Bean Company, $250,000
3. Goodwill of $50,000
4. Goodwill of $10,000
27. Alpha Co. purchased bonds issued by Beta Co. The bonds had a nominal
rate of 8% and were purchased to yield a market rate of 10%. As a
result, the bonds were purchased at:
1. their face value.
2. more than their face value.
3. less than their face value.
4. their maturity value.
28. Francine's Tire Store purchased new depreciable equipment as follows:
Cost $39,000
Residual 9,000
Estimated Useful Life 4 years
Under the sum-of-the-years-digits method of depreciation, what will the
depreciation expense be for year 2?
1. $ 9,000
2. $11,700
3. $12,000
4. $15,600
29. Keep-On Trucking owned a truck which cost $20,000 when it was purchased
on January 1, 19B. It has accumulated depreciation of $8,000 at
December 31, 19C. Keep-On originally estimated the truck would have a
residual value after using it for four years of $2,000. It sold the
truck for $15,000 cash on January 1, 19D. The amount of gain (loss) on
the sale of the truck was:
1. $ 3,000 gain
2. $12,000 gain
3. $ 1,000 loss
4. $ 7,000 gain
30. A clear distinction between return on assets and return on equity is
that return on assets:
1. must always be a smaller percentage than is return on equity.
2. is a measure of management's investment decisions that excludes
any consideration of how the investments were financed.
3. is of greater interest to investors than is return on equity.
4. measures operating leverage while return on equity measures
financial leverage.
31. You know a firm's debt to equity ratio and its return on assets. From
this information you can determine whether the firm is:
1. using leverage.
2. using leverage AND whether the leverage is positive or negative.
3. earning a greater return on assets than it is on equity.
4. earning a greater return on assets than it is paying on
liabilities.
32. A company with good investment opportunities normally can increase its
stockholders' wealth by:
1. increasing its cash dividend payout rate.
2. decreasing its cash dividend payout rate.
3. reducing the amount invested in new assets.
4. reducing its required rate of return on new assets.
33. A company can reduce the volatility of its net income by:
1. diversifying its product line.
2. increasing its financial leverage.
3. increasing its operating leverage.
4. investing in projects with high net present values.
34. Arnold Company has a lower ratio of fixed to variable costs than Sutton
Company. The sales revenues of both companies increased by 10%. If
the firms are similar in size, you would expect Arnold's:
1. expenses to increase more rapidly than Sutton's.
2. expenses to decrease while Sutton's increase.
3. net income to decrease while Sutton's increase.
4. net income to increase more rapidly than Sutton's.
35. You are reviewing the financial statements of a specific firm and
notice that cash flow from operations has been negative for five of the
last seven years. This is an indication to you that:
1. the firm is paying huge dividends.
2. cash flow from financing activities is also probably negative in
those years.
3. this is a new company.
4. the primary activities of the company are consuming cash rather
than generating it.
36. The Rocky Point Bakery reports the following information. All amounts
are in thousands of dollars.
Net Total L-T --------Cash Flow from----------
Year Income Assets Debt Operations Investing Financing
19x4 $43 105 33 29 (20) 0
19x5 30 89 43 33 11 0
19x6 20 233 48 46 (85) 37
19x7 4 280 48 30 (133) 109
19x8 (24) 400 24 41 (129) 91
Identify the true statement below.
1. It is likely that this company has followed a policy of paying out
maximum dividends each year.
2. This company is nearing bankruptcy.
3. This company has been decreasing its operating leverage.
4. Capital expenditures have exceeded depreciation expense in recent
years.
37. Which of the following is deducted in the calculation of BOTH net
income and income before income taxes.
1. Extraordinary loss.
2. Interest expense.
3. Cumulative effect which reduces prior profits.
4. Minority interest in income.
38. The Leaning Wall Construction Company was awarded a three-year contract
to build a giant shopping mall complex at a price of $115 million. At
the end of the first year, the company had incurred $28.5 million of
costs and the project was about 30% completed. The firm estimated that
it would take another $66.5 million to complete the project. What
amount of profit should the firm recognize in the first year of this
project using the percentage of completion accounting method?
1. $-0-
2. $6,000,000
3. $8,550,000
4. $34,500,000
39. When goods are sold FOB shipping point, title passes:
1. at the shipping point.
2. when the goods are unloaded at the buyer's place of business.
3. when the goods are paid for by the buyer.
4. midway between the seller and buyers places of business.
40. The Teeny Weeny Company sells vienna sausage. Inventory information
for a recent week are below:
Units Unit Cost Total Cost
Beginning inventory 2 $3 $6
Purchase 4 4 16
Purchase 6 5 30
If seven units were sold during the week, what is the COST OF GOODS
SOLD if the LIFO method is used?
1. $34
2. $27
3. $25
4. $18
41. Discontinued operations, extraordinary items, and cumulative effects
are all similar in that they:
1. result in an increase in net income for the period reported.
2. have no effect on the cash flow statement (have no cash flow
consequences).
3. are all reported separately on the income statement.
d. all are caused by management having made poor decisions in the
past.
42. The effects of common stock equivalents are included in the calculation
of:
Primary EPS Fully Diluted EPS
1. Yes Yes
2. Yes No
3. No Yes
4. No No
43. Caldwell Furniture's cash flow statement contained the following line
under the operating activities section.
Equity income, net of dividends............. (12,400)
Why is this amount a deduction in that section?
1. Because the firm has minority stockholders and this amount is
attributable to them.
2. To avoid double counting since the cash received from the
investment is recognized both upon it being earned and when it is
received as dividends.
3. Under the direct method of computing cash flow from operations all
inflows and outflows of cash are reported.
4. Income from an equity method investment increased net income but
(except for dividends) no cash was received.
44. A company is valuable when:
1. each of its shares sells for a high price.
2. it owns a large amount of assets.
3. net income and cash flow from operations are growing in opposite
directions.
4. it creates high returns relative to the risk associated with those
returns.
45. You are calculating the growth of return on equity by computing the
average ratio of the change in net income. Which of the following
should be removed from the net income number BEFORE making this
calculation?
Preferred Dividends Depreciation Expense
1. Yes Yes
2. Yes No
3. No Yes
4. No No
46. Which of these yields information about effectiveness?
1. Total current assets.
2. Operating revenues.
3. Operating Income.
4. Total long-term assets.
47. Seinfeld Company reports the following information at a recent balance
sheet date (in millions of dollars).
Net income $18
Average total assets 65
Preferred dividends paid 4
Net sales 100
What is the return on assets for the most recent period?
1. 21.5%
2. 23.0%
3. 27.7%
4. 29.5%
48. Information regarding the Cairo Historical Society is given below.
19x5 19x4 19x3
Net Sales 68.3 74.9 83.1
Cost of Products Sold 30.7 39.0 44.9
Gross Profit 26.4 24.8 23.3
Total costs and expenses 4.3 14.2 21.6
Income before taxes 1.7 5.6 8.6
Provision for income taxes 2.6 8.6 13.0
Net Income
Which of the following have improved over the three year period?
Efficiency Effectiveness
1. Yes Yes
2. Yes No
3. No Yes
4. No No
49. Hartwell Company has provided the summary below of data as of each
December 31 for the past five years.
19E 19D 19C 19B 19A
Cost of goods sold $200 $190 $180 $170 $160
Average inventory 20 22 25 45 50
Which of the following would explain the data above?
1. The firm has switched to a cost leadership strategy from a product
differentiation strategy.
2. The credit terms extended to customers have been tightened-up.
3. The firm has decreased its operating leverage over the years.
4. The company has increased its profit margin but decreased its
asset turnover during the years shown.
50. Match the terms profit margin and asset turnover to the primary
attribute which they measure.
Effectiveness Efficiency
1. Profit margin Asset turnover
2. Profit margin Profit margin
3. Asset turnover Profit margin
4. Asset turnover Asset turnover
Answer Key
1. 4 2. 2 3. 4 4. 2 5. 3 6. 3 7. 1 8. 3 9. 4 10. 2 11. 4 12. 4 13. 2 14. 4 15. 1 16. 1 17. 2 18. 4 19. 2 20. 2 21. 2 22. 4 23. 3 24. 2 25. 2 |
|
26. 4 27. 3 28. 1 29. 1 30. 2 31. 1 32. 2 33. 1 34. 1 35. 4 36. 4 37. 2 38. 2 39. 1 40. 1 41. 3 42. 1 43. 4 44. 4 45. 2 46. 2 47. 3 48. 4 49. 1 50. 3 |