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Multiple Choice and Computation: Financial Management

1. 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. You are examining the common size income statements of two companies, A and B, for 2015. 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 had the highest gross margin ratio.
C) Which company utilized its assets most efficiently.
D) Which company had the biggest increase in sales from the prior year.

3. 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

4. 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) will arise if contingent liabilities are reported

5. Under Statement of Financial Concept 8, the two fundamental qualities of accounting information to make it useful for decision making are:
A) Consistency and Comparability
B) Relevance and Reliability
C) Relevance and Faithful Representation
D) Comparability and Verifiability

6. When considering cash versus accrual accounting, which of the following statements is correct?
A) both cash flows and net income can be manipulated
B) neither cash flows nor net income can be manipulated
C) net income cannot be manipulated but cash flows can
D) cash flows cannot be manipulated but net income can be manipulated

7. 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

8. 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) Sell property, plant, or equipment for cash.
B) Making cash payments on accounts payable.
C) Paying off long-term debt.
D) Leasing equipment under a long-term capital lease agreement.

9. 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 due to an impairment, what is 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

10. 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 by AVPR will be to
A) improve operating performance ratios of AVPR.
B) have a lesser cost of financing to AVPR than borrowing funds from the credit markets
C) have AVPR recognize gains on the sale of their A/R to the SPE.
D) have AVPR issue debentures.

11. In addition to the internal operating activities that affect a company's ratios, which of the following can also affect their ratios?
A) economic events
B) management policies
C) accounting methods
D) all of the above (a, b, and c) can affect a company's ratios

12.The Will Company reports the following information for their 2016 year-end:
2016 2015
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

Required: Calculate the dividend payout ratio for 2016.

13 Cleveland Company reports the following information as of 12/31/2014:

* Preferred Stock - 10% cumulative preferred stock, par value $100, one-year of dividends in arrears; 20,000 shares authorized, 10,000 shares issued; total par $1,000,000.
* Common Stock - 500,000 shares authorized, 40,000 issued and outstanding; $2 par value, total par $80,000; additional paid-in-capital common stock, $450,000.
* Retained Earnings - $2,000,000.

13 (a) Calculate the book value per share of common stock on 12/31/2014.

13 (b) Calculate the book value per share of preferred stock on 12/31/2014.

14. Part A - 10 Points
On January 1, 2016, Hurt Corporation acquired a capital lease that is carried on its books
at its present value of $100,000 (discounted at 12%). Its' annual lease payment is $15,000 and the effective interest method is used. What is the amount of interest expense which will be reported for the calendar years ending on December 31, 2016 and December 31, 2017 from this lease?

15 Part A - 10 Points
The following information is given for Control Furniture Company for the years 2015 and 2016:

Control Furniture Company
(Figures in thousands of dollars)

December 31 2015 2016

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

The income tax rate is 34%. Whichever method of inventory valuation used for
financial reporting is also used for tax purposes.

(a) Given the financial information presented above what would be the effect (increase/decrease and amount) on cash in 2015 of converting the company from LIFO to FIFO? Why would this increase/decrease occur?

(b) Given the financial information presented above what would be the effect (increase/decrease and amount) on net income before taxes in 2016 of converting the company from LIFO to FIFO? What would cause this increase/decrease? Assume that LIFO was used in 2015.

16. Financial Statements of ABC Corp. indicates that ending inventory levels in 2014 and 2015 were $200,000 and $350,000 respectively. Net Sales for 2014 and 2015 were $5,000,000 and $5,500,000 respectively. Gross margin (gross profit) for 2014 and 2015 were $3,100,000 and $3,300,000 respectively. Purchases are recorded using the net method and purchase discounts lost are expensed. Purchase discounts lost in 2014 and 2015 were $50,000 and $75,000 respectively. Calculate the amount of purchases for the ABC Corporation in the year 2015.

Solution Summary

THe right answers have been highlighted. The computations have been provided for the questions wherever necessary

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