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Bill, Financial Advisor
Category: Finance
Satisfied Customers: 3081
Experience:  EA, CEBS - 34 years experience providing financial advice
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Debentures have which one of the following ...

Customer Question

Debentures have which one of the following characteristics?
a.     they have no specific due date on which they must be repaid
b.     they are more like common stock than like debt
c.     they have no specific collateral backing them up
d.     they are issued by very small firms in an industry
Submitted: 6 years ago.
Category: Finance
Expert:  Bill replied 6 years ago.

The answer is c. Answers a., b. and d. are incorrect.


Customer: replied 6 years ago.
Reply to Bill's Post: ____     1.     The relationship of a firm's fixed costs relative to its variable costs yields information about its
a.     degree of financial leverage
b.     degree of operating leverage
c.     degree of earnings leverage
d.     degree of both financial and operating leverage

____     2.     Solo Company has a higher ratio of fixed to variable costs than Luna Company. The sales revenues of both companies increased by 10%. If the firms are similar in size and product mix, you would expect Solo Company's
a.     expenses to increase more rapidly than Luna Company's
b.     expenses to decrease while Luna Company's increase
c.     net income to decrease while Luna Company's increase
d.     net income to increase more rapidly than Luna Company's

____     3.     Which of the following should be classified on the balance sheet as short-term (current) liabilities?

                                         &nbs p;                      That portion of a 5-year
30-year bonds due within one                    insurance policy to be
year of the balance sheet date               consumed in the coming year
a.                Yes                          ;                              Yes
b.                Yes                          ;                              No
c.                No                                                         Yes
d.                No                                                          No

____     4.     Styles Ventures sold a $50,000 issue of bonds. The coupon rate was 10% and the market rate was 8%. The present value of a $1 annuity for ten periods at 8% is $6.7101. The present value of $1 for ten periods at 8% is $0.4632. The selling price of these bonds should be
a.     $47,740
b.     $50,000
c.     $52,830
d.     $56,710

____     5.     At the date of a bond issue, the effective rate of interest is significantly above the stated rate of interest. If the bond has a $1,000 face value, the proceeds from the issue would be
a.     more than $1,000
b.     less than $1,000
c.     $1,000
d.     $0

____     6.     Javelin Sports sold $50,000 face value of ten-year, 8% bonds payable for $61,583 on January 1, 2007 when the market interest rate was 5%. What amount of interest expense will Javelin report for calendar year 2007?
a.     $4,927
b.     $4,000
c.     $3,500
d.     $3,079

____     7.     On January 1, 2007, Beta Company issued 5-year bonds having a face value of $100,000. The bonds pay 7% interest annually and were sold for $94,706 to yield 8.34% interest. Beta’s 2007 income statement should report what amount for interest expense on these bonds?
a.     $6,630
b.     $7,000
c.     $7,898
d.     $8,340

____     8.     Identify the correct statement below:
a.     contingencies are always reported in the liability section of the balance sheet
b.     commitments are disclosed on the income statement because they affect net income but not cash flow
c.     capital leases are accounted for as if the leased assets had been purchased
d.     the expense associated with operating leases is reported on the cash flow statement under the category of investing activities

____     9.     Soft Rock, Inc. sold 4,000 shares of its treasury stock to a new investor. Which of the following increased?

Authorized Stock   Issued Stock
a.           Yes                 Yes
b.           Yes                 No
c.           No                  Yes
d.           No                  No

____     10.     Fletcher Company commenced business on January 1, 2007 but has never declared or paid any dividends. The following are account balances after closing the books at December 31, 2009:

Cash     $18,000
Common stock, $1 par     1,000
Paid-in capital in excess of par value     49,000
Preferred stock, $100 par, 10%, cumulative     50,000
Retained earnings     75,000

Net income during 2009 totaled $30,000 and the Board of Directors wishes to distribute a total of $15,000 in cash dividends. The common stockholders will receive what amount per share?
a.     $15
b.     $11
c.     $ 3
d.     $ 0

____     11.     Which of the following must be used when analyzing the capital structure of a firm?
a.     long-term assets
b.     Liabilities
c.     current assets
d.     Expenses

____     12.     The use of financial leverage always has which of the following effects on a company's financial statements?
a.     increased revenue
b.     increased assets
c.     increased stockholders' equity
d.     increased liabilities

22 when return on equity is low, financial leverage makes it lower. When return on equity is high, financial leverage
makes it higher.

____     13.     To achieve the benefits from the use of high financial leverage, a company needs to generate a
a.     higher level of net income
b.     larger amount of assets
c.     larger amount of liabilities
d.     larger amount of stockholders' equity

____     14.     Given below is financial information about two firms as of the end of a recent accounting period:

Bravo Company:          Easy Company:
Assets     $12,180          Assets     $ 18,659
Liabilities     5,608          Liabilities     7,703
Equity     6,572          Equity     10,956
Net Income     906          Net Income     1,743

Which of the following can be determined from the above information?
a.     Bravo Company has a higher dividend payout ratio than Easy Company
b.     Bravo Company employs more financial leverage than Easy Company
c.     Bravo Company has a higher current ratio than does Easy Company
d.     Bravo Company's common stock will sell for a higher price than Easy Company's

____     15.     Which of the following is a TRUE statement about a company's use of financial leverage?
a.     potential increased returns may be available to the common stockholders
b.     Firms in industries with low margins usually have high levels of financial leverage so as to magnify the return to common stockholders
c.     financial leverage is usually the highest in firms having the largest portion of assets invested in current assets
d.     the higher the volatility of earnings, the greater is the likelihood that a firm employs significant amounts of financial leverage

____     16.     Suppose a company issues common stock to retire its debt. Which of the following effects may occur?
a.     financial leverage will increase
b.     financial leverage will decrease
c.     financial leverage will remain unchanged
d.     the effect on financial leverage cannot be determined

____     17.     Which of the following events would result in a decrease in a firm's financial leverage?
a.     payment of dividends
b.     issuing common stock to purchase assets
c.     issuing debt to purchase assets
d.     purchasing inventory on credit

____     18.     Which of the following equations is TRUE?
a.     return on equity = return on assets x dividend payout
b.     return on assets = debt to assets x net income
c.     return on equity = return on assets x financial leverage
d.     dividend payout ratio = net income x dividends

____     19.     A company will increase risk if it
a.     issues stock and has to pay dividends
b.     borrows money and has to pay interest
c.     reinvests its earnings
d.     increases its current ratio by delaying payments to suppliers

____     20.     Clean Diapers delivery services purchased a delivery truck by making a $1,000 down payment and signing a note payable for the balance. What effect will this have on the firm's financial leverage?
a.     financial leverage will increase
b.     financial leverage will decrease
c.     financial leverage will remain unchanged
d.     the effect on financial leverage cannot be determined

____     21.     The dividend payout ratio is
a.     dividends / retained earnings
b.     dividends paid / dividends declared
c.     dividends / net income
d.     dividends / cash

____     22.     Debt covenants protect the interests of which of the following parties?
a.     Employees
b.     Companies
c.     Stockholders
d.     Creditors

____     23.     Which statement below is true about a company's operating cycle?
a.     it may not exceed one year
b.     it may not be less than a year
c.     it may be longer than a year
d.     it is always one year

____     24.     Accelerated depreciation
a.     results in lower net income in earlier years and higher net income in later years
b.     is used more often on the income statement than is the straight-line method
c.     leads to higher book values for depreciable assets than does the straight-line method
d.     allocates larger portions of cost to later periods than to earlier

____     25.     How is the depreciation process consistent with the matching principle?
a.     the accumulated depreciation account is matched with the plant asset account on the balance sheet
b.     the cost of consuming plant assets is matched with the periods that benefit from using the assets
c.     the book value of the asset is matched with the current market value of the asset
d.     the depreciation method used is matched with the expected productivity of the asset

____     26.     Assume a building was purchased for $250,000 and used for four of its estimated 10-year life. It has residual value of $50,000 and the straight-line method is used for depreciating the building. The book value of the building after the four years' of usage would be reported on the balance sheet at
a.     $20,000
b.     $80,000
c.     $120,000
d.     $170,000

____     27.     Quick Freight Trucking owned a truck which cost $30,000 when it was purchased on January 1, 2007. It had accumulated depreciation of $18,000 at December 31, 2008. The company originally estimated the truck would have a residual value after using it for four years of $3,000. It sold the truck for $22,500 cash on January 1, 2009. The amount of gain (loss) on the sale of the truck was
a.     $4,500 gain
b.     $19,500 gain
c.     $1,500 loss
d.     $10,500 gain

____     28.     A coal mine asset was purchased for $660,000. Estimated production is 20,000,000 tons after which the mine will be sold for $60,000. During a recent year, 6,500,000 tons of coal were produced and sold. The depletion expense for the year would be
a.     $175,500
b.     $195,000
c.     $214,500
d.     $225,000

____     29.     Which of the following is a reason to invest in the securities of other organizations?
a.     to obtain cash
b.     to incur future debt and increase financial leverage
c.     to acquire products from other companies
d.     to fund a future repayment of debt

____     30.     Depreciation and amortization
a.     reduce net income and cash flow from operating activities
b.     reduce net income but increase cash flow from operating activities
c.     reduce net income but have no direct effect on cash flow from operating activities
d.     have no direct effect on net income or cash flow from operating activities

____     31.     Sylvester Company has a lower ratio of fixed to variable costs than Tweety Company. The sales revenues of both companies increased by 10%. If the firms are similar in size and product mix, you would expect Sylvester's
a.     expenses to increase more rapidly than Tweety's
b.     expenses to decrease while Tweety's increase
c.     net income to decrease while Tweety's increase
d.     net income to increase more rapidly than Tweety's

____     32.     Samson Company has about 5% of its total assets in current assets with the remainder invested in fixed assets. Based only on this information, one would expect this firm to have a
a.     high level of operating leverage
b.     high level of financial leverage
c.     low level of operating leverage
d.     low level of financial leverage

____     33.     A primary difference between return on assets and return on equity is that return on assets
a.     requires that interest expense be added back to net income (net-of-tax) but return on equity does not
b.     is affected by how a company chooses to finance investments
c.     is a clearer measure of the quality of investment decisions than is return on equity
d.     requires that preferred dividends be subtracted from net income but not interest expense

____     34.     The following information is available for a company:

Total Assets:               Net sales revenue     $1,656,000
Beginning     $640,000          Interest expense     160,000
Ending      640,000          Wages payable     52,000
Net income      48,000          Income tax rate     40%

The firm's return on assets for the year was
a.     2.6%
b.     6.8%
c.     12.4%
d.     7.5%

____     35     Canyon Record Company had a higher return on assets this year than it did return on equity. This means that, during the year, the
a.     balance in the deferred taxes account decreased
b.     firm reduced its interest expense
c.     firm experienced negative financial leverage
d.     cash flow from operations exceeded income from operations

____     36.     Deere Company and Red Fox Co. are similar in size and in many other respects. The companies reported the following net cash flow from (used for) investing activities in its recent annual reports:

($ in millions)     2009     2008     2007
Deere Company     404      78     (30)
Red Fox Co.     (257)     (294)     (80)

From this information, which of the following is TRUE
a.     Deere Company appears to be growing more rapidly than Red Fox Co.
b.     Red Fox Co. appears to be growing more rapidly than Deere Company
c.     Deere Company has better investment alternatives than Red Fox Co.
d.     Red Fox Co. is less profitable than Deere Company

Figure 11-1
     Petal Co.     Reel Co.     Sphere Co.     Shade Co.
Sales (in millions)     $1,000     $2,000     $2,000     $600
Profit margin      0.15      0.05      0.09     0.20
Asset turnover      1.25      1.50      1.15     1.10

____     37.     Refer to the information in Figure 11-1. Which company is most effective?
a.     Petal Co.
b.     Reel Co.
c.     Sphere Co.
d.     Shade Co.

____     38.     Refer to the information in Figure 11-1. Which company has the most total assets?
a.     Petal Co.
b.     Reel Co.
c.     Sphere Co.
d.     Shade Co.

____     39     Refer to the information in Figure 11-1. Which company is most efficient?
a.     Petal Co.
b.     Reel Co.
c.     Sphere Co.
d.     Shade Co.

____     40.     If an investor concludes that one company is more efficient in generating profits than another company, that investor is looking at which of the following measures?
a.     return on assets
b.     profit margin
c.     asset turnover
d.     operating leverage

____     41.     A company "was able to generate $3.75 of sales for every $1 it had invested in assets.” This statement represents a measure of
a.     operating leverage
b.     return on assets
c.     profit margin
d.     asset turnover

____     42.     If a company's profit margin increases, most likely indicates that the company has
a.     become more effective in using its assets to sell its products
b.     become more efficient in controlling its costs
c.     invested in more plant assets
d.     become more competitive

____     43.     In general, one would assume that

Investing activities        Financing activities
would generate cash      would consume cash
a.          Yes                                ;Yes
b.          Yes                                ; No
c.          No                                  Yes
d.          No                                   No

____     44.     Revenue should be recognized on a transaction
a.     at the a customer places an order
b.     when the cash has been collected from the buyer
c.     when the seller has earned the right to payment from the buyer
d.     as soon as the seller is confident that he has a buyer for the goods under consideration

____     45.     Revenue should ordinarily be recognized when four criteria have been met. Which of the following is NOT one of the four criteria?
a.     seller has completed most of the activities necessary to produce and sell the goods or services
b.     cash has been collected from the buyer
c.     seller is reasonably certain the buyer will pay the cash that is due
d.     seller can objectively measure the amount of revenue he/she has earned

____     46.     The City of Gunnison awarded a $5,000,000 road-construction contract to the Fast Builders Construction Company. Construction was expected to take three years. After one year, Fast Builders had incurred $625,000 of cost and was approximately 20% completed with the road. The company estimated that another $2,500,000 would be expended to complete the contract. The company is confident regarding its estimates. What amount of profit, if any, should Fast Builders recognize for the first year?
a.     $0
b.     $375,000
c.     $500,000
d.     $625,000
e.     $1,000,000

____     47.     When reporting revenues on the income statement, they should be reported net of

   Expected                    Estimated
Sales Returns        Uncollectible Accounts
a.      Yes                             Yes
b.      Yes                             No
c.      No                             Yes
d.      No                             No

____     48.     At the beginning of March, Freewill Magazine Company's unearned revenues included 15,000 annual subscriptions at $18 each. During March, the company received 4,000 new annual subscriptions at $18 each. The March issue was shipped to all subscribers on March 20. The amount of subscription revenue the company should recognize in March would be
a.     $15,000
b.     $28,500
c.     $72,000
d.     $270,000
e.     $342,000

____     49.     Bad debts expense is correctly recorded on the income statement as a(n)
a.     addition to sales discounts
b.     extraordinary expense
c.     reduction of revenue
d.     selling expense

____     50.     You would expect to see the account Work-in-Process Inventory reported on the balance sheet of a

Manufacturing Firm     Merchandising Firm
a.      Yes                             No
b.      No                               No
c.      Yes                             Yes
d.      No                               Yes

____     51.     Work-in-process includes all of the items below EXCEPT
a.     cost of materials used in the production of goods
b.     cost of labor used directly in the production of goods
c.     selling costs associated with the goods
d.     overhead costs incurred in the production of goods

____     52.     Cost of goods sold for a manufacturing company would be calculated as

Beginning finished goods inventory (BFGI)
Ending finished goods inventory (EFGI)
Work-in-process (WIP)
Cost of goods manufactured (CGM)
Raw materials (RM)
Overhead (OH)

a.     BFGI + RM + CGM - EFGI
b.     RM + OH - CGM + EFGI
c.     RM + WIP + OH - EFGI
d.     BFGI + CGM - EFGI

____     53.     Which inventory method results in the lowest income taxes during periods of increasing prices?
a.     first-in-first-out (FIFO)
b.     last-in-first-out (LIFO)
c.     weighted average
d.     work-in-process

____     54.     The inventory valuation method that results in the recognition of the most recent inventory costs on the balance sheet and income statement, respectively, is

     Balance Sheet        Income Statement
a.          FIFO                          LIFO
b.          FIFO                          FIFO
c.          LIFO                          LIFO
d.          LIFO                          FIFO

____     55.     The inventory valuation method that results in the recognition of the oldest inventory costs on the balance sheet and income statement, respectively, is

     Balance Sheet          Income Statement
a.         FIFO                            LIFO
b.         FIFO                            FIFO
c.         LIFO                            LIFO
d.         LIFO                            FIFO

____     56.     Steinbrenner Company has the following inventory information for a recent year:

Beginning inventory     $500     (10 units with an average cost of $50 each)
February purchase     10 units @ $48 each
August purchase     30 units @ $52 each
November purchase     20 units @ $48 each
Ending inventory     25 units

Compute the cost of ending inventory using the weighted average method.
a.     $1,250.00
b.     $1,240.00
c.     $1,237.50
d.     $1,220.00

____     57.     An advocate of the LIFO inventory method would maintain that
a.     current costs are matched with current selling prices
b.     the lowest possible costs are always shown in the ending inventory
c.     the oldest inventory is relieved of its cost before the newer purchases
d.     the highest possible costs are always shown in the ending inventory

____     58.     Which of the following items is reported on an income statement?

Income from                             Cash provided
Continuing operations              by operations
a.             Yes                                 Yes
b.             Yes                                 No
c.             No                                  Yes
d.             No                                  No

____     59.     Which of the following is NOT a deduction on the income statement when computing net income?
a.     loss from discontinued operations
b.     cost of goods sold
c.     interest expense
d.     preferred dividends

____     60.     In order for an event to be reported on the income statement as an extraordinary item, it must be

        Unusual     Infrequent
a.         Yes             Yes
b.         Yes             No
c.         No              Yes
d.         No              No

____     61.     Which of the following is a measure of the company's ability to create profit from existing sales?
a.     operating decision
b.     asset turnover
c.     profit margin
d.     return on assets

____     62.     Which of the following statements is NOT true?
a.     profit margin is the ratio of net income to operating revenues
b.     profit margin is a measure of a company's ability to generate profit from its sales
c.     profit margin is a measure of effectiveness
d.     profit margin is a component of return on assets

Figure 13-1

     Opie Technologies     Bea Corporation
Operating revenues     $375,000     $355,000
Operating income      71,000      54,000
Net income      60,000      42,500
Total assets     625,000      490,000

____     63.     Refer to the table in Figure 13-1. What is return on assets for Bea Corporation?
a.     11.0%
b.     11.4%
c.     8.7%
d.     9.6%

____     64.     Which of the following compares the "botXXXXX XXXXXne result" on an income statement to the first item on the income statement?
a.     gross profit margin
b.     operating profit margin
c.     profit margin
d.     asset turnover

____     65.     The following information was taken from the annual report of Mandala Company:

Net income     $ 400
Total assets     5,000
Total liabilities     3,400

What is the return on assets (ROA) and return on equity (ROE)?

        ROA      ROE
a.      $0.25      $0.08
b.      0.08       0.25
c.      0.08       0.12
d.      0.12       0.08

____     66.     Companies in highly-competitive markets with very similar products, usually will compete on the basis of
a.     product differentiation
b.     price
c.     asset turnover
d.     return on assets

____     67.     Which of the following is NOT true?
a.     a company selects operating strategies depending on the types of products they produce and sell
b.     a company cannot compete in both cost leadership and product differentiation markets
c.     a company that relies on low costs use a cost leadership strategy
d.     product differentiation companies normally rely on brand name identification

____     68.     Which of the following is a measure of a company's efficiency in controlling period costs (i.e., selling and administrative expenses)?
a.     operating profit margin
b.     profit margin
c.     gross profit margin
d.     net income

Figure 13-2
     Wannamaker's Wonders     Delano's Deals
Accounts receivable     $ 159,000     $126,000
Inventory        384,000      254,000
Operating revenues      1,060,000      768,000
Cost of goods sold        559,000      235,000
Operating income        360,000      305,000
Gross profit        501,000      533,000

____     69.     Refer to the table in Figure 13-2. What is inventory turnover for Delano's Deals?
a.     1.46
b.     .83
c.     1.07
d.     .93

____     70.     Refer to the table in Figure 13-2. What is accounts receivable turnover for Wannamaker's Wonders?
a.     6.67
b.     6.10
c.     2.42
d.     2.26

____     71.     Refer to the table in Figure 13-2. What is operating profit margin for Wannamaker's Wonders?
a.     .69
b.     .34
c.     .40
d.     .47

____     72.     Refer to the table in Figure 13-2. What is operating profit margin for Delano's Deals?
a.     .40
b.     .69
c.     .34
d.     .47

____     73.     Which of the following is NOT part of the transformation process?
a.     financial resources are obtained through financing activities
b.     financial resources are used to acquire other resources through investing activities
c.     resources are used to produce and sell goods and services through operating activities
d.     investors make decisions about the allocation of their resources through decision-making activities

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