FIN 202 EVALUATION SET QUESTIONS AND
ANSWERS SURE A+
✔✔QN=42 (20298) The major disadvantages of market-value accounting include
a. the difficulty in estimating the current value for some assets.
b. the difficulty in applying some of the valuation models used to estimate market
values.
c. the resulting numbers are potentially open to abuse.
d. All of these are disadvantages of market-value accounting. - ✔✔D
✔✔QN=43 (20294) The conventional way of preparing a balance sheet is to list all
assets in the order of their
a. market value.
b. risk.
c. liquidity.
d. historical cost. - ✔✔C
✔✔QN=44 (20299) Which one of the following does NOT belong on an income
statement?
a. depreciation and amortization
b. goodwill
c. extraordinary items
d. nonrecurring expenses - ✔✔B
✔✔QN=45 (20300) Which one of the following are NOT all noncash items?
a. depreciation, deferred taxes, and prepaid expenses
b. depletion charges, taxes, and amortization
c. depletion charges, deferred taxes, and prepaid expenses
d. depreciation, amortization, and prepaid taxes - ✔✔B
✔✔QN=46 (20302) Cash flows from financing activities include all but one of the
following:
,a. cash payments on the principal of long-term debt
b. issuing and paying out on insurance contracts
c. cash purchases of treasury stock
d. cash proceeds from a bank loan - ✔✔B
✔✔QN=47 (20290) Dell Computer Corporation has receivables of $2.5 million and
inventory worth $1.8 million. The firm plans to borrow $2 million for working capital
purposes from Austin First National Bank. In evaluating the loan request, the bank
should place the most emphasis on
a. the matching principle.
b. the realization principle.
c. the going-concern assumption.
d. the assumption of arm's-length transactions. - ✔✔C
✔✔QN=48 (20305) Which one of the following is NOT true for a corporation?
a. Interest paid on bonds issued last year is tax deductible.
b. Common-stock dividends to be paid this year are not tax deductible.
c. Common-stock dividends to be paid this year will be tax deductible if the firm has a
net loss for the year.
d. Preferred stock dividends to be paid this year are not tax deductible. - ✔✔C
✔✔QN=49 (20291) The matching principle calls for the accountant of a firm to
a. identify an asset with each liability of the firm.
b. associate the revenue generated from a sale to the costs incurred to produce the
product.
c. match each item of inventory with the historical cost at which it was acquired.
d. none of these - ✔✔B
✔✔QN=50 (20296) When prices are falling, valuing inventory using the LIFO method
rather than FIFO gives
a. inventory a higher value but lowers net income.
b. inventory a lower value and also lowers net income.
c. both inventory and net income a higher value.
d. inventory a lower value and net income a higher value. - ✔✔C
✔✔QN=51 (20309) Which of the following best represents cash flows to investors?
a. Cash flow from operating activity, plus cash flow generated from net working capital.
b. Earnings before interest and taxes times 1 minus the firm's tax rate.
c. Net income, minus dividends paid to preferred stockholders.
d. Cash flow from operating activity, minus cash flow invested in net working capital,
minus cash flow invested in long-term assets. - ✔✔D
✔✔QN=52 (20306) Which of the following statements is not a limitation associated with
market valuation of balance sheet accounts?
,a. It can be difficult to identify the market value of an asset, particularly if there are few
transactions involving comparable assets.
b. The estimates of market value can involve complex financial modeling, and the
resulting numbers can be open to manipulation and abuse.
c. Marking to market provides decision makers with a better chance of making the
correct economic decision, given the information available.
d. Mark-to-market accounting can become inaccurate if market prices deviate from the
"fundamental" values of assets and liabilities. - ✔✔C
✔✔QN=53 (20287) Accounting standards prescribed by GAAP are important because
a. they make the financial statements of all firms standardized.
b. they allow one to examine a firm's performance over time.
c. they make it possible for management or analysts to compare the firm's performance
to that of other competitors.
d. all of these. - ✔✔D
✔✔QN=54 (20285) Annual reports are prepared by a firm's management to
a. communicate to shareholders the firm's failures in the previous year.
b. provide overview of the firm's financial and operating performance.
c. highlight the performance of its chief competitors.
d. provide a forecast of the economy in the coming years. - ✔✔B
✔✔QN=55 (20292) According to the realization principle, revenue from a sale of the
firm's products are recognized
a. when the products are shipped to the buyer.
b. when the buyer orders the goods.
c. when cash is realized from the sale of the products.
d. at the time of the sale. - ✔✔D
✔✔QN=56 (20284) Which of the following sections do annual reports typically contain?
a. financial summary related to the past year's performance
b. information about the company, its products, and its activities
c. audited financial statements, including limited historical financial data
d. All of these sections are included in the annual report. - ✔✔D
✔✔QN=57 (20297) Which one of the following is NOT true about goodwill?
a. It is an intangible asset.
b. It represents the value of all unrecorded assets acquired in a merger.
c. It equals the premium paid over the fair market value of the assets acquired in a
merger.
d. When goodwill appears on a firm's balance sheet, it reduces the firm's net worth by
that amount. - ✔✔D
✔✔QN=58 (20307) Which of the following is an income statement item?
a. Accumulated depreciation.
, b. Accrued taxes.
c. Retained earnings.
d. Selling and administrative expenses. - ✔✔D
✔✔QN=59 (20288) The assumption of arm's-length transaction states that
a. both parties to a transaction can act independently of each other and make
economically rational decisions.
b. both parties to a transaction must have had previous transactions.
c. one of the parties to the transaction is a bank that has full knowledge of the firm's
creditworthiness.
d. none of these - ✔✔A
✔✔QN=60 (20303) Which one of the following is NOT a cash flow from investing
activities?
a. buying and selling bonds or stock of other firms
b. buying or selling of land, buildings, and plant and equipment
c. cash payments of dividends to shareholders
d. issuing and paying out on insurance contracts - ✔✔C
✔✔QN=61 (20295) When prices are rising, valuing ending inventory using the FIFO
method rather than LIFO gives
a. inventory a higher value but lowers net income.
b. inventory a lower value and also lowers net income.
c. both inventory and net income a higher value.
d. inventory a lower value and net income a higher value. - ✔✔C
✔✔QN=62 (20328) Which one of the following statements is correct?
a. The lower the level of a firm's debt, the higher the firm's leverage.
b. The lower the level of a firm's debt, the lower the firm's equity multiplier.
c. The lower the level of a firm's debt, the higher the firm's equity multiplier.
d. The tax benefit from using debt financing reduces a firm's risk. - ✔✔B
✔✔QN=63 (20334) Which one of the following statements is NOT correct?
a. The DuPont system is based on two equations that relate a firm's ROA and ROE.
b. The DuPont system is a set of related ratios that links the balance sheet and the
income statement.
c. Both management and shareholders can use this tool to understand the factors that
drive a firm's ROE.
d. All of these are correct. - ✔✔D
✔✔QN=64 (20322) All but one of the following is true about quick ratios.
a. The quick ratio is calculated by dividing the most liquid of current assets by current
liabilities.
b. Service firms that tend not to carry too much inventory will see significantly higher
quick ratios than current ratios.
ANSWERS SURE A+
✔✔QN=42 (20298) The major disadvantages of market-value accounting include
a. the difficulty in estimating the current value for some assets.
b. the difficulty in applying some of the valuation models used to estimate market
values.
c. the resulting numbers are potentially open to abuse.
d. All of these are disadvantages of market-value accounting. - ✔✔D
✔✔QN=43 (20294) The conventional way of preparing a balance sheet is to list all
assets in the order of their
a. market value.
b. risk.
c. liquidity.
d. historical cost. - ✔✔C
✔✔QN=44 (20299) Which one of the following does NOT belong on an income
statement?
a. depreciation and amortization
b. goodwill
c. extraordinary items
d. nonrecurring expenses - ✔✔B
✔✔QN=45 (20300) Which one of the following are NOT all noncash items?
a. depreciation, deferred taxes, and prepaid expenses
b. depletion charges, taxes, and amortization
c. depletion charges, deferred taxes, and prepaid expenses
d. depreciation, amortization, and prepaid taxes - ✔✔B
✔✔QN=46 (20302) Cash flows from financing activities include all but one of the
following:
,a. cash payments on the principal of long-term debt
b. issuing and paying out on insurance contracts
c. cash purchases of treasury stock
d. cash proceeds from a bank loan - ✔✔B
✔✔QN=47 (20290) Dell Computer Corporation has receivables of $2.5 million and
inventory worth $1.8 million. The firm plans to borrow $2 million for working capital
purposes from Austin First National Bank. In evaluating the loan request, the bank
should place the most emphasis on
a. the matching principle.
b. the realization principle.
c. the going-concern assumption.
d. the assumption of arm's-length transactions. - ✔✔C
✔✔QN=48 (20305) Which one of the following is NOT true for a corporation?
a. Interest paid on bonds issued last year is tax deductible.
b. Common-stock dividends to be paid this year are not tax deductible.
c. Common-stock dividends to be paid this year will be tax deductible if the firm has a
net loss for the year.
d. Preferred stock dividends to be paid this year are not tax deductible. - ✔✔C
✔✔QN=49 (20291) The matching principle calls for the accountant of a firm to
a. identify an asset with each liability of the firm.
b. associate the revenue generated from a sale to the costs incurred to produce the
product.
c. match each item of inventory with the historical cost at which it was acquired.
d. none of these - ✔✔B
✔✔QN=50 (20296) When prices are falling, valuing inventory using the LIFO method
rather than FIFO gives
a. inventory a higher value but lowers net income.
b. inventory a lower value and also lowers net income.
c. both inventory and net income a higher value.
d. inventory a lower value and net income a higher value. - ✔✔C
✔✔QN=51 (20309) Which of the following best represents cash flows to investors?
a. Cash flow from operating activity, plus cash flow generated from net working capital.
b. Earnings before interest and taxes times 1 minus the firm's tax rate.
c. Net income, minus dividends paid to preferred stockholders.
d. Cash flow from operating activity, minus cash flow invested in net working capital,
minus cash flow invested in long-term assets. - ✔✔D
✔✔QN=52 (20306) Which of the following statements is not a limitation associated with
market valuation of balance sheet accounts?
,a. It can be difficult to identify the market value of an asset, particularly if there are few
transactions involving comparable assets.
b. The estimates of market value can involve complex financial modeling, and the
resulting numbers can be open to manipulation and abuse.
c. Marking to market provides decision makers with a better chance of making the
correct economic decision, given the information available.
d. Mark-to-market accounting can become inaccurate if market prices deviate from the
"fundamental" values of assets and liabilities. - ✔✔C
✔✔QN=53 (20287) Accounting standards prescribed by GAAP are important because
a. they make the financial statements of all firms standardized.
b. they allow one to examine a firm's performance over time.
c. they make it possible for management or analysts to compare the firm's performance
to that of other competitors.
d. all of these. - ✔✔D
✔✔QN=54 (20285) Annual reports are prepared by a firm's management to
a. communicate to shareholders the firm's failures in the previous year.
b. provide overview of the firm's financial and operating performance.
c. highlight the performance of its chief competitors.
d. provide a forecast of the economy in the coming years. - ✔✔B
✔✔QN=55 (20292) According to the realization principle, revenue from a sale of the
firm's products are recognized
a. when the products are shipped to the buyer.
b. when the buyer orders the goods.
c. when cash is realized from the sale of the products.
d. at the time of the sale. - ✔✔D
✔✔QN=56 (20284) Which of the following sections do annual reports typically contain?
a. financial summary related to the past year's performance
b. information about the company, its products, and its activities
c. audited financial statements, including limited historical financial data
d. All of these sections are included in the annual report. - ✔✔D
✔✔QN=57 (20297) Which one of the following is NOT true about goodwill?
a. It is an intangible asset.
b. It represents the value of all unrecorded assets acquired in a merger.
c. It equals the premium paid over the fair market value of the assets acquired in a
merger.
d. When goodwill appears on a firm's balance sheet, it reduces the firm's net worth by
that amount. - ✔✔D
✔✔QN=58 (20307) Which of the following is an income statement item?
a. Accumulated depreciation.
, b. Accrued taxes.
c. Retained earnings.
d. Selling and administrative expenses. - ✔✔D
✔✔QN=59 (20288) The assumption of arm's-length transaction states that
a. both parties to a transaction can act independently of each other and make
economically rational decisions.
b. both parties to a transaction must have had previous transactions.
c. one of the parties to the transaction is a bank that has full knowledge of the firm's
creditworthiness.
d. none of these - ✔✔A
✔✔QN=60 (20303) Which one of the following is NOT a cash flow from investing
activities?
a. buying and selling bonds or stock of other firms
b. buying or selling of land, buildings, and plant and equipment
c. cash payments of dividends to shareholders
d. issuing and paying out on insurance contracts - ✔✔C
✔✔QN=61 (20295) When prices are rising, valuing ending inventory using the FIFO
method rather than LIFO gives
a. inventory a higher value but lowers net income.
b. inventory a lower value and also lowers net income.
c. both inventory and net income a higher value.
d. inventory a lower value and net income a higher value. - ✔✔C
✔✔QN=62 (20328) Which one of the following statements is correct?
a. The lower the level of a firm's debt, the higher the firm's leverage.
b. The lower the level of a firm's debt, the lower the firm's equity multiplier.
c. The lower the level of a firm's debt, the higher the firm's equity multiplier.
d. The tax benefit from using debt financing reduces a firm's risk. - ✔✔B
✔✔QN=63 (20334) Which one of the following statements is NOT correct?
a. The DuPont system is based on two equations that relate a firm's ROA and ROE.
b. The DuPont system is a set of related ratios that links the balance sheet and the
income statement.
c. Both management and shareholders can use this tool to understand the factors that
drive a firm's ROE.
d. All of these are correct. - ✔✔D
✔✔QN=64 (20322) All but one of the following is true about quick ratios.
a. The quick ratio is calculated by dividing the most liquid of current assets by current
liabilities.
b. Service firms that tend not to carry too much inventory will see significantly higher
quick ratios than current ratios.
