FIN 545: Advanced Corporate Finance
Quiz 1
Name (please print):
Student ID:
Please do not consult with anyone about this quiz. It is an individual effort. Put your
answers on page 5. Hand in a hard copy of page 5 at the beginning of class on
Thursday, January 14.
1) Information about accounting estimates, assumptions, and methods chosen for
reporting is most likely found in:
a) The auditor’s opinion.
b) The financial statement notes.
c) Management’s discussion and analysis.
2) Information about elections of members to a company’s Board of Directors is most
likely found in:
a) A 10-Q filing.
b) A proxy statement.
c) Footnotes to the financial statements.
3) A decrease in assets would least likely be consistent with a(n):
a) Increase in expenses.
b) Decrease in revenues.
c) Increase in contributed capital.
4) If a firm raises $10 million by issuing new common stock, which of its financial
statements will reflect the transaction?
a) Income statement and statement of owners’ equity.
b) Balance sheet, income statement, and cash flow statement.
c) Balance sheet, cash flow statement and statement of owners’ equity.
5) Paul Schmidt, a representative for Westby Investments, is explaining how security
analysts use the results of the accounting process. He states: “Analysts do not have
access to all the entries that went into creating a company’s financial statements. If
the analyst carefully reviews the auditor’s report for any instances where the
financial statements deviate from the appropriate accounting principles, he can then
be confident that management is not manipulating earnings.” Schmidt is:
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a) Correct.
b) Incorrect, because the entries that went into creating a company’s financial
statements are publicly available.
c) Incorrect, because management can manipulate earnings even within the
confines of generally accepted accounting principles.
6) Which is least likely one of the conclusions about the impact of a change in financial
reporting standards that might appear in management’s discussion and analysis?
a) Management has chosen not to implement the new standard.
b) Management is currently evaluating the impact of the new standard.
c) The new standard will not have a material impact on the company’s financial
statements.
7) For a nonfinancial firm, are depreciation expense (DE) and interest expense (IE)
included or excluded from operating expenses in the income statement?
a) DE included; IE included
b) DE included; IE excluded
c) DE excluded; IE included.
8) Which of the following is least likely a condition for revenue recognition?
a) Cash has been collected.
b) The goods have been delivered.
c) The price has been determined.
9) Which principle requires that cost of goods sold be recognized in the same period in
which the sale of the related inventory is recorded?
a) Going concern.
b) Certainty.
c) Matching.
10) Changing an accounting estimate:
a) Is reported prospectively.
b) Requires restatement of all prior-period statements presented in the current
financial statements.
c) Is reported by adjusting the beginning balance of retained earnings for the
cumulative effect of the change.
11) Which of the following transactions would most likely be reported below income
from continuing operations, net of tax?
a) Gain or loss from the sale of equipment used in a firm’s manufacturing operation.
b) A change from the accelerated method of depreciation to the straight-line
method.
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c) The operating income of a physically and operationally distinct division that is
currently for sale, but not yet sold.
12) Which of the following statements about nonrecurring items is least accurate?
a) Gains from extraordinary items are reported net of taxes at the bottom of the
income statement before net income.
b) Unusual or infrequent items are reported before taxes above net income from
continuing operations.
c) A change in accounting principle is reported in the income statement net of
taxes after extraordinary items and before net income.
13) An analyst gathered the following information about a company. 100,000 common
shares outstanding from the beginning of the year; earnings of $125,000; 1000 7%
$1000 par bonds convertible into 25 shares each, outstanding as of the beginning of
the year; the tax rate is 40%. The company’s diluted EPS is closest to:
a) $1.22
b) $1.25
c) $1.34
14) Which of the following transactions affects owners’ equity but does not affect net
income?
a) Foreign currency translation gain.
b) Repaying the face amount on a bond issued at par.
c) Dividends received from available-for-sale securities.
15) Which of the following is least likely to be included when calculating comprehensive
income?
a) Unrealized loss from cash flow hedging derivatives.
b) Unrealized gain from available-for-sale securities.
c) Dividends paid to common shareholders.
16) Which of the following would most likely result in higher gross profit margin,
assuming no fixed costs?
a) A 10% increase in the number of units sold.
b) A 5% decrease in production cost per unit.
c) A 7% decrease in administrative expenses.
17) Which of the following is most likely an essential characteristic of an asset?
a) An asset is tangible.
b) An asset is obtained at a cost.
c) An asset provides future benefits.
18) Which of the following would most likely result in a current liability?
a) Possible warranty claims.
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b) Future operating lease payments.
c) Estimated income taxes for the current year.
19) At the beginning of the year, Parent Company purchased all 500,000 shares of Sub
Incorporated for $15 per share. Just before the acquisition date, Sub’s balance sheet
reported net assets of $6 million. Parent determined the fair value of Sub’s property
and equipment was $1 million higher than reported by Sub. What amount of
goodwill should Parent report as a result of its acquisition of Sub?
a) $0
b) $500,000
c) $1,500,000
20) At the beginning of the year, Company P purchased 1,000 shares of Company S for
$80 per share. During the year, Company S paid a dividend of $4 per share. At the
end of the year, Company S’s share price was $75. What amount of investment
income should Company P recognize in its income statement if the investment in
Company S is considered trading, and what amount should be recognized if the
investment is considered available-for-sale?
a) -$1000 trading; -$1000 available-for-sale
b) -$1000 trading; $4000 available-for-sale
c) -$5000 trading; $4000 available-for-sale
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Name:
Student ID:
Insert a check mark or X under the appropriate column for each question. For example,
if the answer to question 1 is A, place a check mark or X in cell (1, A)
Question #
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Possible Answers
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C
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