2. Which of the following should be classified on the balance sheet as short-term (current) liabilities?

That portion of a 5-year
30-year bonds due within one insurance policy to be
year of the balance sheet date consumed in the coming year
a. Yes Yes
b. Yes No
c. No Yes
d. No No


____ 3. Debentures have which one of the following characteristics?
a. they have no specific due date on which they must be repaid
b. they are more like common stock than like debt
c. they have no specific collateral backing them up
d. they are issued by very small firms in an industry


____ 4. Asian Trading Company issued 20-year bonds having a coupon rate of 15%. At any time after the third year, the company may notify up to 10% of the bondholders per year that their bonds could be redeemed. Which term below best described the bonds issued by Asian Trading Company?
a. registered
b. callable
c. serial
d. debentures


____ 5. Styles Ventures sold a $50,000 issue of bonds. The coupon rate was 10% and the market rate was 8%. The present value of a $1 annuity for ten periods at 8% is $6.7101. The present value of $1 for ten periods at 8% is $0.4632. The selling price of these bonds should be
a. $47,740
b. $50,000
c. $52,830
d. $56,710


____ 6. At the date of a bond issue, the effective rate of interest is significantly above the stated rate of interest. If the bond has a $1,000 face value, the proceeds from the issue would be
a. more than $1,000
b. less than $1,000
c. $1,000
d. $0


____ 7. If the market rate of the interest for bonds is less than the rate printed on the face of the bonds, then the bonds will be issued at
a. a discount
b. a premium
c. their face value
d. their face value less the interest rate printed on the face of the bonds


____ 8. Javelin Sports sold $50,000 face value of ten-year, 8% bonds payable for $61,583 on January 1, 2007 when the market interest rate was 5%. What amount of interest expense will Javelin report for calendar year 2007?
a. $4,927
b. $4,000
c. $3,500
d. $3,079


____ 9. On January 1, 2007, Beta Company issued 5-year bonds having a face value of $100,000. The bonds pay 7% interest annually and were sold for $94,706 to yield 8.34% interest. Beta’s 2007 income statement should report what amount for interest expense on these bonds?
a. $6,630
b. $7,000
c. $7,898
d. $8,340


____ 10. Identify the correct statement below:
a. contingencies are always reported in the liability section of the balance sheet
b. commitments are disclosed on the income statement because they affect net income but not cash flow
c. capital leases are accounted for as if the leased assets had been purchased
d. the expense associated with operating leases is reported on the cash flow statement under the category of investing activities


____ 11. The par value of stock is
a. the same as market value
b. always greater than market value
c. no longer required
d. the nominal value assigned to each share by a corporation


____ 12. Which of the following is the number of shares actually in the hands of stockholders?
a. authorized shares
b. delivered shares
c. outstanding shares
d. issued shares


____ 13. The maximum number of shares of stock that can be sold and issued as specified in the charter of the corporation is known as
a. outstanding shares
b. subscribed shares
c. issued shares
d. authorized shares


____ 14. Treasury stock
a. is issued by a firm to finance expansion of operations
b. is more similar to preferred stock than to common stock
c. has been issued, but is not currently outstanding
d. will result in an increase stockholders' equity


____ 15. Retained earnings can best be described as
a. cash receipts minus expenses after adjustments
b. net income minus expenses after adjustments
c. undistributed profits
d. net income minus cash disbursements after adjustments


____ 16. Soft Rock, Inc. sold 4,000 shares of its treasury stock to a new investor. Which of the following increased?

Authorized Stock Issued Stock
a. Yes Yes
b. Yes No
c. No Yes
d. No No


____ 17. The issuance of a common stock dividend
a. reduces a company's retained earnings balance
b. brings new owners into a corporation
c. decreases the number of shares of outstanding stock
d. increases a company's retained earnings balance


____ 18. Fletcher Company commenced business on January 1, 2007 but has never declared or paid any dividends. The following are account balances after closing the books at December 31, 2009:

Cash $18,000
Common stock, $1 par 1,000
Paid-in capital in excess of par value 49,000
Preferred stock, $100 par, 10%, cumulative 50,000
Retained earnings 75,000

Net income during 2009 totaled $30,000 and the Board of Directors wishes to distribute a total of $15,000 in cash dividends. The common stockholders will receive what amount per share?
a. $15
b. $11
c. $ 3
d. $ 0


____ 19. Which of the following is a FALSE statement?
a. common stock can be issued at a price greater than its par value
b. treasury stock can be sold at a price less than its cost
c. the claims of owners are honored before those of creditors
d. retained earnings is profit reinvested in a corporation


____ 20. Which of the following must be used when analyzing the capital structure of a firm?
a. long-term assets
b. liabilities
c. current assets
d. expenses


____ 21. The use of financial leverage always has which of the following effects on a company's financial statements?
a. increased revenue
b. increased assets
c. increased stockholders' equity
d. increased liabilities


____ 22. Which of the following would indicate a high degree of financial leverage?
a. a low debt to equity ratio
b. a high return on equity
c. a high debt to assets ratio
d. a low return on equity


____ 23. To achieve the benefits from the use of high financial leverage, a company needs to generate a
a. higher level of net income
b. larger amount of assets
c. larger amount of liabilities
d. larger amount of stockholders' equity


____ 24. Given below is financial information about two firms as of the end of a recent accounting period:

Bravo Company: Easy Company:
Assets $12,180 Assets $ 18,659
Liabilities 5,608 Liabilities 7,703
Equity 6,572 Equity 10,956
Net Income 906 Net Income 1,743


Which of the following can be determined from the above information?
a. Bravo Company has a higher dividend payout ratio than Easy Company
b. Bravo Company employs more financial leverage than Easy Company
c. Bravo Company has a higher current ratio than does Easy Company
d. Bravo Company's common stock will sell for a higher price than Easy Company's


____ 25. Which of the following is a TRUE statement about a company's use of financial leverage?
a. potential increased returns may be available to the common stockholders
b. firms in industries with low margins usually have high levels of financial leverage so as to magnify the return to common stockholders
c. financial leverage is usually the highest in firms having the largest portion of assets invested in current assets
d. the higher the volatility of earnings, the greater is the likelihood that a firm employs significant amounts of financial leverage


____ 26. Suppose a company issues common stock to retire its debt. Which of the following effects may occur?
a. financial leverage will increase
b. financial leverage will decrease
c. financial leverage will remain unchanged
d. the effect on financial leverage cannot be determined


____ 27. Which of the following events would result in a decrease in a firm's financial leverage?
a. payment of dividends
b. issuing common stock to purchase assets
c. issuing debt to purchase assets
d. purchasing inventory on credit


____ 28. Which of the following equations is TRUE?
a. return on equity = return on assets  dividend payout
b. return on assets = debt to assets  net income
c. return on equity = return on assets  financial leverage
d. dividend payout ratio = net income  dividends


____ 29. A company will increase risk if it
a. issues stock and has to pay dividends
b. borrows money and has to pay interest
c. reinvests its earnings
d. increases its current ratio by delaying payments to suppliers


____ 30. Clean Diapers delivery services purchased a delivery truck by making a $1,000 down payment and signing a note payable for the balance. What effect will this have on the firm's financial leverage?
a. financial leverage will increase
b. financial leverage will decrease
c. financial leverage will remain unchanged
d. the effect on financial leverage cannot be determined


____ 31. The dividend payout ratio is
a. dividends / retained earnings
b. dividends paid / dividends declared
c. dividends / net income
d. dividends / cash


____ 32. Debt covenants protect the interests of which of the following parties?
a. employees
b. companies
c. stockholders
d. creditors


____ 33. Which statement below is true about a company's operating cycle?
a. it may not exceed one year
b. it may not be less than a year
c. it may be longer than a year
d. it is always one year


____ 34. Accelerated depreciation
a. results in lower net income in earlier years and higher net income in later years
b. is used more often on the income statement than is the straight-line method
c. leads to higher book values for depreciable assets than does the straight-line method
d. allocates larger portions of cost to later periods than to earlier


____ 35. How is the depreciation process consistent with the matching principle?
a. the accumulated depreciation account is matched with the plant asset account on the balance sheet
b. the cost of consuming plant assets is matched with the periods that benefit from using the assets
c. the book value of the asset is matched with the current market value of the asset
d. the depreciation method used is matched with the expected productivity of the asset


____ 36. Assume a building was purchased for $250,000 and used for four of its estimated 10-year life. It has residual value of $50,000 and the straight-line method is used for depreciating the building. The book value of the building after the four years' of usage would be reported on the balance sheet at
a. $20,000
b. $80,000
c. $120,000
d. $170,000


____ 37. Quick Freight Trucking owned a truck which cost $30,000 when it was purchased on January 1, 2007. It had accumulated depreciation of $18,000 at December 31, 2008. The company originally estimated the truck would have a residual value after using it for four years of $3,000. It sold the truck for $22,500 cash on January 1, 2009. The amount of gain (loss) on the sale of the truck was
a. $4,500 gain
b. $19,500 gain
c. $1,500 loss
d. $10,500 gain


____ 38. A coal mine asset was purchased for $660,000. Estimated production is 20,000,000 tons after which the mine will be sold for $60,000. During a recent year, 6,500,000 tons of coal were produced and sold. The depletion expense for the year would be
a. $175,500
b. $195,000
c. $214,500
d. $225,000


____ 39. Which of the following is a reason to invest in the securities of other organizations?
a. to obtain cash
b. to incur future debt and increase financial leverage
c. to acquire products from other companies
d. to fund a future repayment of debt


____ 40. Depreciation and amortization
a. reduce net income and cash flow from operating activities
b. reduce net income but increase cash flow from operating activities
c. reduce net income but have no direct effect on cash flow from operating activities
d. have no direct effect on net income or cash flow from operating activities

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What will be the effect on current ratio 2:1 if current liability is paid will ratio increase decrease or no effect

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