QUESTION: 1997

Firm A uses Double Declining and Firm B uses Sum-of-digits method of depreciation. In the first year, which of the following is/are TRUE?

A shows lower assets than B
II. A shows higher retained earnings than B
III. A shows a higher debt-to-equity ratio than B
IV. A shows a lower debt-to-asset ratio
II & IV
I & III
I, III & IV
II, III & IV

Answer(s): B

Explanation:

Double Declining results in a higher depreciation in the first year. Therefore, Firm A shows lower assets, lower income and hence lower equity in the first year. Thus, its debt-to-equity and debt-to- asset ratios are higher than B's.

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QUESTION: 1998

If the net cash inflow = $12,000, Investing cash flow = $(4,000) and operating cash flow = $7,000, the financing cash flow equals ________.

$9,000
$23,000
$15,000
$12,000

Answer(s): A

Explanation:

financing cash flow = 12,000 - (-4,000) - 7,000 = $9,000

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QUESTION: 1999

An end-of-period adjustment for depreciation of fixed assets involves an entry to an expense and

the increase of a contra account
the decrease of a contra account
the reduction of a liability
the increase of a liability

Answer(s): A

Explanation:

An adjustment for depreciation expense matches expenses with revenues for the period. An expense is incurred and the asset is reduced by increasing the contra account.

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QUESTION: 2000

Morgan Inc. was organized on January 2, 1997 with the following capital structure:

10% cumulative preferred stock, par value $100 and liquidation value $105; authorized, issued and outstanding 1,000 shares, $100,000

Common stock, par value $25; authorized 100,000 shares;
Issued and outstanding 10,000 shares, $250,000

Morgan had net income of $450,000 for its first year, but no dividends were declared. How much was Morgan's book value per common share at December 31, 1997?

$68.50
$70
$25
$45.00
$69.50

Answer(s): A

Explanation:

The book value per share of cumulative preferred stock is its liquidation value plus any dividends in arrears.
Thus, the book value per preferred share is the $105 liquidation value plus $10 ($100 X 10%) of dividends in arrears, or $115. The total book value for preferred shares is $115,000 ($115 X 1000). The total book value of the company is $800,000 ($100,000 par value of preferred stock + $250,000 par value of common stock + retained earnings equal to $450,000 of net income). Hence, $685,000 ($800,000-115,000) is the book value of the common stock, and book value per common share is $68.50 ($685,000 / 10,000 shares).

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QUESTION: 1997

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QUESTION: 1999

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