1. The distinction between working capital and permanent capital.
2. How to account for bonds payable.
3. How to account for items of owners' equity:
- Capital stock, common and preferred {s}
- Retained earnings
- Dividends {d}
4. The debt/equity ratio.
5. The nature of consolidated financial statements.
@
9.1
In earlier parts, you learned that the balance sheet has two sides with{s}
equal totals. In the simplified balance sheet below, all blanks on the left
side are {1,8,2} and those on the right side are {2,8,2}.
(A) assets (B) equities
{b}LOUGEE COMPANY Balance Sheet as of December 31, 19x1{n}{d}
{f,7} {f,9}{s}
{d}
Current {f,7} $10,000 Current liabilities $ 4,000{d}
Noncurrent liabilities 9,000{s}
{d}Noncurrent {f,7} 20,000 Owners' {f,9} 17,000
{c,196,7} {c,196,7}{d}
Total {f,7} $30,000 Total {f,9} $30,000
*1
- POST - {a,5,13}{b}assets {a,9,13}ASSETS {a,12,13}ASSETS {a,16,13}ASSETS {a,20,8}ASSETS
ASSETS - OK - Good.
A - OK - Good.
EQUITIES - QUIT - No, all entries on the left are {b}assets.
B - QUIT - No, all entries on the left are {b}assets.
*2
- POST - {a,5,13}assets {a,5,31}{b}equities {a,9,50}EQUITIES {a,16,47}EQUITIES {a,20,45}EQUITIES
EQUITIES - OK - Fine.
B - OK - Fine.
ASSETS - QUIT - No, equities are on the right side.
A - QUIT - No, equities are on the right side.
@
9.2
Remember current assets are assets that are expected to be turned into
cash {1,6} one year. Current liabilities are obligations that come due
{2,6} one year.
(A) within (B) after
*1
- POST - {a,8,12}{b}within
WITHIN - OK - That's correct.
A - OK - That's correct.
AFTER - QUIT - No, current assets become cash within one year.
B - QUIT - No, current assets become cash within one year.
*2
WITHIN - OK - Fine.
A - OK - Fine.
AFTER - QUIT - No, current liabilities come due within one year.
B - QUIT - No, current liabilities come due within one year.
@
9.3
For Lougee Company, we can say that of the $10,000 current assets, $4,000
was financed by the C{1,7,2} liabilities. The remaining $6,000 of current
assets and the $20,000 of noncurrent assets were financed by the $9,000 of
noncurrent liabilities and the $17,000 of owners' equity.
*1
URRENT - OK - Fine.
CURRENT - OK - Fine.
- HINT - The kind of liabilities that come due within a year.
@
9.4
That part of the current assets not financed by the current liabilities
is called {b}working capital{n}. Working capital is therefore the difference
between Current {1,12,2} and Current {2,12,2}. In the
example given above, working capital is $10,000 - $4,000 = $6,000.
*1
ASSETS - OK - Good.
- HINT - Working capital = Current assets {c,196,1} Current liabilities.
*2
LIABILITIES - OK - That's right.
- HINT - Working capital = Current assets {c,196,1} Current liabilities.
@
9.5
To highlight how working capital and the noncurrent assets were financed,{s}
we might rearrange the items on the balance sheet as follows:{d}
{b}LOUGEE COMPANY{s}
Sources and Uses of Permanent Capital as of December 31, 19x1{d}
{b}Uses of Capital Sources of Capital
{1,-19 } $ 6,000 Noncurrent liabilities $ 9,000
Noncurrent assets 20,000 Owners' equity 17,000{s}
{c,196,7} {c,196,7}
Total uses $ 26,000 Total sources $ 26,000
{d}
Fill in the blank above by typing the correct letter below:
(A) current assets (B) working capital (C) current liabilities
*1
- POST - {a,19,33}{b}working capital
WORKING CAPITAL - OK - That's correct.
B - OK - That's correct.
CURRENT ASSETS - QUIT - {a,22,1}No, part of the current assets was financed by current liabilities which is {b}not{n} {a,23,1}shown on the right of the balance sheet. This leaves {b}working capital{n}.
A - QUIT - {a,22,1}No, part of the current assets was financed by current liabilities which is {b}not{n} {a,23,1}shown on the right of the balance sheet. This leaves {b}working capital{n}.
CURRENT LIABILITIES - QUIT - No, liabilities {b}never{n} appear on the left.
C - QUIT - No, liabilities {b}never{n} appear on the left.
@
9.6
The right-hand side of the balance sheet given in 9.5 shows the sources
of capital used to finance the working capital and the noncurrent assets.
Collectively, these sources are called {b}permanent capital{n}. As the balance
sheet indicates, there are two types of permanent capital:
(1) N{1,22} [two words] (2) O{2,14} [two words].
The total of these two sources is $26,000 and they are used to finance assets
that also total $26,000.
*1
ONCURRENT LIABILITIES - OK - Well done.
NONCURRENT LIABILITIES - OK - Well done.
- HINT - One type is noncurrent liabilities.
*2
WNERS' EQUITY - OK - Good.
OWNERS' EQUITY - OK - Good.
- HINT - The other type is owners' equity.
@
9.7
To summarize:
- Working capital is the difference between {b}current assets and current{s}
{b}liabilities{n}. {d}
- Permanent capital is {b}noncurrent liabilities plus owners' equity.
@
9.8
In this part we shall describe the principal items of permanent capital
and the ways they are recorded in the accounts.
@
9.9 Noncurrent Liabilities (Debt Capital)
Although all liabilities are debts, the term {b}debt capital{n} refers only
to noncurrent liabilities. Debt capital therefore refers to liabilities that
come due {1,3}.
Please type in the letter of the correct answer below:
(A) within one year (B) more than one year in the future
*1
- POST - {a,12,34}{b}more than one year in the future
B - OK - Correct.
A - QUIT - No, debt capital refers to {b}non{n}current liabilities.
@
9.10
Debt capital is usually obtained by the issuance of {b}bonds{n}. A bond
is a written promise to pay someone who lends money to the entity. Since a
bond usually is a noncurrent liability, the payment is due {1,3}. Choose
the letter of the correct answer below.
(A) within one year (B) more than one year in the future
*1
- POST - {a,10,36}{b}more than one year in the future
B - OK - Right.
A - OK - No, a bond is associated with a {b}non{n}current liability.
@
9.11
The total amount of loan that must be repaid is specified on the face of
a bond and is termed the {b}face amount{n}.
Suppose Green Company issues to the public ten-year bonds whose face amounts
total $100,000. Green Company has assumed a liability, bonds payable, of
${1,-7}.
*1
100,000 - OK - That's correct.
100000 - OK - That's correct.
- HINT - The face amounts total $100,000.
@
9.12
If the company does not receive the face amount of the bonds, there are
accounting complications not discussed in this introductory program. Suppose
that Green Company {u}does{n} receive $100,000 from the issuance of bonds that
have a face amount of $100,000. Choose the letter of the journal entry
necessary to record the effect of this transaction on the Cash and Bonds
Payable accounts.
(A) Bonds payable (B) Cash
Dr. {1,-13,3}.................... 10,000
Cr. {2,-13,3}................... 10,000
*1
- POST - {a,14,37}{b}cash
CASH - OK - Correct.
B - OK - Correct.
BONDS PAYABLE - QUIT - {a,22,1}No, remember that an increase in assets (cash in this example) is a {a,23,1}debit entry.
A - QUIT - {a,22,1}No, remember that an increase in assets (cash in this example) is a {a,23,1}debit entry.
*2
- POST - {a,14,37}cash {a,14,12}{b}bonds payable
BONDS PAYABLE - OK - That's right.
A - OK - That's right.
CASH - QUIT - {a,22,1}No, remember that an increase in a liability (bonds payable in this example) is {a,23,1}a credit entry.
B - QUIT - {a,22,1}No, remember that an increase in a liability (bonds payable in this example) is {a,23,1}a credit entry.
@
9.13
When they are issued, bonds are {1,10,2} liabilities.
(A) current (B) noncurrent
However, as time passes and the due date becomes within one year, the bond
becomes a {2,10,2} liability. In 19x1 a bond that is due on January 1,
19x3, would be a noncurrent liability. In 19x2 the same bond would be a
current liability.
(A) current (B) noncurrent
*1
- POST - {a,4,32}{b}noncurrent
NONCURRENT - OK - Correct.
B - OK - Correct.
CURRENT - QUIT - No, that's incorrect.
A - QUIT - No, that's incorrect.
*2
- POST - {a,14,13}{b}current
CURRENT - OK - Right.
A - OK - Right.
NONCURRENT - QUIT - No, within one year makes it a {b}current{n} liability.
B - QUIT - No, within one year makes it a {b}current{n} liability.
@
9.14
When an entity issues bonds, it assumes two obligations. It is obli-
gated (1) to repay the face amount, the {b}principal{n}, on the due date; and
(2) to pay {b}interest{n}, usually at semiannual intervals (that is, twice a year).
The obligation to pay the principal is usually a {1,10,2} liability.
(A) current (B) noncurrent
The obligation to make the next interest payment is a {2,10,2} liability.
(A) current (B) noncurrent
*1
- POST - {a,10,32}{b}noncurrent
NONCURRENT - OK - That's right.
B - OK - That's right.
CURRENT - QUIT - No, bonds are usually issued for {b}more than{n} one year.
A - QUIT - No, bonds are usually issued for {b}more than{n} one year.
*2
- POST - {a,14,13}{b}current
CURRENT - OK - You got it right.
A - OK - You got it right.
NONCURRENT - NO - No, the interest is paid {b}within{n} one year.
B - NO - No, the interest is paid {b}within{n} one year.
@
9.15
Interest on bonds is an expense and should be recognized in the account-
ing period that the interest payment covers. Thus, if on January 1, 19x2, an
entity pays a semiannual interest payment of $3,000 to cover the last six
months of 19x1, this interest expense should be recognized in 19x{1,-1}. This
is required by the M{2,8,3} concept.
*1
1 - OK - Good.
- HINT - The $3,000 covered the 19x1 accounting period.
*2
ATCHING - OK - Well done.
MATCHING - OK - Well done.
- HINT - The {b}matching concept{n} states that expenses are accounted for in the {a,22,1}period in which they occurred.{s}
@
9.16
The $3,000 of unpaid interest that was an expense in 19x1 would be
recorded in 19x1 by the following entry. Choose the letter of the correct
INTEREST PAYABLE - OK - {a,22,1}You got it right. The interest payable liability is decreased and thus a {a,23,1} debit entry.
B - OK - {a,22,1}You got it right. The interest payable liability is decreased and thus a {a,23,1} debit entry.
CASH - OK - {a,22,1}That's incorrect. The interest payable liability is decreased and thus a {a,23,1} debit entry.
A - OK - {a,22,1}That's incorrect. The interest payable liability is decreased and thus a {a,23,1} debit entry.
*2
- POST - {a,8,29}interest payable {a,8,13}{b}cash
CASH - OK - {a,22,1}Fine. The cash asset is decreased when interest is paid to {a,23,1} the bondholder so this is a credit entry.
A - OK - {a,22,1}Fine. The cash asset is decreased when interest is paid to {a,23,1} the bondholder so this is a credit entry.
INTEREST PAYABLE - QUIT - {a,22,1}No, that's not it. The cash asset is decreased when interest is paid to {a,23,1}the bondholder so this is a credit entry.
B - QUIT - {a,22,1}No, that's not it. The cash asset is decreased when interest is paid to the {a,23,1} bondholder so this is a credit entry.
@
9.18 Owners' Equity
Capital obtained from bonds is called {1,6,2} capital. The other
(A) debt (B) equity
source of permanent capital is owners' equity, which is called {2,6,2}
capital.
(A) debt (B) equity
*1
- POST - {a,4,13}{b}debt
DEBT - OK - That's correct.
A - OK - That's correct.
EQUITY - QUIT - No, that's incorrect.
B - QUIT - No, that's incorrect.
*2
- POST - {a,10,13}debt {a,10,30}{b}equity
EQUITY - OK - Good.
B - OK - Good.
DEBT - QUIT - No.
A - QUIT - No.
@
9.19
A bond is a {u}promise to pay{n}. Such an obligation is a liability.
By contrast, owners' equity is an ownership interest in the entity, and the
entity does not promise to pay the owners anything for this interest. Owners'
equity, therefore, {1,6} a liability.
(A) is (B) is not
*1
- POST - {a,10,26}{b}is not
IS NOT - OK - Yes, that's right.
ISN'T - OK - Yes, that's right.
B - OK - Yes, that's right.
IS - QUIT - Wrong, with no promise to pay there is no liability.
A - QUIT - Wrong, with no promise to pay there is no liability.
@
9.20
The owners' equity section of the balance sheet takes differing forms,
depending on the type of entity. A business that is not incorporated is called
a {b}proprietorship{n} if it is owned by a single person, and a {b}partnership{n} if owned
by two or more persons. For example, an unincorporated business owned by John
Smith and Jim Jones is a {1,14,3}; an unincorporated business owned
by Mary Green is a {2,14,3}.
*1
PARTNERSHIP - OK - Fine.
- HINT - A partnership is owned by two or more persons.
*2
PROPRIETORSHIP - OK - Good.
- HINT - A proprietorship has a single owner.
@
9.21
The owners' equity item in a proprietorship is often reported by giving
the proprietor's name, followed by the word {b}Capital{n}. Suppose Mary Green,
proprietor of Green's Market, has an equity of $10,000 in her business. This
is how the owners' equity item would look:
Mary Green, Capital.........................${1,-6}
*1
10,000 - OK - Correct.
10000 - OK - Correct.
- HINT - Look at the text above.
@
9.22
In a partnership, each partner has a share of the owners' equity. {s}
Unless there are many partners, as in a large accounting firm or law firm, each
partner's share is reported separately.
John Black was once the {u}sole owner{n} of a laundry business. He hired Bill
Gray to manage it. Later, Henry Green joined the business as an {u}equal partner{n}
with Black. Susan Brown is a creditor. On December 31, 19x2, the owners'
equity in the business totals $100,000. The owners' equity would be reported
on that date as follows:{d}
John Black, Capital $ {1,-6}
Henry Green, Capital {2,-6}
{c,196,9}
Total owners' equity $100,000
*1
50,000 - OK - That's right.
50000 - OK - That's right.
- HINT - Each owner's capital is half of total owners' equity.
*2
50,000 - OK - Fine.
50000 - OK - Fine.
- HINT - Each owner's capital is half of total owners' equity.
@
9.23
As you learned earlier, owners' equity consists of capital contributed
by owners, plus earnings retained in the business, less distributions made to
the owners. Thus the item "John Black, Capital, $50,000" means {1,3}.
Choose the letter of the correct answer below.
(A) John Black contributed $50,000 cash to the entity.{s}
(B) The entity owes John Black $50,000.
(C) John Black's ownership interest in the assets is $50,000.
*1
- POST - {a,12,5}{b}{r}
C - OK - Good.
A - NO - No, we don't know the amount of the original contribution.
B - NO - No, the entity does not "owe" its owners.
@
9.24 Shareholder Equity
Owners of a corporation are called {b}shareholders{n} because they hold shares
of the corporation's stock. The owners' equity section of a corporate balance
sheet is therefore labeled S{1,18} [two words].
*1
HAREHOLDER EQUITY - OK - Well done!
SHAREHOLDERS EQUITY - OK - Well done!
- HINT - The section is labeled shareholder equity.
@
9.25
There are two types of shareholders: {b}common shareholders{n} and {b}preferred
{b}shareholders{n}. The stock held by the former is called C{1,6,2} stock, and
that held by the latter is called P{2,9,2} stock. We shall now describe
stock held by common shareholders.
*1
OMMON - OK - Good.
COMMON - OK - Good.
- HINT - Common shareholders hold common stock.
*2
REFERRED - OK - Fine.
PREFERRED - OK - Fine.
- HINT - Preferred shareholders hold preferred stock.
@
9.26
Sometimes stock is issued with a specific amount printed on the face of
each certificate. This amount is called the {b}par value.
@
9.27
Strangely enough, the par value of stock has practically no signifi-
cance. It is a holdover from the days when shareholders were liable if they
purchased stock for less than its par value. In order to avoid this liability,
stock today is always issued for {1,4} than its par value. Nevertheless,
the par value of stock continues to be reported on the balance sheet.
(A) less (B) more
*1
- POST - {a,12,29}{b}more
MORE - OK - That's right.
B - OK - That's right.
LESS - QUIT - No, stock is issued for more than its par value.
A - QUIT - No, stock is issued for more than its par value.
@
9.28
The amount that the shareholders paid the corporation in exchange for{s}
their stock is called {b}paid-in capital{n}. The difference between par value
and the total paid-in capital is called {b}other paid-in capital{n}.
Jones paid $10,000 cash to the Lougee Company and received 1,000 shares of its
$1 par-value common stock. Complete the journal entry that Lougee Company
would make for this transaction.{d}
Dr. Cash............. {1,-6}
Cr. Common stock............. {2,-6}
Other paid-in capital.............. {3,-6}
*1
10,000 - OK - Correct.
10000 - OK - Correct.
- HINT - No, the $10,000 Jones paid is an increase in cash assets and thus a {a,22,1}debit entry.
*2
1,000 - OK - Right.
1000 - OK - Right.
- HINT - No, the common stock value is 1,000 shares x $1 = $1,000.
*3
9,000 - OK - Good.
9000 - OK - Good.
- HINT - $10,000 {c,196,1} $1,000 = $9,000.
@
9.29
If Jones's payment of $10,000 were the only owners' equity transaction,
this section of the Lougee Company balance sheet would appear as follows:
Common stock..................................$ 1,000
Other paid-in capital.........................$ 9,000{s}
{c,196,7}{d}
Total paid-in capital.........................${1,-6}
*1
10,000 - OK - Okay.
10000 - OK - Okay.
- HINT - Look again at the text above.
@
9.30
Not all stocks have a par value. For these {b}no-par-value stocks{n}, the
directors decide on a value. This value, called the {b}stated value{n}, is usually
set close to the amount that the corporation actually receives from the
issuance of the stock. Therefore the {1,6} value of no-par-value stock
(A) par (B) stated
is closer to the amount received at the time it was originally issued by the
corporation than is the {2,6} value of par-value stock.
(A) par (B) stated
*1
- POST - {a,10,28}{b}stated
STATED - OK - Good.
B - OK - Good.
PAR - QUIT - No, the answer is stated value.
A - QUIT - No, the answer is stated value.
*2
- POST - {a,16,13}{b}par
PAR - OK - You got it.
A - OK - You got it.
STATED - OK - No, that's incorrect.
B - OK - No, that's incorrect.
@
9.31
{b}No-par-value{n} stock is recorded at its {u}stated{n} value. The difference{s}
between this amount and cash received is {b}other paid-in capital{n}, just as in
the case of par-value stock.
Medoc Corporation received $100,000 cash from the issuance of 9,000 shares
of stock with a {u}stated value{n} of $10 per share. Give the journal entry
for this transaction by choosing the letter of the correct answer when the blank
highlights.
(A) Common stock (B) $100,000 (C) Cash
(D) $90,000 (E) $10,000 (F) Other paid-in capital{d}
Dr. {1,-21}...........................{2,-7}
Cr. {3,-21}...........................{4,-7}
{5,-21}...........................{6,-7}
*1
CASH - OK - That's correct. The debit entry indicates an increase in {b}cash assets.
C - OK - That's correct. The debit entry indicates an increase in {b}cash assets.
- HINT - The debit entry indicates an increase in {b}cash assets.
*2
100,000 - OK - Yes, that's right. Medoc received $100,000 in cash.
100000 - OK - Yes, that's right. Medoc received $100,000 in cash.
B - OK - Yes, that's right. Medoc received $100,000 in cash.
- HINT - Medoc received $100,000 in cash.
*3
COMMON STOCK - OK - {a,22,1}Ok, the credit entry is {b}common stock{n} which represents an increase in liability.
A - OK - {a,22,1}Ok, the credit entry is {b}common stock{n} which represents an increase in liability.
- HINT - {a,22,1}The credit entry is {b}common stock{n} which represents an increase in liability.{s}
*4
90,000 - OK - Correct, 9,000 shares were issued.
90000 - OK - Correct, 9,000 shares were issued.
D - OK - Correct, 9,000 shares were issued.
- HINT - The common stock value is 9,000 shares x $10 = $90,000.
*5
- POST - {a,18,20}-
OTHER PAID IN CAPITAL - OK - Right, cash minus common stock equals {b}other paid-in capital{n}.
F - OK - Right, cash minus common stock equals {b}other paid-in capital{n}.
- HINT - Cash minus common stock equals {b}other paid-in capital.{n}
*6
10,000 - OK - Yes, cash ($100,000) minus common stock ($90,000) leaves $10,000.
10000 - OK - Yes, cash ($100,000) minus common stock ($90,000) leaves $10,000.
E - OK - Yes, cash ($100,000) minus common stock ($90,000) leaves $10,000.
- HINT - $100,000 {c,196,1} $90,000 = $10,000.
@
9.32
When a corporation is formed, its directors vote to {b}authorize{n} a certain
number of shares of stock and to {b}issue{n} some of this authorized stock to
investors. Thus, at any given time the amount of stock authorized is generally
{1,11,3} the amount issued.
(A) larger than (B) the same as (C) smaller than
*1
- POST - {a,10,10}{b}larger than
LARGER THAN - OK - Right.
A - OK - Right.
THE SAME AS - QUIT - No, usually more is authorized than issued.
B - QUIT - No, usually more is authorized than issued.
SMALLER THAN - QUIT - No, usually more is authorized than issued.
C - QUIT - No, usually more is authorized than issued.
@
9.33
A corporation may buy back some of the stock that it had previously
issued. Such stock is then called {b}treasury stock{n}. The {b}outstanding stock
consists of the issued stock less the treasury stock.
If a company issues 100,000 shares and buys back 15,000 shares, its treasury
stock is {1,-6} shares, and its outstanding stock is {2,-6} shares.
*1
15,000 - OK - Fine.
15000 - OK - Fine.
- HINT - No, the treasury stock is what the company buys back.
*2
85,000 - OK - Yes, that's it.
85000 - OK - Yes, that's it.
- HINT - Check your calculations.
@
9.34
The balance sheet amount for {b}capital stock{n} is the amount for the number
of shares outstanding.
Maxim Company has authorized 100,000 shares of stock. It has issued 60,000
shares, for which it received the stated value of $10 per share. As of
December 31, 19x1, it has bought back 10,000 shares, paying $10 per share.
These shares are in its treasury. The balance sheet amount for capital stock
is ${1,-7}.
*1
500,000 - OK - Good. 50,000 shares at $10 per share are still outstanding.
500000 - OK - Good. 50,000 shares at $10 per share are still outstanding.
- HINT - 50,000 shares at $10 per share are still outstanding.
@
9.35
On the balance sheet, both the amount of common stock and the amount of
treasury stock are reported. This section of the balance sheet for Maxim
Company would read:
Common stock..............................$600,000
Less Treasury stock.....................$100,000{s}
{c,196,9}{d}
Net paid-in capital.......................${1,-7}
*1
500,000 - OK - Fine.
500000 - OK - Fine.
- HINT - Check your calculations.
@
9.36
Shareholders may sell their stock to other investors. Such sales
{1,6} affect the balance sheet of the corporation.
(A) do (B) do not
*1
- POST - {a,6,27}{b}do not
DO NOT - OK - Fine. The entity is the corporation, not the shareholders.
B - OK - Fine. The entity is the corporation, not the shareholders.
DO - QUIT - Incorrect. The entity is the corporation, not the shareholders.
A - QUIT - Incorrect. The entity is the corporation, not the shareholders.
@
9.37
When shareholders sell their stock to other investors, the price at
which the sale takes place is determined in the {b}marketplace{n}. The marketplace
for the stock of large companies is a stock exchange. The value at which a
stock is sold in such a transaction is called the {b}market value.
@
9.38
The market value of the company's stock has no necessary relation to its
par value, its stated value, or the amount of paid-in capital. If the par
value of a certain stock is $1, the market value is {1,21,3}.
(A) $1 (B) any value whatsoever
If the stated value of another stock is $10, the market value is
{2,21,3}. If paid-in capital is $12 per share, the market value
(C) $10 (D) any value whatsoever
is {3,21,6}.
(E) $12 (F) any value whatsoever
*1
- POST - {a,8,27}{b}any value whatsoever
ANY VALUE WHATSOEVER - OK - That's correct.
B - OK - That's correct.
$1 - QUIT - No, the market value of stock has no necessary relation to its par value.
1 - QUIT - No, the market value of stock has no necessary relation to its par value.
A - QUIT - No, the market value of stock has no necessary relation to its par value.
*2
- POST - {a,14,27}{b}any value whatsoever
ANY VALUE WHATSOEVER - OK - Fine.
D - OK - Fine.
$10 - QUIT - No, stock's market value has no necessary relation to its stated value.
10 - QUIT - No, stock's market value has no necessary relation to its stated value.
C - QUIT - No, stock's market value has no necessary relation to its stated value.
*3
- POST - {a,18,27}{b}any value whatsoever
ANY VALUE WHATSOEVER - OK - Right.
F - OK - Right.
$12 - QUIT - No, stock's market value has no relation to the amount of paid-in capital.
12 - QUIT - No, stock's market value has no relation to the amount of paid-in capital.
E - QUIT - No, stock's market value has no relation to the amount of paid-in capital.
@
9.39
The total of the owners' equity is equal to total assets less total
liabilities. It is not likely to be equal to the total market value of all
stock outstanding. Evidently, accounting {1,3} the market value of the
owners' equity.
Choose the letter of the correct answer below:
(A) is a way of measuring (B) does not attempt to measure
*1
- POST - {a,14,40}{b}does not attempt to measure
B - OK - Right.
A - QUIT - No, this would be inconsistent with the cost concept.
@
9.40 Preferred Stock
Some corporations issue stock that gives its owners preferential treat-
ment over the common shareholders. As the word "preferential" suggests, such
stock is called P{1,9,3} stock.
*1
REFERRED - OK - Ok.
PREFERRED - OK - Ok.
@
9.41
Usually {u}preferred shareholders{n} have a preferential claim over the
common shareholders for the par value of their stock if the corporation should
be liquidated. Thus, if the corporation was liquidated, the owner of 500
shares of $100 preferred stock would get ${1,-6} before the common share-
holders got anything.
*1
50,000 - OK - Correct.
50000 - OK - Correct.
- HINT - The owner would get 500 x $100 or $50,000.
@
9.42
As you learned earlier, the par value of common stock has
{1,14} significance. Because preferred stock does have a preferential
(A) some (B) practically no
claim on assets equal to its par value, its par value has {2,14}
(A) some (B) practically no
significance.
*1
- POST - {a,6,28}{b}practically no
PRACTICALLY NO - OK - Correct.
B - OK - Correct.
SOME - QUIT - No, par value of {b}common stock{n} has no real significance.
A - QUIT - No, par value of {b}common stock{n} has no real significance.
*2
- POST - {a,10,12}{b}some
SOME - OK - That's right.
A - OK - That's right.
PRACTICALLY NO - QUIT - No, par value of {b}preferred stock{n} is significant.
B - QUIT - No, par value of {b}preferred stock{n} is significant.
@
9.43
Preferred shareholders usually have preference to a stated amount of
annual dividends. Pemi Corporation has issued $100,000 of 9% preferred stock.
No dividend can be paid to a common shareholder until the preferred share-
holders have received their full dividend of 9% of $100,000, amounting to
${1,-5} a year.
*1
9,000 - OK - You got it.
9000 - OK - You got it.
- HINT - The dividend is 9% of $100,000 or $9,000.
@
9.44 Retained Earnings and Dividends
The net income of a period increases O{1,14} [two words].
The directors may vote to distribute income to the shareholders in the form
of {b}dividends{n}. Dividends decrease O{2,14}.
*1
WNERS' EQUITY - OK - Well done.
OWNERS' EQUITY - OK - Well done.
- HINT - Net income of a period increases owners' equity.
*2
WNERS' EQUITY - OK - Correct.
OWNERS' EQUITY - OK - Correct.
- HINT - Owners' equity is decreased by dividends.
@
9.45
{b}Earnings{n} means the same as net income. If earnings are not distributed
as dividends, they are {b}retained{n} in the corporation. This amount is reported
on the balance sheet with the caption of R{1,17} [two words].
*1
ETAINED EARNINGS - OK - Fine.
RETAINED EARNINGS - OK - Fine.
- HINT - This amount is reported as {b}retained earnings.
@
9.46
The account "Retained Earnings" {1,9} by the amount of net
(A) decreases (B) increases
income each period and {2,9} by the amount of dividends. Thus, if
(A) decreases (B) increases
Retained Earnings are $100,000 at the start of a period during which a dividend
of $20,000 is declared and during which net income is $30,000, Retained
Earnings will be ${3,-7} at the close of the period.
*1
- POST - {a,4,34}{b}increases
INCREASES - OK - Well done.
B - OK - Well done.
DECREASES - QUIT - No, retained earnings is increased by net income.
A - QUIT - No, retained earnings is increased by net income.
*2
- POST - {a,8,13}{b}decreases
DECREASES - OK - You got it right.
A - OK - You got it right.
INCREASES - QUIT - No, retained earnings is decreased by dividends.
B - QUIT - No, retained earnings is decreased by dividends.
*3
110,000 - OK - Good.
110000 - OK - Good.
- HINT - Retained Earnings are decreased by $20,000 and increased by $30,000.{a,22,1}This results in Retained Earnings of $110,000.
@
9.47
If, over the life of the corporation, the total dividends declared equal
the total of the net income each year, Retained Earnings at the end of its life
will be ${1,-5}.
*1
0 - OK - Good.
ZERO - OK - Good.
- HINT - No, in this case, retained earnings are {b}zero{n}.
@
9.48
Levy Corporation started business in 19x1. Its net income was $0 in
19x1, $300,000 in 19x2, and $700,000 in 19x3. During this period, it paid out
40% of its income as dividends. On the December 31, 19x3 balance sheet of
Levy Corporation, the amount reported as retained earnings would be ${1,-7}.
*1
600,000 - OK - Well done!
600000 - OK - Well done!
- HINT - {a,21,1}Retained earnings equals net income ($1,000,000) minus dividends (40% of {a,22,1}$1,000,000) or {b}600,000{n}.
@
9.49
{b}Net income{n} refers to the increase in owners' equity {1,3},
whereas {b}retained earnings{n} refers to the net increases (after deduction of
dividends) {2,3}.
Please fill in the blanks by typing the letter of the correct answer below:
(A) over the life of the corporation to date (B) in one year
*1
- POST - {a,12,58}{b}in one year
B - OK - Good.
A - QUIT - That's incorrect.
*2
- POST - {a,12,58}in one year {a,12,9}{b}over the life of the corporation to date
A - OK - Correct.
B - QUIT - Incorrect.
@
9.50
Owners' equity represents {1,22,5}. Retained
(A) an asset (B) a claim against assets
earnings, which is a part of owners' equity, also represents
{2,22,5}.
(A) an asset (B) a claim against assets
*1
- POST - {a,4,33}{b}a claim against assets
A CLAIM AGAINST ASSETS - OK - Good.
B - OK - Good.
AN ASSET - QUIT - No, owners' equity represents a claim against assets.
A - QUIT - No, owners' equity represents a claim against assets.
*2
- POST - {a,10,33}{b}a claim against assets
A CLAIM AGAINST ASSETS - OK - Right.
B - OK - Right.
AN ASSET - QUIT - Retained earnings are {b}not{n} assets as many people mistakenly believe.
A - QUIT - Retained earnings are {b}not{n} assets as many people mistakenly believe.
@
9.51
Owners' equity is one source of permanent capital, the other source
being noncurrent L{1,11,3}. Retained earnings is the capital made
available to the entity because part of net income was retained in the entity
rather than being distributed as D{2,9,3}.
*1
IABILITIES - OK - Fine.
LIABILITIES - OK - Fine.
- HINT - Noncurrent liabilities provide permanent capital.
*2
IVIDENDS - OK - That's correct.
DIVIDENDS - OK - That's correct.
- HINT - Net income can be distributed as dividends.
@
9.52
Owners' equity is sometimes called "net worth." This term suggests that
the amount shows what the owners' claim on the assets is {u}worth{n}. Because the
amounts reported on the assets side of the balance sheet {1,6} represent
(A) do (B) do not
the real worth of these assets, this suggestion is {2,16,3}.
(C) absolutely right (D) dead wrong
*1
- POST - {a,8,41}{b}do not
DO NOT - OK - That's right.
B - OK - That's right.
DO - QUIT - No, that's incorrect.
A - QUIT - No, that's incorrect.
*2
- POST - {a,12,41}{b}dead wrong
DEAD WRONG - OK - You got it right.
D - OK - You got it right.
ABSOLUTELY RIGHT - QUIT - Incorrect.
C - QUIT - Incorrect.
@
9.53
The {b}worth{n} of a company's stock is what people will pay for it.
This is the market price of the stock, which {1,8} appear anywhere on
the balance sheet.
(A) does (B) does not
*1
- POST - {a,8,29}{b}does not
DOES NOT - OK - Correct.
B - OK - Correct.
DOES - QUIT - No, the balance sheet does {b}not{n} reflect market value.
A - QUIT - No, the balance sheet does {b}not{n} reflect market value.
@
9.54 Types of Dividends
Suppose that a dividend of $5,000 is declared and paid in cash. Write
the journal entry necessary to record the effect of this transaction on the
Cash and Retained Earnings accounts by choosing the letter of the correct
answer below:
(A) $5,000 (B) Retained earnings
(C) Cash (D) $10,000
Dr. {1,-17}..............................{2,-6}{s}
Cr. {3,-17}...................{4,-6}
*1
RETAINED EARNINGS - OK - {a,22,1}Good, retained earnings, which is {b}not{n} an asset, is decreased and so it is a {a,23,1}debit entry.
B - OK - {a,22,1}Good, retained earnings, which is {b}not{n} an asset, is decreased and so it is a {a,23,1}debit entry.
- HINT - Retained earnings, which is {b}not{n} an asset, is decreased and so it is a {a,22,1}debit entry.{s}
*2
5,000 - OK - Yes, retained earnings is decreased by $5,000.
5000 - OK - Yes, retained earnings is decreased by $5,000.
A - OK - Yes, retained earnings is decreased by $5,000.
- HINT - Retained earnings is decreased by $5,000.
*3
CASH - OK - Correct, the cash asset is decreased and thus it is a credit entry.
C - OK - Correct, the cash asset is decreased and thus it is a credit entry.
- HINT - The cash asset is decreased and thus it is a credit entry.
*4
5,000 - OK - Yes, cash is also decreased by $5,000.
5000 - OK - Yes, cash is also decreased by $5,000.
A - OK - Yes, cash is also decreased by $5,000.
- HINT - Cash is also decreased by $5,000.
@
9.55
In the table below, record the effect of a cash dividend on owners'
equity and the number of shares outstanding by choosing the correct answer
when the blank highlights.
(A) increases (B) decreases (C) unchanged
{b}Total amount of Total number of shares{s}
{b}owners' equity outstanding{d}
Cash dividend {1,-9,2} {2,-9,2}
*1
- POST - {a,8,33}{b}decreases
DECREASES - OK - Correct.
B - OK - Correct.
INCREASES - NO - No, a cash dividend {b}decreases{n} owners' equity.
A - NO - No, a cash dividend {b}decreases{n} owners' equity.
UNCHANGED - NO - No, a cash dividend {b}decreases{n} owners' equity.
C - NO - No, a cash dividend {b}decreases{n} owners' equity.
*2
- POST - {a,8,33}decreases {a,8,54}{b}unchanged
UNCHANGED - OK - Fine.
C - OK - Fine.
INCREASES - NO - No, a cash dividend does {b}not{n} change the number of shares outstanding.{s}
A - NO - No, a cash dividend does {b}not{n} change the number of shares outstanding.{s}
DECREASES - NO - No, a cash dividend does {b}not{n} change the number of shares outstanding.{s}
B - NO - No, a cash dividend does {b}not{n} change the number of shares outstanding.{s}
@
9.56
Dividends are usually paid in the form of cash. Sometimes, however, the
dividend consists of shares of stock in the corporation. The latter is called
a {1,5,1} dividend.
(A) cash (B) stock
*1
- POST - {a,8,29}{b}stock
STOCK - OK - Correct.
B - OK - Correct.
CASH - QUIT - No, it is called a stock dividend.
A - QUIT - No, it is called a stock dividend.
@
9.57
In a typical stock dividend, shareholders are issued additional shares
amounting to 5% or 10% of the total they currently own. In a 10% stock divi-
dend, for example, the holder of 900 shares would receive {1,-3} additional
shares of stock.
*1
90 - OK - Yes.
- HINT - 10% of 900 = 90.
@
9.58
Since the number of shares received by each shareholder in a stock divi-
dend is proportional to the number of shares that the shareholder currently
owns, the {b}percent{n} of the total owners' equity owned by each stockholder
{1,14,3} as a result of a stock dividend.
(A) increases (B) stays the same (C) decreases
*1
- POST - {a,10,34}{b}stays the same
STAYS THE SAME - OK - Correct.
B - OK - Correct.
INCREASES - NO - No, the {b}percent{n} stays the same.
A - NO - No, the {b}percent{n} stays the same.
DECREASES - NO - No, the {b}percent{n} stays the same.
C - NO - No, the {b}percent{n} stays the same.
@
9.59
When a dividend of common stock is declared, Retained Earnings is de-
creased and Common Stock is increased by the amount of the dividend. Write a
journal entry to record a dividend of $10,000 of common stock by choosing the
letter of the correct answer when the blank highlights.
(A) Common stock (B) $10,000
(C) $20,000 (D) Retained earnings
Dr. {1,-17,3}...........................{2,-7}{s}
Cr. {3,-17,3}.......................{4,-7}
*1
RETAINED EARNINGS - OK - Good, retained earnings are decreased and thus a debit entry.
D - OK - Good, retained earnings are decreased and thus a debit entry.
- HINT - Retained earnings are decreased and thus a debit entry.
*2
10,000 - OK - Yes, retained earnings are decreased by $10,000.
10000 - OK - Yes, retained earnings are decreased by $10,000.
B - OK - Yes, retained earnings are decreased by $10,000.
- HINT - Retained earnings are decreased by $10,000.
*3
COMMON STOCK - OK - Correct, common stock is increased and thus a debit item.
A - OK - Correct, common stock is increased and thus a debit item.
- HINT - Common stock is increased and thus a debit item.
*4
10,000 - OK - Right, common stock is increased by $10,000.
10000 - OK - Right, common stock is increased by $10,000.
B - OK - Right, common stock is increased by $10,000.
- HINT - Common stock is increased by $10,000.
@
9.60
Since in a common stock dividend, the Retained Earnings account
decreases by an amount equal to the increase in the Common Stock account,
the total amount of owners' equity {1,15,8}.
(A) increases (B) does not change (C) decreases
*1
- POST - {a,8,28}{b}does not change
DOES NOT CHANGE - OK - Correct.
B - OK - Correct.
INCREASES - NO - No, it stays the same.
A - NO - No, it stays the same.
DECREASES - NO - No, it stays the same.
C - NO - No, it stays the same.
@
9.61
Complete the following table by choosing the correct answer when each
blank highlights.
(A) increases (B) decreases (C) unchanged
{b}Total amount of Total number of shares{s}
{b} owners' equity outstanding{d}
Cash dividend decreases unchanged
Stock dividend {1,-9 } {2,-9}
*1
UNCHANGED - OK - Good.
C - OK - Good.
INCREASES - NO - No, it stays the same.
A - NO - No, it stays the same.
DECREASES - NO - No, it stays the same.
B - NO - No, it stays the same.
*2
INCREASES - OK - Right.
A - OK - Right.
DECREASES - NO - No, stock dividends increase the # of outstanding shares.
B - NO - No, stock dividends increase the # of outstanding shares.
UNCHANGED - NO - No, stock dividends increase the # of outstanding shares.
C - NO - No, stock dividends increase the # of outstanding shares.
@
9.62
A corporation may decide to exchange the number of shares outstanding
for two or more times that number. The process is called a {b}stock split{n}. In
a three-for-one stock split, for example, each shareholder receives three new
shares for each old share held. This causes the total number of shares out-
standing to {1,13,3}.
(A) decrease (B) stay the same (C) increase
*1
- POST - {a,12,58}{b}increase
INCREASE - OK - You got it right.
C - OK - You got it right.
DECREASE - NO - No, when a {b}split{n} occurs, more shares are outstanding.
A - NO - No, when a {b}split{n} occurs, more shares are outstanding.
STAY THE SAME - NO - No, when a {b}split{n} occurs, more shares are outstanding.
B - NO - No, when a {b}split{n} occurs, more shares are outstanding.
@
9.63
Although a stock split causes the number of shares outstanding to
increase, it does not affect the total amount of owners' equity or the
{u}percentage{n} of stock held by each stockholder. A shareholder who owns 1%
of the stock before a stock split owns {1,-3}% of it afterwards and owns
{2,18} shares.
(A) fewer (B) the same amount of (C) more
*1
1 - OK - Good.
- HINT - No, the percentage of stock held by each stockholder remains the same.
*2
- POST - {a,12,51}{b}more
MORE - OK - Correct.
C - OK - Correct.
FEWER - NO - No, the shareholder will own the same percentage but more shares.{s}
A - NO - No, the shareholder will own the same percentage but more shares.{s}
THE SAME AMOUNT OF - NO - No, the shareholder will own the same percentage but more shares.{s}
B - NO - No, the shareholder will own the same percentage but more shares.{s}
@
9.64
Complete the following table by choosing the answer for each blank.
(A) increases (B) decreases (C) unchanged
{b}Total amount of Total number of shares{s}
{b} owners' equity outstanding{d}
Cash dividend decreases unchanged
Stock dividend unchanged increases
Stock split {1,-9 } {2,-9}
*1
UNCHANGED - OK - Right.
C - OK - Right.
INCREASES - NO - No, the {b}amount{n} (%) stays the same.
A - NO - No, the {b}amount{n} (%) stays the same.
DECREASES - NO - No, the {b}amount{n} (%) stays the same.
B - NO - No, the {b}amount{n} (%) stays the same.
*2
INCREASES - OK - Yes, that's right.
A - OK - Yes, that's right.
DECREASES - NO - No, a split results in {b}more{n} shares.
B - NO - No, a split results in {b}more{n} shares.
UNCHANGED - NO - No, a split results in {b}more{n} shares.
C - NO - No, a split results in {b}more{n} shares.
@
9.65
In summary, the owners' equity section of a corporation's balance sheet{s}
has these main items:
(1) The amount of stock that has preference, called preferred stock.
(2) For common stock, the amount of paid-in capital, which consists of (a) the
par or stated value of the number of shares outstanding, plus (b) the addition-
al amount paid for the stock, called other paid-in capital.
(3) Retained earnings, which is the cumulative difference between net income
and dividends.
@
9.66
These items {1,7} related to the market value of the stock.
(A) are (B) are not
*1
- POST - {a,4,29}{b}are not
ARE NOT - OK - That's correct.
B - OK - That's correct.
ARE - QUIT - No, the owners look in a newspaper, {b}not{n} the balance sheet, for market value.
A - QUIT - No, the owners look in a newspaper, {b}not{n} the balance sheet, for market value.
@
9.67 Balance Between Debt and Equity Capital
A corporation obtains permanent capital either from the issuance of
bonds, which is {1,6,2} capital, or from the issuance of stock, which is
(A) debt (B) equity
{2,6,2} capital.
(A) debt (B) equity
*1
- POST - {a,6,13}{b}debt
DEBT - OK - Fine.
A - OK - Fine.
EQUITY - QUIT - No, a bond is a promise to pay a {b}debt{n}.
B - QUIT - No, a bond is a promise to pay a {b}debt{n}.
*2
- POST - {a,10,29}{b}equity
EQUITY - OK - Right.
B - OK - Right.
DEBT - QUIT - No, stock is equity.
A - QUIT - No, stock is equity.
@
9.68
A corporation has no fixed obligations to its shareholders; that is, the
company {1,8,2} declare dividends each year, and
(A) must (B) need not
{2,8,2} repay the amount the shareholders have invested.
(A) must (B) need not
*1
- POST - {a,6,29}{b}need not
NEED NOT - OK - You got it right.
B - OK - You got it right.
MUST - QUIT - No, the company need not declare dividends each year.
A - QUIT - No, the company need not declare dividends each year.
*2
- POST - {a,10,29}{b}need not
NEED NOT - OK - Correct.
B - OK - Correct.
MUST - QUIT - No, the company need not repay the amount invested by the shareholders.
A - QUIT - No, the company need not repay the amount invested by the shareholders.
@
9.69
A company has two fixed obligations to its bondholders, however:
(1) payment of {1,10,2}
(2) repayment of {2,10,2}
*1
INTEREST - OK - Well done.
- HINT - A company must pay interest to its bondholders.
*2
PRINCIPAL - OK - Good.
- HINT - A company must repay the principal to its bondholders.
@
9.70
If the company fails to pay either the interest or the principal when
due, the bondholders may force the company into bankruptcy. Evidently bonds
are a {1,4} risky method of raising capital than stock; that is debt
(A) less (B) more
capital is a {2,4} risky source of capital than equity capital.
(A) less (B) more
*1
- POST - {a,8,30}{b}more
MORE - OK - Right!
B - OK - Right!
LESS - QUIT - No, companies must pay bond debts.
A - QUIT - No, companies must pay bond debts.
*2
- POST - {a,12,30}{b}more
MORE - OK - Fine.
B - OK - Fine.
LESS - QUIT - No, bond debt is more risky because it must be paid.
A - QUIT - No, bond debt is more risky because it must be paid.
@
9.71
Since bonds are a firm obligation and stocks are not a firm obligation,
{b}investors{n} have more risk if they invest in a company's stock than if they
invest in the bonds of the same company, because they are not sure of getting
either an annual payment (dividends) or repayment of their investment. Inves-
tors therefore expect a {1,6} return from an investment in stock than
from an investment in bonds in the same company.
(A) higher (B) lower
*1
- POST - {a,14,13}{b}higher
HIGHER - OK - Correct. They take a higher risk in expectation of a greater payoff.
A - OK - Correct. They take a higher risk in expectation of a greater payoff.
LOWER - QUIT - {a,22,1}No, that's not correct. They take a higher risk in expectation of a greater {a,23,1}payoff.
B - QUIT - {a,22,1}No, that's not correct. They take a higher risk in expectation of a greater {a,23,1}payoff.
@
9.72
For example, if a company's bonds had an interest rate of 12 percent, an
investor would invest in its stock only if the expected return on stock was
{1,14,2} 12 percent. (The expected return on stock consists of
both expected dividends and an increase in the price of the stock.)
(A) much more than (B) at least
*1
- POST - {a,10,13}{b}much more than
MUCH MORE THAN - OK - Fine.
A - OK - Fine.
AT LEAST - OK - That's incorrect.
B - OK - That's incorrect.
@
9.73
Thus, from the viewpoint of the issuing company, stock which is
{1,6,2} capital, is a more expensive source of capital than bonds which are
(A) debt (B) equity
{2,6,2} capital.
(A) debt (B) equity
*1
- POST - {a,6,29}{b}equity
EQUITY - OK - That's right.
B - OK - That's right.
DEBT - QUIT - No, stock is equity capital.
A - QUIT - No, stock is equity capital.
*2
- POST - {a,10,13}{b}debt
DEBT - OK - Ok.
A - OK - Ok.
EQUITY - QUIT - No, bonds are debt capital.
B - QUIT - No, bonds are debt capital.
@
9.74
Type Y (for yes) and N (for no) when the statement highlights:
{b}Bonds (Debt) Stock (Equity)
{i}Annual payments required{n} {1,3,1} {2,3,1}
Principal payments required {3,3,1} {4,3,1}
Risk to the entity is high {5,3,1} {6,3,1}
Its cost is relatively high {7,3,1} {8,3,1}
*1
YES - OK - Correct.
Y - OK - Correct.
NO - QUIT - That's incorrect.
N - QUIT - That's incorrect.
*2
- POST - {a,8,1}{n}Annual payments required {a,10,1}{i}Principal payments required{n}
NO - OK - Correct.
N - OK - Correct.
YES - QUIT - That's incorrect.
Y - QUIT - That's incorrect.
*3
YES - OK - Correct.
Y - OK - Correct.
NO - QUIT - That's incorrect.
N - QUIT - That's incorrect.
*4
- POST - {a,10,1}{n}Principal payments required {a,12,1}{i}Risk to the entity is high{n}
NO - OK - Correct.
N - OK - Correct.
YES - QUIT - That's incorrect.
Y - QUIT - That's incorrect.
*5
YES - OK - Correct.
Y - OK - Correct.
NO - QUIT - That's incorrect.
N - QUIT - That's incorrect.
*6
- POST - {a,12,1}{n}Risk to the entity is high {a,14,1}{i}Its cost is relatively high{n}
NO - OK - Correct.
N - OK - Correct.
YES - QUIT - Incorrect.
Y - QUIT - Incorrect.
*7
NO - OK - Correct.
N - OK - Correct.
YES - QUIT - That's incorrect.
Y - QUIT - That's incorrect.
*8
YES - OK - Correct.
Y - OK - Correct.
NO - QUIT - That's incorrect.
N - QUIT - That's incorrect.
@
9.75
In deciding on its permanent capital structure, a company must decide
on the proper balance between {b}debt capital{n}, which has a relatively
{1,4} risk and a relatively {2,4} cost, and {b}equity{n} capital, which has a
relatively {3,4} risk and a relatively {4,4} cost.
Please type in the correct answer from the choices below:
(A) high (B) low
*1
- POST - {a,14,13}{b}high
HIGH - OK - Correct.
A - OK - Correct.
LOW - QUIT - Incorrect.
B - QUIT - Incorrect.
*2
- POST - {a,14,13}high {a,14,29}{b}low
LOW - OK - That's right.
B - OK - That's right.
HIGH - QUIT - No, that's incorrect.
A - QUIT - No, that's incorrect.
*3
LOW - OK - Fine.
B - OK - Fine.
HIGH - QUIT - No.
A - QUIT - No.
*4
- POST - {a,14,29}low {a,14,13}{b}high
HIGH - OK - Okay.
A - OK - Okay.
LOW - QUIT - That's incorrect.
B - QUIT - That's incorrect.
@
9.76
A company runs the risk of going bankrupt if it has too high a propor-
tion of {1,6,2} capital. A company pays an unnecessarily high cost for
(A) debt (B) equity
its permanent capital if it has too high a proportion of {2,6,2} capital.
(A) debt (B) equity
*1
- POST - {a,6,13}{b}debt
DEBT - OK - Right. It {b}must{n} pay its debts!
A - OK - Right. It {b}must{n} pay its debts!
EQUITY - QUIT - No, that's wrong. It {b}must{n} pay its debts!
B - QUIT - No, that's wrong. It {b}must{n} pay its debts!
*2
- POST - {a,10,29}{b}equity
EQUITY - OK - Yes, that's right. Equity capital costs more.
B - OK - Yes, that's right. Equity capital costs more.
DEBT - QUIT - Incorrect. Equity capital costs more.
A - QUIT - Incorrect. Equity capital costs more.
@
9.77
A company that obtains a high proportion of its permanent capital from
debt is said to be {b}highly leveraged{n}. If such a company does not get into
financial difficulty, it will earn a high return for its equity investors,
because each dollar of debt capital takes the place of a {1,4,1} expensive
dollar of equity capital.
(A) more (B) less
*1
- POST - {a,12,13}{b}more
MORE - OK - Correct. Stock is expected to pay {b}more{n} to shareholders!
A - OK - Correct. Stock is expected to pay {b}more{n} to shareholders!
LESS - QUIT - That's incorrect. Stock is expected to pay {b}more{n} to shareholders!
B - QUIT - That's incorrect. Stock is expected to pay {b}more{n} to shareholders!
@
9.78
However, highly leveraged companies are risky because the high
proportion of debt capital and the associated obligation to pay interest
{1,9,3} the chance that the company will not be able to meet its obligations.
(A) increases (B) decreases
*1
- POST - {a,8,13}{b}increases
INCREASES - OK - Fine. The company {b}must{n} pay its debts!
A - OK - Fine. The company {b}must{n} pay its debts!
DECREASES - QUIT - No, that's not it. The company {b}must{n} pay its debts!
B - QUIT - No, that's not it. The company {b}must{n} pay its debts!
@
9.79
A common way of measuring the relative amount of debt and equity capital
is the {b}debt ratio{n}, which is the ratio of debt capital to total permanent
capital. Recall that {b}debt capital{n} is another name for {1,10,3}
(A) total (B) current (C) noncurrent
liabilities. Equity capital is another name for O{2,14}
[two words].
*1
- POST - {a,8,49}{b}noncurrent
NONCURRENT - OK - Yes, that's right.
C - OK - Yes, that's right.
TOTAL - NO - No, debt capital is the same as noncurrent liabilities.
A - NO - No, debt capital is the same as noncurrent liabilities.
CURRENT - NO - No, debt capital is the same as noncurrent liabilities.
B - NO - No, debt capital is the same as noncurrent liabilities.
*2
WNERS' EQUITY - OK - Good.
OWNERS' EQUITY - OK - Good.
- HINT - No, owners' equity is the same as equity capital.
@
9.80
Earlier you worked with the permanent capital structure for Lougee
Company, which had noncurrent liabilities of $9,000 and owners' equity of
$17,000. Calculate its debt ratio.
Debt capital (noncurrent liabilities) ${1,-6}
{c,196,37} = {c,196,9} = {3,-3} %
Debt + equity ${2,-6}
*1
9,000 - OK - Right.
9000 - OK - Right.
- HINT - Noncurrent liabilities are $9,000.
*2
26,000 - OK - Fine.
26000 - OK - Fine.
- HINT - Total debt (noncurrent liabilities) + owners' equity = $26,000.{s}
*3
35 - OK - Correct.
- HINT - No, $9,000 / $26,000 = 35%.
@
9.81
Most industrial companies have a debt ratio of less than 50 percent.
Lougee Company, with a debt ratio of 35%, {1,6} in this category.
(A) is (B) is not
*1
- POST - {a,6,13}{b}is
IS - OK - Correct.
A - OK - Correct.
IS NOT - QUIT - Incorrect.
B - QUIT - Incorrect.
@
9.82 Consolidated Financial Statements
If one corporation owns more than 50% of the stock in another corpora-
tion, it can control the affairs of that corporation because it can outvote any
other owners. Many businesses consist of a number of corporations that are
legally separate entities but, because they are controlled by one corporation,
