AC EXAM

1. What does preferred stock provide?
Priority in dividends and liquidation, but usually no voting rights

2. What kinds of intangibles are amortized?
Those with finite lives like patents and copyrights

3. What is the face value of a bond?
The amount repaid at maturity

4. When is an expenditure expensed immediately?
If it's routine maintenance or a small repair

5. What is the legal protection for creative works?
Copyright

6. What are the three dividend dates?
Declaration, Record, Payment

7. What is the biggest disadvantage of a corporation?
Double taxation

8. What is treasury stock?
Company’s own stock that has been repurchased

9. What is goodwill?
Excess paid over fair value during acquisition; indefinite life, not amortized

10. What does debt-to-equity ratio measure?
Financial leverage

11. What does EPS measure?
Earnings attributable to each common share

12. What is the journal entry for issuing bonds at face?
Dr Cash; Cr Bonds Payable

13. Are trademarks amortized?
No, if indefinite life

14. What is the formula for EPS?
(Net Income – Preferred Dividends) ÷ Weighted Avg. Common Shares

15. Is goodwill amortized?
No, but tested for impairment

16. Are internally developed intangibles capitalized?
Generally no, they are expensed

17. What does current ratio measure?
Short-term liquidity

18. What does the statement of stockholders’ equity show?
Changes in equity accounts over the period

19. What are one-time items?
Nonrecurring items like lawsuit gains or natural disasters

20. What are persistent earnings?
Ongoing, repeatable income from core operations

21. What goes in the stockholders’ equity section?
Common stock, preferred stock, APIC, retained earnings, treasury stock

22. What is the journal entry for bond interest payment?
Dr Interest Expense; Cr Cash

23. What does the horizontal analysis show?
Dollar and % change from one period to the next

24. What is the journal entry on declaration date for dividends?
Dr Retained Earnings; Cr Dividends Payable

25. What is the formula for amortization expense?
(Cost – Residual Value) ÷ Useful Life

26. What is the key feature of a liability?
A present obligation from a past event to be settled in the future

27. What is equity financing?
Raising money by issuing stock

28. What does common stock provide?
Ownership, voting rights, and residual claim on assets

29. What is the biggest advantage of a corporation?
Limited liability

30. What does vertical analysis show?
Each line as % of a base: sales (I/S) or assets (B/S)

31. What happens if an asset is sold for more than book value?
A gain is recorded

32. What costs are included in the capitalized cost of land?
Purchase price, legal fees, title transfer, clearing, grading

33. Are land improvements depreciated?
Yes

34. Give three examples of land improvements.
Fencing, parking lots, lighting

35. What is included in the cost of a building?
Purchase price, legal fees, renovation costs

36. What costs are included in equipment capitalization?
Purchase price, shipping, installation, testing, insurance in transit

37. Are natural resources depreciated or depleted?
Depleted

38. What is the legal life of a patent?
20 years

39. Are patents amortized?
Yes

40. How long does a copyright last?
Life of creator + 70 years

41. Can trademarks be renewed indefinitely?
Yes, every 10 years

42. When should an expenditure be capitalized?
If it extends useful life or increases capacity

43. Is an oil change capitalized or expensed?
Expensed

44. Is a building renovation capitalized or expensed?
Capitalized

45. What is the formula for straight-line depreciation?
(Cost – Residual Value) ÷ Useful Life

46. What is the concept behind double declining balance?
Accelerated depreciation: 2 × straight-line rate × book value

47. When is activity-based depreciation used?
When asset use varies from year to year

48. What is the formula for depreciation per unit?
(Cost – Residual Value) ÷ Estimated Units

49. How do you calculate depreciation expense using the activity method?
Depreciation per unit × Units used in the year

50. What are the steps to record asset disposal?

1. Record depreciation

2. Remove asset and accumulated depreciation

3. Record cash received

4. Record gain or loss

51. What is the journal entry for a loss on disposal?
Dr A/D, Dr Cash, Dr Loss; Cr Asset

52. What is debt financing?
Borrowing money to be repaid with interest

53. Are interest payments on debt tax deductible?
Yes

54. What is unearned revenue?
Cash received before providing goods/services; a liability

55. What is the journal entry for earning unearned revenue?
Dr Unearned Revenue; Cr Revenue

56. What is the coupon rate on a bond?
The stated interest rate used to calculate interest payments

57. What is the journal entry for retiring bonds at maturity?
Dr Bonds Payable; Cr Cash

58. Is treasury stock an asset?
No, it’s a contra equity account

59. What is the journal entry when repurchasing stock?
Dr Treasury Stock; Cr Cash

60. What is the journal entry for dividend payment?
Dr Dividends Payable; Cr Cash

61. What is the formula for retained earnings?
Beginning RE + Net Income – Dividends

62. What does return on assets (ROA) measure?
Efficiency in using assets to generate net income

63. What does net profit margin measure?
Net income as a % of sales

64. What is the times interest earned ratio?
(Net Income + Interest + Taxes) ÷ Interest Expense

65. What does a high debt-to-equity ratio mean?
The company is more leveraged and potentially riskier

66. What are market value ratios used for?
To assess investor expectations and market valuation

67. What does price-to-earnings (P/E) ratio indicate?
Growth expectations—higher P/E may mean more optimism

68. Why do analysts adjust net income for one-time items?
To better assess the company’s core, repeatable earnings

69. Why is EPS important to investors?
It measures profitability per share of common stock

70. How do you increase EPS (even artificially)?
Repurchase shares to reduce denominator