Question 1

A firm with earnings per share of $3 and a price-earnings (P/E) ratio of 24 will have a stock market price of

Accepted Answer

Stock price = EPS × P/E ratio = $3 × 24 = $72

Question 2

Which of the following is not subtracted in arriving at operating income?

Accepted Answer

Interest expense is not subtracted in arriving at operating income. Operating income is calculated by subtracting operating expenses (such as cost of goods sold, depreciation, and selling and administrative expenses) from gross income. Interest expense is considered a non-operating expense and is subtracted later to determine net income.

Question 3

Increasing interest expense will have what effect on Earnings Before Interest and Taxes (EBIT)?

Accepted Answer

EBIT, or Earnings Before Interest and Taxes, is calculated before considering interest expenses. Therefore, changes in interest expenses do not affect EBIT.

Question 4

Price-earnings (P/E) ratio is influenced by all of the following BUT

Accepted Answer

The P/E ratio is directly influenced by earnings per share (B) as it is a component of the ratio itself. Business risk (A) and quality of management (C) indirectly affect the P/E ratio through their impact on the company's future earnings potential and investor perception, but they are not direct components of the P/E ratio calculation. Therefore, all the options listed do influence the P/E ratio in some manner.

Question 5

Consider the following information for Ball Corp.
$\begin{array}{lr}
\text { Selling and administrative expense } & \$ 40,000 \
\text { Depreciation expense } & 70,000 \
\text { Sales } & 350,000 \
\text { Interest expense } & 30,000 \
\text { Cost of goods sold } & 110,000 \
\text { Taxes } & 17,500
\end{array}$
What is the operating profit for Ball Corp.?

Accepted Answer

Operating profit is calculated as Sales minus Cost of Goods Sold, Selling and Administrative Expenses, and Depreciation Expense. So, $350,000 - $110,000 - $40,000 - $70,000 = $130,000.

Question 6

A firm has $1,500,000 in its common stock account and $1,000,000 in its capital paid in excess of par account. The firm issued 100,000 shares of common stock. What was the issue price (market value) if only one stock issuance has occurred?

Accepted Answer

The answer of A firm has $1,500,000 in its common...

Question 7

Asset accounts on the balance sheet are listed in order of

Accepted Answer

The asset accounts on the balance sheet are listed in order of liquidity, which means how quickly they can be converted into cash. The most liquid assets are listed first, such as cash and short-term investments, while the least liquid assets are listed last, such as property, plant and equipment. This order helps investors and analysts assess a company's ability to meet its short-term obligations.

Question 8

When a firm's earnings are falling more rapidly than its stock price, its P/E ratio will

Accepted Answer

When a firm's earnings are falling more rapidly than its stock price, the price-to-earnings (P/E) ratio will go up. This is because the P/E ratio is calculated by dividing the current market price of the stock by its earnings per share (EPS). If earnings (the denominator) decrease faster than the stock price (the numerator), the ratio increases.

Question 9

Candy Company had sales of $320,000 and cost of goods sold of $112,000. What is the gross profit margin (ratio of gross profit to sales)?

Accepted Answer

Gross profit margin is calculated as (Sales - Cost of Goods Sold) / Sales. Here, it is ($320,000 - $112,000) / $320,000 = $208,000 / $320,000 = 0.65 or 65%.

Question 10

Allen Lumber Company had earnings after taxes of $750,000 in the year 2015 with 300,000 shares outstanding on December 31, 2015. On January 1, 2016, the firm issued 50,000 new shares. The company took the proceeds from these new shares as well as other operating improvements and earned $937,500 earnings after taxes in 2016. Earnings per share for the year 2016 were

Accepted Answer

Year 2015
Earnings per share = (Earnings after taxes/Shares outstanding) = ($750,000/300,000) = $2.50
Year 2016
Earnings after taxes = $750,000 × 1.25 = $937,500
Shares outstanding = 300,000 + 50,000 = 350,000
Earnings per share = $937,500/350,000 = $2.68

Question 11

Earnings per share is

Accepted Answer

Earnings per share (EPS) is calculated by subtracting preferred dividends paid from net income and then dividing by the number of shares outstanding. This formula is represented by D in the given options.

Question 12

Which of the following factors do not influence the firm's P/E ratio?

Accepted Answer

All the options listed (past earnings, shares outstanding, and volatility in business performance) influence a firm's Price-to-Earnings (P/E) ratio. Past earnings affect investor expectations for future earnings, shares outstanding impact earnings per share, and volatility in business performance can affect risk perceptions and future earnings predictability, all of which are factors in determining a firm's P/E ratio.

Question 13

Elgin Battery Manufacturers had sales of $1,000,000 in 2015 and their cost of goods sold is $700,000. Selling and administrative expenses were $100,000. Depreciation expense was $80,000 and interest expense for the year was $10,000. The firm's tax rate is 30 percent. What is the dollar amount of taxes paid in 2015?

Accepted Answer

To calculate the taxes paid, first determine the net income before taxes: Sales - Cost of Goods Sold - Selling and Administrative Expenses - Depreciation Expense - Interest Expense = Net Income before Taxes. So, $1,000,000 - $700,000 - $100,000 - $80,000 - $10,000 = $110,000. Then, apply the tax rate: $110,000 * 30% = $33,000.

Question 14

Although depreciation does not provide cash to the firm directly, the fact that it is tax-deductible can provide cash inflow to the company.

Accepted Answer

Depreciation is tax-deductible, which means it can decrease the taxable income of the company and, as a result, reduce the taxes paid. This can provide cash inflow to the company as it will have to pay lesser taxes.

Question 15

Reinvested funds into retained earnings theoretically belong to

Accepted Answer

Reinvested funds into retained earnings belong to common stockholders as they own the equity of the company. Bondholders are creditors and are not entitled to any portion of the company's profits. Employees do not have ownership rights in the company's profits.

Question 16

Gross profit is equal to

Accepted Answer

Gross profit is calculated by deducting the cost of goods sold from the total revenue earned from the sales of goods. Therefore, gross profit is equal to sales minus cost of goods sold.

Question 17

Density Farms Inc. had sales of $750,000, cost of goods sold of $200,000, selling and administrative expense of $70,000, and operating profit of $150,000. What was the value of depreciation expense?

Accepted Answer

The answer of Density Farms Inc. had sales of $750,000,...

Question 18

An item which may be converted to cash within one year or one operating cycle of the firm is classified as a

Accepted Answer

A current asset is an item that can be converted to cash within one year or one operating cycle of the firm. Examples of current assets include cash, accounts receivable, and inventory. Long-term assets, long-term liabilities, and current liabilities do not meet this criteria.

Question 19

A firm has $4,000 in its common stock account and $10,000 in its paid-in capital account. The firm issued 1,000 shares of common stock. What is the par value of the common stock?

Accepted Answer

Par value = Common stock/number of shares outstanding = $4,000/1,000 = $4

Question 20

Which of the following would not be classified as a current asset?

Accepted Answer

Plant property and equipment is a long-term asset and would not be classified as a current asset. The other three options (A, C, and D) are all types of current assets.

Quiz 2: Review of Accounting