PBL Finance 2002 NLC

Mark the correct answer on your scantron sheet for each of the following questions.

1. The overall objective of financial reporting is to provide information

a. that is useful for decision-making.
b. about an enterprise’s assets, liabilities, and owners’ equity.
c. about an enterprise’s financial performance during a period.
d. that allows owners to assess management’s performance

2. The primary purpose of the Securities and Exchange Commission is to

a. regulate the issuance and trading of securities.
b. issue accounting and auditing regulations for publicly held companies.
c. prevent the trading of speculative securities.
d. enforce generally accepted accounting principles.

3. The International Accounting Standards Committee was formed to

a. enforce FASB standards in foreign countries.
b. develop worldwide accounting standards.
c. establish accounting standards for U.S. multinational companies.
d. develop accounting standards for countries that do not have their own standard-setting
bodies.

4. The United States Securities and Exchange Commission

a. has recognized IASC standards as an acceptable alternative to U.S. GAAP.
b. requires foreign companies listing their shares on U.S. stock exchanges.
c. has barred foreign companies from listing their shares on U.S. stock exchanges.
d. has no jurisdiction in the United States over foreign companies listing their shares on
U.S. stock exchanges.

5. If an inventory account is understated at year end, the effect will be to

a. overstate the net purchases.
b. overstate the gross margin.
c. overstate the cost of goods available for sale.
d. overstate the cost of goods sold.

6. Balance sheet analysis is useful in assessing a firm’s liquidity, which is the ability to
a. maintain profitable operations.
b. maintain past levels of preferred and common dividends.
c. satisfy short-term obligations.
d. survive a major economic downturn.

7. Hogi-Yogi Co. has total debt of $252,000 and stockholders’ equity of $420,000. Hogi-Yogi is
seeking capital to fund an expansion. Hogi-Yogi is planning to issue an additional $180,000
in common stock, and is negotiating with a bank to borrow additional funds. The bank
requires a maximum debt ratio of .75. What is the maximum additional amount Hogi-Yogi
will be able to borrow after the common stock is issued?
a. $ 639,000
b. $ 852,000
c. $1,236,000
d. $1,548,000

Page 1
PBL Finance 2002 NLC

8. Barney Company’s current ratio is 2:1. Which of the following transactions would normally
increase Barney’s current ratio?
a. Purchasing inventory on account
b. Borrowing money by signing a long-term note
c. Collecting an account receivable
d. Purchasing land for cash

9. What is the effect of the collection of accounts receivable on the current ratio and net
working capital respectively?
Current Ratio Net Working Capital
a. No effect No effect
b. Increase Increase
c. Increase No effect
d. No effect Increase

10. If a company anticipates a 40% increase in sales volume, then it is most likely that the
company will need
a. about a 40% increase in property, plant, and equipment.
b. about a 40% increase in accounts payable.
c. about a 40% increase in bank loans payable.
d. about a 40% increase in operating profit.

11. Which of the following represents the least likely option for financing business expansion?
a. Sale of preferred stock
b. Sale of common stock
c. Internal financing through use of retained earnings
d. An unrealized gain on available-for-sale securities

12. In calculating a company’s accounts receivable turnover, which of the following sets of
factors would be used?
a. Net income and average accounts receivable
b. Average accounts receivable and average total assets
c. Average accounts receivable and net credit sales
d. Net credit sales and average stockholders’ equity

13. The balance in Accounts Receivable is not reduced in recording which of the following types
of financing arrangements?
a. Assignment of specific accounts receivable
b. General assignment of accounts receivable
c. Factoring of accounts receivable
d. Transfer of accounts receivable without recourse

14. A 180-day, 12 percent interest-bearing note receivable is sold to a bank after being held for
45 days. The proceeds are calculated using a 15 percent interest rate. The note receivable
has been
Discounted Pledged
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Page 2
PBL Finance 2002 NLC

15. On December 1, 2002, Bain Company received a $10,000, 60-day, 6 percent note from a
customer. On December 31, 2002, the company discounted the note at the bank. The
bank’s discount rate was 9 percent. How much were the proceeds received by Bain from
the bank?
a. $ 9,700.00
b. $ 9,924.25
c. $10,024.25
d. $10,050.00

16. On September 1, Riva Company assigns specific receivables totaling $750,000 to Pacific
Bank as collateral on a $625,000, 12 percent note. Riva Company will continue to collect
the assigned accounts receivable. Pacific also assesses a 2 percent service charge on the
total accounts receivable assigned. Riva Company is to make monthly payments to Pacific
with cash collected on assigned accounts receivable. Collections of assigned accounts
during September totaled $260,000 less cash discounts of $3,500. What were the proceeds
from the assignment of Riva’s accounts receivable on September 1?
a. $610,000
b. $612,500
c. $625,000
d. $735,000

17. Simpson Company held a $6,000, 3-month, 15 percent note. One month before maturity, it
discounted the note at 10 percent at a local bank. Approximately how much interest did
Simpson earn on the note?
a. $ 52
b. $ 60
c. $173
d. $225

18. In a period of falling prices, the use of which of the following inventory cost flow methods
would typically result in the highest cost of goods sold?
a. FIFO
b. LIFO
c. Weighted average cost
d. Specific identification

19. The following information is available for Lyman Company:

Cost of goods sold for 2002 $1,200,000
Inventories at December 31, 2001 350,000
Inventories at December 31, 2002 310,000

Assuming that a business year consists of 360 days, the number of days’ sales in average
inventories for 2002 was
a. 49.5.
b. 93.
c. 99.
d. 105.

Page 3
PBL Finance 2002 NLC

20. The spot rate is the exchange rate

a. in effect on the date of the specific transaction.
b. in effect on the date the balance sheet is prepared.
c. in effect on the date an invoice denominated in a foreign currency is issued.
d. at which currencies can be traded immediately.

21. Petersen Menswear, Inc. maintains a markup of 60 percent based on cost. The company’s
selling and administrative expenses average 30 percent of sales. Annual sales were
$1,440,000. Petersen’s cost of goods sold and operating profit for the year are
Cost of Goods Sold Operating Profit
a. $864,000 $144,000
b. $864,000 $432,000
c. $900,000 $108,000
d. $900,000 $432,000

22. Utah Enterprises purchased inventory from Tokyo Distributing for 1,000,000 yen on
December 1, 2001, when the exchange rate for yen was $.004. On December 31, 2001,
Utah’s year-end, the exchange rate was $.0035. Utah Enterprises paid the invoice in 2002
when the exchange rate was $.0038. How much exchange gain or loss would Utah
Enterprises recognize in 2002 relating to this transaction?
a. $200 loss
b. $200 gain
c. $300 loss
d. $300 gain

23. Bruemmer Co. has a $20,000, two-year note payable to Second City Bank that matures
June 30, 2002. Bruemmer’s management intends to refinance the note for an additional
three years and is negotiating a financing agreement with Second City. In order to exclude
this note from current liabilities on its December 31, 2001, balance sheet, Bruemmer co.
must
a. complete the refinancing before the balance sheet date.
b. complete the refinancing before the note’s maturity date.
c. pay off the note and complete the refinancing before the 1999 financial states are
issued.
d. Demonstrate an ability to refinance the obligation before the 1999 financial statements
are issued.

24. Any gains or losses from the early extinguishment of debt should be
a. recognized in income of the period of extinguishment.
b. treated as an increase or decrease in Paid-In Capital.
c. allocated between a portion that is an increase (decrease) in Paid-In Capital and a
portion that is recognized in current income.
d. amortized over the remaining original life of the extinguished debt.

Page 4
PBL Finance 2002 NLC

25. The market price of a bond issued at a discount is the present value of its principal amount
at the market (effective) rate of interest.
a. Minus the present value of all future interest payments at the market (effective) rate of
interest.
b. Minus the present value of all future interest payments at the rate of interest state don
the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of
interest.
d. Plus the present value of all future interest payments at the rate of interest stated on the
bond.

26. For a bond issue that sells for more than its par value, the market rate of interest is
a. dependent on the rate stated on the bond.
b. equal to the rate stated on the bond.
c. less than the rate stated on the bond.
d. higher than the rate stated on the bond.

27. The effective interest rate on bonds is higher than the stated rate when bonds sell
a. at face value.
b. above face value.
c. below face value.
d. at maturity value.

28. Accrued interest on bonds that are sold between interest dates
a. is ignored by both the seller and the buyer.
b. increases the amount a buyer must pay to acquire the bonds.
c. is recorded as a loss on the sale of the bonds.
d. decreases the amount a buyer must pay to acquire the bonds.

29. Callable bonds

a. nature in a series of payments.
b. can be redeemed by the issuer at some time at a pre-specified price.
c. can be converted to stock.
d. none of the above.

30. The net amount required to retire a bond before maturity, assuming no call premium and
constant interest rates, is the
a. issuance price of the bond plus any unamortized discount or minus any unamortized
premium.
b. face value of the bond plus any unamortized premium or minus any unamortized
discount.
c. face value of the bond plus any unamoritzed discount or minus any unamortized
premium.
d. maturity value of the bond plus any unamortized discount or minus any unamortized
premium.

Page 5
PBL Finance 2002 NLC

31. Selected financial data of Alexander Corp. for the year ended December 31, 2002, is
presented below:
Operating income $900,000
Interest income (100,000)
Income before income tax $800,000
Income tax expense (320,000)
Net income $480,000
Preferred stock dividends (200,000)
Net income available to common stockholders $280,000

Common stock dividends were $120,000. The times-interest-earned ratio is

a. 2.8 to 1.
b. 4.1 to 1.
c. 6.0 to 1.
d. 9.0 to 1.

32. Littleton Corporation had the following long-term debt at December 31.
Collateral trust bonds having securities of unrelated
corporations as security $250,000
Bonds unsecured as to principal 150,000

The debenture bonds amounted to

a. $0
b. $150,000
c. $250,000
d. $400,000

33. White Sox Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay
interest on January 1 and July 1 and have a stated rate of 10 percent. If the market rate of
interest at the time the bonds are sold is 8 percent, what will be the issuance price of the
bonds?
a. $175,078
b. $211,283
c. $215,902
d. $227,183

34. On January, 1, 2002, Matlock, Inc. issued its 10 percent bonds in the face amount of
$1,500,000. They mature on January 1, 2012. The bonds were issued for $1,329,000 to
yield 12 percent resulting in bond discount of $171,000. Matlock uses the effective-interest
method of amortizing bond discount. Interest is payable July 1 and January 1. For the six
months ended June 30, 2002, Matlock should report bond interest expense of
a. $75,000.
b. $79,740.
c. $83,550.
d. $85,260.

Page 6
PBL Finance 2002 NLC

35. On December 31, 2002, Roberts Corporation’s current liabilities total $60,000 and long-term
liabilities total $160,000. Working capital at December 31, 2002, is equal to $90,000. If
Roberts Corporation’s debt-to-equity ratio is .40 to 1, total long-term assets must equal
a. $770,000.
b. $550,000.
c. $680,000.
d. $620,000.

36. Which of the following features of preferred stock would common shareholders most likely
oppose?
a. Par or stated value
b. Callable
c. Redeemable
d. Participating

37. Which of the following is least likely to affect the retained earnings balance?
a. Conversion of preferred stock into common stock
b. Treasury stock transactions
c. Stock splits
d. Stock dividends

38. Which of the following is most likely to be found in state laws regarding payment of
dividends?
a. Dividends may be paid from legal capital.
b. Retained earnings are available for dividends unless restricted by contract or by statute.
c. Unrealized capital is available for any type of dividend.
d. Capital from donated assets is available for dividends.

39. The par value of common stock represents

a. the liquidation value of the stock.
b. the book value of the stock.
c. the legal nominal value assigned to the stock.
d. the amount received by the corporation when the stock was originally issued.

40. At the date of the financial statements, common stock shares issued would exceed common
stock shares outstanding as a result of the
a. purchase of treasury stock.
b. declaration of stock split.
c. declaration of a stock dividend.
d. payment in full of subscribed stock.

41. Which of the following is issued to shareholders by a corporation as evidence of the

ownership of rights to acquire its unissued or treasury stock?
a. Stock options
b. Stock dividends
c. Stock subscriptions
d. Stock rights

Page 7
PBL Finance 2002 NLC

42. When a dividend is declared and paid in stock,

a. stockholders’ equity does not change.
b. total stockholders’ equity decreases.
c. the current ratio increases.
d. the amount of working capital decreases.

43. A quasi-reorganization usually results in a net

a. write-down of assets and the continuation of a deficit.
b. write-up of assets and a net write-down of retained earnings.
c. write-down of assets and the elimination of a deficit.
d. write-down of assets and a net write-down of retained earnings.

Questions 44 & 45
On December 10, Daniel Company split its stock 5-for-2 when the market value was $65 per
share. Prior to the split, Daniel had 200,000 shares of $15 par value stock.

44. After the split, the par value of the stock was
a. $ 3.00.
b. $ 6.00.
c. $15.00.
d. $26.00.

45. After the split, Daniel’s outstanding shares would be

a. 200,000.
b. 300,000.
c. 500,000.
d. 1,000,000.

46. The Gradison Corporation had the following classes of stock outstanding as of December
31, 2002.
Common stock, $20 par value, 20,000 shares outstanding
Preferred stock, 6 percent, $100 par value, cumulative, 2,000 shares outstanding
No dividends were paid on preferred stock for 2000 and 2001. On December 31, 2002, a
total cash dividend of $200,000 was declared. What are the amounts of dividends payable
on both the common and preferred stock, respectively?
a. $0 and $200,000
b. $164,000 and $36,000
c. $176,000 and $24,000
d. $188,000 and $12,000

47. In a business combination, goodwill is defined as the excess of cost over the
a. book value of asses acquired less the liabilities assumed.
b. net book value of assets acquired.
c. fair value of assets acquired.
d. fair value of assets acquired less the liabilities assumed.

48. Which securities are purchased with the intent of selling them in the near future?
a. Trading securities
b. Marketable equity securities
c. Available for sale securities
d. Held to maturity securities

Page 8
PBL Finance 2002 NLC

49. Which category includes only debt securities?

a. Marketable equity securities
b. Available for sale securities
c. Trading securities
d. Held to maturity securities

50. If the combined market value of trading securities at the end of the year is less than the
market value of the same portfolio of trading securities at the beginning of the year, the
difference should be accounted for by
a. reported an unrealized loss in security investments in the stockholders’ equity section of
the balance sheet.
b. reporting an unrealized loss in security investments in the income statement.
c. a footnote to the financial statements.
d. a credit to Investment in Trading Securities.

51. Consolidated financial statements are typically prepared when one company has
a. accounted for its investment in another company by the equity method.
b. significant influence over the operating and financial policies of another company.
c. a substantial equity interest in the net assets of another company.
d. the controlling financial interest in another company

52. When an investor uses the equity method to account for investments in common stock, cash
dividends received by the investor from the investee should be recorded as
a. an increase in the investment account.
b. dividend revenue.
c. a deduction from the investment account.
d. a deduction from the investor’s share of the investee’s profits.

53. Northwick Company acquired 10,000 shares of the common stock of Shaver Corp. in July
2002. The following January, Shaver announced a $100,000 net income for 2002 and was
declared a cash dividend of $.50 per share on its 100,000 shares of outstanding common
stock. The Northwick Company dividend revenue from Shaver Corp. in January 2002 would
be
a. $0.
b. $2,500.
c. $5,000.
d. $10,000.

54. One of the four general criteria for a capital lease is that the present value at the beginning
of the lease term of the minimum lease payments equals or exceeds
a. the property’s fair market value.
b. 50 percent of the property’s fair market value.
c. 75 percent of the property’s fair market value.
d. 90 percent of the property’s fair market value.

Page 9
PBL Finance 2002 NLC

55. Martin Company purchased the following portfolio of trading securities during 2002 and
reported the following balances at December 31, 2002. No sales occurred during 2002. All
declines are considered to be temporary.
Security Cost Market Value at 12/31/02
X $ 80,000 $ 82,000
Y 140,000 132,000
Z 32,000 28,000

The carrying value of the portfolio at December 31, 2002, on Martin Company’s balance
sheet would be
a. $222,000.
b. $240,000.
c. $242,000.
d. $252,000.

56. Lease Y does not contain a bargain purchase option, but the lease term is equal to 90
percent of the estimated economic life of the leased property. Lease Z does not transfer
ownership of the property to the lessee by the end of the lease term but the lease term is
equal to 75 percent of the estimated economic life of the leased property. How should the
lessee classify these leases?
Lease Y Lease Z
a. Capital lease Operating Lease
b. Capital lease Capital lease
c. Operating lease Capital lease
d. Operating lease Operating lease

57. Draper Corp. leased a new building and land from Baylor Leasing Inc. for 25 years. At the
inception of the lease the building and land have fair market values of $200,000 and
$25,000, respectively. The building has an expected economic life of 30 years. Which of
the following statements is correct regarding Draper’s treatment of the lease?
a. Draper should treat the lease as a capital lease even though there is no bargain
purchase option and no automatic transfer of ownership at the termination of the lease.
b. Draper should treat the lease as a capital lease only if there is either a bargain purchase
option or an automatic transfer of ownership at the termination of the lease.
c. Draper should treat the lease as a capital lease provided that the land and building are
recorded in separate asset accounts and accounted for separately.
d. Draper should treat the lease as a capital lease only if Baylor treats the transaction as a
leveraged lease.

58. In order for a lease to be considered a finance (or capital) lease, international accounting
standards require that a lease agreement
a. transfers substantially all risks and rewards incident to ownership of an asset to the
lessee.
b. contains a provision requiring transfer of title to the lessee by the end of the lease term.
c. provides that the term of the lease contract be longer than one year.
d. provides for a bargain purchase option.

Page 10
PBL Finance 2002 NLC

59. An item that would create a permanent difference in pretax financial and taxable incomes
would be
a. using accelerated depreciation for tax purposes and straight-line depreciation for book
purposes.
b. purchasing equipment previously leased with an operating lease in prior years.
c. using the percentage-of-completion method on long-term construction contracts.
d. paying fines for violation of laws.

60. Warren Corporation began operations in 1997 and had operating losses of $400,000 in 1998
and $300,000 in 1999. For the year ended December 31, 200, Warren had a pretax
financial income of $600,000. For 1998 and 1999, assume an enacted tax rate of 30
percent, and for 2000 a 35 percent tax rate. There were no temporary differences in any of
the years. In Warren’s 2000 income statement, how much should be reported as income tax
expense.
a. $ 0
b. $ 30,000
c. $180,000
d. $210,000

61. Which of the following taxes is not included in the payroll tax expense of the employer?
a. State unemployment taxes
b. Federal unemployment taxes
c. FICA taxes
d. Federal income taxes

62. Which of the following taxes must the employee and the employer pay?
a. Social security tax (FICA)
b. State unemployment tax
c. State withholding tax
d. Federal unemployment tax

63. The vested benefits of an employee in a pension plan represent benefits

a. to be paid to the retired employee in the current year.
b. to be paid to the retired employee in subsequent years.
c. to be paid from funds currently in the hands of an independent trustee.
d. that are not contingent on the employee’s continuing in the service of the employer.

64. During the first week of January, Sam Jones earned $200. Assume that FICA taxes are 7.65
percent of wages up to $50,000, state unemployment tax is 5.0 percent of wages up to
$13,000 and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that
Sam has voluntary withholdings of $10 (in addition to taxes) and that federal and state
income tax withholdings are $18 and $6, respectively. What amount is the check, net of all
deductions, that Sam received for the week’s pay.
a. $140.10
b. $141.70
c. $150.70
d. $155.20

Page 11
PBL Finance 2002 NLC

65. The following information relates to the defined benefit pension plan of the McDonald
Company for the year ending December 31, 2002.
Projected benefit obligation, January 1 $4,600,000
Projected benefit obligation, December 31 4,729,000
Fair value of plan assets, January 1 5,035,000
Fair value of plan assets, December 31 5,565,000
Expected return on plan assets 450,000
Amortization of deferred gain 32,500
Employer contributions 425,000
Benefits paid to retirees 390,000
Settlement rate 10%

The actual return on plan assets for the year is

a. $105,000.
b. $495,000.
c. $503,500.
d. $530,000.

66. Uncertainty about the future market value of an asset is referred to as

a. price risk.
b. credit risk.
c. interest rate risk.
d. exchange rate risk.

67. Uncertainty that the party on the other side of an agreement will abide by the terms of the
agreement is referred to as
a. price risk.
b. credit risk.
c. interest rate risk.
d. exchange rate risk.

68. A contract, traded on an exchange, that allows a company to buy a specified quantity of a
commodity or a financial security at a specified price on a specified future date is referred to
as a(n)
a. interest rate swap.
b. forward contract.
c. futures contract.
d. option.

69. If a cannery wanted to lock in the price, they would pay for peaches in August four months
before harvest (in April of the same year). What kind of agreement would they most likely
enter?
a. Interest rate swap.
b. Forward contract.
c. Futures contract.
d. Option.

Page 12
PBL Finance 2002 NLC

70. A contract giving the owner the right, but not the obligation, to buy or sell an asset at a
specified price any time during a specified period in the future is referred to as a(n)
a. interest rate swap.
b. forward contract.
c. futures contract.
d. option.

71. In exchange for the rights inherent in an option contract, the owner option will typically pay a
price
a. only when a call option is exercised.
b. only when a put option is exercised.
c. when either a call option or a put option is exercised.
d. at the time the option is received regardless of whether the option is exercised or not.

72. When gains or losses on derivatives designated as fair value hedges exceed the gains or
losses on the time being hedged, the excess
a. affects reported net income.
b. is recognized as an equity adjustment.
c. is recognized as part of comprehensive income.
d. is not recognized.

73. For which type of derivative are changes in the fair value deferred and recognized as an
equity adjustment?
a. Fair value hedge
b. Cash flow hedge
c. Operating hedge
d. National value hedge

74. On February 1, Shoemaker Corporation entered into a firm commitment to purchase

specialized equipment from the Okazaki Trading Company for 80,000,000 yen on April 1.
Shoemaker would like to reduce the exchange rate risk that could increase the cost of the
equipment in U.S. dollars by April 1, but Shoemaker is not sure which direction the
exchange rate may move. What type of contract would protect Shoemaker from an
unfavorable movement in the exchange rate while allowing them to benefit from a favorable
movement in the exchange rate?
a. Interest rate swap
b. Forward contract
c. Call option
d. Put option

75. A company enters into a futures contract with the intent of hedging an account payable of
DM400,000 due on December 31. The contract requires that if the U.S. dollar value of
DM400,000 is greater than $200,000 on December 31, the company will be required to pay
the difference. Alternatively, if the U.S. dollar value is less that $200,000 the company will
receive the difference. Which of the following statements is correct regarding this contract?
a. The deutsche mark futures contract effectively hedges against the effect of exchange
prate changes on the U.S. dollar value of the Deutsche mark payable.
b. The futures contract is a contract to buy Deutsche marks at a fixed price.
c. The contract obligates the company to pay if the value of the US. dollar increases.
d. The futures contract is a contract to sell Deutsche marks at a fixed price.

Page 13
PBL Finance 2002 NLC

76. Alpha Company purchases a call option to hedge an investment in 20,000 shares of Beta
Company stock. The option agreement provides that if the prices of a share of Beta
Company stock is greater than $30 on October 25, Alpha receives the difference (multiplied
by 20,000 shares). Alternatively, the price of the stock is less than $30; the option is
worthless and will be allowed to expire. Which of the following statements regarding this call
option is correct?
a. The call option effectively hedges the investment in the shares of Beta Stock.
b. The call option is an option to sell Beta Company stock at a fixed price.
c. The call option represents a speculative option rather than a hedge.
d. Alpha could have purchased a put option or a call option to effectively hedge the
investment in the shares of Beta stock.

77. On July 1, 2002, Cahoon Company sold some limited edition art prints to Sitake Company
for ¥47,850,000 to be paid on September 30 of that year. The current exchange rate on July
1, 2002, was ¥110=$1, so the total payment at the current exchange rate would be equal to
$435,000. Cahoon entered into a forward contract with a large bank to guarantee the
number of dollars to be received. According to the terms of the contract, if ¥47,850,000 is
worth less than $35,000, the bank will pay Cahoon the difference in cash. Likewise, if
¥47,850,000 is worth more than $435,000 Cahoon must pay the bank the difference in cash.
Assuming the exchange rate on September 30 is ¥115=$1, what amount will Cahoon pay to,
or receive from, the bank (round to the nearest dollar)?
a. $18,913 payment
b. $18,913 receipt
c. $20,714 payment
d. $20,714 receipt

78. When computing earnings per share on common stock, dividends on cumulative,
nonconvertible preferred stock should be
a. deducted from net income only if the dividends were declared or paid in the current
period.
b. deducted from net income regardless of whether the dividends were not paid or declared
in the period.
c. deducted from net income only if net income is greater than the dividends.
d. ignored.

79. In calculating diluted earnings per share, which of the following should not be considered?
a. The weighted average number of common shares outstanding
b. The amount of dividends declared on cumulative preferred shares
c. The amount of cash dividends declared on common shares
d. The number of common shares resulting from the assumed conversion of debentures
outstanding.

80. The EPS computation that is forward-looking and based on assumptions about future
transactions is
a. diluted EPS.
b. basic EPS.
c. continuing operations EPS.
d. extraordinary EPS.

Page 14
PBL Finance 2002 NLC

81. When computing diluted earnings per share, stock options are
a. recognized only if they are dilutive.
b. recognized only if they are antidilutive.
c. recognized only if they were exercised.
d. ignored.

82. When using the if-converted method to compute diluted earnings per share, convertible
securities should be
a. included only if antidilutive.
b. included only if dilutive.
c. included whether dilutive or not.
d. not included.

83. Where in the financial statements should basic and complex EPS figures for income from
continuing operations be reported?
a. In the accompanying notes
b. In management’s discussion and analysis
c. On the income statement
d. On the statement of cash flows

84. On December 31, 2002, the Murdock Company had 150,000 shares of common stock
issued and outstanding. On April 1, 2003, an additional 30,000 shares of common stock
were issued. Murdock’s net income for the year ended December 31, 2003, was $517,500.
During 2003, Murdock declared and paid $300,000 in cash dividends on its nonconvertible
preferred stock. The basic earnings per common share, rounded to the nearest penny, for
the year ended December 31, 2003 should be
a. $3.00.
b. $2.00.
c. $1.45.
d. $1.26.

85. Glendale Enterprise had 200,000 shares of common stock issued and outstanding at
December 31, 2002. On July 1, 2003, Glendale issued a 10 percent stock dividend.
Unexercised stock options to purchase 40,000 shares of common stock (adjusted for the
2003 stock dividend) at $20 per share were outstanding at the beginning and end of 2003.
The market price of Glendale’s common stock (which was not affected by the stock
dividend) was $25 per share during 2003. Net income for the year ended December 31,
2003, was $1,100,000. What should be Glendale’s 2003 diluted earnings per common
share, rounded to the nearest penny?
a. $4.23
b. $4.82
c. $5.00
d. $5.05

Page 15
PBL Finance 2002 NLC

86. A useful tool in financial statement analysis is the common size financial statement. What
does this tool enable the financial analyst to do?
a. Evaluate financial statements of companies within a given industry of approximately the
same value.
b. Determine which companies in the same industry are at approximately the same state of
development.
c. Ascertain the relative potential of companies of similar size in different industries.
d. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company
over time or between companies within a given industry without respect to relative size.

87. Raugh Corp. had a current ratio of 2.0 at the end of 2001. Current assets and current
liabilities increased by equal amounts during 2002. The effects on networking capital and on
the current ratio, respectively, were
a. no effect, increase.
b. no effect, decrease
c. increase, increase
d. decrease, decrease.

88. Which of the following ratios measures’ short-term solvency?

a. Current ratio
b. Creditors’ equity to total assets
c. Return on investment
d. Total asset turnover.

89. Which of the following transactions would increase a firm’s current ratio?
a. Purchase of inventory on account
b. Payment of accounts payable
c. Collection of accounts receivable
d. Purchase of temporary investments for cash

90. In comparing the current ratios of two companies, why is it invalid to assume that the
company with the higher current ratio is the better company?
a. A high current ratio may indicate inadequate inventory on hand.
b. A high current ratio may indicate inefficient use of various assets and liabilities.
c. The two companies may define working capital in different terms.
d. The two companies may be different sizes.

91. Which item should a company hold during an inflationary period to experience the greatest
gain in general purchasing power?
a. Bonds payable
b. Cash
c. Accounts receivable
d. Certificate of deposit

92. Which of the following is the primary factor in determining the functional currency of a
foreign subsidiary?
a. How the costs for the foreign entity’s product are determined
b. The denomination of the foreign entity’s financing
c. The location of the primary sales market that influences the price of the foreign entity’s
product
d. Management’s assessment of all relevant factors

Page 16
PBL Finance 2002 NLC

93. A translation adjustment resulting from the translation process is disclosed on the financial
statements
a. as a separate component of stockholders’ equity.
b. as a below-the-line item on the income statement.
c. as an adjustment to retained earnings.
d. as a part of income from operations on the income statement.

94. Which of the following is the least likely means a company might choose to meet the needs
of international investors?
a. Translation of financial statements or annual reports into the language of the user.
b. Denomination of the financial statements in the currency of the country where the
financial statements will be used.
c. Partial or complete restatement of financial statements to the accounting principles of
the financial statement users’ country.
d. Mutual recognition in which one country accepts the financial statements of another
country for regulatory purposes such as listing on stock exchanges or filing annual
reports.

95. Information for Henry Company follows.

December 31
2001 2002
Common Stock $600,000 $600,000
Additional paid-in capital 250,000 250,000
Retained earnings 170,000 370,000
Net income for year 120,000 240,000

Henry’s return on common stockholder’s equity, rounded to the nearest percent for 2002 is
a. 20 percent.
b. 21 percent.
c. 28 percent.
d. 40 percent.

96. Cougar Corporation began operations on January 1, 2002, with $12,000 of cash and
immediately purchased for cash $7,000 of inventory. By December 31, 2002, the
replacement cost of the inventory had increased to $7,400 and the general price-level index
increased from 100 to 110. If Cougar prepares financial statements adjusted for price-level
changes, what is Cougar’s purchasing power loss?
a. $400
b. $500
c. $600
d. $700

Page 17
PBL Finance 2002 NLC

97. Ellison Mfg accounting records shows

Net Sales $3,600,000
Cost of goods sold 2,400,000
Inventories at January 1 672,000
Inventories at December 31 576,000

What is the number of days’ sales in average inventories for the year?
a. 102.2
b. 94.9
c. 87.6
d. 68.1

98. On October 15, 2002, the Fenmore Department Store purchased 2,000 dresses at $35 for
resale. The store had sold 1,100 dresses by December 31, 2002, at $65. At that time the
replacement cost was $45. What was Fenmore’s unrealized holding gain during 2002?
a. $ 9,000
b. $11,000
c. $20,000
d. $24,000

99. Albright Distributing, Inc. converts its foreign subsidiary financial statements using the
translation process. Their German subsidiary reported the following for 2002: revenues and
expenses of 10,050,000 and 7,800,000 marks, respectively, earned or incurred evenly
throughout the year, dividends of 2,000,000 marks were paid during the year. The following
exchange rates are available:
On January 1, 2002 $.250
On December 31, 2002 .285
Average rate for 2002 .275
Rate when dividends were declared and paid .255

Translated net income for 2002 is

a. $641,250.
b. $607,500.
c. $131,250.
d. $ 97,500.

100. Thorne Company records show

Net Sales for 2002 $900,000
Cost of goods sold for 2002 $600,000
Inventory at December 31, 2001 180,000
Inventory at December 31, 2002 156,000

Thorne’s inventory turnover for 2002 is

a. 5.36 times
b. 3.85 times
c. 3.67 times
d. 3.57 times

Page 18
PBL Finance 2002 NLC

2002 PBL FINANCE ANSWER KEY

ANSWER ANSWER ANSWER ANSWER

1. A 26. C 51. D 76. C
2. A 27. A 52. C 77. A
3. B 28. B 53. C 78. B
4. B 29. A 54. D 79. C
5. D 30. B 55. C 80. A
6. C 31. D 56. B 81. A
7. D 32. B 57. A 82. B
8. B 33. D 58. A 83. C
9. A 34. B 59. D 84. D
10. B 35. D 60. A 85. B
11. D 36. D 61. D 86. D
12. C 37. C 62. A 87. B
13. B 38. B 63. D 88. A
14. B 39. C 64. C 89. B
15. C 40. A 65. B 90. B
16. A 41. D 66. A 91. A
17. C 42. A 67. B 92. D
18. A 43. C 68. C 93. A
19. C 44. B 69. D 94. D
20. D 45. C 70. D 95. B
21. C 46. B 71. D 96. B
22. C 47. C 72. A 97. B
23. D 48. A 73. B 98. A
24. A 49. D 74. C 99. B
25. C 50. B 75. D 100. D

Page 19