Exam 2 ch7-8 concepts
Bond and Liability Essentials Quiz
Test your understanding of key concepts related to bonds and current liabilities. This quiz covers essential topics such as financial leverage, interest calculation, and the effects of accrual accounting. Whether you're a student, a professional, or just someone interested in finance, this quiz is designed to challenge your knowledge.
- 63 multiple-choice questions
- Focuses on chapters 7-8 concepts
- Great for studying or brushing up on financial principles
The market value of a bond is the sum of the present value of future interest payments and the present value of the amount to be repaid at maturity, discounted at:
The market rate.
The prime rate.
The dividend rate.
The coupon rate.
An Accounts Payable normally results from which of the following transactions?
Purchasing accounts for cash
Purchasing land on credit
Purchasing goods and services from suppliers on credit
Purchasing buildings and equipment on credit
Financial leverage refers to which of the following?
The difference between the rate of return earned on assets (ROI) and the rate of return earned on stockholders' equity (ROE).
The difference between the rate of return earned on current assets and the rate of return earned on retained earnings.
Decreasing fixed costs per unit by increasing production.
The leverage a firm obtains from increasing production.
Many current liabilities are affected by accrual accounting entries. This happens because:
Liabilities are usually paid when they are incurred.
Accrual accounting frequently involves recognizing liabilities before they are incurred.
The only way to reduce a liability account balance is with an adjusting entry.
Accrual accounting involves recognizing liabilities when expenses have been incurred but not yet paid.
The financial leverage characteristic of long-term debt results in:
The deductibility, for income tax purposes, of dividends to stockholders.
A magnification of ROE relative to what it would be without long-term debt.
A reduction of the risk that creditors will not be paid.
A magnification of ROI relative to what it would be without long-term debt.
Which of the following is not usually associated with bonds?
Maturity rate
Face amount
Coupon rate
Maturity value
The noncurrent Deferred Tax Liability account arises because:
Some expenses are deducted for tax purposes before they are deducted for book purposes.
Some book income will never be subject to income tax.
The company has not paid income taxes currently due.
Income tax rates change from year to year.
Which of the following is a true statement regarding interest calculation methods?
If a borrower receives a loan on a discount-basis, the APR will be less than the simple interest.
If a borrower receives a loan on a discount-basis, the APR will be more than the simple interest rate.
Interest is calculated on either a straight-basis or an undiscounted-basis.
Interest is calculated on either a straight-basis or a delayed-basis.
The adjusting entry to accrue Interest Expense results in:
A decrease in Cash.
An increase in Interest Expense.
A decrease in Interest Payable.
A decrease in Interest Expense.
The largest item of the deferred tax liability for most companies is cause by:
Differences in inventory cost flow assumptions (FIFO vs LIFO) for tax versus financial accounting purposes
Differences in depreciation methods (accelerated vs straight-line) for tax versus financial accounting purposes
Providing the allowance for doubtful for book purposes
Amortizing bond premium or discount for tax purposes
Which of the following is NOT sometimes associated with bonds?
Debenture
Callable
Cumulative
Convertible
Southern Company’s accountant failed to accrue as of 12/31/19 some employee fringe benefit program expenses that were incurred in 2019 and that will be paid in 2020. The result of this omission is to:
Not affect the current ratio at 12/31/19 but to Overstate ROI and ROE for the year ended 12/31/19
Understate the current ratio at 12/31/19 but to Understate ROI and ROE for the year ended 12/31/19
Overstate the current ratio at 12/31/19 but to Understate ROI and ROE for the year ended 12/31/19
Overstate the current ratio at 12/31/19 but to Overstate ROI and ROE for the year ended 12/31/19
When a Company issues a bond at a discount
The company’s interest expense will be less than the interest paid each year
The company will pay less than the face amount of the bond at its maturity
The company’s interest expense will be more than the interest paid each year
The company will pay more than the face amount of the bond at its maturity
The payment of a current liability will:
Decreasing working capital
Increase working capital
Not affect working capital
Decrease net income
Current maturities of long term debt:
Are classified with long term debt
Permit a more accurate determination of working capital
Reflect overdue installments of bond payable
Represent cash that has been set aside for debt payment due within a year
A loan discount is:
A loan used to purchase a bond at a discount, based on a discount interest rate on a loan
The same as a bond discount
The interest amount that is subtracted from the loan principal (and effectively prepaid) when a loan is obtained on a discount basis
The interest amount that is paid along with the loan principal when a loan obtained on a straight basis is paid off on the maturity date
A working capital loan will generally:
Be classified as a noncurrent liability
Require that interest (if any) be paid monthly
Not affect working capital
Not have an interest rate
The purpose of reporting current maturities of long-term debt is to:
Report any portion of a long-term borrowing that is to be paid in the upcoming accounting period as a current liability.
Reclassify a portion of debt from the noncurrent section of the balance sheet to the current section of the balance sheet.
Properly classify liabilities.
All the above are correct.
Financial leverage refers to which of the following:
The leverage a firm obtains from increasing production
The difference between the ROI on current assets and ROE earned on retained earnings
Decreasing fixed cost per unit by increasing production
The difference between the ROI on assets and the ROE earned on Stockholder equity
Which of the following is true regarding bond discounts and/or premiums?
Bond discount is amortized but not bond premium
Both bond discount and premiums are amortized
Neither bond discounts or premiums are amortized
Bond premium is amortized but not bond discount
Computing a borrower’s effective interest rate is another application of which of the following concepts?
Current value concept
Present value concept
Period interest concept
None of these
Southern company accountant failed to accrue as of 12/31/19 some employee fringe benefit program expense that were incurred in 2019 and will be paid in 2020. The result of this omission is to:
Understate 2019 expenses and understate current liabilities at 12/31/19
Overstate 2019 expenses and Overstate current liabilities at 12/31/19
Understate 2019 expenses and Overstate current liabilities at 12/31/19
Overstate 2019 expenses and understate current liabilities at 12/31/19
When a company issues a bond at a Premium:
The company’s interest expense will be less than the interest paid each year
The company is more profitable than most companies in its industry
The company’s interest expense will be more than the interest paid each year
Investors perceive the bond to be a very safe investment
When a supplier makes a downward adjustment in the amount owed by a creditor, the creditor will:
Reduce the amount of the account payable to the supplier and decrease an asset such as inventory
Increase the amount of the account payable to the supplier and increase an asset such as inventory
Reduce the amount of the account payable to the supplier and increase cash
Reduce the amount of the account payable to the supplier and decrease cash
The current liability for wages payable (or accrued payroll) represents:
Gross pay earned by employees which they have not yet been paid
Net pay earned by employees for which that have not yet been paid
Employer’s federal and state payroll tax obligations
Employer’s liability for various withholdings that taken out of the gross pay earned by employees
Many airlines have frequent flyer programs that permit to accumulate credits that can be applied to the cost of tickets for future flights. Most airlines recognize the cost of their frequent flyer program when the credits are used to purchase tickets. This practice, which seems to ignore the matching concept, results in:
Stating liabilities and expenses at appropriate amounts
Understating liabilities and expenses
Overstating liabilities and expenses
Understating liabilities and overstating expenses
Which of the following is TRUE statement pertaining to bonds?
Bonds can be sold at discount, par, or premium
Bonds can’t be sold at a discount, par, or premium
The SEC sets the market price of a bond
The issuing firm sets the price of the bond
When borrowing money that more important objective of the borrower should be to:
Maximize APR
Minimize APR
A transaction that is likely to cause an increase in a current liability is:
Payment of accrued wages
Depreciation of equipment
Accrual of bad debt expenses
Accrual of interest expense
The liabilities for product warranty claim an example of a liability that
Has been calculated using estimates
Has been recorded in the process of matching revenue
Also resulted in a reduction of the net income
All of the above are correct
The amortization of a bond discount:
Increase cash paid to bondholders for interest
Results in bond interest expense being less than the interest paid to bondholders
Reduces the carrying value of bonds payable on balance sheet
Results in bond interest expense being greater than the interest paid to bondholders
Cassady, Inc. borrowed $25,000 for 3 months at an APR of 10%. The amount of interest paid on this loan was:
$2500
$7500
$625
$833
A magazine publisher has an account called “Unearned Subscription Revenue.” The transaction that causes the balance of this account to decrease is:
Cash is received from new subscribers
Magazines are mailed to subscribers
Subscriptions are sold to new subscribers
Magazines are printed for publishers
Bonner’s Inc. borrowed $36,000 for 4 months on a discount basis. The lender used an interest rate of 8% to calculate the discount. The amount of cash Bonner’s Inc actually had available to use from this loan was:
$960
$36960
$35040
$11520
The statement of changes in retained earnings for the years shows:
Amount received from the sales of additional common stock during the year
Gain or losses from discontinued operations during the year
The effect of a stock split during the year
The retained earning balance at the beginning of the year
Braco has 80,000 shares of $100 par value common stock outstanding, and 20,000 shares of treasury. Braco is located in a state that allows dividends on treasury stock. The number of additional shares that would be issued in a 5% stock dividend is:
5,000
1,000
2,000
4,000
Which of the following is NOT a right or attribute of common stock ownership?
Approving changes in corporate charter
Liability limited to amount invested
Determining dividend policy
Electing directors
The principle reason for a company having a common stock split is to:
Increase the total cash dividends paid to stockholders
Decrease the market value per share of common stock
Decrease the total stockholders’ equity
Capitalize retained earnings
The declaration of a cash dividend by the directors results in:
A decrease in net income and an increase in current liabilities
A decrease in net income and decrease in cash
A decrease in cash and a decrease in retained earnings
A decrease in retained earning and an increase in current liabilities
The number of shares of a class of stock that are outstanding is:
The number of shares issued minus the number of shares held as treasury stock
The number of shares authorized minus the number of shares issued
The number of shares issued minus the number of shares owned by the directors
The number of shares authorized minus the number of shares held as treasury stock
Preferred stock is used much less than long term debt in the capital structure of most industrial and merchandising companies principally because:
For income tax purposes, dividends paid on preferred stock are not deductible but interest on long term debt is deductible
Preferred stock may be convertible to common stock but long term debt cannot be convertible
Preferred stock has a fixed liquidation or redemption value but long term debt does not have a fixed maturity date
The preferred stock dividend requirement is fixed claim against income but interest on long term debt is not a fixed amount
In comparison to stockholder equity section of a corporation’s balance sheet, owner’s equity of a proprietorship or partnership:
Normally uses “capital” accounts for each individual owner rather than a “retained earnings” account for all stockholders
Normal using “Drawing” accounts for each individual account owner rather than a “Dividends” account for all the stockholders
Normally does not make a distinction between investment capital and retained earnings
All of the above are correct
If a common stock has no par value:
The stockholder do not have a preemptive right
The stock must have a stated value
There is no way to determine the market value per share
There will not be any additional paid in capital related to it.
Which of the following is NOT a stockholders’ equity account?
Retained earnings
Additional paid in capital
Accumulated depreciation
Common stock
The Dividend Declaration date pertains to:
The date used to determine who receives dividends
The date on which the board of directors declares it going to liquidate the firm
The date on which the board of directors declares a dividend
The date a dividend is paid
Factors that usually affect retained earning directly includes:
Net income or net loss, and dividends
Stock dividends and gains or losses from the sale of treasury stock
Restructuring changes and losses from discontinued operations
Net income or net loss, and the issuance of stock at an amount in excess of par value
When a stock dividend is declared and issued:
Retained earnings is normally decrease by the par value of the shares issued in the dividend
Total paid in capital is decreased by the market value of the shares issued in the dividend
Total paid in capital does no change
Total stockholder equity does not change
The noncurrent liability, Noncontrolling interest, arises if:
A firm owns more than 50% but less than 100% of another entity
A firm owes less than 50% of another entity
A firm owns 100% of another entity
Noncontrolling interest is accounted for as an equity item
When a company splits its common stock 3 for 1:
Total paid in capital increase by a factor of 3
Retained earning is decreased by the market value of shares issued
The market value of the company’s stock normally falls by two-thirds
The stockholders are assured of receiving larger cash dividends
If a firm sells treasury stock for more than its cost:
A gain is recognized in the income statement
Retained earnings is increased
Addition paid in capital is increased
Total stockholder’s equity does not change
The term preemptive right pertains to which of the following
The board of directors rights in liquidation
Present shareholders’ right to purchase shares from any additional share issuances
Present shareholders’ rights to purchase treasury shares when reissued
Preferred stockholders’ rights to dividends
When a company repurchases its own stock as treasury stock:
Total stockholders’ equity increase
Total stockholder equity is not affected
A company is not allow to do this
Total stockholder equity decreases
Which of the following is NOT preference of preferred stock?
The right to vote on company matters
The right to receive dividends unpaid from previous years from cumulative preferred stock before common stockholders receive dividends
Preference in receiving corporate assets over common stockholders in the event of liquidation/bankruptcy
First claims to dividends over common stockholders
Which of the following is NOT usually a right or attribute of preferred stock?
Having a claim to dividends in excess of annual dividend requirements if dividends on common stock exceed dividends on preferred stock
Having a priority claim to dividends relative to the common stock’s claim to dividends
Having a priority claim in liquidation relative to common stock’s claims in liqudation
Having a claim to dividends that is cumulative over time if the annual dividends requirement is not satisfied
Which of the following terms is NOT used to identify owners equity or stockholder equity?
Partner’s capital
Additional paid-in-retained earnings
Proprietors capital
Paid in capital and retained earnings
Fred Sanford owns 112 shares of the Grady corporation's stock. Grady announces a 3-for-2 stock split. How many shares with Fred half after the split?
280 shares
168 shares
75 shares
336 shares
Stock dividend is similar to a cash dividend in that:
The stockholders equity in the firm’s net assets is reduced by each
The stockholders’ cash is increased by each
The stockholders’ equity in the firms’ net assets is increased by each
Retained earnings and the amount of potential future dividends is reduced by each
Another term frequently used to describe stockholders equity is:
Paid-in-capital
Gross assets
Net assets
Capital stock
Accumulated other comprehensive income (loss) includes each of the following items except:
Cumulative foreign currency translation adjustments
Amounts received from sale of additional common stock during the year
Unrealized gains or losses on available-for-sale investments
Gain on certain derivative instruments
In most states, par value of issued shares represents:
No par capital
Legal capital
Noncontrolling capital
Corporate capital
Additional paid-in-capital is most likely to appear on the balance sheet of a corporation that:
Has no par value stock
Has par value stock
Has issued stocks at different dates
Has issued stock dividends
Retained earnings represents:
Cash that is available for dividends
The total net income of the firm since the beginning
Net income plus gains (or minus losses) on treasury stock transactions
Cumulative net income of the firm since its beginning that has not been distributed to its stockholders in the form of dividends
Accumulated other comprehensive income (loss):
Is a component of net income and reported on the income statement
Is another name for cumulative foreign currency translation adjustment
Is a component of stockholders equity on the balance sheet
Includes a component that adjust for the effects of treasury stock transactions
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