Accountancy 421 Review Which of the following describes the effect of financial leverage on shareholders' return?

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Myron French
5 years ago
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1 1. If a lessor appropriately classifies a lease as a sales-type lease, the following items related to the lease should be reported on the lessor s income statement in the first year of the lease. Rental Revenue Interest Revenue Deprecia tion Expense Gain (loss) On Sale of Leased Property a. No No No No b. No Yes No Yes c. No Yes Yes Yes d. Yes No Yes No 2. Which of the following describes the effect of financial leverage on shareholders' return? a. Financial leverage magnifies gains only. b. Financial leverage magnifies losses only. c. Financial leverage magnifies both gains and losses. d. Financial leverage magnifies neither gains nor losses.

2 3. According to the abnormal earnings approach of equity valuation, investors willingly pay a premium for those firms that a. earn less than the cost of equity capital. b. produce negative abnormal earnings. c. produce positive abnormal earnings. d. earn an amount equal to the equity cost of capital. 4. Covenants that stipulate actions that a borrower must take are called a. negative covenants. b. negotiated covenants. c. affirmative covenants. d. implicit covenants. 5. A minority passive investment is represented by a. less than 20% ownership b. more than 20% and less than 50% ownership c. more than 50% ownership d. more than 20% and less than 30% ownership

3 6. Which of the following is not true in regard to the LIFO inventory cost flow assumption? a. If a company uses LIFO for tax purposes, it must also use LIFO for external financial reporting purposes. b. For income statement purposes, the more recent costs are matched against the current revenues under the LIFO assumption. c. For balance sheet purposes, the cost of inventory will approximate the current replacement cost under the LIFO assumption. d. The LIFO cost flow assumption does not normally reflect the normal physical flow of inventory units. 7. The FASB requires that virtually al costs incurred for Research and Development of an internally generated patent be a. expensed b. capitalized c. amortized over 40 years d. ignored

4 8. If a discount on bonds payable is amortized by the effective interest method, the reported interest expense will a. increase over the term of the bonds. b. decrease over the term of the bonds. c. remain the same, while the amount of amortization decrease each period. d. increase for several years and then decrease. 9. A lease should be classified as a capital lease if the present value of the minimum lease payments at the beginning of the lease term is equal to or exceeds a. 70 percent of the fair value of the leased property. b. 75 percent of the fair value of the leased property. c. 80 percent of the fair value of the leased property. d. 90 percent of the fair value of the leased property.

5 10. On October 1, 1995, Pine Company received $120,000 of rent in advance for the period October 1, 1995, through September 30, For income tax purposes, $120,000 was included in the 1995 taxable income; whereas, for financial reporting purposes, only $30,000 was included in the 1995 pretax financial income. The tax effects of the $90,000 difference would affect provision for income taxes, the deferred tax asset, and the deferred tax liability in the following ways for 1995: Provision for Deferred Deferred Income TaxesTax Asset Tax Liability a. Increase Increase No effect b. Decrease Increase No effect c. Increase No effect Increase d. Decrease No effect Increase

6 11. The expected tax benefits resulting from a net operating loss carryforward are reported in the year of the net operating loss as a(n) a. Income tax refund receivable. b. Deferred tax asset. c. Extraordinary gain. d. Reduction in deferred tax liability. 12. On June 10, 1999, the Pfister Company issued 7-year stock options to a group of employees. The options entitled the employees to buy 2,000 shares of stock for $1.00 per share when the stock was selling for $2.00 per share. Under APB No. 25, compensation expense per employee was a. $ -0- b. $2,000 c. $3,000 d. $4,000

7 13. The dollar value at which debt may be exchanged for common stock is the a. conversion price b. grant price c. exercise price d. par value 14. An investor would be willing to pay more than the book value for an interest in a company as a result of a. goodwill b. negative goodwill c. historical cost being higher than fair market value d. fair market value being lower than cost.

8 15. In calculating diluted earnings per share, the interest expense relating to convertible bonds that are dilutive should be a. Deducted from income to arrive at income available for common shareholders. b. Deducted from income, net of its tax effect, to arrive at income available for common shareholders. c. Added to income to arrive at income available for common shareholders. d. Added to income, net of its tax effect, to arrive at income available for common shareholders.

9 16. Dual presentation of earnings per share data is required a. For all corporations. b. Whenever stock is reacquired. c. When the capital structure of a corporation is simple. d. When the capital structure of a corporation is complex. 17. According to SFAS No. 123, the date when the terms for stock options are mutually agreed-upon and the stock options are awarded to employees is the a. vesting date b. grant date c. exercise date d. payment date

10 18. Unrealized gains and losses would be reported as a separate component of stockholders' equity for which of the following securities? Trading Securities Available-for-sale Securites a. Yes Yes b. No Yes c. Yes No d. No No 19. In order to report a business combination as a pooling of interests, the minimum amount of an investee s common stock that must be acquired during the combination period in exchange for the investor s common stock is a. 51 percent. b. 80 percent. c. 90 percent. d.100 percent.

11 20. If an investor is required to use the equity method to account for an investment and the investor fails to accrue its proportionate share of the investee s income, the investor s investment account will be a. correctly stated. b. understated. c. overstated. d. incorrect this year, but correct in the next year because the error will reverse itself.

12 21. Core Investments bought 2,000 shares of Jon Company common stock on January 1, 1999 for $10,000 and 2,000 shares of Rob Company for $12,000. At the end of 1999 the market value of Jon was $14,000 and the market value of Rob was $15,000. The stocks are considered to be held for their long-term investment potential. How should Core record the year-end adjustment? a. Market adjustment trading securities 7,000 Unrealized Gain (Income) 7,000 b. Market adjustment trading securities 7,000 Unrealized Gain (Equity) 7,000 c. Market adjustment A-f-S securities 7,000 Unrealized Gain (Equity) 7,000 d. Market adjustment A-f-S securities 7,000 Realized Gain (Income) 7,000

13 22. If Accounts receivable are sold and their buyer assumes all responsibility in the event of default, they are said to be a. assigned b. factored with recourse c. factored without recourse d. collateral

14 Allison, Inc. reported net income of $1,540,000 for Year 8. Allison sold 30,000 shares of treasury stock, acquired in a previous year, on August 1 and issued 30,000 new shares on December 1. At year end, 360,000 shares were outstanding. Allison had 40,000 shares of $100 par value 7% preferred stock outstanding all year. Allison declared and paid preferred dividends as stipulated. 23. What is basic earnings per share. a. $4.00 per share b. $4.67 per share c. $4.89 per share d. $5.13 per share 24. If each share of preferred stock is convertible into 2 share of common stock, what is diluted earnings per share? a. $3.90 per share b. $4.06 per share c. $4.89 per share d. $5.13 per share

ANSWER SHEET EXAMINATION #1

ANSWER SHEET EXAMINATION #1 NAME: DATE: 1) 29) Multiple-choice (38) 2) 30) Matching (46) 3) 31) Problems (16) 4) 32) Total (100) / Grade 5) 33) 6) 34) 7) 35) 8) 36) 9) 37) 10) 38) 11) 12) 13) 14) 15) 16)