Finance - Quiz 1 review with answers

Raising money and investing money is a function of the:

a. controller

b. treasurer

c. accounting department

d. all of the above

b. treasurer

Why: the accounting department creates the Financial Statements (FLSs). The treasurer of a school club, for example, must raise money to support the club’s cause.

Which of the following is/are effective in controlling the agency problem?

a. tie a large part of management’s compensation to company profit

b. Trust the management

c. Board of directors

d. both a and c

d. both a and c

Why: management compensation will fall if the company does not own up to its actions; the board of directors oversee everyday operations.

Which of the following is not included in the calculation of current assets?

a. accruals

b. accounts receivable

c. allowance for doubtful accounts

d. cash

e. inventory

a. accruals

Why: it collects over time; consider: you are ‘accruing’ or building up interest

Do the math:

Wessel Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 per unit each.

Cost of goods sold will be 40% of the sale price.

Depreciation expense will be $3,000, interest expense $2,500, and other expenses will be $4,000.

Wessel’s tax rate is 20%. What will Wessel Corp’s net income be for 2005?

a. $3,500

b. $6,800

c. $14,000

d. $16,400

c. $14,000

Why:

45,000 [1,000 * $45]

(18,000) [45,000 * .4]

= 27,000

(3,000)

= 24,000

(2,500)

= 21,500

(4,000)

= 17,500 * .2 = 3,500

(3,500)

= 14,000

Do the math:

The following items are components of a firm’s balance sheet. How much is the firm’s current assets?

Cash $2,000

Long-term debt $10,000

Inventory $12,000

Owners’ equity $62,000

Accounts payable $8,000

Accruals $1,500

Accumulated depreciation $6,000

Accounts receivable $14,000

a. $26,000

b. $27,500

c. $28,000

d. $16,000

e. None of the above

c. $28,000

Why:

Cash + Inventory + Accounts Receivable

= $2,000 + 12,000 + 14,000

Long-term Debt - Liability

Owner’s Equity - Equity

Accounts Payable - Liability

Accruals - sort of like using a credit card. You can credit/charge up to a certain amount, but it eventually needs to be paid back

Accumulated Depreciation - contra asset

Which of the following does not appear on the income statement?

a. Cost of Goods Sold

b. Depreciation Expense

c. Accumulated Depreciation

d. Earnings Before Interest and Tax

e. Gross Margin

c. Accumulated Depreciation

Why: it grows over time, and is considered a contra asset

Which of the following does not appear on the right hand side of the balance sheet?

a. current liabilities

b. accounts receivable

c. retained earnings

d. long term debt

e. total equity

b. accounts receivable

Why:

Assets = Liabilities + Equity

current liabilities - L

retained earnings - E

long-term debt - L

total equity - E

accounts receivable - A (payment yet to be received, but the service was performed)

The income statement is intended to inform the reader of:

a. the overall financial condition of the firm at a point in time

b. how much the firm has earned during an accounting period

c. how much income has been distributed to shareholders

d. the cash flow generated by the firm over a period of time

b. how much the firm has earned during an accounting period

Why:

overall financial condition of the firm at a point in time → balance sheet

how much income has been distributed to shareholders → stockholder’s equity, also on balance sheet

the cash flow generated by the firm over a period of time → ‘cash flow’ automatically thinking of the Cash Flow Statement

Do the math:

The following items are components of a traditional balance sheet. How much is the total equity of the firm?

Long-term debt $12000

Common stock 15,000

Accounts payable 8,000

Paid in excess 6,000

Accrued interest payable 1,500

Plant and equipment 60,000

Retained earnings 28,000

Accounts receivable 22,000

a. $62,000

b. $49,000

c. $93,000

d. $97,000

b. $49,000

Why:

Common stock + Paid in excess + Retained Earnings

= 15,000 + 6,000 + 28,000

• paid in excess is essentially paying two months rent when you usually go to pay one month at a time, not having to worry about the next month already.

Long-term debt - L

Accounts payable - L

Accrued interest payable - L

Plant and equipment - A

Accounts receivable - A

Do the math:

The following items are components of a traditional balance sheet. How much are the total assets of the firm?

Plant and equipment $42,000

Common stock 15,000

Cash 8,000

Inventory 21,000

Bad debt reserve 6,000

Paid in excess 6,000

Accumulated depreciation 28,000

Accounts receivable 22,000

a. $87,000

b. $65,000

c. $59,000

d. $93,000

c. $59,000

Why:

P&E + Cash + Inventory + A|R - bad debt - depreciation

= 42,000 + 8,000 + 21,000

= 71,000 - 6,000

= 65,000 - 28,000

= 37,000 + 22,000

= $59,000

Accumulated depreciation - value decreases as soon as it’s used for the first time; negative value is added