Chapter 02 – Review of Accounting
72. A firm has $4,000,000 in its common stock account and $10,000,000 in its paid-in capital
account. The firm issued 1,000,000 shares of common stock. What is the par value of the
common stock?
73. A firm with earnings per share of $3 and a price-earnings ratio of 20 will have a stock
price of
74. Earnings per share is
Chapter 02 – Review of Accounting
75. Reinvested funds from retained earnings theoretically belong to:
76. The firm’s price-earnings (P/E) ratio is influenced by its
77. When a firm’s earnings are falling more rapidly than its stock price, its P/E ratio will:
78. Which of the following factors do not influence the firm’s P/E ratio?
Chapter 02 – Review of Accounting
79. Which of the following would not be classified as a current asset?
80. An item which may be converted to cash within one year or one operating cycle of the
firm is classified as a
81. Which of the following would not be included in the balance sheet investment account?
Chapter 02 – Review of Accounting
82. Asset accounts on the balance sheet are listed in the order of:
83. Which of the following is not a primary source of capital to the firm?
84. How many of the following balance sheet items are classified as current?
Retained earnings
Accounts payable
Plant and equipment
Inventory
Common stock
Bonds payable
Accrued wages payable
Accounts receivable
Preferred stock
Chapter 02 – Review of Accounting
85. How many of the following items are found on the balance sheet, rather than the income
statement?
• Accounts receivable
• Retained earnings
• Income tax expense
• Accrued expenses
• Cash
• Selling and administrative expenses
• Plant and equipment
• Operating expense
• Marketable securities
• Interest expense
86. How many of the following items are found on the income statement, rather than the
balance sheet?
• Sales
• Notes payable (6 months)
• Bonds payable, maturity 2001
• Common stock
• Depreciation expense
• Inventories
• Capital in excess of par value
• Net income (earnings after taxes)
• Income tax payable
Chapter 02 – Review of Accounting
87. Which account represents the cumulative earnings of the firm since its formation, minus
dividends paid?
88. The major limitation of financial statements is
89. Net worth is equal to stockholders’ equity
Chapter 02 – Review of Accounting
90. Book value is the same as
91. Total stockholders’ equity consists of
92. The net worth of a firm
Chapter 02 – Review of Accounting
93. The orientation of book value per share is _________, while the orientation of market
value per share is __________.
94. The primary disadvantage of accrual accounting is that
95. The statement of cash flows does not include which of the following sections?
Chapter 02 – Review of Accounting
96. Which of the following is an outflow of cash?
97. Which of the following is an inflow of cash?
98. A statement of cash flows allows a financial analyst to determine
Chapter 02 – Review of Accounting
99. Which of the following would represent a use of funds and, indirectly, a reduction in cash
balances?
100. Which of the following would represent a source of funds and, indirectly, an increase in
cash balances?
101. A firm’s purchase of plant and equipment would be considered a
Chapter 02 – Review of Accounting
102. An increase in investments in long-term securities will:
103. How many of the following items decrease cash flow in the Statement of Cash flows?
• Increase in accounts receivable
• Increase in notes payable
• Depreciation expense
• Increase in investments
• Decrease in accounts payable
• Decrease in prepaid expenses
• Dividend payment
• Increase in accrued expenses
104. Depreciation is a source of cash inflow because
Chapter 02 – Review of Accounting
105. Depreciation tends to
106. Preferred stock dividends __________ earnings available to common stockholders.
107. Free cash flow is equal to:
Chapter 02 – Review of Accounting
108. In the last decade, free cash flow has been associated with special financial activities
such as:
109. Free cash flow is equal to cash flow from operating activities
110. Given the following, what is free cash flow?
Chapter 02 – Review of Accounting
111. Assuming a tax rate of 40%, depreciation expenses of $500,000 will
112. Assuming a tax rate of 40%, the after-tax cost of interest expense of $1,000,000 is
113. Assuming a tax rate of 30%, the after-tax cost of a $100,000 dividend payment is
114. Farah Snack Co. has earnings after taxes of $150,000. Interest expense for the year was
$20,000; preferred dividends paid were $20,000; and common dividends paid were $30,000.
Taxes were $22,500. The firm has 100,000 shares of common stock outstanding. Earnings per
share on the common stock was
115. Gerry Co. has a gross profit of $1,200,000 and $400,000 in depreciation expense. Selling
and administrative expense is $250,000. Given that the tax rate is 40 percent, compute the
cash flow for Gerry Co.