Ch. 7 Economics Study Set: Financing Activities Terms

1) All of the following are primary events that typically lead to changes in book value of shareholders' equity except:

Debtholders requiring firms to enter into debt covenants.

2) Which of the following is the typical tradeoff when issuing preferred stock?

The tradeoff between maintaining corporate control and creating a class of shareholders with preference in all asset distributions.

3) Which of the following is the date on which a company incurs a legal liability to distribute the dividend to owners of the stock?

date of declaration

4) Which of the following is the date on which a company determines the owners of the stock that will receive a dividend?

date of record

5) Which of the following is the date on which the dividend distribution occurs?

date of payment

6) Which kind of dividend is a return of the original investment by shareholders?

liquidating dividend

7) Which kind of dividend has an interest-bearing promise to pay dividends?

scrip dividend

8) Which kind of dividend typically pays dividends with additional shares of the corporation's stock?

stock dividend

9) Which is the date when a firm gives a stock option to employees?

grant date

10) Which is the date when employees elect to exchange the option and cash for shares of common stock?

exercise date

11) Which is the first date when employees can exercise their stock options?

vesting date

12) According to U.S. GAAP, which of the following provides the most reliable measure for fair value measurement?

Observable quoted market prices in active markets for identical assets or liabilities

13) All of the following are benefits of leasing except:

They have the ability to shift the tax benefits from depreciation and other deductions from a lessee to a lessor.

14) All of the following are correct regarding operating leases except:

Depreciation expense can be recorded on the books by the lessee

15) Porter Corporation

NOTE: The following multiple choice questions require present value information.

On January 1, Year 1, Porter Corporation signed a five-year non-cancelable lease for certain machinery. The terms of the lease called for:

1)

Price to make annual payments of $60,000 at the end of each year (starting on Dec. 31, Year 1) for five years. Porter must return the equipment to the lessor end of this period.

2)

The machinery has an estimated useful life of 6 years and no expected salvage value.

3)

Porter uses the straight-line method of depreciation for all of its fixed assets.

4)

Porter's incremental borrowing rate is 8%.

5)

The fair value of the asset at January 1, Year 1 is $275,000.

What accounting method should Porter use to account for the equipment lease?

Financial Lease method

16) Under which of the following conditions does the equipment lease qualify for financial lease accounting?

A, and B are correct answers.

17) All of the following are correct regarding treasury stock except:

Treasury Stock account is usual shown at the bottom of the consolidates statement of other comprehensive income.

18) Debit issuance is evidence by a bod indenture, promissory note, or lease agreement. In general, the documents will specify all of the above except

Schedule of amortization of hedging activities.

19) All of the following are examples of hybrid securities except

Mortgage

20) Which of the following is not one of the three criteria for recognition of a liability?

The firm is required to make a cash payment for the goods or services.

21) Which of the following is not one of the GAAP classifications for derivatives?

Asset-liability hedge

22) Derivatives are financial instruments that derive their value from changes in any of the following underlying securities except:

Percentage discount on accounts receivable

23) All of the following are elements of derivatives except

A derivative always require an initial investment

24) Under current U.S. GAAP, unrealized gains and losses from four balance sheet items are reported in accumulated other comprehensive income or loss. Which of the following is not one of the balance sheet items?

Deferred tax assets related to net operating loss carry forwards

25) ______ means that a company will buy back those receivables that are not collected by the company they are factored to. Select the best term to complete the sentence.

With recourse

26) U.S. GAAP and IFRS lease accounting rules which were passed in 2016 and became effective beginning in 2019, address "off balance sheet" ______ which were allowable under the old lease accounting rules. Select the best term to complete the sentence.

assets and liabilities

27) Convertible preferred stock has both the attributes of equity and ______.

debt

28) One criterion that must be satisfied for a firm to recognize an obligation is that the transaction or event giving rise to the obligation has already ______.

occurred

29) The first date at which employees can exercise their stock options is termed the ______.

vesting date

30) The acceptable method of accounting for stock options is the ______ method.

fair value

31) The ______ is the date a firm gives a stock option to employees.

grant date

32) Under the fair value method of accounting for stock options, firms must value stock options on the date of ______.

grant

33) Derivative instruments acquired to hedge exposure to variability in expected future cash are ______ hedges.

cash flow.

34) Gains and losses on cash flow hedges affect earnings ______ than those on fair value hedges.

later

35) When firms use derivatives effectively to manage risks, the net gain or loss each period should be relatively ______.

small

36) Derivative instruments acquired to hedge exposure to changes in the fair value of an asset or liability are ______ hedges.

fair value

37) All of the following are correct regarding stock dividends except:

Stock dividends do not involve distribution of additional shares to current shareholders

38) When a company adopts new accounting rules or makes change between existing accounting rules, it should use a retrospective approach to reflect that change in the financial statements. Under this approach company:

Remeasures the asset and liabilities under the new standard as of the beginning of the period and adjust the beginning balance of retained earnings

39) Outstanding debt can be reduced by all of the following except:

Conversion from current debt into long-term debt