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True or False
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1
The two basic sources of financing are debt and equity.
A)True
B)False
2
The providers of borrowed capital for the business are called creditors.
A)True
B)False
3
An indenture contract provides some level of security to creditors for repayment of loans they have made to a company.
A)True
B)False
4
Assets that have been pledged to secure specific liabilities are called collateral.
A)True
B)False
5
General credit obligations are secured only by the credit standing or financial position of the borrower.
A)True
B)False
6
The claims of creditors are secondary to the claims of owners.
A)True
B)False
7
Estimated liabilities have two basic characteristics: (1) the liability is known to exist and (2) precise dollar amount of the liability can be determined.
A)True
B)False
8
The amount of working capital available to the company will have a direct effect on whether the company has the ability to purchase inventory on credit.
A)True
B)False
9
Interest that will be paid in future periods appears as a liability on the borrower's balance sheet.
A)True
B)False
10
A trade account payable is generally recorded when merchandise is received, regardless of the shipping terms.
A)True
B)False
11
Legally, the buyer's obligation for a trade account payable occurs after the merchandise has been received.
A)True
B)False
12
The maturity value of a $12,000, 12%, 60-day note is $12,240.
A)True
B)False
13
If a company's fiscal year ends on December 31, issued a$12,000, 90-day, 12%, note payable on November 1 and paid the note on its due date, $360 of interest would be recognized on the due date.
A)True
B)False
14
An accrued liability represents an accrued expense.
A)True
B)False
15
A $360,000 mortgage note with monthly principal payments of $1,500 would be shown in the balance sheet as a short-term liability of $18,000 and a long-term liability of $342,000.
A)True
B)False
16
The employee pays income taxes, social security taxes, and state and federal unemployment taxes.
A)True
B)False
17
Workers' compensation is an employer tax mandated by the federal government.
A)True
B)False
18
All employers must pay Social Security and Medicare taxes on the wages or salary paid to each employee.
A)True
B)False
19
The amounts withheld from employee's pay do not represent taxes on the employer or expenses of the employer.
A)True
B)False
20
Unearned fees and customer deposits are examples of earned revenues.
A)True
B)False
21
When the economic substance of a transaction differs from its legal form or its outward appearance, financial statements should reflect the economic substance rather than the legal form.
A)True
B)False
22
The combined cash outlays required for repayment of principal amounts borrowed and for payments of interest expense during an accounting period is called debt service.
A)True
B)False
23
The amount of the first payment debited to the principal balance of a $100,000, 8% installment note that requires monthly installments of $1,000, including interest, would be $666.67.
A)True
B)False
24
An amortization table for a $16,393, 12%, note, with principal and interest of $1,000 paid monthly for 20 months, would show a reduction of $844.43 in the unpaid balance for the second payment.
A)True
B)False
25
A bond represents a long-term, interest-bearing, note payable.
A)True
B)False
26
When you purchase one hundred, $1,000, 5%, 5-year bonds, you will be issued 100 bond certificates.
A)True
B)False
27
When bonds are issued, the corporation usually utilizes the services of an investment-banking firm, called an underwriter.
A)True
B)False
28
One of the most important features of bonds is liquidity.
A)True
B)False
29
A $1,000 bond selling at a market price 103 would be sold for $1,030.
A)True
B)False
30
An unsecured bond is a debenture bond.
A)True
B)False
31
A 20-year bond that can be redeemed (retired) at any time during the life of the bond is called a callable bond.
A)True
B)False
32
A convertible bond is a bond that can be converted to cash at any given time.
A)True
B)False
33
Bonds secured by specific assets are called mortgage bonds.
A)True
B)False
34
A cash fund that is established with a trustee and is designated to repay the bonds at maturity is called a sinking fund.
A)True
B)False
35
Bonds that promise substantially higher rates of interest than do investment quality bonds are called junk bonds.
A)True
B)False
36
A major advantage of raising capital through the sale of bonds is that the interest paid on the bonds is a tax-deductible item.
A)True
B)False
37
Dividends paid to stockholders are deductible for income tax purposes.
A)True
B)False
38
Financing with bonds has no tax advantage to the business.
A)True
B)False
39
The December 31 year-end accrued interest for a $1,000,000, 9%, 5-year bond issue sold for 102 on November 1, with interest paid semiannually, is $15,000.
A)True
B)False
40
When selling a bond between interest dates, the issuer receives the market price of the bond plus the interest accrued since the last interest payment.
A)True
B)False
41
The amount that investors will pay for bonds is the present value of the principal and interest payments they will receive.
A)True
B)False
42
Issuing a bond at a discount decreases the cost of borrowing.
A)True
B)False
43
A bond discount is amortized when interest expense associated with the bond issue is recorded.
A)True
B)False
44
When the discount on bonds is recorded, the net carrying value of the bonds increases.
A)True
B)False
45
As time passes, the net carrying value of Bonds Payable becomes larger when the premium associated with the bonds is amortized.
A)True
B)False
46
The amortization of the Premium on Bonds is charged to interest revenue.
A)True
B)False
47
If the bonds pay a below-market rate, investors will buy them only at a discount.
A)True
B)False
48
The future value of a $1,000, 10%, 1-year bond is $1,100, and the present value of a bond is $1,000 for an investor who requires a 10% return for a future value of $1,100 at the end of one year.
A)True
B)False
49
The rate of interest that will cause a given present value to grow to a given future amount is called the discount rate or effective rate.
A)True
B)False
50
The contract rate of interest on bonds is determined by the market place.
A)True
B)False
51
Falling interest rates generally cause bonds prices to fall.
A)True
B)False
52
Fluctuations in interest rates have a far greater effect on the market prices of short-term bonds than on the market prices of long-term bonds.
A)True
B)False
53
The changes in the market price of issued bonds are reflected in the balance sheet of the issuing corporation through adjusting entries.
A)True
B)False
54
When interest rates rise, the corporation's cost of borrowing through bonds issued at an earlier time will increase.
A)True
B)False
55
It is possible to retire bonds at a gain.
A)True
B)False
56
In all cases, the sale or retirement of bonds should be disclosed as a financing activity in the statement of cash flows.
A)True
B)False
57
There is no advantage to a corporation for early retirement of bond debt.
A)True
B)False
58
Loss contingencies have more certainty than estimated liabilities.
A)True
B)False
59
Loss contingencies not only involve a greater degree of uncertainty than estimated liabilities but can also extend to possible impairments of assets.
A)True
B)False
60
Loss contingencies are recorded in the accounting records only when it has been determined that it is probable the loss has been incurred and the amount of the loss can be reasonably estimated.
A)True
B)False
61
When the criteria to record a loss contingency are not met, the loss contingency should be disclosed in notes to the financial statements if the loss is considered to be remote.
A)True
B)False
62
Contracts for future transactions are called commitments and are liabilities.
A)True
B)False
63
The interest coverage ratio is computed by dividing the annual operating income by the annual interest expense.
A)True
B)False
64
Borrowing funds at 8% to fund business operations that provide a return of 18% is an example of leverage.
A)True
B)False
65
The current ratio is equal to current assets divided by current liabilities.
A)True
B)False
66
The debt ratio shows how many times the company earns its annual interest obligations.
A)True
B)False
67
Working capital is a more stringent measure of solvency than the quick ratio.
A)True
B)False
68
Operating leases are sometimes termed off-balance sheet financing.
A)True
B)False
69
A lease agreement that meets any two of the FASB criteria will qualify that lease as an operating lease.
A)True
B)False
70
An operating lease requires a periodic charge to the Rent Expense account.
A)True
B)False
71
A lease agreement that contains a bargain purchase option is an operating lease.
A)True
B)False
72
Rent expense is not recorded by the lessee with a capital lease.
A)True
B)False
73
A lease with a term of 8 years, which is 20% less than the estimated economic life of the leased property, is a capital lease.
A)True
B)False
74
To qualify as a capital lease, the terms of the lease must meet at least one of the FASB criteria for a capital lease.
A)True
B)False
75
A pension fund is carried in the employer's balance sheet as an asset.
A)True
B)False
76
When a pension fund is fully funded, no liability for pension payments appears in the employer's balance sheet.
A)True
B)False
77
Funded costs for employee retirement benefits are debited directly to the Pension Expense account.
A)True
B)False
78
Unfunded post-retirement costs are noncash expenses.
A)True
B)False
79
In the statement of cash flows, payments of postretirement costs are classified as financing activities.
A)True
B)False
80
Deferred income taxes may result from differences in deprecation recognized for financial statements and depreciation recognized for income tax returns.
A)True
B)False





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