1. Rate regulation provides incentives for public utility managers to artificially: A. decrease the asset base. B. increase the asset base. C. decrease operating expenses. D. decrease taxes. 2.Potential conflicts of interest between shareholders and managers may be overcome if managers are given incentives which cause them to behave as if they were: A. creditors. B. owners. C. debtors. D. vendors. 3. When one party to a business relationship can make decisions that benefit him or her but harm the other party a: A. lawsuit is automatically filed. B. contract arises. C. conflict of interest arises. D. contingent liability arises. 4. In the banking industry, the ratio of invested capital/gross assets, as defined by RAP, is the __________ ratio. A. capital asset B. capital adequacy C. gross asset D. indirect capital 5.Covenants that place direct restrictions on managerial decisions are called: A. affirmative restrictions. B. affirmative covenants. C. negative restrictions. D. negative covenants. 6.One low-cost, effective way of eliminating or reducing conflicts of interest in business relationships is to: A. only deal with related parties. B. carefully specify mutual expectations in contract terms. C. use lawyers to negotiate all terms. D. use an arbitrator for all negotiations. 7. A compensation committee should be comprised of: A. the CEO and the CFO of the company. B. the CEO of the company and the outside attorney. C. members of the Board of Directors who are also officers of the company. D. members of the Board of Directors who are outside (non-management) directors. 8.Discretionary accounting accruals are: A. cash financial statement adjustments, which accrue revenue or expenses. B. noncash financial statement adjustments, which accrue revenue or expenses. C. cash financial statement adjustments, which accrue only revenue. D. noncash financial statement adjustments, which accrue only expenses 9. The widespread use of accounting-based incentives to determine executive compensation is controversial for which one of the following reasons? A. Earnings growth automatically increases shareholder value. B. Accounting based incentive plans can encourage managers to adopt a long-term business focus. C. Executives can use their discretion over the accounting policies. D. Managers do not have accounting flexibility. 10. In a study of discretionary accounting accruals, it was found that abnormal accruals in the year prior to reporting covenant violations significantly: A. decreased the companys current ratio but significantly increased the companys reported earnings. B. decreased the companys net worth. C. increased reported earnings and increased working capital. D. increased reported earnings but decreased working capital. 11. Stock options: A. have value only if the market price of the stock declines. B. have value only if the market price of the stock rises. C. are taxed at ordinary rates. D. do not qualify for favorable tax treatment. 12. Affirmative covenants generally would NOT include which of the following stipulations? A. The lender has the right to inspect business assets and business contracts. B. Limits on the borrowers total indebtedness C. The borrower must maintain insurance on business properties. D. Specific financial covenants and reporting requirements 13. Banks that fail to comply with regulations, including the failure to maintain an adequate capital adequacy ratio, face: A. higher costs. B. lower costs. C. mergers and expansion of services. D. incarceration of officers. 14. A decrease in market-wide interest rates will result in a/an: A. increase in the cost of equity capital. B. decrease in the cost of equity capital. C. increase in the cost of debt. D. decrease in the demand for fixed-rate bond investments. 15. IRS regulations govern the computation of: A. net income for GAAP. B. net income for tax purposes. C. gross profit for GAAP. D. net income for the SEC. 16. When faced with falling short of a desired earnings target, financial executives reportedly might consider any of the following actions EXCEPT: A. prematurely taking an accounting charge. B. providing incentives for customers to buy more product this quarter. C. decreasing discretionary spending. D. delaying the start of a new project. 17. The section of a loan agreement that describes circumstances in which the creditor obtains additional rights is called the __________ section. A. events of compliance B. certificate of compliance C. events of termination D. events of default 18. Many loan agreements have financial covenants that rely on: A. floating GAAP. B. fixed GAAP. C. flexible GAAP. D. regulatory accounting procedures (RAP). 19. Compensation plans should: A. not link incentive plans to financial performance. B. not be based on long-term business goals. C. align shareholders incentives with the objectives of managers. D. align managers incentives with the objectives of shareholders. 20. Banking regulators have a powerful weapon to encourage compliance with minimum capital guidelines as they can impose costs on noncomplying banks by doing any or all of the following EXCEPT: A. require the bank to increase the number of outside directors on its board. B. require the bank to submit a plan describing how and when its capital will be increased. C. subject the bank to more frequent examinations by the regulator. D. deny a request to merge, open new branches, or expand services. 21.Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2014. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2016. Island will record this transaction to recognize: A. an extraordinary debt restructuring gain of $20,000. B. an extraordinary debt restructuring loss of $20,000. C. an ordinary debt restructuring gain of $20,000. D. neither a gain nor a loss from debt restructuring. 22.The determining factor for accounting treatment of a troubled debt restructuring when there is a continuation with modification of terms is whether: A. there is a gain or loss on the transaction to the debtor. B. there is a gain or loss on the transaction to the lender. C. the undiscounted sum of the future cash flows under the restructured note is above or below the notes book value (including accrued interest) at the restructuring date. D. the discounted sum of the future cash flows under the restructured note is above or below the notes book value (including accrued interest) at the restructuring date. 23.Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the: A. direct write-off method. B. percent of sales method only. C. percent of gross receivables method only. D. percent of sales or the percent of gross receivables method. 24.Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2014. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2016. What effective interest rate will Island use for the restructured note? A. 8.7% B. 8.9% C. 10.0% D. 13.1% 25.Harry Jones accepted a six-month, 8%, $40,000 note receivable from a customer on July 1, 2014. Jones has an arrangement with the National Bank to discount selected customer notes at 10%. If the note were discounted on August 1 under the terms of agreement with National Bank, which one of the following journal entries would Jones record? A. DR Cash39,867 CR Note payable - National Bank 39,867 B. DR Cash40,000 CR Note receivable 40,000 C. DR Cash39,867 DR Interest Expense123 CR Note receivable 40,000 D. DR Cash39,867 DR Interest Expense123 CR Note payable - National Bank 40,000 26.What will be the balance in the Notes ReceivableLewisburg Fabricators account at the end of 2015? A. $54,447 B. $58,802 C. $63,507 D. $80,000 27.When a firm does not adopt the fair value option, it: A. need not disclose the fair value of its long-term notes receivable. B. still must disclose the fair value of its long-term notes receivable unless the reported value approximates fair value. C. still must disclose the fair value of its long-term notes receivable if the reported value exceeds fair value. D. may disclose the fair value of its long-term notes receivable if the reported value exceeds fair value, but such disclosure is not required. 28. The Fair value adjustmentaccounts receivable account is an asset valuation account that: A. would be adjusted upward or downward as fair values change and as the receivables are collected. B. is created when fair value accounting is adopted but is not subsequently adjusted. C. can only be adjusted downward. D. is unaffected by the subsequent collection of receivables. 29. With a loan collateralized by receivables: A. the bank makes the loan without recourse. B. the bank has recourse against the accounts receivable customers. C. a company receives cash and is not responsible for repaying the loan. D. a company receives cash and is responsible for repaying the loan. 30.Research evidence suggests that: A. companies increase bad debt expense when earnings are otherwise low and then decrease the expense when earnings are high. B. companies reduce bad debt expense when earnings are otherwise low and then increase the expense when earnings are high. C. there is no correlation between bad debt expense and earnings levels. D. a companys ratio of allowance for uncollectibles to gross receivables should always be close to the average for its industry. 31. If a transfer of receivables is really a borrowing but is erroneously treated as a sale then: A. both assets and liabilities are understated. B. both assets and liabilities are overstated. C. both assets and equity are understated. D. ratios like debt-to-equity are consequently distorted by the overstatements. 32.When receivables are bundled together and transferred to another organization that issues securities collateralized by the transferred receivables, the arrangement is: A. collateralization. B. discounting. C. factoring. D. securitization. 33. Smith Company is a manufacturer of medical devices and has an excellent quality control department, thus defective product returns are rare. In 2014, Smith reported sales of $276,344,000. The company did, however, have two returns in 2014 related to the wrong product model being shipped. Smiths 2014 journal entry to record a $37,500 return from Foxtrot Medical would be: A. DR Sales returns and allowances37,500 CR Accounts receivable - Foxtrot Medical 37,500 B. DR Sales returns and allowances37,500 CR Allowance for Sales Returns and Allowances 37,500 C. DR Sales37,500 CR Accounts receivable Foxtrot Medical 37,500 D. DR Sales returns expense37,500 CR Accounts receivable Foxtrot Medical 37,500 34. Jones Co. sells on credit and maintains an allowance for doubtful accounts equal to 2% of the companys $3,450,000 receivables balance. Due to a cash shortfall, Jones sells $275,000 of its receivables with recourse to Ninth National Bank, and the bank withholds $12,000 from the factoring proceeds to cover possible noncollections. If the noncollections eventually amount to $15,000, the entry on Jones books when notified of this fact would be: A. DR Allowance for doubtful accounts3,000 CR Accounts receivable (specific customers) 3,000 B. DR Allowance for doubtful accounts15,000 CR Accounts receivable (specific customers) 15,000 C. DR Bad Debt expense3,000 CR Cash 3,000 D. DR Allowance for doubtful accounts15,000 CR Due from Ninth National Bank 12,000 CR Cash 3,000 35. If a note receivable is discounted with recourse and the customer defaults at final payment, the seller: A. has no obligation to the bank. B. must repay the full amount of the note plus interest to the bank. C. must refund the proceeds of the discounting to the bank. D. must repay the principal only to the bank. 36. What effective interest rate will Mutual Bank use for the restructured note? A. 8.7% B. 8.9% C. 10.0% D. 13.1% 38. Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2014. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2016. What will be Islands carrying value of the restructured note? A. $100,000 B. $108,000 C. $118,000 D. $128,000