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Homework answers / question archive / FPT University FIN 202 Chapter 3 1)Annual reports are prepared by a firm's management to A) communicate to shareholders the firm's failures in the previous year
FPT University
FIN 202
Chapter 3
1)Annual reports are prepared by a firm's management to
A) communicate to shareholders the firm's failures in the previous year.
B) provide overview of the firm's financial and operating performance.
C) highlight the performance of its chief competitors.
D) provide a forecast of the economy in the coming years.
2. The generally accepted accounting principles (GAAP) are
A) rules that outline how a firm can operate ethically.
B) rules on how the firm will be valued in the event of a merger.
C) rules and procedures that define how companies are to maintain financial records and prepare financial reports.
D) rules for how a company can issue stock to raise money.
3. Accounting standards prescribed by GAAP are important because
A) they make the financial statements of all firms standardized.
B) they allow one to examine a firm's performance over time.
C) they make it possible for management or analysts to compare the firm's performance to that of other competitors.
D) all of the above.
4. The assumption of arm's-length transaction states that
A) both parties to a transaction can act independently of each other and make economically rational decisions.
B) both parties to a transaction must have had previous transactions.
C) one of the parties to the transaction is a bank that has full knowledge of the firm's creditworthiness.
D) none of the above
5. Your uncle, who has a second home in Bethany Beach, Delaware, is planning to sell it in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of
A) The cost principle.
B) the assumption of arm's-length transactions.
C) the realization principle.
D) the going-concern assumption.
E) the matching principle.
6. The going concern assumption implies that
A) a firm will continue to be in business for the foreseeable future.
B) a firm will be going out of business in the near future.
C) a firm will continue to operate in the near future but only after being acquired by another firm.
D) none of the above
7. Dell Computer Corporation has receivables of $2.5 million and inventory worth $1.8 million. The firm plans to borrow $2 million for working capital purposes from Austin First National Bank. In evaluating the loan request, the bank should place the most emphasis on
A) the matching principle.
B) the realization principle.
C) the going-concern assumption.
D) the assumption of arm's-length transactions.
8. The matching principle calls for the accountant of a firm to
A) identify an asset with each liability of the firm.
B) associate the revenue generated from a sale to the costs incurred to produce the product.
C) match each item of inventory with the historical cost at which it was
acquired.
D) none of the above
9. Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced in the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate
A) the inventory acquired on July 2 with the products sold.
B) the inventory acquired on April 23 with the products sold.
C) Neither of these dates is valid because the products were sold in July.
D) None of the above.
10. According to the realization principle, revenue from a sale of the firm's products are recognized
A) when the products are shipped to the buyer.
B) when the buyer orders the goods.
C) when cash is realized from the sale of the products.
D) at the time of the sale.
11. On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on
A) June 23, 2008.
B) July 2, 2008.
C) September 20, 2008.
D) none of the above.
12. The cost principle states that an asset should be recognized on the balance sheet at
A) the market value of the asset.
B) at the market values, less the accumulated depreciation on the asset.
C) at its historical cost.
D) at its historical cost, less the accumulated depreciation on the asset.
13. Trekkers Footwear bought a piece of machinery on January 1, 2006 at a
cost of $2.3 million, and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its market value on December 31, 2008 is $1.75 million. The firm's accountant is preparing its financial statement for the fiscal year end on December 31, 2008. The asset's value should be recognized on the balance sheet at
A) $2.3 million.
B) $1.61 million.
C) $230,000.
D) $1.75 million.
14. The conventional way of preparing a balance sheet is to list all assets in the order of their
A) market value.
B) risk.
C) liquidity.
D) historical cost.
Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium
15. Petra, Inc., has $400,000 as current assets, $1.225 million as plant and
equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders?
A) current assets, goodwill, and plant and equipment
B) current assets, plant and equipment, and goodwill
C) goodwill is not an asset and is not listed here
D) none of the above.
Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium
16. When prices are rising, valuing ending inventory using the FIFO method
rather than LIFO gives
A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.
Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium
17. When prices are falling, valuing inventory using the LIFO method rather
than FIFO gives
A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.
Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium
18. Which one of the following is NOT true about goodwill?
A) It is an intangible asset.
B) It represents the value of all unrecorded assets acquired in a merger.
C) It equals the premium paid over the fair market value of the assets acquired in a merger.
D) When goodwill appears on a firm's balance sheet, it reduces the firm's
net worth by that amount.
Format: Multiple Choice Learning Objective: LO 3 Level of Difficulty: Medium
19. Which of the following is NOT true about treasury stock?
A) It is the firm's own shares repurchased in the market by the firm.
B) It can be reissued under stock option and other employee benefit
plans.
C) It lowers the value of the company.
D) It increases the net worth of the company.
Format: Multiple Choice Learning Objective: LO 3 Level of Difficulty: Medium
20. The major disadvantages of market-value accounting include
A) the difficulty in estimating the current value for some assets.
B) the difficulty in applying some of the valuation models used to estimate market values.
C) the resulting numbers are potentially open to abuse.
D) All of the above are disadvantages of market-value accounting.
Format: Multiple Choice Learning Objective: LO 4 Level of Difficulty: Medium
21. Which one of the following does NOT belong on an income statement?
A) depreciation and amortization
B) goodwill
C) extraordinary items
D) nonrecurring expenses
Format: Multiple Choice Learning Objective: LO 4 Level of Difficulty: Medium
22. Which one of the following are NOT all noncash items?
A) depreciation, deferred taxes, and prepaid expenses
B) depletion charges, taxes, and amortization
C) depletion charges, deferred taxes, and prepaid expenses
D) depreciation, amortization, and prepaid taxes
23. Which one of the following is NOT a cash flow from operating activities?
A) cash payments on the principal of long-term debt
B) payments for utilities and rent
C) payments to purchase raw materials
D) cash receipts from selling goods and services
24. Cash flows from financing activities include all but one of the following:
A) cash payments on the principal of long-term debt
B) issuing and paying out on insurance contracts
C) cash purchases of treasury stock
D) cash proceeds from a bank loan
25. Which one of the following is NOT a cash flow from investing activities?
A) buying and selling bonds or stock of other firms
B) buying or selling of land, buildings, and plant and equipment
C) cash payments of dividends to shareholders
D) issuing and paying out on insurance contracts
26. Trident Corporation had the following cash flows in the current year. Which one of the following is a financing activity cash flow?
A) Rent on a warehouse amounting to $1.1 million
B) Purchase of $125,000 worth of five-year bonds issued by Towson Utilities
C) Preferred dividends to the tune of $330,000 paid to shareholders
D) Lease income received on a piece of land
27. Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of 32 percent this year. It is planning to construct a new recording studio next year. The appropriate tax rate to be applied on the income generated from the new studio is
A) the average tax rate.
B) the marginal tax rate.
C) either one.
D) none of the above.
28. Which one of the following is NOT true for a corporation?
A) Interest paid on bonds issued last year is tax deductible.
B) Common-stock dividends to be paid this year are not tax deductible.
C) Common-stock dividends to be paid this year will be tax deductible if the firm has a net loss for the year.
D) Preferred stock dividends to be paid this year are not tax deductible.
29. Maddux, Inc., has completed its fiscal year and reported the following
information. The company had current assets of $153,413, net fixed assets of $ 412,331, and other assets of $7,822. The firm also has current liabilities worth $65,314, long-term debt of $178,334, and common stock of $162,000. How much retained earnings does the firm have?
A) $ 405,648
B) $243,648
C) $167,918
D) $573,566
30. Galan Associates prepared its financial statement for 2008 based on the
information given here. The company had cash worth $1,234, inventory worth $13,480, and accounts receivables of $7,789. The company's net
fixed assets are $42,331, and other assets are $1,822. It had accounts payables of $9,558, notes payables of $2,756, common stock of $22,000, and retained earnings of $14,008. How much long-term debt does the firm have?
A) $54,342
B) $76,342
C) $12,314
D) $18,334
31. Tumbling Haven, a gymnastic equipment manufacturer, provided the
following information to its accountants. The company had current assets of $145,332, net fixed assets of $356,190, and other assets of $4,176. The firm has long-term debt of $76,445, common stock of $200,000, and retained earnings of $134,461. What amount of current liabilities does this firm have?
A) $94,792
B) $505,678
C) $171,217
D) none of the above
32. Teakap, Inc., has current assets of $ 1,456,312 and total assets of
$4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. How much long-term debt does the firm have?
A) $1,844,022
B) $2,303,010
C) $2,123,612
D) $803,010
33. Chandler Sporting Goods produces baseball and football equipment and
lines of clothing. This year the company had cash and marketable securities worth $335,485, accounts payables worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes payable worth $313,663, and other current assets of $121,427. What is the company's net working capital?
A) $3,596,632
B) $1,801,784
C) $2,123,612
D) $1,673,421
34. Tre-Bien Bakeries generated net income of $233,412 this year. At year end,
the company had accounts receivables of $47,199, inventory of $63,781, and cash of $21,461. It also had accounts payables of $51,369, short-term notes payables of $11,417, and accrued taxes of $6,145. The net working capital of the firm is
A) $68,931
B) $63,510
C) $69,655
D) none of the above
35. Spartan, Inc., is a manufacturer of automobile parts located in Greenville,
South Carolina. At the end of the current fiscal year, the company had net working capital of $157,903. The company showed accounts payables of
$94,233, accounts receivables of $83,112, inventory of $171,284, and cash and marketable securities of $12,311. What amount of notes payables does the firm have?
A) $14,571
B) $26,882
C) $15,471
D) none of the above
36. Centennial Brewery produced revenues of $1,145,227 in 2008. It has
expenses (excluding depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays an average tax rate of 34 percent. What is the firm's net income after taxes?
A) $120,140
B) $248,475
C) $79,292
D) $40,848
37. Simplex Healthcare had net income of $5,411,623 after paying taxes at 34
percent. The firm had revenues of $20,433,770. Their interest expense for the year was $1,122,376, while depreciation expense was $2,079,112.
What was the firm's operating expenses excluding depreciation?
A) $8,199,429
B) $9,032,853
C) $9,321,805
D) none of the above
38. Triumph Trading Company provided the following information to its
auditors. For the year ended March 31, 2008, the company had revenues of
$1,122,878, operating expenses (excluding depreciation and leasing expenses) of $612,663, depreciation expenses of $231,415, leasing expenses of $126,193, and interest expenses equal to $87,125. If the company's tax rate was average 34 percent, what is its net income after taxes?
A) $43,218
B) $65,482
C) $152,607
D) none of the above
39. Parrino Corporation has announced that its net income for the year ended
June 30, 2008, is $1,824,214. The company had an EBITDA of $ 5,174,366, and its depreciation and amortization expense was equal to
$1,241,790. The company's average tax rate is 34 percent. What is the amount of interest expense for the firm?
A) $2,763,961
B) $939,747
C) $1,187,720
D) $1,168,615
40. During 2008, Towson Recording Company increased its investment in
marketable securities by $36,845, funded fixed assets acquisition by
$109,455, and had marketable securities to the tune of $14,215 mature. What is the net cash provided (used) in investing activities?
A) $132,085
B) $145,940
C) –$132,085
D) none of the above
41. Trident Manufacturing Company's treasurer identified the following cash
flows during this year as significant. It had repaid existing debt to the tune of $425,110, while raising additional debt capital of $750,000. It also repurchased stock in the open markets for a total of $63,250. It paid
$233,144 in dividends to its shareholders. What is the net cash provided (used) by financing activities?
A) $28,496
B) $91,746
C) –$28,496
D) –$91,746
42. Super Grocers, Inc., provided the following financial information for the
quarter ending September 30, 2006:
Depreciation and amortization – $133,414 Net income – $341,463
Increase in receivables – $ 112,709 Increase in inventory – $81,336 Increase in accounts payables – $62,411
Decrease in marketable securities – $31,225
What is the cash flow from operating activities generated during this quarter by the firm?
A) $308,458
B) $374,468
C) –$374,468
D) –$308,458
Use the following to answer questions 68-70:
Thunderbird Amusement Park—Balance Sheet as of June
30
Assets 2007 2008
Cash $ 13,221 $ 11,729
Accounts receivables 31,323 37,909
Inventory 77,244 91,617
Total current assets $121,788 $141,255
Net fixed assets 344,712 390,836
Total assets $466,500 $532,091
Liabilities and Stockholders' Equity
Accounts payable
$ 38,549
$ 42,881
Notes payable 12,004 16,753
Deferred taxes 21,934 16,788
Total current liabilities $ 72,487 $ 76,422
Long-term debt 78,445 61,290
Common stock 125,000 175,000
Retained earnings 190,568 219,379 Total liabilities and stockholders' equity $466,500 $532,091
The company had a net income of $248,462, and depreciation expenses were equal to $72,487.
43. What is the firm's cash flow from operating activities? A) $304,322
B) $299,176
C) $192,602
D) none of the above
Reference: Ref 3-1 Format: Multiple Choice Learning Objective: LO 5 Level of Difficulty: Hard
44. What is the firm's cash flow from investing activities?
A) $0
B) $46,124
C) –$46,124
D) none of the above
45. What is the firm's cash flow from financing activities?
A) –$66,405
B) $61,656
C) –$61,656
D) -$182,057
46. Trimeton Corporation announced that in the year ended June 30, 2008, its
earnings before taxes amounted to $2,367,045. Calculate its taxes using the following table.
Tax Rate Taxable Income
15% $0 to $50,000
25 50,001 – 75,000
34 75,001 – 100,000
39 100,001 – 335,000
34 335,001 – 10,000,000
35 10,000,001 – 15,000,000
38 15,000,001 – 18,333,333
35 More than $18,333,333
A) $804,795
B) $690,895
C) $713,145
D) none of the above
47. Chartworth Associates' financial statements indicated that the company had EBITDA of $3,145,903. It had depreciation of $633,000, and its interest rate on debt of $1.25 million was 7.5 percent. Calculate the amount of taxes the company is likely to owe.
Tax Rate Taxable Income
15% $0 to $50,000
25 50,001 – 75,000
34 75,001 – 100,000
39 100,001 – 335,000
34 335,001 – 10,000,000
35 10,000,001 – 15,000,000
38 15,000,001 – 18,333,333
35 More than $18,333,333
A) $1,069,607
B) $1,037,732
C) $822,512
D) none of the above
Format: Multiple Choice Learning Objective: LO 7 Level of Difficulty: Hard
48. Chartworth Associates’ financial statements indicated that the company has
EBITDA of $3,145,903. It had depreciation of $633,000, and its interest rate on debt of $1.25 million was 7.5%. The company is likely to owe
$822,512 in taxes. What are the marginal and average tax rates for this company?
Tax Rate Taxable Income
15% $0 to $50,000
25 50,001 – 75,000
34 75,001 – 100,000
39 100,001 – 335,000
34 335,001 – 10,000,000
35 10,000,001 – 15,000,000
38 15,000,001 – 18,333,333
35 More than $18,333,333
A) 34%, 35%
B) 35%, 34%
C) 34%, 34%
D) none of the above
49. Which of the following is the best example of how a market-value balance
sheet item differs from the firm’s book-value balance sheet item?
A) A firm issued long-term bonds five-years ago that currently sell for par value.
B) A firm sold common stock twenty-years ago for $20.00 share. The
firm’s common stock is currently selling for $96.50 per share.
C) A firm has $5 million of accrued liabilities on the books.
D) A firm issued preferred stock ten-years ago. These shares of preferred stock currently are selling for par value.
50. Which of the following statements is not a limitation associated with
market valuation of balance sheet accounts?
A) It can be difficult to identify the market value of an asset, particularly if there are few transactions involving comparable assets.
B) The estimates of market value can involve complex financial
modeling, and the resulting numbers can be open to manipulation and abuse.
C) Marking to market provides decision makers with a better chance of
making the correct economic decision, given the information available.
D) Mark-to-market accounting can become inaccurate if market prices
deviate from the “fundamental” values of assets and liabilities.
51. EBIT: Arco Steel, Inc. generated total sales of $45,565,200 during fiscal
2010. Depreciation and amortization for the year totaled $2,278,260, and cost of goods sold was $27,339,120. Interest expense for the year was
$9,641,300 and selling, general, and administrative expenses totaled
$4,556,520 for the year. What is Arco’s EBIT for 2010?
A) $9,641,300
B) $11,391,300
C) $13,275,030
D) $18,490,000
52. Which of the following is an income statement item?
A) Accumulated depreciation.
B) Accrued taxes.
C) Retained earnings.
D) Selling and administrative expenses.
53. Which of the following presents a summary of the changes in a firm’s
balance sheet from the beginning of an accounting period to the end of that accounting period?
A) The statement of retained earnings.
B) The statement of working capital.
C) The statement of cash flows.
D) The statement of net worth.
54. Which of the following is a cash flow from investing activities?
A) Cash payment of dividends to shareholders.
B) Cash from sale of products.
C) Purchase of plant, and equipment.
D) Rent received from industrial property owned.
55. Statement of Cash Flows – Cash from Financing Activities: Natural
Lite, Inc. reported the following items during fiscal 2010. The firm purchased marketable securities of $87,500, paid down a long-term loan in the amount of $650,000, purchased $4,250,000 of new equipment. The firm also sold $6,250,000 of common stock, paid $350,225 in dividends to its common shareholders, and repurchased $1,250,000 of common stock in the open market. What is the net cash provided by financing activities? (Round off to the nearest)
A) $4,575,210
B) $1,733,285
C) $3,999,775
D) $2,467,915
56. Which of the following best represents cash flows to investors?
A) Cash flow from operating activity, plus cash flow generated from net working capital.
B) Earnings before interest and taxes times 1 minus the firm’s tax rate.
C) Net income, minus dividends paid to preferred stockholders.
D) Cash flow from operating activity, minus cash flow invested in net working capital, minus cash flow invested in long-term assets.
57. Which of the following statements is true?
A) Only 20 percent of interest income is taxable income for a corporation.
B) Dividend income is fully taxable income.
C) Interest paid on debt obligations is a tax-deductible business expense.
D) Dividends paid to stockholders are a tax-deductible business expense.
58. Federal Income Tax: United Brands Corp. just completed their latest
fiscal year. The firm had sales of $16,650,000. Depreciation and amortization was $832,500, interest expense for the year was $825,000, and selling general and administrative expenses totaled $1,665,000 for the year, and cost of goods sold was $9,990,000 for the year. Assuming a federal income tax rate of 34%, what was the United Brands net income after-tax?
A) $2,202,750
B) $1,745,325
C) $3,505,100
D) $2,813,000
59. Identify and explain the five fundamental principles that form the basis of accounting standards in the United States.
60. Explain the differences in using FIFO versus LIFO in accounting for inventory.
61. What are the advantages and disadvantages of using market-value accounting?
62. Explain the following income statement items.
a. Amortization expense
b. Nonrecurring expense
c. Extraordinary items
d. EBITDA
.
63. Identify the noncash items that a firm may have on its financial statement and explain their impact on the shareholders of the firm.
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