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Mock exam number 6 - part 4 of 6

Question 55 of 120.


Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:

Cash: $725,000
Accounts receivable (net): $1,640,000
Inventories: $2,945,000
Total current assets: $5,310,000

Accounts payable: $1,236,000
Accrued liabilities: $831,000
Total current liabilities: $2,067,000
The board of directors of Milton met on May 5, 1997 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 1997 to shareholders of record as of May 15, 1997.

Assume that the only transactions that affected Milton during May 1997 were the dividend transactions. If the dividend declared by Milton had been a 10% stock dividend instead of a cash dividend, Milton's total shareholders' equity would have been

A. increased by the dividend declaration and decreased by the dividend distribution.
B. unchanged by either the dividend declaration or the dividend distribution.
C. increased by the dividend declaration and unchanged by the dividend distribution.
D. unchanged by the dividend declaration and decreased by the dividend distribution.

Question 56 of 120.

A firm's accountant has mistakenly overstated depreciation by 50 and understated accounts receivables by 35. The firm's tax rate is 40%. Then, which of the following is/are true?

I. Income is understated by 30.
II. Income is understated by 50.
III. Operating cash flow is overstated by 55.
IV. Operating cash flow is overstated by 85.

A. III and IV.
B. I and IV.
C. II and III.
D. I and III.

Question 57 of 120.

Which of the following is/are true?

I. An increase in inventories has a positive impact on cash flows.
II. An increase in receivables has a positive impact on cash flows.
III. Deferred taxes increase current cash balance.
IV. Utilization of tax loss carry-forwards has a positive impact on cash flows.

A. III & IV
B. II & III
C. I & II
D. I, II, III & IV

Question 58 of 120.

Which accounting principle is consistent with reporting financial results that can be compared with previous periods?
A. materiality
B. consistency
C. matching
D. adequate disclosure

Question 59 of 120.

Which of the following would not be reported as an extraordinary item?
A. Loss from a big strike.
B. uninsured loss from a flood
C. gain or loss from passing of a new law
D. gain or loss from early retirement of debt

Question 60 of 120.

A firm has a current ratio greater than 1.0. If the firm's ending inventory is understated by $3,000 and beginning inventory is overstated by $5,000, the firm's net income (before taxes) and current ratio will be:
A. Net Income: understated by $2,000; Current Ratio: too low
B. Net Income: overstated by $2,000; Current Ratio: too low
C. Net Income: understated by $8,000; Current Ratio: too low
D. Net Income: understated by $8,000; Current Ratio: too high

Question 61 of 120.

Beginning inventory of 50 units, purchased at $5
50 units purchased at $10
35 units purchased at $9
25 units sold at $15
70 units sold at $12
Tax rate = 40%

Given the above, the LIFO reserve at the end of the period is ________.

A. $185
B. $225
C. $165
D. $135

Question 62 of 120.

In a given period, the firm's beginning gross investment is 4,000 and ending gross investment is 12,000. The accumulated depreciation at the beginning was 800 and the ending balance in this account was 900. The firm uses straight-line depreciation. The average age of the firm's assets at the end of the period is ________.
A. 15 years
B. 5 years
C. 9 years
D. 13.3 years

Question 63 of 120.

Which of the following is/are FALSE?

I. Depreciation does not affect cash flows since it is a non-cash expense.
II. Depreciation does not affect the cash flow statement since it is an allocation of past investing expense.
III. Under US GAAP, companies can use different methods of depreciation for financial reporting and tax purposes.

A. I only.
B. I and III.
C. II and III.
D. I and II.

Question 64 of 120.

In a given period for a firm, the deferred tax assets decreased by 450. The pretax income of the firm was 10,000 and the taxable income was 5,550. The firm's tax rate is 40%. Then, the deferred liability changes by ______.
A. 2,220
B. 1,420
C. 1,330
D. 2,230

Question 65 of 120.

Reasons for variations in tax rates for similar companies would be all of the following except
A. different statutory tax rates in different jurisdictions.
B. tax holidays that some countries offer.
C. differences in taxable income.
D. permanent differences between financial and taxable income.

Question 66 of 120.

On January 3, 1996, Jupiter Company issued long-term bonds due January 3, 2001. The bond covenant includes a call provision that is effective if the firm's current ratio falls below 2:1. On June 30, 1996, the fiscal year-end for the company, its current ratio was 1.5:1. The bonds should be reported on the financial statements as a
A. long-term debt because the maturity date is January 3, 2001.
B. current liability if the covenant violation is not cured.
C. current liability, regardless of any action by the bondholder, because the company was in violation of the covenant on the balance sheet date.
D. long-term debt if it is reasonably possible that Jupiter can cure the covenant violation before the end of any allowed grace period.

Question 67 of 120.

When market interest rates increase, will a company that issued fixed-rate debt to the increase in rates most likely experience a(n):

economic loss? | change in the amount of debt recorded on the balance sheet?

A. No | No
B. No | Yes
C. Yes | No
D. Yes | Yes

Question 68 of 120.

Which of the following is/are true?

I. If the lease term exceeds 90% of the economic life, it's a capital lease.
II. If the present value of the MLPs exceeds 75% of the fair value, it is a capital lease.
III. The present value must be calculated at the lessee's incremental borrowing rate.
IV. If the lease does not transfer ownership at the end of the term, it's an operating lease.

A. I & II
B. I only
C. I, II, III & IV
D. III only

Question 69 of 120.

A firm's lease agreement reveals the following:

Lease term = 10 years
Economic life = 15 years
Annual payments = 100,000
Fair value of equipment = 1.3 million
Lessor's implicit rate = 9%
Lessee's incremental borrowing rate = 10%
The agreement contains no bargain purchase option.

The firm's interest expense in Year 1 is close to ________.

A. 0
B. 100,000
C. 61,500
D. 58,000

Question 70 of 120.

In a sale-leaseback transaction, the seller-lessee has retained the property. The gain on the sale should be recognized at the time of the sale-leaseback when the lease is classified as ________.
A. a capital lease
B. an operating lease
C. neither an operating nor capital lease
D. either an operating or capital lease

Question 71 of 120.

Magnum Steel had 1,250,000 shares outstanding on January 1. Its fiscal year is based on the calendar year. It purchased 25,000 shares of its own common on March 15th as treasury stock. It issued 13,500 stock options on June 1st to its senior executives. It implemented a stock split of 3:2 on August 1st and sold 75,000 new shares on December 31st. What was the average number of shares outstanding for the year for Magnum if stock options had an exercise price of 65 and the stock ended the year at the same price?
A. 1,837,500
B. 1,904,714
C. 1,845,313
D. 1,879,001

Question 72 of 120.

A company's current ratio is 2.0. If the company uses cash to retire notes payable that are due within one year, will this transaction most likely increase or decrease the company's current ratio and asset turnover ratio, respectively?

Current ratio | Asset turnover ratio

A. Increase | Increase
B. Increase | Decrease
C. Decrease | Increase
D. Decrease | Decrease