You are trying to determine which of two companies is the most profitable. Which of the following would be the best indicator of relative profitability? A) highest net income B) highest retained earnings C) highest return on equity D) highest income from continuing operations 2. Which of the following would not be considered a source of financing? A) notes receivable B) common stockholders' equity C) retained earnings D) capital lease obligations 3. Will Company reports the following: 2009 2008 Retained Earnings $2,000,000 $ 1,300,000 Common Stock $ 500,000 $ 500,000 Paid-in Capital $3,000,000 $ 3,000,000 Net Income for year $ 900,000 $ 400,000 Dividend payout ratio for 2009 was: A) 12% B) 18.7% C) 22.2% D) 27% 4. If a company receives an unqualified audit opinion it means the auditors A) did not complete a full audit and therefore do not feel qualified to give and opinion on financial statements. B) are providing assurance that the company will remain financially viable for at least the next year. C) are providing assurance that the company's financial statements fairly present company's financial performance and position. D) are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance. 5. The Management Discussion and Analysis Section of the annual report: A) is required by the SEC B) is optional but normally included in the annual report C) is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company D) is required by the SEC only if they have a qualified audit opinion 6. To estimate the intrinsic values of an equity or debt security using present value theory you need to know A) the yield to maturity. B) a discount rate and the expected payoffs over the life of the security. C) the probability of the expected future payoffs over the life of the security. D) the current market value of the equity or debt security. 7. Which of the following is not a common tool used in financial statement analysis? A) random walk analysis B) ratio analysis C) common size statement analysis D) trend series analysis 8. A common size income statement would typically be prepared by dividing: A) All items on income statement in Year t by their corresponding value in Year t-1 B) All items on income statement in Year t by their corresponding balance sheet account in Year t C) All items on income statement in Year t by net income in Year t-1 D) All items on income statement in Year t by sales in Year t 9. You are examining the common size income statements of two companies, A and B, for 2011. This data is most likely to help you answer which of the following questions? A) Which company had the largest net income. B) Which company utilized its assets most efficiently. C) Which company had the highest gross margin ratio. D) Which company had the biggest increase in sales from the prior year. 10. Which of the following statements concerning financial ratios is incorrect? A) accounting principles and methods used by a company will not affect financial ratios B) the informational value of a ratio in isolation is limited C) a ratio is one number expressed as a percentage or fraction of another number D) calculation of financial ratios is not sufficient for a complete financial analysis of a company 11. Which of the following is (are) a change(s) in accounting principle? I. a change from LIFO to FIFO II. a change in estimated salvage value of depreciable asset III. a change from straight line to sum-of-the-years digits IV. recording depreciation for first time on machinery purchased five years ago A) I, II, III and IV B) I, II and III C) I and II D) I 12. If a company fails to record a material amount of depreciation in a previous year, this is considered: A) a change in accounting principle B) an unusual item C) an accounting error D) a change in estimate 13. Which of the following are examples of judgments made in the accounting reporting process? I. Useful life of machinery II. Allowance for doubtful accounts III. Obsolescence of assets IV. Classification of investments as available for sale or trading securities. A) I, II, III and IV B) I, II and III C) II and III D) I and III 14. Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next? I. Change in accounting principles II. Disposition of segment of business III. Restructuring expense IV. Change in auditors A) I and II B) I and III C) I, II and III D) I, III and IV 15. When analyzing financial statements it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct? Accounting distortions: A) can arise as management may deliberately manipulate financial statements B) arise often through application of (correct) accounting principles C) can affect the quality of earnings D) arise because the stock market is not efficient 16. The two secondary qualities of accounting information to make it useful for decision making are: A) Consistency and Comparability B) Relevance and Reliability C) Materiality and Comparability D) Full Disclosure and Relevance 17. When considering cash versus accrual accounting, which of the following statements is correct? A) neither cash flows nor net income can be manipulated B) net income cannot be manipulated but cash flows can C) both cash flows and net income can be manipulated D) cash flows cannot be manipulated but net income can be manipulated 18. Which one of the following is not an example of a red flag, used to evaluate earnings quality? A) Qualified audit report B) Net income this year is higher then net income last year C) Poor financial performance D) Frequent or unexplained changes in accounting policies 19. Which of the following is not considered part of GAAP? A) Statements of Financial Accounting Standards (SFAS) B) International Accounting Standards (IAS) C) Accounting Research Bulletins (ARB). D) Accounting Principles Board Opinions (APB). 20. Which of the following is not considered a monitoring mechanism? A) The Securities and Exchange Commission (SEC) B) Top level management C) The board of directors audit committee D) The external auditors Use the following to answer questions 21 and 22: Cleveland Company reports the following information as of 12/31/2012: -10% cumulative preferred stock, par value $100, One-year of dividends in arrears; 20,000 shares authorized; issued, 10,000 shares; $1,000,000 0 -Common stock - authorized 500,000; 40,000 outstanding; $2 par value - $80,000 Pg 190 Additional paid-in-capital - $450,000 -Retained Earnings - $2,000,000 21. The book value per share of common stock is: A) $57.75 B) $60.25 C) $60.75 D) $63.25 22. The book value per share of preferred stock is: A) $ 100 B) $ 110 C) $ 112 D) $ 116 23. Hurt Corporation acquired a capital lease that is carried on its books at a present value of $100,000 (discounted at 12%). Its annual lease payment is $15,000. What is the amount of interest expense from this lease? First Year Second Year A) 12,000 10,200 B) 12,000 11,640 C) 12,000 12,350 D) 15,000 15,000 24. Recording a long-term lease as an operating lease, as opposed to a capital lease, for a lessee will cause the following ratios to be: Debt/Equity Total Asset Turnover A) Higher Lower B) Higher Higher C) Lower Higher D) Lower Lower 25. If a company leases equipment to other companies and records these leases as operating leases rather than a capital leases, its: I. recorded liabilities will be lower II. recorded assets will be higher III. total cash flows will be higher IV. leverage ratios will be higher A) I and III B) II and IV C) I only D) II, III and IV 26. In 2009, after the adoption of SFAS 158, the pension asset/liability on a companys books will be equal to A) The difference between the projected benefit obligation and the fair value of the plan assets. B) The difference between the pension expense and the amount funded during the current year. C) The pension expense and the projected benefit obligation for any given year, less the amount funded. D) The fair value of the plan assets less the unamortized prior service cost, plus any unamortized gains minus any unamortized losses. 27. Capitalizing interest costs will have which of the following effects on a companys financial statements after the initial period? A) Net earnings will be lower. B) Current ratio will increase. C) Total debt will be lower. D) Pretax cash flow will be lower. 28. Which of the following is not a component of pension expense under defined benefit plans? A) Service cost B) Amortization of prior service costs C) Interest cost D) Amortization of prior interest costs 29. For a company with a current ratio of less than 1.0, which of the following accounting actions is most likely to increase its current ratio? A) Accruing direct labor costs. B) Making a cash payment on accounts payable. C) Paying off long-term debt. D) Leasing equipment under a long-term capital lease agreement. 30. A company's current assets are $150 and its current liabilities are $100. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio and return on assets ratio? A) Current Ratio: Increase; Return on Assets: Increase B) Current Ratio: Increase; Return on Assets: Decrease C) Current Ratio: Decrease; Return on Assets: Increase D) Current Ratio: Decrease; Return on Assets: Decrease Use the following information to answer questions 31 and 32 Control Furniture Company Annual Report Excerpts (Figures in thousands of dollars) December 31 Year X1 Year X2 Inventories at FIFO Cost 846.3 852.6 Excess of FIFO Cost over LIFO Cost (231.4) (257.2) Inventories at LIFO Cost 614.9 595.4 Income Tax rate is 34% Answers are rounded to the nearest decimal point. 31. Given the financial information presented above what would be the effect on cash in year X1 of converting the company from LIFO to FIFO: A) Increase of 78.7 B) Decrease of 78.7 C) Decrease of 152.7 D) Increase of 152.7 32. Given the financial information presented above what would be the effect on net income before taxes in year X2 of converting the company from LIFO to FIFO: A) Increase of 257.2 B) Decrease of 257.2 C) Increase of 174.9 D) Decrease of 174.9 33. HTGT Inc. has a defined contribution pension plan for its employees. Under this type of plan which best describes the contingent liability associated with the plan? A) HTGT has a contingent liability until the employee retires. B) HTGT has a contingent liability until the employee dies. C) HTGT has no contingent liability. D) The trustee of the plan assumes the risk and has a contingent liability. 34. Captain Inc. purchases a depreciable asset for $100,000. The life of the asset is 10 years and it has an estimated salvage value of $10,000. Captain Inc. takes a full year of depreciation expense in the year the asset is acquired. Which of the following statements is true? A) In year three using straight-line depreciation the amount will be $10,000. B) Changing depreciation methods in year four will be considered a change in accounting principle. C) Depreciation under the double-declining method (200%) in year one will be equal to $18,000. D) Changing depreciation methods in year two will require prospective application. 35. Which of the following is not an effect capitalization? A) Capitalization usually reduces net income B) Capitalization usually yields a smoother net income C) Capitalization usually decreases the volatility of the return on investment D) Capitalization usually increases net income 36. Companies are supposed to write-down value of assets if a permanent impairment of value or loss of utility occurs. If a company writes down its assets this year the effect on: This year's ROA Next year's ROA A) Increased No change B) Decreased No change C) Decreased Decreased D) Decreased Increased 37. Under current US GAAP, goodwill is: I. amortized over a period not to exceed 40 years II. tested annually for impairment III. exclusive of separately identifiable intangible assets IV. recorded only upon purchase of another entity A) I, II, III and IV B) II, III and IV C) I, II and III D) II and IV 38. Which of the following scenarios reflects the correct application of U.S. GAAP for capitalization of certain expenditures as intangible assets? A) A companys marketing department researches, develops and promotes a completely new name, packaging and design for its main product line, capitalizing $1.8 million in related costs. Previously, the brand had remained unchanged for 45 years. B) A pharmaceutical company capitalizes cost of $47 million after 5 years of researching and developing a new hair growth pill. C) A company capitalizes $12 million of research and development costs incurred during the most recent operating cycle. D) A software company capitalizes $3.9 million in development costs after a working model of its newest product is completed. It is beyond the beta testing stage. 39. AVPR Company sets up a qualifying SPE to sell their accounts receivable (A/R) to the SPE. The SPE meets the unconsolidated requirement under GAAP. The most likely outcome of using the SPE will be to A) improve operating performance ratios of AVPR. B) have AVPR recognize gains on the sale of their A/R to the SPE. C) have the SPE issue debentures. D) be a greater cost of financing to AVPR than borrowing funds from the credit markets. 40. Financial Statements of ABC Corp. indicates that ending inventory levels in 2010 and 2011 were $200,000 and $350,000 respectively. Net Sales for 2010 and 2011 were $5,000,000 and $5,500,000 respectively. Cost of Goods sold for 2010 and 2011 were $1,900,000 and $2,200,000 respectively. Purchases are recorded using the net method and purchase discounts lost are expensed. Purchase discounts lost in 2010 and 2011 were $50,000 and $75,000 respectively. Purchases in 2011 were: A) $2,225,000 B) $2,275,000 C) $2,350,000 D) $2,425,000 ********** Five-Point Bonus Question********** The YC Company requests that you extend them credit for purchases that they plan to make from your company totaling about $200,000 a month. They are privately owned, and have been in busy for two-years. The sales would be beneficial to your company as you are trying to expand your business. You request financial statements from the YC Company to determine how much credit you are willing to extend to them. In your analysis you will primarily be most concerned with A) their capital structure. B) their solvency. C) their liquidity. D) their income statement