When compound interest is used, interest accumulates less quickly than when simple interest is used.
The annual interest earned on an amount deposited into a bank account will be the same each year when compound interest is used.
An ordinary annuity is a series of equal payments made at the end of equal intervals of time.
In a deferred payment arrangement, interest is charged only if it is stated.
If the net present value of a proposed investment is negative, it means that the investment should not be made.
* Assets purchased under a deferred payment plan should be recorded at the future value of the installment payments.
Decision makers rely on the future values, rather than on the present values, of future cash flows.
Use this information to answer the following question:
Periods Future Value of $1 at 12% Future Value of Ordinary Annuity of $1 at
(1) 1.120 1.000
(2) 1.254 2.120
(3) 1.405 3.374
A deposit of $2,000 made at the beginning of period 1 would grow to how much at the end of three years?
Which of the following phrases is NOT descriptive of an ordinary annuity?
Payments made at the beginning of equal periods of time
Both present and future value can be calculated
Compound interest assumed
Series of equal payments
The higher the interest rate assumed, the
higher the present value of an ordinary annuity.
more one must deposit today to accumulate to a desired sum.
lower the future value of a sum invested in the bank today.
lower the present value of a sum due in the future.
Heidi wishes to deposit an amount into her savings account that will enable her to withdraw $800 per year for the next four years. She should deposit $800, multiplied by the
present value of a single sum factor.
present value of an ordinary annuity factor.
future value of a single sum factor.
future value of an ordinary annuity factor.
First City Bank computes interest semiannually. If the interest rate is currently 6% per annum, the amount deposited today should be multiplied by which future value factor to calculate the amount that will accumulate by the end of 10 years?
20 periods at 12%
20 periods at 3%
10 periods at 6%
10 periods at 3%
* A company purchases an asset on a deferred payment plan, ultimately paying $10,000. On the payment date, the company would
credit Cash for less than $10,000.
debit Interest Expense for the imputed amount.
debit the asset account for $10,000.
debit Accounts Payable for $10,000.
SHORT ANSWER! - (LOOK AT TABLES!)
--What is the present value of receiving $1,000 at the end of each year for 6 years, assuming 7% interest compounded annually?---
--What amount must be deposited at the bank today to grow to $300 in 5 years, assuming 14% interest compounded semiannually?--
1,000 x 4.67 = $4,767
300 x .508 = $152.40
Do the math!!
Extraordinary gains/losses are a component of income from operations.
A gain on the sale of an asset is a component of income from operations.
The quality of a company's earnings is affected by the accounting estimates chosen by the company's management.
If the amount of income taxes expense exceeds the amount of actual income taxes payable for a year, the difference is recorded by a debit to a balance sheet account called Deferred Income Taxes.
Discontinued operations and extraordinary items should be reported in the financial statements of "net of tax."
Gains and losses caused by the passage of a new law should be classified as extraordinary on the income statement.
A business with 100,000 shares of stock outstanding for three months would use a weighted-average 25,000 shares in its EPS calculation.
A company with convertible bonds is considered to have a complex capital structure.
A debit balance in the Retained Earnings account is referred to as a deficit.
A synonymous phrase for retained earnings is accumulated earnings.
When common stock is originally issued, its market value per share should approximate its par or stated value per share.
Par value or stated value is arbitrarily set when stock is authorized.
Which of the following is not a component of income from operations?
costs and expenses
write-downs of assets
When alternative acceptable accounting methods exist, a better quality of earnings generally is produced from selecting an accounting method that has the effect of reporting the
lowest amount of future earnings
greatest amount of retained earnings currently
lowest amount of current earnings
greatest amount of assets currently
Which of the following is analyzed when a financial statement reader is looking at the nature of nonoperating items?
cost of goods sold
An excess of income taxes expense over income taxes payable will result in recording a
debit to Deferred Income Taxes
debit to Income Taxes Payable
credit to Deferred Income Taxes
credit to Prior Period Adjustment
Because noncash investing and financing transactions do not affect cash, they should be excluded from the statement of cash flows.
The payment of taxes would be included in the operating activities section of the statement of cash flows.
A U.S. treasury bill with an original maturity of one year or less is considered cash equivalent.
The primary purpose of the statement of cash flows is to provide information about a company's investing and financing activities during an accounting period.
A negative free cash flow indicates that the company has met all its planned cash commitments and has cash available to reduce debit or expand.
A decrease in the balance of merchandising inventory is added to net income when calculating net cash flows from operating activities using the indirect method.
Cash inflows and outflows are not netted in the investing activities section of the statement of cash flows but are separately disclosed to give the reader full information.
Dividends paid are reflected in the financing activities section of the statement of cash flows.
The net income for the period would appear in the cash flows from financing activities section of a statement of cash flows prepared using the indirect method.
A schedule of noncash investing and financing activities is not required when a statement of cash flows is prepared using the indirect method.
Cash equivalents do not include
U.S. treasury bills
money market accounts
Management would not use the statement of cash flows to
access the liquidity of the business
determine dividend policy
evaluate the effects of major policy decisions involving investments and financing
determine the financial position of the company
A Corporation engaged in the transaction:
Declared and issued a stock dividend. Indicate which section, if any, each transaction would appear in, or relate to, on a statement of cash flows.
financing activities section
operating activities section
does not represent a cash flow
investing activities section
The direct method of preparing a statement of cash flows
is the overwhelming choice of most companies
begins with net income in the operating activities section
is more difficult to understand than the indirect method for the average reader
will produce more the same net figure as the indirect method
The calculation of free cash flow could include all of the following except:
cash purchase of plant assets
net cash flows from operating activities
Per the Sarbanes-Oxley Act of 2002, public corporations must establish a compensation committee to determine how its top executives will be compensated.
Liquidity is the ability to earn a satisfactory net income
Investors, creditors and customers are considered external users of financial statements.
The analysis of risk and return is important to both investors and creditors.
A limitation of using industry norms in financial performance evaluation is that some companies in the same industry may not be comparable.
A 20% change in net sales will result in a 20% change in net income.
Vertical analysis is the same as common-size analysis
It is possible for horizontal analysis to indicate a decrease in revenues from one year to another and an increase in net income.
A primary purpose of vertical analysis is to observe trends over a 5 year period.
Ration analysis is useful only if the ratio states a meaningful relationship between two numbers.
Executive officers' compensation is typically comprised of all of the following except:
stock option awards
annual base salaries
Which of the following is the least useful in evaluating a relationship as either favorable or unfavorable?
past and current performances company
past performance of the company
Dun & Bradstreet publishes
data on average ratios and relationships
credit ratings of companies
data on industry norms
all of these
One of the best places to look for early signs of change in a company's profitability is the
annual report sent to the SEC (10K)
year-end financial statement
interim financial statement
annual report sent to stockholders
Horizontal analysis of comparative financial statements include the
development of common-size statements
calculation of dollar amount changes and percentage changes from the previous to the current year
calculation of the percentage of net sales for each listed
calculation of liquidity ratios
A company with $50,000 in current assets, $25,000 in quick assets, and $30,000 in current liabilities makes a payment of a $1,500 current debt. As a result of this transaction, the current ratio and quick ratio will
increase and decrease, respectively
remain the same and decrease, respectively
A high receivable turnover indicates that
many customers are defaulting on their debts
a large proportion of the company's sales is on credit
the company's inventory is moving very quickly
customers are making payments very quickly
The higher the debit to equity ratio, the great the financial risk the company is taking
* When a monthly mortgage payment is made and recorded, the debit to Mortgage Payable represents the reduction in the principal balance
A capital lease is the lease of property, plant or equipment that is in effect an installment purchase
Bondholders are creditors of the issuing corporation
Secured bonds are also known as debentures
An $80,000 bond issue priced at 97-3/4 is sold for $78,200.
The par value of a bond is equal to its face value
It is the bondholder rather than the issuer who may exercise the call feature of a callable bond.
The entry to record the issuance of bonds between interest payment dates will include a debit to Bond Interest Expense.
A company with income before income taxes of $94,000 and $20,000 in interest expense, has an interest coverage ratio of
If bonds are issued at a premium the face interest rate is
lower than the market rate of interest
higher than the market rate of interest
too low to attract investors
adjusted to higher effective rate of interest
Ten $1000 bonds issued at 99.75 on the interest date result in a debit to the Cash account for
A Corporation issued $100,000 of 20-year, 6% bonds at 98 on one of its semiannual interest dates. The straight-line method amortization is to be used. What is the total interest cost of the bonds?
A corporation has a 7% $600,000 bond issue that originally was issued 5 years ago. There are now ten years remaining on the bond issue, and the market interest rate is 12%. Interest is paid semiannually. Calculate the current market value of the bond issue, using the present value tables.
Single Amount Table 3
Annuity/Semi annuity - Series Amount Table 4
Be sure to use tables!
The P/E (price/earnings) ratio is a measure of investors' confidence in a company's future.
Stockholders elect the board of directors which appoints the officers of a corporation.
The board of directors carries out the day-to-day operations of a corporation.
The liability of a stockholder is usually limited to the stockholders' investment in the corporation.
The declaration of a cash dividend causes an increase in a corporation's liabilities at the date of record.
No entry is required on the date of record for a cash dividend.
Stock options are often granted by a corporation to management personnel as a means of additional compensation to and motivation of employees.
The stockholders' equity in a corporation consists of capital contributed by a stockholders and retained earnings.
Retained earnings consist of a pool of funds to be distributed to stockholders.
The cost of treasury stock is deducted from total Contributed Capital and Retained Earnings in determining total stockholders' equity.
Dividends yield equals
market price per share divided by dividends per share
net income divided by dividends per share
dividends per share divided by net income
dividends per share divided by market price per share
A disadvantage of the corporate form of business is
centralized authority and responsbility
its status as a separate legal entity
is established for a share of stock after it is issued
is the legal capital established for a share of stock
represents what a share of stock is worth
represents the original selling price for a share of stock
The Board of Directors of B Corporation declared a cash dividend on January 18th, 2011, to be paid on February 18th, 2011, to shareholders holding the stock on February 2nd, 2011. Given these facts, the date February 2nd, 2011 is referred to as the
date of declaration
date of payment
date of record
All of the following are stockholders' equity accounts except
Any act that lies beyond the authority of a corporation to perform is an ultra vires act.
When stock is sold at par you...
Debit Cash / Credit Par Value
Debit Par Value / Credit Cash
A corporation set up perfectly is considered....
A corporation set up with mistakes is....
Name the accounts in the Income Statement
Contributed Capital includes all of these EXCEPT
Common & Preferred Stock
Paid in Capital in Excess
A fraudulent dividend declaration is considered an act of....
Piercing the Corporate Veil
Deferred Income Tax
No journal entry is required on
Date of Declaration
Date of Record
Date of Payment
Date of Issuance
A Bondholder is a Debter
Interest Formula =
Principal x Rate x Time
Income before Taxes + Interest Expense / Interest Expense
Current Assets / Current Liabilities
Dividends per share / Market $ per share
What measures how much a risk a company represents
Interest Cover Ratio
Debt to Equity Ratio
Dividends Yield Ratio
Return on Equity Ratio