1. Which of the following statements is true about a partnership? a. One capital
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Question
1. Which of the following statements is true about a partnership?
a. One capital and one drawings account is used for each partnership.
b. The capital account is used to record each partner's investment and that partner's designated share of the earnings.
c. Partnerships are subject to separate income taxes.
d. The drawings account is closed to retained earnings at the end of the period.
2. Which of the following statements does not correctly describe preferred stock?
a. Preferred shareholders have a preference with respect to dividend payments.
b. Preferred shareholders have a preference with respect to assets in the event of dissolution.
c. Preferred shareholders have voting rights on a per share basis.
d. Preferred stock typically has a fixed dividend rate.
3. Which of the following statements is false?
a. Common stockholders have a residual claim on assets in the event of liquidation.
b. Shares of stock held in the treasury are subtracted from the number of issued shares in the determination of the number of outstanding shares.
c. Common stockholders have voting rights at annual stockholder meetings.
d. Corporations are governed by their stockholders.
4. Which of the following would not be reported as a financing activities cash flow?
a. Issuing common stock for cash.
b. Cash dividend payments.
c. Purchasing treasury stock.
d. Purchase of a building by signing a note payable.
5. Which of the following is not reported as a cash flow from investing activities?
a. Sale of a depreciable asset for cash.
b. Purchasing land in exchange for common stock.
c. Selling a long-term investment at a loss for cash.
d. Purchase of a patent in exchange for cash.
6. Which of the following transactions would be reported within the investing section of the cash flow statement?
a. The cash sale of land at a loss.
b. The purchase of a building in exchange for common stock.
c. The receipt of a stock dividend from a stock investment.
d. The cash receipt of a dividend from a stock investment.
7. Which of the following would be subtracted from net income when determining cash flows from operating activities under the indirect method?
a. A decrease in utilities payable.
b. Patent amortization expense.
c. A decrease in prepaid rent.
d. A loss on the sale of a depreciable asset.
7. Which of the following would be added to net income when determining cash flows from operating activities under the indirect method?
a. A decrease in accounts payable.
b. Patent amortization expense.
c. An increase in prepaid insurance.
d. A gain on the sale of a depreciable asset.
8. Which of the following would not be a cash flow from financing activities?
a. Issuance of common stock for cash.
b. Borrowing cash on a long-term note payable.
c. Collection of a cash dividend.
d. Repayment of principal on a long-term note payable.
9. The cash payment of a previously declared dividend increases which of the following ratios?
a. Debt-to-equity.
b. Earnings per share.
c. Price/earnings ratio.
d. Asset turnover.
10. The debt-to-equity ratio measures which of the following?
a. Liquidity.
b. Solvency.
c. Profitability.
d. Market strength.
11. Negative financial leverage occurs when the:
a. Average net (after tax) interest rate on borrowed funds is less than the company's earnings rate on its assets.
b. Return on assets is more than return on equity.
c. Return on equity is more than return on assets.
d. Operating expenses exceed gross profit.
12. Which of the following ratios is not considered to be a test of profitability?
a. Current ratio.
b. Profit margin.
c. Return on assets.
d. Earnings per share.
13. Home Depot's operating strategy is to offer a broad assortment of high-quality merchandise and services at competitive prices using highly knowledgeable service-oriented personnel and aggressive advertising. Which of the following is not as critical to achieving Home Depot's strategy?
a. Cost control
b. Product differentiation
c. High level of customer service
d. High sales volume
13. Which of the following ratios is not part of the DuPont model?
a. Asset turnover.
b. Debt-to-equity.
c. Net profit margin.
d. Return on equity.
Which of the following statements is not correct?
Purchasing fixed assets through debt financing decreases the financial leverage ratio.
Accruing an expense will affect the net profit margin ratio.
Return on equity may increase even when the financial leverage ratio decreases.
Purchasing treasury stock results in a decrease in asset turnover.
Explanation / Answer
1. Which of the following statements is true about a partnership?
a. One capital and one drawings account is used for each partnership.
b. The capital account is used to record each partner's investment and that partner's designated share of the earnings.
c. Partnerships are subject to separate income taxes.
d. The drawings account is closed to retained earnings at the end of the period.
Ans : In partnership capital account is used for each partner’s investment balance and share of earnings , so option b. is correct.
2. Which of the following statements does not correctly describe preferred stock?
a. Preferred shareholders have a preference with respect to dividend payments.
b. Preferred shareholders have a preference with respect to assets in the event of dissolution.
c. Preferred shareholders have voting rights on a per share basis.
d. Preferred stock typically has a fixed dividend rate.
Ans: preference share holders do not have voting rights , so statement c is not correct.
3. Which of the following statements is false?
a. Common stockholders have a residual claim on assets in the event of liquidation.
b. Shares of stock held in the treasury are subtracted from the number of issued shares in the determination of the number of outstanding shares.
c. Common stockholders have voting rights at annual stockholder meetings.
d. Corporations are governed by their stockholders.
Ans: Corporations are governed by the management and Board of Directors not by stockholders. So option d is false.
4. Which of the following would not be reported as a financing activities cash flow?
a. Issuing common stock for cash.
b. Cash dividend payments.
c. Purchasing treasury stock.
d. Purchase of a building by signing a note payable.
Ans : Purchase of building by signing a note payable does not have any cash flow and is not financing activity cash flow. So option is d.
5. Which of the following is not reported as a cash flow from investing activities?
a. Sale of a depreciable asset for cash.
b. Purchasing land in exchange for common stock.
c. Selling a long-term investment at a loss for cash.
d. Purchase of a patent in exchange for cash.
Ans : Purchasing land in exchange for common stock does not involve any cash flow. So option is b.
6. Which of the following transactions would be reported within the investing section of the cash flow statement?
a. The cash sale of land at a loss.
b. The purchase of a building in exchange for common stock.
c. The receipt of a stock dividend from a stock investment.
d. The cash receipt of a dividend from a stock investment.
Ans : Stock dividend and purchase of a building in exchange for common stock do not have cash flow, cash dividend is financing activity cash flow. Only cash sale of land at a loss is to be reported within the investing section of the cash flow statement. Option is a.
7. Which of the following would be subtracted from net income when determining cash flows from operating activities under the indirect method?
a. A decrease in utilities payable.
b. Patent amortization expense.
c. A decrease in prepaid rent.
d. A loss on the sale of a depreciable asset.
Ans; Options , b,c ,d are added to net income for determining cash flows from operating activities under the indirect method. A decrease in utilities payable is a negative cash flow and deducted from net income. So option is a.
7. Which of the following would be added to net income when determining cash flows from operating activities under the indirect method?
a. A decrease in accounts payable.
b. Patent amortization expense.
c. An increase in prepaid insurance.
d. A gain on the sale of a depreciable asset.
Ans : Options a,c,d are deducted from net income when determining cash flows from operating activities under the indirect method. Patent amortization expense is added to net income when determining cash flows from operating activities under the indirect method. So option is b.
8. Which of the following would not be a cash flow from financing activities?
a. Issuance of common stock for cash.
b. Borrowing cash on a long-term note payable.
c. Collection of a cash dividend.
d. Repayment of principal on a long-term note payable.
Ans: Under UGAAP receipt of cash dividend is a cash flow from operating activity,So option is c.
9. The cash payment of a previously declared dividend increases which of the following ratios?
a. Debt-to-equity.
b. Earnings per share.
c. Price/earnings ratio.
d. Asset turnover.
Ans :The cash payment of a previously declared dividend decreases cash , so reduces asset balance and increases asset turnover ratio. So the option is d.
10. The debt-to-equity ratio measures which of the following?
a. Liquidity.
b. Solvency.
c. Profitability.
d. Market strength.
The debt-to-equity ratio measures the solvency or ability to pay back long term loans. So option b is correct.
11. Negative financial leverage occurs when the:
a. Average net (after tax) interest rate on borrowed funds is less than the company's earnings rate on its assets.
b. Return on assets is more than return on equity.
c. Return on equity is more than return on assets.
d. Operating expenses exceed gross profit.
Ans ; Negative financial leverage occurs when the Operating expenses exceed gross profit. So Option is d.
12. Which of the following ratios is not considered to be a test of profitability?
a. Current ratio.
b. Profit margin.
c. Return on assets.
d. Earnings per share.
Ans : a. current ratio is not considered to be a test of profitability
13. Home Depot's operating strategy is to offer a broad assortment of high-quality merchandise and services at competitive prices using highly knowledgeable service-oriented personnel and aggressive advertising. Which of the following is not as critical to achieving Home Depot's strategy?
a. Cost control
b. Product differentiation
c. High level of customer service
d. High sales volume
Ans: As there is broad assortment of products, there is no Product differentiation
. So option is b.
13. Which of the following ratios is not part of the DuPont model?
a. Asset turnover.
b. Debt-to-equity.
c. Net profit margin.
d. Return on equity.
Ans: Debt-equity is not a ratio involved in DuPont ROE calculation.
Which of the following statements is not correct?
Purchasing fixed assets through debt financing decreases the financial leverage ratio.
Accruing an expense will affect the net profit margin ratio.
Return on equity may increase even when the financial leverage ratio decreases.
Purchasing treasury stock results in a decrease in asset turnover.
Ans : Purchasing treasury stock results in a reduction is asset and increase in asste turnover. So the last statement is not correct.
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