394 ACC Spring 2005 Final Exam CHAPTER 7--LONG-TERM DEBT-PAYING ABILITY
1. Jones Company has long-term debt of $1,000,000, while Smith Company, Jones' competitor, has long-term debt of $200,000. Which of the following statements best represents an analysis of the long-term debt position of these two firms? a. Smith Company's times interest earned should be lower than Jones. b. Jones obviously has too much debt when compared to its competitor. c. Jones should sell more stock and use less debt. d. Smith has five times better long-term borrowing ability than Jones. e. Not enough information to determine if any of the answers are correct. ANS: E PTS: 1
2. Ingram Dog Kennels had the following financial statistics for 2006: Long-term debt (average rate of interest is 8%) Interest expense Net income Income tax Operating income What is the times interest earned for 2006? a. 11.4 times b. 3.3 times c. 3.1 times d. 3.7 times e. none of the answers are correct ANS: D PTS: 1
$400,000 35,000 48,000 46,000 107,000
3. A times interest earned ratio of 0.90 to 1 means: a. that the firm will default on its interest payment b. that net income is less than the interest expense c. that the cash flow is less than the net income d. that the cash flow exceeds the net income e. none of the answers are correct ANS: B PTS: 1
4. Which of the following will not cause times interest earned to drop? Assume no other changes than those listed. a. An increase in bonds payable with no change in operating income. b. An increase in interest rates. c. A rise in preferred stock dividends. d. A rise in cost of goods sold with no change in interest expense. e. A drop in sales with no change in interest expense. ANS: C PTS: 1
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5. A times interest earned ratio indicates that: a. preferred stock has no maturity date b. the debt will never become due c. the firm will be able to repay the principal when due d. the principal can be refinanced e. none of the answers are correct ANS: E PTS: 1
6. Jordan Manufacturing reports the following capital structure: Current liabilities Long-term debt Deferred income taxes Preferred stock Common stock Premium on common stock Retained earnings What is the debt ratio? a. 0.48 b. 0.49 c. 0.93 d. 0.96 e. none of the answers are correct ANS: B PTS: 1
$100,000 400,000 10,000 80,000 100,000 180,000 170,000
7. The debt ratio indicates: a. the ability of the firm to pay its current obligations b. the efficiency of the use of total assets c. the magnification of earnings caused by leverage d. a comparison of liabilities with total assets e. none of the answers are correct ANS: D PTS: 1
8. Joseph and John, Inc., had the following balance sheet results for 2006: (in millions) Current liabilities Bonds payable Lease obligations Minority interest Common stock Retained earnings
$12.6 18.6 2.7 1.4 8.6 22.9 $66.8
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Compute the debt-equity ratio. a. 112.1% b. 87.6% c. 67.6% d. 46.7% e. none of the answers are correct ANS: A PTS: 1
9. Which of the following statements best compares long-term borrowing capacity ratios? a. The debt/equity ratio is more conservative than the debt ratio. b. The debt ratio is more conservative than the debt/equity ratio. c. The debt/equity ratio is more conservative than the debt to tangible net worth ratio. d. The debt to tangible net worth ratio is more conservative than the debt/equity ratio. e. The debt ratio is more conservative than the debt to tangible net worth ratio. ANS: D PTS: 1
10. In computing debt to tangible net worth, which of the following is not subtracted in the denominator? a. copyrights b. goodwill c. patents d. investments e. trademarks ANS: D PTS: 1
11. A fixed charge coverage: a. is a balance sheet indication of debt carrying ability b. is an income statement indication of debt carrying ability c. is a liquidity ratio d. frequently includes research and development e. computation is standard from firm to firm ANS: B PTS: 1
12. The following financial statement data are taken from Xeron Company's 2006 annual report: (in millions) Current assets Investments Intangibles Tangible assets (net) Current liabilities Long-term debt Stockholders' equity
$12.6 9.4 6.8 58.1 6.4 39.7 40.8
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Compute the debt ratio. a. 196.9% b. 113.0% c. 53.0% d. 45.7% e. none of the answers are correct ANS: C PTS: 1
13. The following financial statement data are taken from Xeron Company's 2006 annual report: (in millions) Current assets Investments Intangibles Tangible assets (net) Current liabilities Long-term debt Stockholders' equity Compute the debt to tangible net worth ratio. a. 146.8% b. 135.6% c. 53.0% d. 45.7% e. none of the answers are correct ANS: B PTS: 1
$12.6 9.4 6.8 58.1 6.4 39.7 40.8
14. If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in the financial statements, then: a. the times interest earned ratio will be overstated, based upon the financial statements b. the fixed charge ratio will be overstated, based upon the financial statements c. the debt ratio will be understated d. the working capital will be understated e. none of the answers are correct ANS: C PTS: 1
15. Under the Employee Retirement Income Security Act, a company can be liable for its pension plan up to: a. 30 percent of its total assets b. 30 percent of its net worth c. 40 percent of its total assets d. 40 percent of its net worth e. 50 percent of its total assets ANS: B PTS: 1
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CHAPTER 8--PROFITABILITY
16. Which of the following is not a base against which profits are measured? a. owners' equity b. owners' and creditors' funds provided c. intangibles d. revenues e. productive assets ANS: C PTS: 1
17. Net profit margin measures return on: a. sales b. owners' equity c. productive assets d. total assets e. inventory ANS: A PTS: 1
18. Total asset turnover measures the ability of a firm to: a. generate profits on sales b. generate sales through the use of assets c. buy new assets d. move inventory e. cover long-term debt ANS: B PTS: 1
19. The DuPont method return on assets uses two component ratios. What are they? a. inventory turnover gross profit margin b. times interest earned debt ratio c. return on equity dividend payout d. net profit margin total asset turnover e. return on investment total investment turnover ANS: D PTS: 1
20. Return on assets cannot fall under which of the following circumstances? Net Profit Margin a. b. c. d. e. Total Asset Turnover
decline rise rise decline rise rise decline decline The ratio could fall under all of the answers. PTS: 1
ANS: C
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21. A reason that equity earnings create a problem in analyzing profitability is that equity earnings are: a. usually greater than the related cash flow b. less than dividends declared c. more than dividends declared d. extraordinary e. nonrecurring ANS: A PTS: 1 22. In the analysis of profitability, if equity earnings are substantial, it is advisable to: a. consider them as extraordinary b. consider them as nonrecurring c. investigate the earning power of the parent outside of the related investing activities d. recompute the debt ratio and times interest earned to remove the impact of equity earnings e. use the DuPont method to lessen the impact of equity earnings ANS: C PTS: 1
23. Which of the following is not a type of operating asset? a. inventory b. cash c. land d. investments e. equipment ANS: D PTS: 1
24. Operating income is: a. net sales less cost of goods sold b. earnings before interest and tax c. earnings before tax and nonrecurring items d. gross profit less operating expenses e. net income plus interest ANS: D PTS: 1
25. Which of the following circumstances will cause sales to fixed assets to be abnormally high? a. A recent purchase of land. b. A labor-intensive industry. c. A highly mechanized facility. d. High direct labor costs from a new union contract. e. The use of units-of-production depreciation. ANS: B PTS: 1
26. Which of the following ratios will usually have the lowest percent? a. return on investment b. return on total equity c. return on common equity d. return on total assets e. there is not enough information to tell ANS: D PTS: 1
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27. Which suppliers of funds bear the greatest risk and should therefore earn the greatest return? a. bondholders b. suppliers c. general creditors such as banks d. preferred shareholders e. common shareholders ANS: E PTS: 1
28. Gross profit margin is an important ratio of merchandising firms because: a. their investments in real property are high b. cost of goods sold is usually the largest expense c. selling expenses, like advertising, are usually quite high d. it measures their ability to collect receivables e. it measures their ability to use total assets ANS: B PTS: 1
29. Which of the following is not a reporting requirement on interim reports? a. seasonal information b. major changes in income tax provision c. full, although condensed, balance sheet d. earnings per share e. significant changes in financial position ANS: C PTS: 1
30. Income tax expense in interim reporting should: a. be based on the quarterly income only b. contain a judgment estimation of the annual effective tax rate c. be based on the income year-to-date d. exclude extraordinary items in earlier quarters of the year e. disregard year-end adjustments ANS: B PTS: 1
CHAPTER 9--FOR THE INVESTOR
31. The ratio percentage of earnings is retained the same as that termed: a. dividend yield b. dividend payout c. this year's retained earnings to income d. return on common equity e. book value ANS: C PTS: 1
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32. The earnings per share is computed for: a. common stock b. non-redeemable preferred c. redeemable preferred d. common stock and non-redeemable preferred stock e. common stock and fully diluted preferred stock ANS: A PTS: 1
33. In 2006, ABC Company reported earnings per share of $2.00 for 10,000 shares. In 2007, there was a 2-for-1 stock split, for which 2007 earnings per share were reported at $2.10. The appropriate earnings per share presentation for a 2-year comparative analysis would be: 2007 a. b. c. d. e. 2006
$2.10 $2.00 $1.05 $2.00 $1.05 $2.00 $2.10 $1.00 none of the answers are correct PTS: 1
ANS: D
34. Interest expense creates magnification of earnings through financial leverage because: a. the interest rate is variable b. interest accompanies debt financing c. the use of interest causes higher earnings d. interest costs are cheaper than the required rate of return to equity owners e. while earnings available to pay interest rise, earnings to residual owners rise faster ANS: E PTS: 1
35. What is the effect of the exercise of stock options? a. They generate cash to the issuing firm and therefore increase profit per share. b. They are an expense at the time of exercise. This lowers net income. c. They increase debt and lower borrowing capacity but have no effect on profit. d. They increase the number of shares outstanding. e. They have no immediate effect on profitability. ANS: D PTS: 1
36. A summarized income statement for Leveraged Inc. is presented below. Sales Cost of Sales Gross Profit Operating Expenses Operating Income Interest Expense Earnings Before Tax Income Tax Net Income
$1,000,000 600,000 $ 400,000 250,000 $ 150,000 30,000 $ 120,000 40,000 $ 80,000
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The degree of financial leverage is: a. $150,000/$30,000 b. $150,000/$120,000 c. $1,000,000/$400,000 d. $150,000/$80,000 e. $400,000/$120,000 ANS: B PTS: 1
37. Dawn Alive reported the following for 2006. $40.75 Ending market price Earnings per share: Basic 2.50 Diluted 2.08 1.10 Dividends per share The price/earnings ratio and dividend payout were: a. 19.59 and 52.88% b. 16.30 and 52.88% c. 16.30 and 44.00% d. 19.59 and 44.00% e. 37.04 and 52.88% ANS: A PTS: 1
38. The best dividend payout ratio: a. approximates 50% b. continues at the same level as was historically paid c. is similar to the industry average d. is higher than that of competitors e. does not follow any rule of thumb for dividend payout ANS: E PTS: 1
39. The following data were gathered from the annual report of Desk Products. Market price per share Number of common shares Preferred stock, 5% $100 par Common equity The book value per share is: a. $30.00 b. $15.00 c. $14.00 d. $13.75 e. none of the answers are correct ANS: C PTS: 1
$30.00 10,000 $10,000 $140,000
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40. Which of the following is not a reason to interpret book value with caution? a. Land may be worth more than it cost. b. Depreciable assets may be held. c. Investments may be worth more than their purchase price. d. Patents may have a high market value. e. All of the answers are correct. ANS: E PTS: 1
41. Which of the following is not a true statement regarding stock options? a. They may cause dilution of earnings per share. b. They generally allow the purchase of common stock at favorable terms. c. They involve a compensation expense. d. Exercise improves the short-term liquidity and debt position of the issuing firm. e. The potential dilution can be disregarded in financial analysis. ANS: E PTS: 1
42. Good Boss Inc. had the following pattern of results related to stock appreciation rights. Shares in the plan Option price Market price-- end year 1 end year 2 end year 3 The compensation expense would be: Year 1 Year 2 Year 3
20,000 $15.00 $20.00 $18.00 $22.00
a. $100,000 $ -0$40,000 b. 100,000 60,000 40,000 c. 100,000 (40,000) 80,000 d. 400,000 -040,000 e. none of the answers are correct ANS: C PTS: 1
43. Using financial leverage is a good financial strategy from the viewpoint of stockholders of companies having: a. a high debt ratio b. cyclical highs and lows c. steady or rising profits d. a steadily declining current ratio e. none of the answers are correct ANS: C PTS: 1
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44. A firm has a degree of financial leverage of 1.20. If earnings before interest and tax increase by 20%, then net income: a. will not necessarily change b. will increase by 20% c. will decrease by 24% d. will decrease by 20% e. none of the answers are correct ANS: E PTS: 1
45. The price/earnings ratio: a. measures the past earning ability of the firm b. is a gauge of future earning power as seen by investors c. relates price to dividends d. relates price to total net income e. all of the answers are correct ANS: B PTS: 1
CHAPTER 10--STATEMENT OF CASH FLOWS
46. Which of the following is not a purpose of the statement of cash flows? a. To show cash flow from operations. b. To show cash flow from financing activities. c. To show cash flow from investing activities. d. To show all investing and financing transactions. e. To show operating expenses for a period of time. ANS: E PTS: 1
47. Which of the following is not a typical cash flow under operating activities? a. cash inflows from sale of goods or services b. cash inflows from interest c. cash outflows to employees d. cash outflows to suppliers e. cash inflows from sale of property, plant, and equipment ANS: E PTS: 1
48. Which of the following is not a typical cash flow under investing activities? a. cash inflow from receipt of loans b. cash inflow from sale of property, plant, and equipment c. cash outflow for payment of amounts borrowed d. cash outflow for loans to other entities e. cash outflow for purchase of property, plant, and equipment ANS: C PTS: 1
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49.Which of the following is not a typical cash flow under financing activities? a. cash inflow from sale of equity securities b. cash inflow from sale of bonds c. cash outflow for payment of dividends d. cash outflow for loans to other entities e. cash outflow for payment of amounts borrowed ANS: D PTS: 1 50. Working capital is defined as: a. total assets less intangible assets b. current assets divided by current liabilities c. current assets less current liabilities d. total assets less current assets e. current assets less liabilities ANS: C PTS: 1 51. Amortization of patents can be added to income in the operations section of the statement of cash flows because: a. it is not a tax deductible expense b. it results in a cash inflow c. it does not require the outlay of cash d. patent amortization is not an expense e. it represents an inflow of cash ANS: C PTS: 1 52. Which of the following is not an item added back to income in the operations section of the statement of cash flows when using the indirect presentation? a. depreciation b. amortization of goodwill c. increase in deferred income taxes d. amortization of bond premium e. amortization of patents ANS: D PTS: 1
53. Which of the following transactions is not reflected in a statement of cash flows? a. sale of treasury stock b. declaration of a stock dividend c. purchase of foreign subsidiary with cash d. issuance of convertible bonds e. purchase of equipment with cash ANS: B PTS: 1
54. Management should not use the statement of cash flows for which of the following purposes? a. To determine dividend policy. b. To determine cash flow from operations. c. To determine cash flow from investing activities. d. To determine cash flow from financing activities. e. To determine the balance in accounts receivable. ANS: E PTS: 1
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55. Tim Company had sales of $30,000, increase in accounts payable of $5,000, decrease in accounts receivable of $1,000, increase in inventories of $4,000, and depreciation expense of $4,000. What was the cash collected from customers? a. $31,000 b. $35,000 c. $34,000 d. $25,000 e. $26,000 ANS: A PTS: 1
56. Conroy Company had sales of $50,000, increase in accounts payable of $4,000, decrease in accounts receivable of $3,000, tax expense of $5,000, and an increase in taxes payable of $1,000. What was the cash outflow for taxes? a. $54,000 b. $4,000 c. $6,000 d. $53,000 e. $45,000 ANS: B PTS: 1
57. Francis Company had operating expenses of $20,000 and depreciation expenses of $4,000. What was the cash paid for operating expenses? a. $24,000 b. $22,000 c. $16,000 d. $20,400 e. $23,000 ANS: C PTS: 1
58. In a statement of cash flows (indirect method), depreciation expense should be presented as: a. a cash flow from financing activities b. a cash flow from investing activities c. a deduction from net income d. an addition to net income e. a financial activity ANS: D PTS: 1
59. The retirement of debt by the issuance of common stock should be presented in a statement of cash flows in which of the following sections? a. supplemental schedule of noncash investing and financing activities b. cash flows from operating activities c. cash flows from investing activities d. cash flows from financing activities e. supplemental schedule to reconcile net income to net cash provided by operations ANS: A PTS: 1
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60. The statement of cash flows became a required statement in which year? a. 1995 b. 1978 c. 1971 d. 1987 e. 1993 ANS: D PTS: 1
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