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Types of Interest in Accounting

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1. The concept of compound interest refers to:
A) earning interest on the original investment.
B) payment of interest on previously earned interest.
C) investing for a multi-year period of time.
D) determining the APR of the investment.

2. When an investment pays only simple interest, this means:
A) the interest rate is lower than on comparable investments.
B) the future value of the investment will be low.
C) the earned interest is non taxable to the investor.
D) interest is earned only on the original investment.

3. Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?
A) $ 952
B) $1,600
C) $1,728
D) $3,973

4. How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for three years?
A) $107.69
B) $133.10
C) $134.49
D) $313.84

5. How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment one year from today, at an interest rate of 12%?
A) $3,604,78
B) $3,746.25
C) $4,037.35
D) $4,604.78

6. A stock's par value is represented by:
A) the maturity value of the stock.
B) the price at which each share is recorded.
C) the price at which an investor could sell the stock.
D) the price received by the firm when the stock was issued.

7. Capital Budgeting is the process of evaluating:
A) short-term investment alternatives for the current assets.
B) the long-term capital rationing process.
C) the costs associated with an IPO.
D) the CAPM formula.

8. Which of the following equity concepts would you expect to be least important to a financial analyst?
A) Par value per share
B) Additional paid-in capital
C) Retained earnings
D) Net common equity

9. An increase in a firm's financial leverage will:
A) increase the variability in earnings per share.
B) reduce the operating risk of the firm.
C) increase the value of the firm in a non-MM world.
D) increase the WACC.

10. Financial risk refers to the:
A) risk of owning equity securities.
B) risk faced by equityholders when debt is used.
C) general business risk of the firm.
D) possibility that interest rates will increase.

11. Ignoring taxes, a firm's weighted-average cost of capital is equal to:
A) its expected return on assets.
B) its expected return on equity.
C) the sum of expected return on equity and expected return on debt.
D) its expected return on assets times the debt-equity ratio.

12. A firm has an expected return on equity of 16% and an after-tax cost of debt of 8%. What debt-equity ratio should be used in order to keep the WACC at 12%?
A) .50
B) .75
C) 1.00
D) 1.50

13. The following are all methods for evaluating capital projects except:
A) Payback
B) NPV
C) CAPM
D) IRR

14. The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent is:
A) $77
B) $200
C) $518
D) $50

15. In leasing, which of the following is true:
A) Leasing always involves more risk than buying
B) Leasing always costs more than buying
C) Leasing allows the deduction of depreciation by the lessee
D) Leasing allows the deduction of depreciation by the lessor

16. Which item is not part of the Initial Public Offering process:
A) Meet throughout the process with the media
B) Select the underwriters
C) Register the stock with the Securities and Exchange Commission
D) Distribute a prospectus

17. In the IPO process, the "spread" refers to:
A) The underwriting firm's payment for services
B) Internally generated funds
C) Prospectus
D) None of the above

18. A financial plan can be used to project all except the following:
A) Profitability
B) Cash Flow
C) Market competitiveness
D) Asset utilization

19. A merger tactic that buys shares directly from a shareholder is called:
A) Tender offer
B) Poison pill
C) Leveraged buyout
D) Shark repellent

20. Which of the following merger motivations is least compelling from a financial perspective:
A) Horizontal Integration
B) Vertical Integration
C) Diversification
D) Use surplus funds

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Government and Nonprofit Accounting: 41 MCQ

1. A primary characteristic that distinguishes governmental entities from business entities is
a) The need to generate revenues equal to or in excess of expenditures/expenses.
b) The importance of the budget in the governing process.
c) The need to provide goods or services.
d) The correlation between revenues generated and demand for goods or services.

2. A primary characteristic that distinguishes not-for-profit entities from business entities is
a) The need to generate revenues equal to or in excess of expenditures/expenses.
b) The importance of the budget in the governing process.
c) The need to provide goods or services.
d) The correlation between revenues generated and demand for goods or services.

3. Which of the following is NOT a reason why users need governmental and not-for-profit external financial statements?
a) To determine the ability of the entity to meet its obligations.
b) To determine the ability of the entity to continue to provide services.
c) To predict future fiscal solvency.
d) To evaluate the overall profitability of the entity.

4. Which of the following is an objective of financial reporting by governmental entities as established by GASB?
a) Financial reporting should assist users in assessing the management skills of top management.
b) Financial reporting should assist users in determining if current-period revenues were sufficient to pay for current-period services.
c) Financial reporting should assist users in evaluating the cash management operations of the governmental entity for the year.
d) Financial reporting should assist users in assessing whether the government provided appropriate services to its constituents in the current year.

5. A city receives a donation from a citizen who specifies that the principal must be invested and the earnings must be used to support operations of a city-owned recreational facility. The principal of this gift should be accounted for in which of the following funds?
a) Trust fund.
b) Special revenue fund.
c) Permanent fund.
d) Internal service fund.

6. The state collects a gasoline tax that must be used to support highway construction and maintenance. The gasoline tax revenue should be accounted for in which of the following funds?
a) General fund.
b) Special revenue fund.
c) Debt service fund.
d) Internal service fund.

7. Under the GASB Statement No. 34 reporting model for governmental entities, which of the following is required?
a) Only one set of financial statements, prepared on the full accrual basis of accounting.
b) Only one set of financial statements, prepared on the modified accrual basis of accounting.
c) Two sets of financial statements, one that views the government as a collection of separate funds and reports using the current financial resources measurement focus and modified accrual basis of accounting for governmental funds and one that views the government as a whole by combining all governmental activities in one column and all business-type activities in another column using the full accrual basis of accounting for both columns.
d) Two sets of financial statements, one that views the government as a whole using the current financial resources measurement focus and modified accrual basis of accounting and one that views the government by function and combines all governmental activities in one column and all business-type activities in another column using the full accrual basis of accounting for both columns.

8. The financial reporting entity is composed of
a) The primary government.
b) The primary government and all legally separate governments for which the primary government is financial accountable.
c) The primary government and all legally separate organizations for which the primary government is financially accountable.
d) The primary government, all legally separate organizations for which the primary government is financially accountable and any organizations whose omission would cause the primary governments financial statements to be misleading or incomplete.

9. The State has a legally separate State Building Authority which has a board appointed by the Governor. The Authority issues debt in its own name, holds title to buildings in its own name, and leases its building exclusively to the State. The Authority would be considered a(n)
a. Primary government.
b. Component unit.
c. Related organization.
d. Affiliated organization.

10. The introductory section of a CAFR includes which of the following?
a) Auditor's opinion on the basic financial statements.
b) Basic financial statements.
c) Letter of Transmittal.
d) MD&A and other RSI.

11. The financial section of a CAFR includes:
a) MD&A and other RSI.
b) Statistical section.
c) Letter of Transmittal.
d) GFOA certificate of achievement.

12. Which of the following bases of accounting has been established by GASB for use in the preparation of the general fund budget?
a) Cash basis.
b) Modified accrual basis.
c) Accrual basis.
d) None of the above.

13. To close Encumbrances at the end of the year which of the following entries should be made?
a) Debit Encumbrances; Credit Fund Balance.
b) Debit Reserve for Encumbrances; Credit Encumbrances.
c) Debit Fund Balance; Credit Encumbrances.
d) No closing entry needed.

14. To close Reserve for Encumbrances at the end of the year which of the following entries should be made?
a) Debit Reserve for Encumbrances; Credit Fund Balance.
b) Debit Reserve for Encumbrances; Credit Encumbrances.
c) Debit Fund Balance; Credit Reserve for Encumbrances.
d) No closing entry needed.

15. Why would a government be more likely than a not-for-profit organization to integrate its budget into its accounting system?
a) Because the amount of expenditures are likely to be greater.
b) Because the penalties for exceeding budgeted expenditures are more severe.
c) Because governments have more sophisticated accounting systems than not-for-profit organizations.
d) Governments are NOT more likely than not-for-profits to formally integrate their budget into their accounting system.

16. As used in governmental accounting, expenditures are decreases in
a) Net Assets.
b) Net Financial Resources.
c) Net Cash.
d) Net Economic Resources.

17. Other financing sources/uses would appear on which of the following statements?
a) Balance sheet.
b) Statement of Revenues, Expenditures, and Changes in Fund Balance.
c) Cash flow statement.
d) None of the above.

18. In which fund type would a governmental entity's capital projects fund be found?
a) Governmental fund type.
b) Proprietary fund type.
c) Fiduciary fund type.
d) Governmental activities.

19. In which fund type would a governmental entity's debt service fund be found?
a) Governmental fund type.
b) Proprietary fund type.
c) Fiduciary fund type.
d) Governmental activities.

20. A City issued bonds for the purpose of financing a major capital improvement. Which fund is the most appropriate fund in which to record the receipt of the bond proceeds?
a) General Fund.
b) Special Revenue Fund.
c) Capital Projects Fund.
d) Debt Service Fund.

21. Harbor City issued 6% tax-exempt bonds and used the proceeds to acquire federal government securities yielding 7%. After paying the interest on the tax-exempt bonds, the City cleared 1%. This is an example of
a) An illegal act.
b) Poor fiscal management.
c) Arbitrage.
d) Debt refunding.

22. As used in governmental accounting, interperiod equity refers to a concept of
a) providing the same level of services to citizens each year.
b) measuring whether current year revenues are sufficient to pay for current year services.
c) levying property taxes at the same rate each year.
d) requiring that general fund budgets be balanced each year.

23. For fund financial statements, the measurement focus and basis of accounting used by governmental fund types are
a) current financial resources and modified accrual accounting.
b) economic resources and modified accrual accounting.
c) financial resources and full accrual accounting.
d) economic resources and full accrual accounting.

24. The modified accrual basis of accounting is used in presenting the fund financial statements of the governmental funds because
a) it is the superior method of accounting for the economic resources of any entity.
b) it provides information as to the extent the entity achieved interperiod equity.
c) it is budget oriented while facilitating comparisons among entities.
d) it results in accounting measurements based on the substance of transactions.

25. As used in defining the modified accrual basis of accounting, the term "available" means
a) received in cash.
b) will be received in cash within 60 days of year-end.
c) collection in cash is reasonably assured.
d) collected within the current period or expected to be collected soon enough thereafter to be used to pay liabilities of the current period.

26. Under the modified accrual basis of accounting, derived nonexchange revenues are recognized when
a) they are earned.
b) they are measurable and available to finance the expenditures of the current period.
c) the underlying exchange transaction occurs.
d) the underlying exchange transaction occurs and they are measurable and available to finance the expenditures of the current period.

27. Under the accrual basis of accounting, property tax revenues are recognized
a) when they are received in cash.
b) in the year for which they were levied.
c) in the year for which they were levied and when collection in cash is reasonably assured.
d) they are available to finance expenditures of the fiscal period.

28. Under the modified accrual basis of accounting, the amount of property tax revenues that should be recognized by a governmental entity in the current year related to the current year levy will be
a) the total amount of the levy.
b) the expected collectible portion of the levy.
c) the portion of the levy collected.
d) the portion of the levy collected in the current year or within sixty days of the fiscal period.

29. General long-term debt of a governmental entity includes
a) All future financial obligations.
b) All future financial obligations that result from past transactions.
c) All future financial obligations that result from past transactions for which the government has already received a benefit.
d) All future financial obligations that are backed by the government's general credit and revenue raising power and that result from past transactions for which the government has already received a benefit.

30. When the proceeds of long term debt are reported in governmental fund financial statements
a) They are reported only as an increase in liabilities in the funds.
b) They are reported only as revenues in the funds.
c) They are reported only as an other financing source?debt proceeds.
d) They are reported only as an other financing use?debt proceeds.

31. In governmental fund financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the fund financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.

32. In the government-wide financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the government-wide financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.

33. Southwest City enters into a lease agreement that contains a nonappropriation clause. The clause
a) Has been held by courts in 26 states to effectively cancel the lease.
b) Stipulates that the yearly lease payment must be appropriated by the City Council each year.
c) Prohibits the City from replacing leased property with similar property.
d) Permits the City to lease at lower rates than would be possible without the presence of the clause.

34. Industrial development bonds are issued in the name of a government with the proceeds used to attract private businesses to a community. Which of the following is a true statement about industrial development bonds?
a) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government backs the bonds in the event of default by the private corporation.
b) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government does not back the bonds in the event of default by the private corporation.
c) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the government out of the additional tax revenues received from the private corporation.
d) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the private corporation in lieu of property taxes.

35. Which of the following is a valid reason for governmental entities to engage in business-type activities?
a) The entity does not want control over the activity.
b) The activity competes with general government activities.
c) The entity does not want to subsidize the activity.
d) The entity can provide the services more cheaply or efficiently than can a private firm.

36. Which of the following is a valid argument for separate accounting principles for proprietary activities?
a) Two separate measurement focuses and bases for accounting within the same set of financial statements are confusing.
b) There are no clear-cut distinctions between business and non-business activities.
c) The measurement focus on all economic resources is more consistent with the GASB's objectives that financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services.
d) Surveys of statement users indicate that information on depreciation is not of high priority to governmental decision makers.

37. Which of the following is a key reason for using business-type accounting to account for proprietary fund activities?
a) The modified accrual basis of accounting captures all the resources and obligations associated with an activity.
b) Depreciation is not recognized in business-type accounting in governments and surveys of statement users indicate that information on depreciation is not of high priority to governmental decision makers.
c) The measurement focus on all economic resources is more consistent with the GASB's objectives that financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services.
d) Business-type accounting facilitates comparisons with governmental activities.

38. A proprietary fund of a governmental entity has donor-restricted assets on its balance sheet. Which of the following best describes where and how those assets will generally be displayed?
a) In a separate restricted asset category on the statement of net assets.
b) Intermingled with other assets on the statement of net assets.
c) Intermingled with other assets on the statement of net assets but footnoted.
d) In a separate restricted fund.

39. Over the long run, governmental internal service funds are intended to
a) Generate revenues sufficient to cover the full costs of providing services.
b) Generate revenues sufficient to cover the full costs of providing services and to earn a profit.
c) Generate revenues sufficient to cover the current operating costs of providing services.
d) Generate revenues sufficient to cover the current operating costs of providing services and to earn an operating profit.

40. Which of the following factors are considered by rating agencies when considering revenue bond debt?
a) Tax base.
b) Assessed valuation of property in jurisdiction.
c) History of rates and rate increases.
d) Demographics.

41. The reporting of activities by an Enterprise Fund is most likely optional if:

a) Fees are charged to external users for goods or services.
b) The entity's pricing policies set fees and charges to recover costs.
c) The entity is financed with debt, and the only security is a pledge of the activity's net revenues from fees and charges.
d) The entity's costs are legally required to be recovered from fees and charges.

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