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web.groovymark@gmail.com
- December 12, 2024
Question 41
How are dividends in arrears on cumulative preferred stock reported?
A. As a liability
B. In the footnotes
C. As a reduction in retained earnings
D. As an expense
Answer: B. In the footnotes
Explanation: Dividends in arrears on cumulative preferred stock are disclosed in the footnotes to the financial statements, but they are not recorded as a liability until declared.
Question 42
What is the effect of declaring a property dividend on retained earnings?
A. Retained earnings decrease
B. Retained earnings increase
C. Retained earnings are unaffected
D. Retained earnings decrease and then increase
Answer: A. Retained earnings decrease
Explanation: Declaring a property dividend decreases retained earnings, as the dividend represents a distribution of the company’s assets to shareholders.
Question 43
Which of the following is a liability that should be classified as current?
A. Bonds payable maturing in 5 years
B. A note payable due in 6 months
C. A convertible bond
D. Deferred tax liabilities
Answer: B. A note payable due in 6 months
Explanation: Notes payable due within one year or the operating cycle (whichever is longer) are classified as current liabilities.
Question 44
What is the impact of converting preferred stock to common stock on stockholders’ equity?
A. Decreases stockholders’ equity
B. Increases stockholders’ equity
C. Has no effect on stockholders’ equity
D. Increases retained earnings
Answer: C. Has no effect on stockholders' equity
Explanation: Converting preferred stock to common stock has no overall effect on stockholders' equity because it only shifts the equity from preferred to common stock.
Question 45
How are bond discounts reported on the balance sheet?
A. As a long-term asset
B. As a long-term liability
C. As a contra liability
D. As a contra asset
Answer: C. As a contra liability
Explanation: Bond discounts are reported as a contra liability, reducing the carrying amount of the bonds payable on the balance sheet.
Question 46
What is the formula for calculating the payout ratio?
A. Dividends declared / net income
B. Dividends declared / net income – preferred dividends
C. Dividends declared / weighted average shares outstanding
D. Dividends declared / total shares outstanding
Answer: B. Dividends declared / net income - preferred dividends
Explanation: The payout ratio measures the percentage of net income distributed to shareholders as dividends, after accounting for preferred dividends.
Question 47
When are bonds reported at face value?
A. At the time of issuance
B. When issued at par
C. When issued at a premium
D. When issued at a discount
Answer: B. When issued at par
Explanation: Bonds are reported at face value when they are issued at par, meaning the market and coupon rates are equal.
Question 48
Which of the following is considered a dilutive security?
A. Nonconvertible preferred stock
B. Stock options
C. Term bonds
D. Treasury stock
Answer: B. Stock options
Explanation: Stock options are considered dilutive securities because they can potentially increase the number of common shares outstanding, diluting earnings per share.
Question 49
How is the times interest earned ratio used by analysts?
A. To assess a company’s profitability
B. To measure a company’s ability to pay interest on its debt
C. To determine a company’s liquidity
D. To evaluate a company’s asset efficiency
Answer: B. To measure a company’s ability to pay interest on its debt
Explanation: The times interest earned ratio helps analysts evaluate a company’s ability to meet its interest obligations from operating income.
Question 50
What is the accounting entry for stock options exercised at par value?
A. Debit cash, debit paid-in capital, credit common stock
B. Debit cash, credit common stock
C. Debit cash, credit paid-in capital and common stock
D. Debit common stock, credit paid-in capital
Answer: C. Debit cash, credit paid-in capital and common stock
Explanation: When stock options are exercised, cash is debited, and both paid-in capital and common stock are credited for the par value and any excess.
