ACCT 504 FINAL EXAM
ACCT 504 FINAL EXAM – LATEST DEVRY
1. Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?
Reduced legal liability for investors
Harder to transfer ownership
Lower taxes
Most common form of organization
2. Dividends _____.
represent an expense and are an operating activity
represent an obligation and are an operating activity
represent a distribution of earnings and are a financing activity
represent an asset and are an investing activity
3. Below is a partial list of account balances for LBJ Company:
Cash $15,000
Prepaid insurance 5,000
Accounts receivable 2,500
Accounts payable 3,000
Notes payable 6,000
Common stock 10,000
Dividends 500
Revenues 15,000
Expenses 13,000
What did LBJ Company show as total debits?
$34,000
$36,000
$70,000
$31,000
4. Under the accrual basis of accounting, revenues are recorded and reported _____.
when companies receive payments for jobs performed or products provided
when companies have provided products or performed
services
when companies receive payments prior to providing products or performing services
when companies receive payments after providing products or performing services
5. In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income?
LIFO
The average cost method
FIFO
Income tax expense for the period will be the same under all assumptions.
6. Equipment was purchased for $55,000 on January 1, 2011. Freight charges of $2,200 were incurred and there was a cost of $1,800 for installation. It is estimated the equipment will have a $5,500 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the straight-line method will be _____.
$10,340
$10,700
$10,260
$9,900
7. Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____.
debit to Cash of $100,000
credit to Bonds Payable of $94,000
credit to Premium on Bonds Payable of $4,000
debit to Discount on Bonds Payable of $6,000
8. Accounts receivable arising from sales to customers amounted to $80,000 and $120,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $2,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____.
$2,040,000
$2,000,000
$1,200,000
$1,960,000
9. If you are making comparisons within a company to detect changes in financial relationships and significant trends, you are performing what type of analysis?
Industry averages analysis
Intercompany analysis
Common-size analysis
Intracompany analysis
10. The formula for performing horizontal analysis is _____.
(Current Year Amount minus Base Year Amount) divided by Current Year Amount
Base Year Amount divided by Current Year Amount
Current Year Amount minus Base Year Amount
(Current Year Amount minus Base Year Amount) divided by Base Year Amount
11.Horizontal analysis of comparative financial statements includes the _____.
development of common-size statements
calculation of liquidity ratios
calculation of dollar amount changes and percentage changes from the previous year to the current year
evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount
12. A common measure of solvency is the _____.
asset turnover
current cash debt coverage ratio
cash debt coverage ratio
current ratio
13. Stockholders would be most interested in which of the following ratios?
Days in inventory
Free cash flow
Current ratio
Average collection period
14. To calculate the market value of a bond, we need to _____.
multiply the bond price times the interest rate
calculate the present value of the principal only
calculate the present value of the interest only
calculate the present value of both the principal and interest payments
/
ircumstances.
17.Shareholder wealth is measured by the market value of the firm’s common stock.
18.The agency problem arises due to the separation of ownership and control in a firm.
19.There is little, if any, difference between a business error and an ethical error.
20.For markets to be efficient, price adjustments to new information must be correct.
21.Ethical dilemmas frequently exist in finance.
22.Even though diversification can eliminate risk, it also makes it more difficult to measure a project’s or an asset’s risk.
23.Consider the following equally likely project outcomes: Profit XY Pessimistic prediction$0$500 Expected outcome$ 500$500 Optimistic prediction$1000 $500
a.Project Y has less uncertainty than Project X.
b.Project X has more variability than Project Y.
c.a and b.
d.Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.
24.Maximization of shareholder wealth as a goal is superior to profit maximization because:
a.it considers the time value of the money.
b.following the shareholder wealth maximization goal will ensure high stock prices.
c.it considers uncertainty.
d.a and c.
25.Why is maximizing shareholder wealth a better goal than maximizing profits?
a.Maximizing shareholder wealth places greater emphasis on the short term.
b.Maximizing profits ignores the uncertainty that is related to expected profits.
c.Maximizing shareholder wealth gives superior consideration to the entire portfolio of shareholder investments.
d.Maximizing profits gives too much weight to the tax position of shareholders.
46.A limited liability company (LLC) is:
a.able to retain limited liability for owners.
b.taxed like a corporation.
c.a cross between a partnership and a corporation.
d.a and c.
e.all of the above.
47.Purchasing a security of a company that is issuing their stock for the first time publicly would be considered:
a.a secondary market transaction.
b.an initial public offering.
c.a seasoned new issue.
d.both a and b.
48.In measuring value, the focus should be on:
a.cash flow.
b.accounting profits.
c.time value of money.
d.earnings per share.
49.Which of the following is regarding accounting profits?
a.Received by the firm and reinvested
b.Reflects money in hand
c.Represents actual money received and paid out
d.Equals cash in the bank
50.Which of the following statements is regarding competitive markets?
a.Large profits exist over the long run.
b.Product differentiation produces insulation for competitors.
c.Cost advantages attract new entrants.
d.Both b and c.
59.Briefly discuss why financial decision makers must focus on incremental cash flows when evaluating new projects.
60.Discuss the risk/return tradeoff and how it relates to finance.
61.Compare and contrast primary market and secondary market transactions as it relates to the flow of funds in the transactions.
62.Discuss how new entrants are deterred from entering a competitive market.
63.What is incremental cash flow and
how is
it used in project analysis?
Ch1:
1. In the past, the study of finance has included
A) mergers and acquisitions.
B) raising capital.
C) bankruptcy.
D) all of the above.
2. One of the major disadvantages of a sole proprietorship is
A) that there is unlimited liability to the owner.
B) the simplicity of decision making.
C) low organizational costs.
D) low operating costs.
3. Many companies such as Tyco, Enron, WorldCom, etc. that suffered financial distress in the late 1990s and early 2000s,
A) committed fraud.
B) had failed corporate governance oversight.
C) went bankrupt.
D) all of the above are .
4. Agency theory would imply that conflicts are more likely to occur between management and shareholders when
A) the company is owned and operated by the same person.
B) management acts in the best interests of maximizing shareholder wealth.
C) the chairman of the board is also the chief executive officer (CEO).
D) the board of directors exerts strong and involved oversight of management
5. Maximization of shareholder wealth is a concept in which
A) increased earnings is of primary importance.
B) profits are maximized on a quarterly basis.
C) virtually all earnings are paid as dividends to common stockholders.
D) optimally increasing the long-term value of the firm is emphasized.
6. Money markets would include which of the following securities?
A) common stock and corporate bonds.
B) treasury bills and commercial paper.
C) certificates of deposit and preferred stock.
D) all of the above.
7.
The Internet
has affected the financial markets by
A) creating more competition between markets.
B) pushing the cost of trading down.
C) forcing brokerage companies to consolidate.
D) all of the above
6. Use the table to answer following questions:
Sales (75,000 units) $750,000
Variable costs 225,000
Contribution margin $525,000
Fixed manufacturing costs 187,500
Operating income $337,500
Interest 75,000
Earnings before taxes $262,500
Taxes (at 31%) 81,375
Net Income $181,125
Shares outstanding 15,000
1. (TCO A) Which of the following is an advantage of the sole proprietorship relative to the corporate form of business organization? (Points : 5)
Limited liability of investor
Transferability of ownership
Simple to establish
Unlimited life
2. (TCO A) Dividends _____. (Points : 5)
represent an expense and are an operating activity
represent an obligation and are an operating activity
represent a distribution of earnings and are a financing activity
represent an asset and are an investing activity
3. (TCOs A, B) Below is a partial list of account balances for LBJ Company:
Cash $15,000
Prepaid insurance 5,000
Accounts receivable 2,500
Accounts payable 3,000
Notes payable 6,000
Common stock 10,000
Dividends 500
Revenues 15,000
Expenses 13,000
What did LBJ Company show as total debits?
(Points : 5)
$34,000
$36,000
$70,000
$31,000
4. (TCOs B, E) Why is the accrual basis of accounting preferred by GAAP? (Points : 5)
The Accrual basis is easier to use.
The Accrual basis is also preferred by the Internal Revenue Service.
The Accrual basis complies with the revenue recognition and matching principles.
The Accrual basis requires fewer accounting resources.
5. (TCO D) In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income?(Points : 5)
LIFO
The average cost method
FIFO
Income tax expense for the period will be the same under all assumptions.
6. (TCOs A, E) Equipment was purchased for $75,000 on January 1, 2011. Freight charges of $3,200 were incurred and there was a cost of $6,000 for installation. It is estimated the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the straight-line method will be _____. (Points : 5)
$13,800
$14,440
$12,600
$13,240
7. (TCO D,G) Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____. (Points : 5)
debit to Cash of $100,000
credit to Bonds Payable of $94,000
credit to Premium on Bonds Payable of $4,000
debit to Discount on Bonds Payable of $6,000
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