accounting test

Created by samimyers12 

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Financial statement analysis is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

true

Financial statement analysis may be used for personal investment decisions.

true

The evaluation of company performance and financial condition includes evaluation of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

true

External users of accounting information make the strategic and operating decisions of a company.

false

One purpose of financial statement analysis for internal users is to provide information helpful in improving the company's efficiency and effectiveness in providing products and services.

true

A company's board of directors analyzes financial statements to assess future company prospects for making operating decisions.

false

Financial analysis only refers to the communication of relevant financial information to decision makers.

false

Vertical analysis is the comparison of a company's financial condition and performance across time.

false

Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

false

Three of the most common tools of financial analysis include horizontal analysis, vertical analysis, and ratio analysis.

true

Earnings per share are calculated only on income from continuing operations.

false

Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

true

Ratios, like other analysis tools, are only historically oriented.

false

The higher the accounts receivable turnover, the less quickly accounts receivable are collected.

false

A company that has days' sales uncollected of 30 days and days' sales in inventory of 18 days implies that inventory will be converted to cash in about 12 days.

false

External users of financial information:

re not directly involved in operating the company.

The building blocks of financial statement analysis include:

All of the above:
Liquidity and efficiency.
Solvency.
Profitability.
Market prospects.

Financial reporting refers to:

The communication of financial information useful for decision making.

Three of the most common tools of financial analysis are:

Horizontal analysis, vertical analysis, ratio analysis.

Trend analysis is also called:

Index number trend analysis.

In horizontal analysis the percent change is computed by:

Subtracting the base period amount from the analysis period amount, dividing the result by the base period amount, then multiplying that amount by 100

Common-size statements:

Reveal changes in the relative importance of each financial statement item.

Registered bond

Records and tracks the bondholders' names.

Debenture

Is unsecured; backed only by the issuer's credit standing.

Serial bond

Has varying maturity dates for amounts owed.

Bond indenture

Identifies rights and responsibilities of the issuer and the bondholders.

Convertible bond

Can be exchanged for shares of the issuer's stock.

Bearer bond

Is unregistered; interest is paid to whoever possesses them.

Sinking fund bond

Maintains a separate asset account from which bondholders are paid at maturity

Secured bond

Pledges specific assets of the issuer as collateral.

Interest payment journal entry

Dr. Bond interest expense
Cr. Cash

Bonds issued at discount journal entry

Dr. Cash
Dr. Discounts on BP
Cr. Bonds Payable

Bonds issued at premium journal entry

Dr. Cash
Cr. Bonds Payable
Cr. Premium on BP

Discount

Par value - Issue price

Premium

Issue price - Par value

Bonds after amortization

Dr. Bond interest expense
Cr. Discount on BP
Cr. Cash

Dr. Bond interest expense
Dr. Premium on BP
Cr. Cash

Semiannual cash interest payment

par value * contract rate / # periods pr year

Number of payments

years * 2

Discount

contract rate < market rate

Premium

contract rate > market rate

Par

contract rate = market rate

Straight-line discount amortization

discount/semiannual payments (payments * 2)

A machine with a cost of $140,000 and accumulated depreciation of $95,000 is sold for $55,000 cash. The amount that should be reported as a source of cash under cash flows from investing activities is:

55,000

The primary purpose of the statement of cash flows is to report all major cash receipts (inflows) and cash payments (outflows) during a period.

true

To be classified as a cash equivalent, the only criterion an item must meet is that it must be readily convertible to a known amount of cash.

false

Business activities that generate or use cash are classified as operating, investing, or financing activities on the statement of cash flows.

true

Financing activities include (a) the purchase and sale of long-term assets, (b) the purchase and sale of short-term investments, and (c) lending and collecting on loans.

false

The purchase of stock in another company is classified as a financing activity.

false

Receipts of cash dividends and interest earned on loans are classified as investing activities.

false

The payment of cash dividends to shareholders is classified as a financing activity.

true

The full disclosure principle requires that noncash investing and financing activities be disclosed in the financial statements.

true

A purchase of land in exchange for a long-term note payable is reported in the investing section of the statement of cash flows.

false

Accounting standards require companies to include a statement of cash flows in a complete set of financial statements.

true

Most managers stress the importance of understanding and predicting cash flows for business decisions.

true

Which of the following accurately describes a debenture?

A type of bond which is not collateralized but backed only by the issuer's general credit standing

A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 8%. The amount of interest owned to the bondholders for each semianual interest payment is.

Answer: $33,750

Par Value * Contract Rate / 2

A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between par value and issue price for this bond is recorded as a:

Credit to Premium on Bonds Payable

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued as 6.5%. The company received $101,137 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

$3,386.30

Premium: 1,137
Interest payment: 3500
Amortized premium: 1,137/10
Interest expense: interest payment - amortized premium

A cash equivalent must be readily convertible to a known amount of cash, and must be sufficiently close to its maturity so its market value is unaffected by interest rate changes.

True

Business activities that generate or use cash are classified as operating, investing, or financing activities on the statement of cash flows.

True

Financing activities include (a) the purchase and sale of long-term assets, (b) the purchase and sale of short-term investments, and (c) lending and collecting on loans.

False

The payment of cash dividends to shareholders is classified as a financing activity.

True

The direct method for preparing and reporting the statement of cash flows reports net income and then adjusts it for items necessary to calculate net cash provided or used by operating activities.

False

Investing activities include: (a) the purchase and sale of long-term assets, (b) lending and collecting on notes receivable, and (c) the purchase and sale of short-term investments in the securities of other entities, other than cash equivalents and trading securities.

True

The appropriate section in the statement of cash flows for reporting the purchase of equipment for cash is:

Investing Activities

The appropriate section in the statement of cash flows for reporting the cash payment of wages is:

Operating Activities

The appropriate section in the statement of cash flows for reporting the issuance of common stock for cash is:

Financing Activities

A machine with a cost of $130,000 and accumulated depreciation of $85,000 is sold for $50,000 cash. The amount should be reported as a source of cash under cash flows from investing activities is:

$50,000 (cash actually exchanged; no calculation)

Profitability is the ability to generate future revenues and meet long-term obligations.

False

Liquidity and efficiency are considered to be building blocks of financial statement analysis.

True

Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

False

Vertical Analysis is the comparison of a company's financial condition and performance across time.

False

Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

False

A company's sales in Year 1 were $250,000 and in year 2 were $287,500. Using year 1 as the base year, the sales trend percent for year 2 is:

115%

Year 2 / Year 1 (287,500 / 250,000 = 1.15)

A corporation reported cash of $14,000 and total assets of $178,300. Its common-sized percent for cash equals:

7.85%

Common-size percent: 14,000 / 178,300

Common-size percent

Analysis amount (cash) / base amount (total sales or total assets) * 100

Retirement at maturity

Carrying value of bonds at maturity always equals par value

Dr. Bonds payable
Cr. Cash

Retirement prior to maturity

Two common ways to retire bonds before maturity (1) exercise a call option or (2) purchase them on the open market

Dr. Bonds Payable
Dr. Premium on BP
Cr. Gain on Bond Retirement
Cr. Cash

Direct Method

presentation of net cash from operating activities for the statement cash flows that lists major operating cash receipts less major operating cash payments

Indirect Method

presentation that reports net income and then adjusts it by adding and subtracting items to yield net cash from operating activities on the statement of cash flows

Operating Activities

Report cash received and paid in the daily operations of the business, including:

Financing Activities

Report cash received and paid as a result of the activities to obtain and repay funds used to finance the operations of a company. Financing activities can be divided into two categories.

Investing Activities

Report cash received and paid as a result of the sale and purchase of investments. The investments reported in this section can be divided into two categories:

Dividends

Corporation's distributions of assets to its owners

Horizontal analysis

comparison of a company's financial condition and performance across time

Vertical analysis

Evaluation of each financial statement item or group of items in terms of a specific base amount

Working Capital (formula)

current assets - current liabilities

Profit margin (formula)

net income / net sales

Liquidity

availability of resources to meet short-term cash requirements

Profitability

company's ability to generate an adequate return on invested capital

cash flows

1. Paid cash for property taxes on building. Operating activities
2. Paid cash dividends. Financing activities
3. Paid cash for wages and salaries. Operating activities
4. Purchased inventories for cash. Operating activities
5. Received cash payments from customers. Operating activities
6. Received cash from sale of land at a loss. Investing activities
7. Received cash interest on a note. Operating activities
8. Paid cash interest on outstanding notes. Operating activities
9. Issued common stock for cash. Financing activities
10. Sold long-term investments for cash. Investing activities

terms

Records and tracks the bondholders' names. Registered bond
B. Is unsecured; backed only by the issuer's credit standing. Debenture
C. Has varying maturity dates for amounts owed. Serial bond
D. Identifies rights and responsibilities of the issuer and the bondholders. Bond indenture
E. Can be exchanged for shares of the issuer's stock. Convertible bond
F. Is unregistered; interest is paid to whoever possesses them. Bearer bond
G. Maintains a separate asset account from which bondholders are paid at maturity. Sinking fund bond
H. Pledges specific assets of the issuer as collateral. Secured bond

Amortizing a bond discount:

Allocates a portion of the total discount to interest expense each interest period.

Common-size statements:

Reveal changes in the relative importance of each financial statement item.

The measurement of key relations among financial statement items is known as:

Ratio analysis

Standards for comparisons in financial statement analysis include:

Intracompany standards.
Competitors' standards.
Industry standards.
Guidelines (rules of thumb).
All of these.

Financial statement analysis:

Is the application of analytical tools to general-purpose financial statements and related data for making business decisions.
Involves transforming accounting data into useful information for decision-making.
Helps users to make better decisions.
Helps to reduce uncertainty in decision-making.
All of these.

Intracompany standards for financial statement analysis:

Are often based on a company's prior performance.

The higher the accounts receivable turnover, the less quickly accounts receivable are collected.

true

The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

true

One purpose of financial statement analysis for internal users is to provide information helpful in improving the company's efficiency and effectiveness in providing products and services.

true

The evaluation of company performance and financial condition includes evaluation of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

true

When preparing a statement of cash flows on the indirect method, each of the following should be classified as an operating activity cash flow except:

A gain from disposal of a long-term asset

The indirect method for the preparation of the operating activities section of the statement of cash flows:

Reports net income and then adjusts it for items necessary to determine net cash provided or used by operating activities.

An example of a transaction that must be disclosed as a noncash investing and financing activity includes:

The retirement of debt by issuance of equity.
The purchase of long-term assets financed by a cash down payment and a note payable to the seller for the balance.
The leasing of assets in a transaction that qualifies as a capital lease.
The purchase of noncash assets in exchange for equity or debt securities.
All of these.

A cash equivalent is an investment that:

s readily convertible to a known amount of cash.
Is sufficiently close to its maturity date so its market value is unaffected by interest rate changes.
Generally is within 3 months of its maturity date.
Is highly liquid.
All of these.

The statement of cash flows is:

A financial statement that reports the cash inflows and cash outflows for an accounting period, and that classifies those cash flows as operating activities, investing activities, or financing activities.

If a bond's interest period does not coincide with the issuing company's accounting period, an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

true

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