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A company's beginning inventory was overstated by $3,000, now ending inventory is understated by $2,000. If purchases were properly reported, then earnings before taxes will be:
overstated by $1,000.
overstated by $5,000.
understated by $5,000

Which accounting methods are preferable for income statements and balance sheets?
Last in, first out (LIFO) for income statements and first in, first out (FIFO) for the balance sheet.
Last in, first out (LIFO) for the balance sheet and first in, first out (FIFO) for the income statement.
First in, first out (FIFO) for both income statements and balance sheets

For balance sheet purposes, inventories based on:
FIFO are preferable to those based on LIFO, as they more closely reflect current costs.
LIFO are preferable to those based on FIFO, as they more closely reflect the current costs.
LIFO are preferable to those based on average cost, as they more closely reflect the current costs.

Which of the following statements regarding the capitalization of an expense is least accurate?
Capitalizing an expense creates an asset.
Capitalizing an expense lowers current period net income
Capitalized expenses increases equity

Which of the following statements regarding the capitalization of an expense is least accurate?
Capitalizing an expense creates an asset
Capitalizing an expense lowers current period net income.
Capitalized expenses increases equity

When comparing capitalizing versus expensing costs which of the following statements is most accurate?
Capitalizing costs creates higher cash flows from operations and lower cash flows from investing.
Expensing costs creates lower cash flows from operations and lower cash flows from investing.
Capitalizing costs creates lower cash flows from operations and higher cash flows from investing.

Compared with firms that expense costs, firms that capitalize costs can be expected to report:
higher asset levels and higher equity levels in the early years of the asset's life
higher asset levels and lower equity levels in the early years of the asset's life.
lower asset levels and higher equity levels in the early years of the asset's life.

Capitalized interest costs are typically reported in the cash flow statement as an outflow from:
operating.
investing.
financing.

Which of the following statements is least accurate regarding accounting for foreign currency translations? The:
temporal method uses the historical exchange rate to translate non-monetary assets and liabilities into the currency of the country of the parent company.
current rate method applies the average exchange rate to all income statement accounts
current rate method applies the current exchange rate to all balance sheet accounts.

Which of the following securities would most likely be characterized as a held-to-maturity security?
Debt securities.
Debt or equity securities.
Equity securities.

The following amounts were drawn from the records of JME Company: total assets = $1,200; total liabilities = $750; contributed capital = $600. Based on this information alone, retained earnings must be equal to:
150.
450.
150.

Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of Octabius to review all purchases that occurred between February 1 and February 8 to investigate an error on the receiving dock. Singh will most likely look at the:
general journal.
initial trial balance.
general ledger.

Which of the following is the best description of the flow of information in an accounting system?
Journal entries, general ledger, trial balance, financial statements.
General ledger, trial balance, general journal, financial statements.
Trial balance, general ledger, general journal, financial statements.

Reading the footnotes to a company’s financial statements and the Management Discussion & Analysis is least likely to help an analyst determine:
the detailed information that underlies the company’s accounting system.
the various accruals, adjustments and assumptions that went into the financial statements.
how well the financial statements reflect the company’s true performance.

Which of the following statements about financial statements and reporting standards is least accurate?
Financial statements could potentially take any form if reporting standards didn’t exist.
The objective of financial statements is to provide economic decision makers with useful information.
Reporting standards focus mostly on format and presentation and allow management wide latitude in assumptions.

According to IFRS when a company pays dividends to its stockholders, which type of cash flow does this represent?
Financing.
Operating.
Investing.

Which of the following is least likely a cash flow in the calculation of cash flow from operations according IFRS
Interest income.
Dividends paid.
Dividends received.

What are the main components of cash flow from operations?
Changes in accounts receivable, inventory, accounts payable, and items that flow through the income statement
Capitalization activities, sale of assets, and purchasing securities.
Repayment of bonds, issuance of common stock, and stock splits.

What would be the impact on a firm’s return on assets ratio (ROA) of the following independent transactions, assuming ROA is less than one? Transaction #1 – A firm owned investment securities that were classified as available-for-sale and there was a recent decrease in the fair value of these securities.Transaction #2 – A firm owned investment securities that were classified as available-for-trading and there was recent increase in the fair value of the securities.Transaction #1 Transaction #2
Higher Higher
Higher Lower
Lower Higher

Would projecting future financial performance based on past trends provide a reliable basis for valuation of the following firms?Firm #1 – A rapidly growing company that has made numerous acquisitions and divestitures.Firm #1 Firm #2
Yes No
No Yes
No No

A firm is more solvent if it has:
low leverage ratios and high coverage ratios.
low leverage and coverage ratios.
high leverage and coverage ratios.

A firm enters an operating lease to occupy two floors of an office building. This transaction will most likely decrease the firm’s:
fixed charge coverage ratio but will not affect its interest coverage ratio.
leverage ratios and fixed charge coverage ratio.
interest coverage ratio but will not affect its leverage ratios.

Other things equal, and ignoring issuance costs, a firm that raises cash by issuing a new bond is most likely to:
increase its leverage ratios and increase its coverage ratios.
decrease its leverage ratios and increase its coverage ratios
increase its leverage ratios and decrease its coverage ratios

Which of the following statements regarding finance and operating leases is least accurate?
During the life of an operating lease, the rent expense equals the lease payment
For financial reporting of finance and operating leases, no entry is required on the lessee's balance sheet at the inception of the lease.
Asset turnover is higher for the lessee with an operating lease than a finance lease

Which of the following is least likely disclosed in the financial statement footnotes of a lessee?
A general description of the leasing arrangement.
The lease interest rate.
The lease payments to be paid in each of the next five years.

Under a finance lease (versus an operating lease) which of the lessee's financial ratios will be higher?
Asset turnover
Debt/equity.
Return on equity.

On the lessee's cash flow statement, the principal portion of a finance lease payment is a:
financing cash flow.
operating cash flow.
investing cash flow.

For a given lease payment and term, which of the following is least accurate regarding the effects of the classification of the lease as a finance lease as compared to an operating lease?
The lessee's asset turnover will be lower for a finance lease.
The lessee's current ratio will be higher for a finance lease.
The lessee's debt-to-equity ratio will be higher for a finance lease.

Compared to a finance lease, an operating lease is most likely to be favored when:
management compensation is not based on returns on invested capital.
the lessee has bond covenants relating to financial policies.
at the end of the lease, the lessee may be better able to sell the asset than the lessor.

Under an operating lease (versus a finance lease) which of the following is higher for the lessee?
Cash flow from financing.
Cash flow from operations
Assets.

Which of the following provisions would least likely be included in the bond covenants? The borrower must:
maintain insurance on the collateral that secures the bond.
maintain a debt-to-equity ratio of no less than 2:1.
not increase dividends to common shareholders while the bonds are outstanding.

Which of the following statements regarding differences in taxable and pretax income is CORRECT? Differences in taxable and pretax income that:
increase or reduce the effective tax rate are called temporary differences.
result in deferred taxes are called temporary differences
are not reversed for five or more years are called permanent differences.

Which of the following statements about deferred taxes is least accurate? Deferred taxes:
arise primarily due to differences between GAAP and IRS code.
can relate to either permanent or temporary differences
may never “reverse” in the case of companies that are growing

Which of the following types of assets are least likely to be securitized as asset-backed securities (ABS)?
Auto loans.
Home equity lines of credit.
Insurance policies.

How is a collateralized mortgage obligation (CMO) created? A CMO is created by:
eliminating prepayment risk.
redistributing the cash flows of mortgage-related products to different bond classes.
eliminating extension risk

maturity of a mortgage pass through security is:
will always be longer than its true life.
unlikely to equal its true life.
will always be shorter than its true life.

Which of the following spreads will reflect the option risk in a callable bond?
The Z-spread only.
The OAS only.
Both the nominal spread and the Z-spread.

As the volatility of interest rates increases, the value of a putable bond will:
rise.
decline.
rise if the interest rate is below the coupon rate, and fall if the interest rate is above the coupon rate.

According to the pure expectations theory, how are forward rates interpreted? Forward rates are:
expected future spot rates.
expected future spot rates if the risk premium is equal to zero
equal to futures rates.

According to the liquidity theory, how are forward rates interpreted? Forward rates are
expected future spot rate plus a rate exposure premium.
equal to futures rates.
expected future spot rates.

Which of the following contains the overall rights of the bondholders?
Covenant.
Rights offering.
Indenture

Which of the following is NOT a negative bond covenant?
Credit rating must be investment grade.
Current ratio of at least 2.25.
Restriction on asset sales

Which of the following is an example of a positive covenant? The company
must not use the same collateral to back more than one debt obligation.
may not sell fixed assets that have been pledged as collateral for the bonds.
must maintain a times interest earned ratio of at least two times.

Sometimes floating rate issues have caps and/or floors, which limit the maximum or minimum coupon rate that the issue will pay. Which of the following statements is CORRECT with regard to floating rate issues that have caps and floors?
A floor is a disadvantage to both the issuer and the bondholder while a cap is an advantage to both the issuer and the bondholder.
A cap is an advantage to the bondholder while a floor is an advantage to the issuer.
A cap is a disadvantage to the bondholder while a floor is a disadvantage to the issuer

If the market rate of interest is greater than the coupon rate, the bond will be valued:
less than par.
at par.
greater than par.

Which of the following is a difference between an on-the-run and an off-the-run issue? An on-the-run issue:
is publicly traded whereas an off-the-run issue is not.
is the most recently issued security of that type.
tends to sell at a lower price.

Which of the following statements about the call feature is least accurate? The:
call feature lengthens the bond's duration, increasing price risk.
call feature exposes investors to additional reinvestment rate risk.
call feature reduces the bond's capital appreciation potential.

If investors expect future rates will be higher than current rates, the yield curve should be:
vertical.
downward sweeping.
upward sweeping

A downward sloping yield curve generally implies:
interest rates are expected to decline in the future.
shorter-term bonds are less risky than longer-term bonds.
interest rates are expected to increase in the future.

Which of the following yield curves represents a situation where long-term rates are less than short-term rates?
Normal yield curve.
Inverted yield curve.
Humped yield curve.

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