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Chapter 7—Financing Activities
MULTIPLE CHOICE
1. All of the following are primary events that typically lead to changes in book value of shareholders’
equity except:
a.
Investments by shareholders, usually net cash received by the company at equity issue
date.
b.
Profitable operating and investing activities, with net income being a large component of
this increase.
c.
Debtholders requiring firms to enter into debt covenants.
d.
Distributions to shareholders, usually in the form of periodic cash dividend payments
to investors and sometimes in the form of share repurchases.
2. Which of the following is the typical tradeoff when issuing preferred stock?
a.
The tradeoff between different accounting for an initial issuance of preferred stock as
compared to a common stock issuance.
b.
The tradeoff between maintaining corporate control and creating a class of shareholders
with preference in all asset distributions.
c.
The tradeoff of giving common shareholders priority over preferred shareholders in
corporate liquidations.
d.
The tradeoff of a convertibility feature of common shares into preferred shares.
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?
a.
date of record
b.
commitment date
c.
date of declaration
d.
date of payment
4. Which of the following is the date on which a company determines the owners of the stock that will
receive a dividend?
a.
date of record
b.
measurement date
c.
date of declaration
d.
date of payment
5. Which of the following is the date on which the dividend distribution occurs?
a.
date of record
b.
commitment date
c.
date of declaration
d.
date of payment
6. Which kind of dividend is a return of the original investment by shareholders?
a.
cash dividend
b.
stock dividend
c.
liquidating dividend
d.
scrip dividend
7. Which kind of dividends have an interest-bearing promise to pay dividends?
a.
property dividend
b.
stock dividend
c.
liquidating dividend
d.
scrip dividend
8. Which kind of dividends typically pay dividends with investments in other corporations’ stock?
a.
property dividend
b.
stock dividend
c.
liquidating dividend
d.
scrip dividend
9. Which kind of dividends typically pay dividends with additional shares of the corporation’s stock?
a.
property dividend
b.
stock dividend
c.
liquidating dividend
d.
scrip dividend
10. Which is the date when a firm gives a stock option to employees?
a.
vesting date
b.
grant date
c.
exercise date
d.
market date
11. Which is the date when employees elect to exchange the option and cash for shares of common stock?
a.
vesting date
b.
grant date
c.
exercise date
d.
market date
12. Which is the first date when employees can exercise their stock options?
a.
vesting date
b.
grant date
c.
exercise date
d.
liquidating date
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13. In some countries the account Reserve for Contingencies may be most comparable to which of the
following accounts for a company reporting under U.S. GAAP?
a.
Contingency Expense
b.
Retained Earnings Appropriated for Contingencies
c.
Unearned Contingency Fees
d.
Contingency Losses
14. All of the following are criteria that financial reporting requires before recognizing an obligation as a
liability except:
a.
The transaction or event that gave rise to the obligation has already occurred.
b.
The firm has a present obligation and little or no discretion to avoid the transfer.
c.
The firm must know the precise amount of the obligation before recording it.
d.
The obligation involves a probable future sacrifice of economic benefits–a future transfer
of cash, goods, or services; the forgoing of a future cash receipt; or the transfer of equity
shares–at a specified or determinable date. The firm can measure with reasonable
precision the cash-equivalent value of the resources needed to satisfy the obligation.
15. All of the following are the general principles underlying the valuation of liabilities except:
a.
Liabilities requiring future cash payments appear at the present value of the required future
cash flows discounted at an interest rate that reflects the uncertainty that the firm will be
able to make the cash payments.
b.
The fair value of a liability cannot differ from the amount appearing on the balance sheet,
particularly for long-term debt.
c.
Liabilities representing cash advances from customers appear at the amount of the cash
advance.
d.
Liabilities requiring the future delivery of goods or services appear at the estimated cost of
those goods and services.
16. All of the following are typically recognized as accounting liabilities except:
a.
Obligations with Fixed Payment Dates and Amounts
b.
Obligations under Mutually Unexecuted Contracts
c.
Obligations Arising from Advances from Customers on Unexecuted Contracts and
Agreements
d.
Obligations with Fixed Payment Amounts but Estimated Payment Dates
17. Warranties payable and Notes payable are considered which of the following
a.
Accounting Liabilities
b.
Assets
c.
Stockholders’ Equity
d.
Other Financial Assets
18. All of the following are typically recognized as accounting liabilities except:
a.
Bonds Payable
b.
Rental Fees Received in Advance
c.
Loan Guarantees
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d.
Taxes Payable
19. Under IFRS, cash payments for purchase of treasury stock
a.
operating cash outflow
b.
investing cash outflow
c.
financing cash outflow
d.
Both A and C are correct.
20. According to U.S. GAAP, which of the following provides the most reliable measure for fair value
measurement?
a.
Observable market data serving as inputs into estimates into present value-based
measurements such as foreign exchange rates.
b.
Quoted market prices of identical assets or liabilities in inactive markets
c.
Observable quoted market prices in active markets for identical assets or liabilities
d.
Unobservable inputs used by the reporting entity when modeling how the market would
determine the fair value of the asset or liability in question
21. Regarding accounting for troubled debt, which of the following statements is true?
a.
The treatment for troubled debt is the same under both U.S. GAAP and IFRS.
b.
The settlement of troubled debt results in an economic loss to the debtor because the
creditor accepts more than the book value of the debt to settle the debt.
c.
U.S. GAAP uses a “10 percent rule” to determine whether a gain is recognized by the
debtor in a troubled debt situation.
d.
Because IFRS uses the present value approach to determine the magnitude of the
settlement for troubled debt, the magnitude of the new book value of the restructured debt
will be lower and the gain recognition will be larger under IFRS.
22. FASB has set forth all of the following conditions for recognizing transfers of receivables as sales only
if the following conditions of surrendering control of the receivables are met except:
a.
The assets transferred have been isolated from the selling firm.
b.
The buying firm obtains the right to pledge or exchange the transferred assets, and no
condition both constrains the transferee from taking advantage of its right and provides
more than a trivial benefit to the transferor.
c.
The selling firm does not maintain effective control over the assets transferred through (a)
an agreement that both entitles and obligates it to repurchase the assets or (b) the
ability to unilaterally cause the transferee to return specific assets.
d.
A creditor of the selling firm can access the receivables in the event of the seller’s
bankruptcy.
23. Financial reporting requires that firms recognize product financing arrangements as liabilities
if which of the following conditions is met?
a.
The arrangement requires the sponsoring firm to purchase the inventory, substantially
identical inventory, or processed goods of which the inventory is a component at specified
prices.
b.
The selling or sponsoring firm physically controls the inventory.
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c.
The payments made to the other entity cover all acquisition, holding, and financing
costs.
d.
Both A and C are correct.
24. All of the following are benefits of leasing except:
a.
They have the ability to shift the tax benefits from depreciation and other deductions from
a lessee that has little or no taxable income to a lessor that has substantial taxable income.
b.
They provide flexibility to change capacity as needed without having to purchase or sell
assets.
c.
They have the ability to reduce the risk of technological obsolescence, relative to outright
ownership, by maintaining the flexibility to shift to technologically more advanced assets.
d.
In an operating lease, the lessee recognizes the signing of the lease as the simultaneous
acquisition of a long-term asset and the incurring of a long-term liability for lease
payments.
25. Under U.S. GAAP, which of the following items would require a lessee to classify a lease of
equipment as a capital lease?
a.
There is no transfer of ownership to the lessee at the end of the lease term.
b.
The lease does not contain a bargain purchase option.
c.
The lease term is 90% of the estimated economic life of the lease property.
d.
The present value of the contractual minimum lease payments is 75% of the fair value of
the leased property.
26. All of the following are correct regarding operating leases except:
a.
Cash outflow is in the form of rent payments
b.
The rights to use the property for a specified period of time are conferred to the lessee by
the lessor.
c.
At the end of the lease the lessee returns the property to the lessor
d.
Depreciation expense can be recorded on the books by the lessee
Porter Corporation
NOTE: The following multiple choice questions require present value information.
On January 1, 2012, Porter Corporation signed a five-year noncancelable 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, 2012) 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, 2012 is $275,000.
27. What accounting method should Porter use to account for the equipment lease?
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a.
Operating Lease method
b.
Capital Lease method
c.
Equipment Lease method
d.
Lessee Accounting method
28. Under which of the following conditions does the equipment lease qualify for capital lease
accounting?
a.
The lease contains a bargain purchase option.
b.
The lease term is equal to or greater than 75% of the asset’s economic life.
c.
A, and B are correct answers.
d.
The lease transfers ownership to the lessee at the end of the lease term.
29. At January 1, 2012, Porter should record an asset and liability with respect to the equipment lease
equal to
a.
$258,726
b.
$239,562
c.
$275,000
d.
$0
30. For the year ended December 31, 2012, Porter should record depreciation expense for the leased
equipment equal to
a.
$55,000
b.
$39,927
c.
$47,912
d.
$0
Santa Corporation
NOTE: These multiple choice questions require present value information.
Santa Corporation manufactures Christmas decorations and supplies throughout the world. The
company owns property, plant, and equipment and also enters into operating leases for certain
facilities. Assume that Santa’s incremental borrowing rate is 8%. The company’s tax rate is 40%.
Listed below is selected financial data for Santa and a portion of the company’s operating lease
footnote.
2012
2010
Property, Plant, & Equipment (net)
$ 882,468
$ 658,214
Total Assets
1,756,854
1,254,896
Common Shareholders’ Equity
867,992
587,951
Sales
$2,922,915
Cost of Goods Sold
2,016,811
Depreciation Expense
78,584
Interest Expense
106,663
Net Income
248,448
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Santa Corp.
Operating Lease Disclosure
(amounts in thousands)
Operating Lease Commitments
at the end of 2012
Year
Reported Lease Commitments
2013
$148,239
2014
$252,800
2015
$278,327
2016
$279,210
2017
$285,452
Beyond 2017
$2,471,600
31. Using the information provided by Santa Corporation estimate the average life of the operating leases.
a.
8.66 years
b.
13.66 years
c.
10 years
d.
Not able to determine
32. Using the information provided by Santa Corporation calculate the present value of the operating
leases.
a.
$2,155,843
b.
$2,024,945
c.
$1,482,390
d.
$2,854,452
Present Value
33. Using the information provided by Santa Corporation calculate the company’s 2012 fixed asset ratio.
a.
3.0
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b.
3.65
c.
3.23
d.
5.21
34. Assuming that Santa Corporation was required to capitalize its operating lease how would the
company’s fixed asset ratio change under this assumption.
a.
increase
b.
decrease
c.
no effect
d.
unable to determine
35. Under the fair value method of accounting for stock options, firms must value stock options on the
a.
grant date.
b.
intrinsic date.
c.
measurement date.
d.
fair value date.
36. Which of the following does not represent an acceptable method of transferring receivables to increase
cash flow?
a.
With recourse
b.
Without recourse
c.
Factoring
d.
Tax deferred Method
37. Where in the financial statements are changes in the fair value of cash flow hedges reported
a.
On the Balance Sheet as part of retained earnings
b.
On the Income Statement as other gains.losses
c.
As other comprehensive income and accumulated in other comprehensive income on the
Balance Sheet.
d.
On the Statement of Stockholder’s Equity
38. Which of the following is not one of the three criteria for recognition of a liability?
a.
The obligation involves a probable future sacrifice of resources at a specified or
determinable date.
b.
The firm is required to make a cash payment for the goods or services.
c.
The firm has little or no discretion to avoid the transfer.
d.
The transaction or event giving rise to the liability has already occurred.
39. Which of the following is not true concerning the recognition of unrealized gains and losses on foreign
currency translation during the consolidation process?
a.
Firms do not recognize these gains/losses in current income.
b.
Firms recognize these gain/losses in the statement of other comprehensive income
c.
Firms increase/reduce their investment accounts by the translation gains/losses
d.
Unrealized gains and losses increase/decrease other accumulated comprehensive income
in shareholders’ equity.
COMPLETION
1. __________ means that a company will buy back those receivables that are not collected by the
company they are factored to.
2. A(n) ____________________ lease arrangement is one in which the lessee enjoys the use of the
property for a set period of time.
3. Under an operating lease agreement the lessee recognizes ______________________________ each
period that the leased asset is used.
4. An agreement in which a purchaser agrees to pay specified amounts periodically to a seller for
products or services is known as a ________________________________________.
5. Convertible preferred stock has both the attributes of _______ and
_____________________________________.
6. One of the conditions that must be met to recognize an estimated loss from a contingency is that the
amount of loss can be estimated with ________________________________________.
7. Liabilities requiring the future delivery of goods or services appear on the balance sheet at the
______________________________ of those goods and services.
8. One criteria that must be satisfied for a firm to recognize an obligation is that the transaction or event
giving rise to the obligation has already ____________________.
9. The first date at which employees can exercise their stock options is termed the
_________________________.
10. The acceptable method of accounting for stock options is the _________________________ method.
11. The _________________________ is the date a firm gives a stock option to employees.
12. Under the fair value method of accounting for stock options, firms must value stock options on the
date of ____________________.
SHORT ANSWER
1. Why can exercising stock options can create cash flow problems for managers at the exercise date?
What is an alternative to this problem?
2. A. Listed below are 12 accounting liabilities.
1.
Insurance paid in advance
2.
Interest Payable
3.
Unsettled lawsuits where a reasonable estimate of loss can be determined and the loss is
probable
4.
Accounts payable
5.
Warranties payable
6.
Bonds payable
7.
Accrued Liabilities
8.
Taxes payable
9.
Employment commitments
10.
Notes payable
11.
Purchase commitments
12.
Salaries payable
Place the accounting liabilities in one of the following six categories:
a.
Obligations with fixed payment dates and amounts
b.
Obligations with fixed payment amounts but estimated payment dates
c.
Obligations for which the firm must estimate both timing and amount of payment
d.
Obligations arising from advances from customers on unexecuted contracts and agreements
e.
Obligations under mutually executed contracts
f.
Contingent obligations
B. In addition, determine which of the liabilities would be recognized on the balance sheet as liabilities
and which would not be recognized.
Suggestion: format your answer as follows (this is not a correct sample answer):
a. Obligations with fixed payment dates and amounts (not generally recognized):
1.Rent Payable
ANS: