Question 1
Please write a short summary of the article below. Posted at 06:00 AM ET, 09/21/2011 Obama, taxes and the ?Buffett Rule? By Glenn Kessler ?Any reform should follow another simple principle: Middle-class families shouldn?t pay higher taxes than millionaires and billionaires. That?s pretty straightforward. It?s hard to argue against that. Warren Buffett?s secretary shouldn?t pay a higher tax rate than Warren Buffett. There is no justification for it. It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.? --President Obama, September 19, 2011 We have to admit we had overlooked this part of President Obama?s Rose Garden speech until we read David Brooks?s column in The New York Times Tuesday accusing the president of being misleading on the issue of taxes. ?He repeated the old half-truth about millionaires not paying as much in taxes as their secretaries,? Brooks wrote. We?re not going to get into an argument between Brooks and Obama. We understood Obama?s comments to be specific to the situation that investor Warren Buffett outlined in his famous opinion article in The New York Times, in which he noted that he paid a lower tax rate than other people in his office. But, looking at Obama?s words again, we can see why Brooks thought Obama was saying that in general middle-class families were paying more in taxes than millionaires. (For the record, the White House says that was not Obama?s intent.) Indeed, the plan Obama released on Monday simply states the ?Buffett Rule? as this: ?No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay.? But the report never really explains what that means, and administration officials have refused to lay out any detailed proposal. Already, on average, most teachers, nurses, construction workers and the like already pay a lower rate than people making more than $1 million. Still, there are so many numbers tossed around about taxes that it seems a good time to take a step back and look at the data. After all, Republicans frequently note that 50 percent of Americans pay no income taxes. So how is it that Democrats can complain that billionaires are paying a lower tax rate than their secretaries? And does the so-called ?Buffett Rule? make sense as tax policy? The Facts The numbers are so confusing because the data points are so different. Democrats speak of tax rate averages, and include payroll taxes (Social Security and Medicare). Republicans tend to focus on just federal income taxes and marginal rates, which is the tax on each next dollar of earnings. There is vast income disparity in the United States, which is why under the progressive tax system, the wealthy already pay most of the income taxes. In 2001, in a previous life, The Fact Checker wrote the first article that disclosed how much the 400 richest Americans pay in federal income taxes. The number at the time was calculated as $8.7 billion ? about as much in federal income taxes as paid by 40 million individuals and families at the bottom of the income scale. That article caused quite a stir at the time, and now the Internal Revenue Service regularly releases data on the top 400 taxpayers. The most recent information, for 2008, shows that the 400 wealthiest Americans paid $19.5 billion in income taxes. That seems like a lot, but their average (effective) tax rate was 18.11 percent, down from as much as 29.93 percent in 1995. Averages don?t tell the whole story. Of the 400 taxpayers, 238 taxpayers paid a marginal rate of 35 percent, the top income tax bracket. That figure ? which Republicans focus on ? means that more than one-third of each additional dollar earned went to the federal government. However, various deductions and the like helped bring down the average rate. In fact, only 59 taxpayers in this rarified group had an effective tax rate of between 30 and 35 percent. The Congressional Budget Office also has released reports looking at taxation across income classes. In 2006, the most recent data available, the top 1 percent of taxpayers (about 1 million households), with a minimum income of $332,000, paid nearly 40 percent of all federal income taxes collected. The average income tax rate was 19 percent for this group, compared to an average rate of 14 percent for the top one-fifth of households (minimum income of $71,000). However, these numbers do not include payroll taxes. Social Security tax is no longer collected once a person makes more than $106,800, so the share of such taxes declines quickly for wealthier groups. Thus, the top one percent pay an effective rate of 1.6 percent on social insurance taxes, compared to an effective rate of about 9 percent for most other income groups. (The data are further distorted by the fact that some wealthy individuals, such as lawyers, are paid through corporate structures, so their taxes are listed as corporate income taxes.) When you add up all of the various taxes, and look at the effective tax rates, it is clear the tax system is already pretty progressive. Everyone pays some tax, even those who pay no federal income taxes, and the wealthiest pay a larger percentage share of taxes. Here?s the effective tax rate for all of the groups, according to the CBO: Lowest quintile (23.4 million taxpayers), zero to $18,900: 4.3 percent Second lowest quintile (22.4 million), $18,900-$32,100: 10.2 percent Middle quintile (22.9 million), $32,100-$47,400: 14.2 percent Fourth quintile (23 million), $47,400-$71,200: 17.6 percent Highest quintile (23.6 million), above $71,200: 25.8 percent Top 10 percent (12 million), minimum income of $98,100: 27.5 percent Top 5 percent (5.9 million), minimum income of $134,400: 29 percent Top 1 percent (1.1 million), minimum income of $332,300: 31.2 percent The Bottom Line Maybe it?s not a good thing to make policy by anecdote. It may well be the case that Buffett pays a lower average rate than his secretary. (Buffett, in his article, never says that; that?s the president?s characterization.) Buffett wrote that although he paid an average of 17.4 percent on his income, other people in his office had tax burdens that ?ranged from 33 percent to 41 percent and averaged 36 percent.? Those numbers actually seem rather high when you look at the tax data. As shown, on average, people at lower income brackets have much lower effective rates. (At least one tax expert, in fact, thinks Buffett confused marginal rates with average rates.) Buffett?s effective rate, in fact, is actually virtually identical to the rate paid by the top 400 taxpayers. Perhaps people in Buffett?s office make enough money that they are hit with the alternative minimum tax, which really bites taxpayers making between $150,000 and $400,000. But that?s certainly not a category that includes, as Obama put it, ?a teacher or a nurse or a construction worker who earns $50,000.? More broadly, there are certainly some people making millions of dollars in the securities markets who are only paying 15 percent on their capital gains taxes, compared to the lowest tax bracket of 10 percent (which is applied on the first $8,000 of income). Add in payroll taxes, and there could be some instances where the effective tax rate of a middle-income person is less than the stock trader ? but it does not appear that would be a common situation. We don?t have enough data to make a Pinocchio ruling, but we were struck by the fact that at a White House briefing, administration officials resolutely refused to explain how the Buffett Rule would be put into effect. ?Now, there are lots of different ways to achieve that principle,? Treasury Secretary Timothy Geithner said. ?How you do it depends on what you do to the broader tax system as a whole. ? We?re going to fight to make sure that's part of what Congress considers and ultimately delivers.? In other words, it may be an effective political argument, even if it?s not really much of a problem.
Question 3
1. Give an example of a potential agency problem for a corporation and identify three means by which the firm can help reduce or eliminate that problem. 2. Briefly describe CNBC?s American Greed story, Inside the WorldCom Scam. How does this story relate to the agency theory? Shareholder theory? Stakeholder theory? 3. Do you think that maximizing the current value of existing stock is an appropriate goal of the financial manager? Why or why not? 4. Explain why the marginal tax rate, rather than the average tax rate, is used when computing the cash flows from a proposed new project. 5. Explain why the DuPont identity is so useful to a financial manager. 6. Assume this is your first day on the job as the new chief financial officer of a mid-??size company. Identify the three key ratios that you would compute first as you begin to try to understand the financial status of the firm. Explain why you selected the three ratios that you did. 7. You are trying to compare the financial performance of your firm to that of similar firms. What are some of the key problems you might encounter in doing this comparison? Since there are no perfect or ideal standard ratios for a firm, why is ratio analysis still considered a valuable management tool? 8. Explain the time value of money principle. 9. You want to have $2.5 million saved on the day you retire. Explain how you can minimize the amount of cash you must invest in order to achieve this goal. 10. Benartzi and Thaler (2007) discuss ?Heuristics and Biases in Retirement Savings Behavior.? Examine how the ?Save More Tomorrow? program is constructed to overcome certain psychological biases. Do you have any suggestions to help individuals reach their savings and retirement goals? 11. Explain the similarities and differences among an ordinary annuity, an annuity due, and a perpetuity. Identify four ways that you can use annuity computations in your everyday life. 12. The time value of money principles can be applied to the valuation of corporate securities. Explain how corporate bonds and stocks are valued. 13. Describe what it means for a bond to trade at a discount or a premium. What is the relation between the market rate and the coupon rate when the bond trades at a discount? At a premium? 14. Identify one primary strength and one primary weakness for each of the following methods of investment analysis: 1) Net present value; 2) Internal rate of return; 3) Profitability index; 4) Payback period. Explain why the net present value is considered to be the best method of analyzing an investment. 15. The present value of the benefits of a particular investment happens to equal the initial cost of that investment at the required rate of 14 percent. What is the value of the investment's internal rate of return, its net present value, and its profitability index? 16. Explain the concept of incremental cash flow analysis and its purpose. In doing so, explain the difference between a sunk cost and an opportunity cost and give an example of each. 17. There are regulations that prohibit "insider trading," which is the use of non-??public information about a security to earn abnormal profits from trading that security. Which form of market efficiency would make these laws unnecessary? Explain why. 18. Compare and constrast Malkiel (2003) and Shiller?s (2003) arguments for and against market efficiency. Do you think markets are efficient? Why or why not? If so, what form (i.e., weak, semi-??strong, strong)? 19. For the period 1926-??2008, small-??company stocks had a risk premium of 12.6 percent. What does the term "risk premium" mean? Is the risk premium on these stocks considered to be relatively high or relative low as compared to other investment classes? Explain why. 20. What is the ?principle of diversification?? Why is the standard deviation of a portfolio less than the weighted average of the standard deviations of the assets in the portfolio? 21. Explain the differences between total risk, unsystematic risk, and systematic risk. Identify how these different risks are measured. 22. What is a company?s ?cost of capital?? How is it related to the return required by investors? 23. The cost of capital depends primarily on the use of the funds, not the source. Explain. 24. Assume a firm follows a policy of using its weighted average cost of capital as the required return for all of its proposed projects. Evaluate this policy. How will this policy affect the overall risk level of the firm over time? 25. You are considering a firm under three separate scenarios: 1) no debt, taxes or bankruptcy costs, 2) with debt and taxes but no bankruptcy costs, and 3) with debt, taxes, and bankruptcy costs. Under which one of these three scenarios will the firm have the highest value? Explain. COOGAN DEVELOPMENT CO., INC. 2002 Income Statement Sales $25,000 Cost of goods sold 15,000 Depreciation 3,000 Earnings before interest and taxes 7,000 Interest paid 1,000 Taxable income 6,000 Taxes (34%) 2,040 Net income 3,960 Retained earnings 2,376 Dividends 1,584 COOGAN DEVELOPMENT CO., INC. Balance Sheets as of December 31, 2002 ASSETS Current assets 2002 Cash $ 3,000 Accounts receivable 11,000 Inventory 4,500 Total current assets $ 18,500 Fixed assets Net plant and equipment 31,500 Total assets $ 50,000 LIABILITIES AND OWNERS? EQUITY Current liabilities Accounts payable $ 2,500 Notes payable 6,416 Total current liabilities $ 8,916 Long-??term debt $ 13,000 Owners? equity Common stock and paid-??in-??surplus 16,500 Retained earnings 11,584 Total owners? equity $ 28,084 Total liabilities and equity $ 50,000 Be sure to show your work (i.e., formulas and inputs). 1. Compute the quick ratio using 2002 financial statement data. 2. Compute the total debt ratio using 2002 financial statement data. 3. Assume that a Big Mac costs $2.50 today. If the price of a Big Mac increases at an annual rate of 3%, how much will a Big Mac cost when you retire 40 years from now? 4. Congratulations! You have just won the lottery. The lottery officials say that you prize is worth $5,000,000. However, you will actually receive your prize in 25 equal annual payments of $200,000 each with the first payment today. If appropriate interest rate is 7% per annum, what is the present value of your prize? 5. You are trying to plan for your retirement. You project that you will retire in 40 years. After retirement you estimate that you will need to withdraw from your retirement account $50,000 per year with the first withdrawal to occur at the end of the first year of retirement (i.e. 41 years from today). You estimate that you will live long enough to make 25 annual withdrawals from the account. You want to accumulate the necessary retirement funds by making equal annual deposits into the retirement account, with the first payment to be made one year from today. You currently have $10,000 that you will deposit into the account today. You estimate that the account will earn 7%. What should be the amount of your annual deposit? 6. You have just purchased a 10-??year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid each 6 months. If the yield to maturity is 10 percent, how much did you pay for it? 7. The last dividend on Spirex Corporation's common stock was $4.00, and the expected growth rate is 10 percent. If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock? 8. You are evaluating a capital budgeting project. The appropriate discount rate for the project is 12.5%. The initial cost of the project will be $200,000. The project is expected to produce positive after tax cash flows of $60,000 per year for 4 years. Winding up of the project will produce a salvage value for an additional after tax positive cash flow of $15,000 in the fourth year. What is the Net Present Value of the project? 9. If a stock has a beta coefficient, ?, equal to 1.20, the risk premium associated with the market is 9 percent, and the risk-??free rate is 5 percent, application of the capital asset pricing model indicates the appropriate return should be __________? 10. Scholes Industries has a target capital structure consisting of 40% debt, 15% preferred stock and 45% common equity. The before-??tax yield to maturity (YTM) on Scholes? long-??term bonds is 9.5%, its cost of preferred stock is 8% and its cost of equity is 12.5%. If the firm?s tax rate is 40%, what is Schole?s WACC?
Question 4
1. (Points: 1) With respect to a corporation, select the statement that is correct. a. Its organization requires an approved charter which is governed by state law. b. Ownership rights to the corporation are transferable. c. A corporation is a separate legal entity from its owners. d. Stockholders have limited liability. e. All of the above are correct. Save Answer 2. (Points: 1) Which of the following represents the shares currently in the hands of investors? a. Authorized shares b. Issued shares c. Outstanding shares d. Unissued shares e. Treasury shares Save Answer 3. (Points: 1) The par value of common stock is the a. average market price of the stock during the period in which it is sold. b. ceiling (maximum) amount above which the stock may not be sold initially. c. floor (minimum) amount below which the stock may not be sold initially. d. selling price of the stock at the date it was issued by the corporation. e. same as the market value for the stock on the date of issue. Save Answer 4. (Points: 1) Vaughan Company has one class of capital stock issued. It is a. common stock. b. preferred stock, voting. c. preferred stock, noncumulative. d. common stock, nonvoting. e. None of the above is correct. Save Answer 5. (Points: 1) If Lynch Corporation sells and issues 100 shares of its $10 par value common stock at $11 per share, the entry to record the sale will not include a a. Debit to Cash of $1,100. b. Credit to Contributed capital in excess of par of $100. c. Credit to Common stock of $1,000. d. Credit to Retained earnings of $100. e. All of the above would be included. Save Answer 6. (Points: 1) The conversion feature on convertible preferred stock enables the stockholder to convert it to a. convertible bonds. b. cash. c. common stock. d. products of the company. e. dividends in arrears. Save Answer 7. (Points: 1) Choose the correct definition for par value from the following: a. The amount that a corporation must pay when it exercises its right to convert shares of stock. b. The equity of one share of outstanding stock in the issuing corporation's net assets as recorded in the corporation's accounts. c. An arbitrary value placed on a share of stock at the time the stock is authorized in the corporate charter. d. The costs of bringing a corporation into existence, such as legal fees, promotor's fees, and amounts paid to the state to secure a charter. Save Answer 8. (Points: 1) Guest Corporation issued (sold) 1,000 shares of its no par common stock for $110 per share. The bylaws established a stated value of $100 per share. The transaction is recorded as an increase in contributed capital of a. $ 100,000. b. $ 110,000. c. $1,000,000. d. $1,100,000. e. None of the above is correct. Save Answer 9. (Points: 1) Which of the following statements is true? a. An initial public offering (IPO) occurs when the company first offers their stock for sale to the public. b. A seasoned new issue is the term used for any additional sales of new stock to the public after the IPO. c. An underwriter, usually an investment banker, advises the corporation on matters concerning the sale of shares of stock and helps to market those shares for a fee. d. A and B are true. e. All of the above are true. Save Answer 10. (Points: 1) Shares of stock eligible for dividends are a. the number of shares of authorized. b. the number of shares issued. c. the number of shares outstanding. d. the number of treasury shares. e. none of the above. Save Answer 11. (Points: 1) The declaration and payment of a cash dividend a. reduces retained earnings and increases liabilities by the amount of the dividend. b. reduces retained earnings and increases contributed capital by the same amount. c. reduces assets and increases liabilities each by the amount of the dividend. d. reduces assets and retained earnings each by the amount of the dividend. e. None of the above is correct. Save Answer 12. (Points: 1) Retained earnings a. is an asset. b. has a debit balance for a successful corporation. c. represents the future dividend liability of the company. d. represents the income that has been earned by the company, less any dividends declared since the first day of operations. e. is presented on the Statement of Cash Flows. Save Answer 13. (Points: 1) At the end of 20C, Allen Corporation reported a retained earnings credit balance of $50,000. During 20D, Allen reported the following amounts: Cash dividends declared and paid $15,000, net income of $35,000, and a $5,000 prior period adjustment (debit). The 20D ending balance of total retained earnings was a. $75,000. b. $70,000. c. $65,000. d. $60,000. e. None of the above is correct. Save Answer 14. (Points: 1) Which of the following accounts would appear in the general ledger of a partnership? a. Retained earnings account. b. Dividends paid account. c. Common stock accounts. d. Drawings accounts. e. None of the above. Save Answer 15. (Points: 1) The statement of cash flows reports directly on the a. financial position of the business. b. accrual basis in accordance with GAAP. c. causes of the inflows and outflows of cash. d. financial operating performance of the business. e. None of the above is correct. Save Answer 16. (Points: 1) Which of the following transactions would not create a cash flow? a. The company purchased some of its own stock from a stockholder. b. Amortization of patent for the period. c. Payment of a cash dividend. d. Sale of equipment at book value (i.e. no gain or loss). e. None of the above is correct. Save Answer 17. (Points: 1) Which of the following transactions is not a direct source of cash? a. Disposal of inventory for cash. b. Borrowing cash. c. Sale and issuance of capital stock for cash. d. Sale of services for cash. e. All of the above are direct sources of cash. Save Answer 18. (Points: 1) Which of the following transactions is not a direct use of cash? a. Acquisition of inventory for cash. b. Exchanges of bonds payable for land. c. Purchase of treasury stock with cash. d. Cash dividend paid. e. All of the above are direct uses of cash. Save Answer 19. (Points: 1) Which of the following transactions is not a source of cash? a. Cash sales of merchandise. b. Sale and issuance of capital stock for cash. c. Short-term borrowing of cash. d. Sale of operational assets for cash. e. All of the above are typical sources of cash. Save Answer 20. (Points: 1) Common stockholders have the right to a. sell their stock. b. share in any dividends distributed to common stockholders. c. have the first opportunity to purchase any additional shares of common stock issued by the corporation. d. vote at stockholders' meetings. e. All of the above are true. Save Answer 21. (Points: 1) Which of the following would not be a cash flow from investing activities? a. Purchase of long-term investments. b. Sale of a patent. c. Collection of principal of a note receivable. d. Collection of interest revenue on a long-term note. e. None of the above is correct. Save Answer 22. (Points: 1) Which of the following would not be a cash flow from financing activities? a. Issuance of common stock. b. Borrowing on a long-term note payable. c. Collection of a cash dividend. d. Repayment of principal on a long-term note payable. e. None of the above is correct. Save Answer 23. (Points: 1) Which of the following is a cash flow from operating activities? a. Purchase of merchandise for resale. b. Sale of a piece of land no longer used in operations. c. Sale of long-term investments in common stock. d. Payment of a note payable. e. None of the above is correct. Save Answer 24. (Points: 1) A cash inflow from financing activities includes a. proceeds from selling investments in equity securities of another company. b. proceeds from selling equipment. c. proceeds from issuance of bonds payable. d. receipt of interest payments. e. None of the above is correct. Save Answer 25. (Points: 1) The statement of cash flows (indirect method) reports depreciation expense as an addition to net income because depreciation a. causes an inflow of funds for the replacement of assets. b. reduces reported net income of the period but does not involve an outflow of cash for that period. c. is a direct use of cash. d. reduces reported net income and causes an inflow of cash. e. None of the above is correct. Save Answer 26. (Points: 1) When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following are not provisions specified in the indenture? a. Dates of interest payments. b. Rate of interest to be paid. c. Maturity date. d. Cash to be received at the issue date. e. All of the above are specified in the indenture. Save Answer 27. (Points: 1) Positive financial leverage occurs when a. interest payments can be deducted for income tax purposes. b. the company's after-tax return on total assets is less than the after-tax cost of borrowing. c. the return to the owners is enhanced through the use of debt financing. d. payment of resources to creditors is limited to the required interest payments while the return of the principal borrowed is not required. e. None of the above is correct. Save Answer 28. (Points: 1) Bonds payable usually are classified on the balance sheet as a. long-term liabilities. b. current liabilities. c. investments and funds. d. current assets. e. None of the above is correct. Save Answer 29. (Points: 1) The annual interest rate specified on a bond (which is based on the maturity amount of the bond) appropriately can be called the a. stated rate. b. nominal rate. c. coupon rate. d. contract rate. e. A through D are all acceptable terms. Save Answer 30. (Points: 1) Which of the following statements is correct? a. Bonds are always issued (sold) at their par value. b. Bonds issued at more than par value are said to be issued at a discount. c. Once bonds are issued, the bonds will trade in the bond market above or below par depending on changes in interest rates. d. Bondholders must hold their bonds to maturity to receive cash for their investment. e. None of the above is correct. Save Answer 31. (Points: 1) On July 1, 20A, Wilson Company issued $300,000, five-year, 9% bonds at 103. The reason Wilson issued the bonds at a premium was a. the stated rate of interest was higher than the rate being paid on investments with comparable risk. b. the stated rate of interest was the same as the rate being paid on investments with comparable risk. c. the stated rate of interest was lower than the rate being paid on investments with comparable risk. d. the bonds were callable. e. None of the above is correct. Save Answer 32. (Points: 1) Deany Company issued $100,000 bonds. The stated rate of interest was 8% and the market rate 9%. Which of the following statements is true? a. The bonds were issued at a premium. b. Annual interest expense will exceed the company's actual cash payments for interest. c. Annual interest expense will be $8,000. d. Deany Company cannot issue bonds if the market rate is higher than the stated rate. e. None of the above is correct. Save Answer 33. (Points: 1) If a bond is sold at 98, its stated rate of interest would be a. higher than the market rate. b. lower than the market rate. c. equal to the market rate. d. unrelated to the market rate. e. None of the above is correct. Save Answer 34. (Points: 1) Ratios are most useful for analysis when a. used alone. b. compared with historical ratios of the same company. c. compared with ratios for other companies in the industry. d. Both B and C are correct. e. All of the above are correct. Save Answer 35. (Points: 1) The base amount in preparing a common-size income statement is usually a. cost of goods sold. b. gross profit. c. net income. d. net sales. e. All of the above are appropriate. Save Answer 36. (Points: 1) The Able Company had net income of $47,500 and earnings per share of $3.17 during 20B. On December 31, 20B, the stock had a market price of $18.50 per share. What is Able's price/earnings ratio? a. 25.70. b. 8.11. c. 5.84. d. 0.17. e. None of the above is correct. Save Answer 37. (Points: 1) Perot Company had income before interest and taxes of $120,000. Interest expense for the period was $17,000 and income taxes amounted to $28,500. The average stockholders' equity was $680,000. What is Perot's return on equity? a. 17.65%. b. 15.15%. c. 13.46%. d. 10.96%. e. None of the above is correct. Save Answer 38. (Points: 1) A business must maintain a sufficient amount of working capital to a. meet current debts b. carry adequate inventories c. take advantage of cash discounts d. to maintain liquidity. e. All of the above are correct. Save Answer 39. (Points: 1) Crusader Company reported the following amounts in the 20A balance sheet Total assets $330,000 Total liabilities $100,000 Common stock, par value $9 (no preferred stock) $90,000 The book value of the common stock was a. $11. b. $20. c. $33. d. $22. e. None of the above is correct. Save Answer 40. (Points: 1) At the end of 20B, Storage Company reported outstanding common stock (par $20) of $300,000. Total liabilities were $440,000 and total assets were $860,000. The company had no preferred stock. The book value per share of common stock was a. $29.00. b. $13.90. c. $28.00. d. $14.00. e. None of the above is correct. Save Answer 41. (Points: 1) Bailey Corporation reported the following information for 20A Net income $10,000 Total assests $16,000 Total stockholders' equity $8,000 Morgan's debt/equity ratio was a. .33 or 33%. b. 1.25 or 125 %. c. 1.0 or 100%. d. 3.0 or 300%. e. None of the above is correct. Save Answer 42. (Points: 1) Shore Company reported income before extraordinary items of $25,000, total liabilities of $150,000, and total stockholders' equity of $100,000. The return on assets was a. 10%. b. 25%. c. 16.67%. d. Cannot be determined from the data given. e. None of the above is correct. Save Answer 43. (Points: 1) If the current (working capital) ratio is 2 to 1, the payment of a cash dividend, which was recorded as a liability on the date of declaration, will a. increase the current ratio. b. decrease the current ratio. c. have no effect on the current ratio. d. invalidate earnings per share. e. None of the above is correct. Save Answer 44. (Points: 1) The records of ZZZZ Better Corporation include the following: Average total assets $60,000 Average total liabilities $45,000 Total revenue $107,600 Total expense (including income tax) $104,000 The return on equity is (round to the nearest percent) a. 13%. b. 6%. c. 24%. d. 6%. e. None of the above is correct. Save Answer 45. (Points: 1) An important measure of the average movement of goods "on and off the shelf" of a company is the a. Profit margin. b. Price/earnings ratio. c. Inventory turnover ratio. d. Gross inventory ratio. e. None of the above is correct. Save Answer 46. (Points: 1) Book value per common share a. usually is a good indicator of the market value of the common stock. b. is a good measure of management performance. c. is usually greater than the market value per share. d. is a measure of liquidity. e. is not widely used in assessing the future dividend potential of the corporation. Save Answer 47. (Points: 1) Which of the following ratios is NOT a test of liquidity? a. Receivable turnover. b. Cash ratio. c. Current ratio. d. Quick ratio. e. All of the above are tests of liquidity. Save Answer 48. (Points: 1) Which of the following ratios is not a test of solvency? a. Debt to equity ratio. b. Owners' equity to total equity ratio. c. Creditors' equity to total equity ratio. d. Earnings per share ratio. e. All of the above are tests of solvency. Save Answer 49. (Points: 1) Which of the following ratios is not an indicator of a company's short-term financial strength? a. Price/earnings ratio. b. Receivable turnover. c. Working capital ratio. d. Quick ratio. e. All of the above are indicators of the current position. Save Answer 50. (Points: 1) Which of the following ratios usually is not considered to be a test of profitability? a. Current ratio. b. Profit margin. c. Return on assets. d. Earnings per share. e. None of the above is correct. Save Answer 1. (Points: 1) Managerial accounting: a. has its primary emphasis on the future. b. is required by regulatory bodies such as the SEC. c. focuses on the organization as a whole, rather than on the organization's segments. d. Responses a, b, and c are all correct. Save Answer 2. (Points: 1) Which of the following statements are true regarding financial and managerial accounting? I. Both are mandatory. II. Both rely on the same underlying financial data. III. Both emphasize the segments of an organization, rather than just looking at the organization as a whole. IV. Both are geared to the future, rather than to the past. a. I, II, III, and IV b. Only II, III and IV c. Only II and III d. Only II Save Answer 3. (Points: 1) Managerial accounting places considerable weight on: a. generally accepted accounting principles. b. the financial history of the entity. c. ensuring that all transactions are properly recorded. d. detailed segment reports about departments, products, and customers. Save Answer 4. (Points: 1) The benefits of a successful Just-In-Time system include all of the following except: a. funds tied up in inventories are released for use elsewhere. b. inventory buffers are increased. c. throughput time is reduced. d. defect rates are decreased. Save Answer 5. (Points: 1) A key concept of the JIT inventory system is: a. the raw materials, work in process, and finished goods inventories of manufacturing companies act as buffers so that operations can proceed smoothly even if suppliers are late with deliveries or a department is unable to operate for a brief period due to breakdowns or other reasons. b. the use of many suppliers so as to ensure rapid delivery of materials for production. c. the maintenance of a stock of raw materials so that defective materials can be replaced quickly so as to maintain a high rate of productivity. d. inventories are costly to carry and can be kept to minimum levels or eliminated completely with careful planning. Save Answer 6. (Points: 1) The just in time (JIT) concept applies to which of the following: I. The acquisition of raw materials. II. The assembly of manufactured parts in products. III. The shipment of finished products to customers. a. I. b. I, III. c. I, II, III. d. II, III. Save Answer 7. (Points: 1) The flow of goods through a JIT system is based on: a. a workstation efficiently completing its processing of a batch of units so that the units can proceed forward to the next workstation before the next workstation is ready to receive them. b. processing goods in large batch sizes rather than less economical small batches. c. maintaining a stockpile of raw materials in anticipation of materials shortages. d. producing to meet customer demand with no buildup of inventory at any point in the production process. Save Answer 8. (Points: 1) A successful JIT system is based upon which of the following concepts? a. The company must rely upon a large number of suppliers to ensure frequent deliveries of small lots. b. The company should always choose those suppliers offering the lowest prices. c. The company should avoid long-term contracts with suppliers so as to exert pressure on suppliers to make prompt and frequent deliveries. d. A small number of suppliers make frequent deliveries of specific quantities thus avoiding the buildup of large inventories of materials on hand. Save Answer 9. (Points: 1) A danger in Process Reengineering is that: a. non-value-added activities may be eliminated. b. some resources may no longer be required. c. employee morale may suffer. d. all of the above. Save Answer 10. (Points: 1) The Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management contains a policy regarding confidentiality that requires that management accountants: a. refrain from disclosing confidential information acquired in the course of their work except when authorized by management. b. refrain from disclosing confidential information acquired in the course of their work in all situations. c. refrain from disclosing confidential information acquired in the course of their work except when authorized by management, unless legally obligated to do so. d. refrain from disclosing confidential information acquired in the course of their work in all cases since the law requires them to do so. Save Answer 11. (Points: 1) The Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management states that significant ethical issues should be discussed first with an immediate superior unless the superior is involved. If satisfactory resolution cannot be achieved when the problem is initially presented, then the issues should be: a. submitted to the next higher managerial level. b. submitted to the chief executive officer of the firm. c. submitted to the audit committee, executive committee, board of directors, or owners. d. submitted to outside legal counsel. Save Answer 12. (Points: 1) The corporate controller's salary would be considered a(n): a. manufacturing cost. b. product cost. c. administrative cost. d. selling expense. Save Answer 13. (Points: 1) The cost of fire insurance for a manufacturing plant is generally considered to be a: a. product cost. b. period cost. c. variable cost. d. all of the above. Save Answer 14. (Points: 1) Each of the following would be a period cost except: a. the salary of the company president's secretary. b. the cost of a general accounting office. c. depreciation of a machine used in manufacturing. d. sales commissions. Save Answer 15. (Points: 1) For a manufacturing company, which of the following is an example of a period rather than a product cost? a. Depreciation of factory equipment. b. Wages of salespersons. c. Wages of machine operators. d. Insurance on factory equipment. Save Answer 16. (Points: 1) Which of the following would be considered a product cost for external financial reporting purposes? a. Cost of a warehouse used to store finished goods. b. Cost of guided public tours through the company's facilities. c. Cost of travel necessary to sell the manufactured product. d. Cost of sand spread on the factory floor to absorb oil from manufacturing machines. Save Answer 17. (Points: 1) Which of the following would NOT be treated as a product cost for external financial reporting purposes? a. Depreciation on a factory building. b. Salaries of factory workers. c. Indirect labor in the factory. d. Advertising expenses. Save Answer 18. (Points: 1) Transportation costs incurred by a manufacturing company to ship its product to its customers would be classified as which of the following? a. Product cost b. Manufacturing overhead c. Period cost d. Administrative cost Save Answer 19. (Points: 1) Micro Computer Company has set up a toll-free telephone line for customer inquiries regarding computer hardware produced by the company. The cost of this toll-free line would be classified as which of the following? a. Product cost b. Manufacturing overhead c. Direct labor d. Period cost Save Answer 20. (Points: 1) wages of factory maintenance personnel would usually be considered to be: Indirect labor; Manufacturing overhead a. No; Yes b. Yes; No c. Yes; Yes d. No; No Save Answer 21. (Points: 1) Direct materials are a part of: Conversion cost; Manufacturing cost; Prime cost a. Yes; Yes; No b. Yes; Yes; Yes c. No; Yes; Yes d. No; No; No Save Answer 22. (Points: 1) Manufacturing overhead consists of: a. all manufacturing costs. b. all manufacturing costs, except direct materials and direct labor. c. indirect materials but not indirect labor. d. indirect labor but not indirect materials. Save Answer 23. (Points: 1) Which of the following should NOT be included as part of manufacturing overhead at a company that makes office furniture? a. sheet steel in a file cabinet made by the company. b. manufacturing equipment depreciation. c. idle time for direct labor. d. taxes on a factory building. Save Answer 24. (Points: 1) Rossiter Company failed to record a credit sale at the end of the year, although the reduction in finished goods inventories was correctly recorded when the goods were shipped to the customer. Which one of the following statements is correct? a. Accounts receivable was not affected, inventory was not affected, sales were understated, and cost of goods sold was understated. b. Accounts receivable was understated, inventory was overstated, sales were understated, and cost of goods sold was overstated. c. Accounts receivable was not affected, inventory was understated, sales were understated, and cost of goods sold was understated. d. Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was not affected. Save Answer 25. (Points: 1) If the cost of goods sold is greater than the cost of goods manufactured, then: a. work in process inventory has decreased during the period. b. finished goods inventory has increased during the period. c. total manufacturing costs must be greater than cost of goods manufactured. d. finished goods inventory has decreased during the period. Save Answer 26. (Points: 1) Last month, when 10,000 units of a product were manufactured, the cost per unit was $60. At this level of activity, variable costs are 50% of total unit costs. If 10,500 units are manufactured next month and cost behavior patterns remain unchanged the: a. total variable cost will remain unchanged. b. fixed costs will increase in total. c. variable cost per unit will increase. d. total cost per unit will decrease. Save Answer 27. (Points: 1) Variable cost: a. increases on a per unit basis as the number of units produced increases. b. remains constant on a per unit basis as the number of units produced increases. c. remains the same in total as production increases. d. decreases on a per unit basis as the number of units produced increases. Save Answer 28. (Points: 1) Within the relevant range, the difference between variable costs and fixed costs is: a. variable costs per unit fluctuate and fixed costs per unit remain constant. b. variable costs per unit are constant and fixed costs per unit fluctuate. c. both total variable costs and total fixed costs are constant. d. both total variable costs and total fixed costs fluctuate. Save Answer 29. (Points: 1) Which of the following statements regarding fixed costs is incorrect? a. Expressing fixed costs on a per unit basis usually is the best approach for decision making. b. Fixed costs expressed on a per unit basis will react inversely with changes in activity. c. Assumptions by accountants regarding the behavior of fixed costs rest heavily on the concept of the relevant range. d. Fixed costs frequently represent long-term investments in property, plant, and equipment. Save Answer 30. (Points: 1) An opportunity cost is: a. the difference in total costs which results from selecting one alternative instead of another. b. the benefit forgone by selecting one alternative instead of another. c. a cost which may be saved by not adopting an alternative. d. a cost which may be shifted to the future with little or no effect on current operations. Save Answer 31. (Points: 1) Which of the following costs is often important in decision making, but is omitted from conventional accounting records? a. Fixed cost. b. Sunk cost. c. Opportunity cost. d. Indirect cost. Save Answer 32. (Points: 1) When a decision is made among a number of alternatives, the benefit that is lost by choosing one alternative over another is the: a. realized cost. b. opportunity cost. c. conversion cost. d. accrued cost. Save Answer 33. (Points: 1) Conversion cost consists of which of the following? a. Manufacturing overhead cost. b. Direct materials and direct labor cost. c. Direct labor cost. d. Direct labor and manufacturing overhead cost. Save Answer 34. (Points: 1) Which one of the following costs should NOT be considered an indirect cost of serving a particular customer at a Dairy Queen fast food outlet? a. the cost of the hamburger patty in the burger they ordered. b. the wages of the employee who takes the customer's order. c. the cost of heating and lighting the kitchen. d. the salary of the outlet's manager. Save Answer 35. (Points: 1) Green Company's costs for the month of August were as follows: direct materials, $27,000; direct labor, $34,000; sales salaries, $14,000; indirect labor, $10,000; indirect materials, $15,000; general corporate administrative cost, $12,000; taxes on manufacturing facility, $2,000; and rent on factory, $17,000. The beginning work in process inventory was $16,000 and the ending work in process inventory was $9,000. What was the cost of goods manufactured for the month? a. $105,000 b. $132,000 c. $138,000 d. $112,000 Save Answer 36. (Points: 1) A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $2,700 and is paid at the beginning of the first year. Eighty percent of the premium applies to manufacturing operations and 20% applies to selling and administrative activities. What amounts should be considered product and period costs respectively for the first year of coverage? Product; Period a. $2,700; $0 b. $2,160; $ 540 c. $1,440; $360 d. $720; $180 Save Answer 37. (Points: 1) Using the following data, calculate the beginning work in process inventory. Cost of goods sold: $70 Direct labor: $20 Direct materials: $15 Cost of goods manufactured: $80 Work in process ending: $10 Finished goods ending: $15 Manufacturing overhead: $30 The beginning work in process inventory is: a. $20. b. $15. c. $55. d. $25. Save Answer 38. (Points: 1) During the month of May, Bennett Manufacturing Company purchased $43,000 of raw materials. The manufacturing overhead totaled $27,000 and the total manufacturing costs were $106,000. Assuming a beginning inventory of raw materials of $8,000 and an ending inventory of raw materials of $6,000, direct labor must have totaled: a. $34,000. b. $38,000. c. $36,000. d. $45,000. Save Answer 39. (Points: 1) Using the following data for January, calculate the cost of goods manufactured: Direct materials: $38,000 Direct labor: $24,000 Manufacturing overhead: $17,000 Beginning work in process inventory: $10,000 Ending work in process inventory: $11,000 The cost of goods manufactured was: a. $89,000. b. $78,000. c. $79,000. d. $80,000. Save Answer 40. (Points: 1) During the month of June, Reardon Company incurred $17,000 of direct labor, $8,500 of manufacturing overhead and purchased $15,000 of raw materials. Between the beginning and the end of the month, the raw materials inventory increased by $2,000, the finished goods inventory increased by $1,500, and the work in process inventory decreased by $3,000. The cost of goods manufactured would be: a. $38,500. b. $40,500. c. $41,500. d. $43,500. Save Answer 41. (Points: 1) Williams Company's direct labor cost is 25% of its conversion cost. If the Manufacturing overhead cost for the last period was $45,000 and the direct materials cost was $25,000, the direct labor cost was: a. $15,000. b. $60,000. c. $33,333. d. $20,000. Save Answer 42. (Points: 1) The Lyons Company's cost of goods manufactured was $120,000 when its sales were $360,000 and its gross margin was $220,000. If the ending inventory of finished goods was $30,000, the beginning inventory of finished goods must have been: a. $20,000. b. $50,000. c. $110,000. d. $150,000. Save Answer 43. (Points: 1) The gross margin for Cushing Company for the first quarter of last year was $325,000 when sales were $700,000. The beginning inventory of finished goods was $60,000 and the ending inventory of finished goods was $85,000. The cost of goods manufactured for the first quarter would have been: a. $375,000. b. $350,000. c. $400,000. d. $385,000. Save Answer 44. (Points: 1) Last month a manufacturing company had the following operating results: Beginning finished goods inventory: $74,000 Ending finished goods inventory: $73,000 Sales: $464,000 Gross margin: $52,000 What was the cost of goods manufactured for the month? a. $413,000 b. $411,000 c. $412,000 d. $463,000 Save Answer 45. (Points: 1) The following information was provided by Grand Company for the year just ended: Beginning finished goods inventory: $130,425 Ending finished goods inventory: $125,770 Sales: $500,000 Gross margin: $100,000 The cost of goods manufactured for the year was: a. $395,345. b. $95,345. c. $104,655. d. $404,655. Save Answer 46. (Points: 1) Delta Merchandising, Inc., has provided the fo
