ACC 599 MIDTERM EXAM

Question 1

Dawn Alive reported the following for 2012.

Ending market price $40.75
Earnings per share:
Basic 2.50
Diluted 2.08
Dividends per share 1.10


The price/earnings ratio and dividend payout were:
Answer

19.59 and 52.88%

16.30 and 52.88%

16.30 and 44.00%

19.59 and 44.00%

37.04 and 52.88%

Question 2

The ratio percentage of earnings retained is the same as that termed:
Answer

dividend yield.

dividend payout.

this year's retained earnings to net income.

return on common equity.

book value.

Question 3

What is the effect of the exercise of stock options?
Answer

They generate cash to the issuing firm and therefore increase profit per share.

They are an expense at the time of exercise. This lowers net income.

They increase debt and lower borrowing capacity but have no effect on profit.

They increase the number of shares outstanding.

They have no immediate effect on profitability

Question 4

Interest expense creates magnification of earnings through financial leverage because:
Answer

the interest rate is variable.

interest accompanies debt financing.

the use of interest causes higher earnings.

interest costs are cheaper than the required rate of return to equity owners.

while earnings available to pay interest rise, earnings to residual owners rise faster.
Question 5

Book value per share may not approximate market value per share because:
Answer

the book value is after tax.

book values are based on replacement costs rather than market values.

book value is related to book figures and market value is related to the future potential as seen by investors.

investors do not understand book value.

book value is not related to dividends.

Question 6

The price/earnings ratio:
Answer

measures the past earning ability of the firm.

is a gauge of future earning power as seen by investors.

relates price to dividends.

relates price to total net income.
Question 7

Which of the following ratios appears most frequently in annual reports?
Answer

Earnings per Share

Return on Equity

Profit Margin

Effective Tax Rate

Debt/Equity
Question 8

Which of the following ratios is rated to be a primary measure of liquidity and the highest significance rating of the liquidity ratios according to commercial loan departments?
Answer

Debt/Equity

Current Ratio

Degree of Financial Leverage

Inventory Turnover in Days

Accounts Receivable Turnover in Days
Question 9

Which of the following ratios is given the highest significance rating by controllers?
Answer

Current Ratio

Earning Per Share

Return on Equity - After Tax

Return on Assets - After Tax

Price/Earnings Ratio
Question 10

There are many definitions or descriptions given to financial failure. Which of the following does not appear to be a reasonable definition or description:
Answer

refinancing of bonds payable.

liquidation.

deferment of payments to short-term creditors.

deferment of payments of interest on bonds.

deferment of payments of principal on bonds
Question 11

Which of the following ratios is a primary measure of liquidity according to the corporate controller survey?
Answer

Earnings per Share

Debt/Equity Ratio

Return on Equity after Tax

Current Ratio

None of the answers are correct
Question 12

Which of the following ratios is given the highest significance rating by Certified Public Accountants?
Answer

Quick Ratio

Debt/Equity

Net Profit Margin

Current Ratio

Times Interest Earned
Question 13

The identification and elimination of activities that fail to add value refers to
Answer

external failures.

activity reduction.

internal failures.

activity elimination.
Question 14

____ can help a company become more competitive by providing more accurate cost data.
Answer

Unit-based costing

Volume-based costing

Kaizen costing

Production costing

Activity-based costing
Question 15

A(n) ____ ratio measures the proportion of an activity consumed by a product.
Answer

production

consumption

efficiency

quality

usage
Question 16

Costs incurred when products and services fail to conform to requirements or satisfy customer needs after being delivered to customers are
Answer

prevention costs.

appraisal costs.

internal failure costs.

external failure costs.

a different category of quality-related costs.
Question 17

____ is present whenever products have different consumption ratios for different overhead activities.
Answer

Environmental costs

Activity sharing

Product diversity

Activity inputs

Control costs
Question 18

Increasing the efficiency of necessary activities by using economies of scale is known as
Answer

activity inputs.

activity sharing.

control activities.

cycle time.
Question 19

Costs incurred when products and services prior to being delivered do not conform to specifications or customer needs are
Answer

prevention costs.

appraisal costs.

a different category of quality-related costs.

external failure costs.

internal failure costs.
Question 20

The earning of interest on interest is
Answer

present value.

future value.

discount rate.

compounding of interest.

interest earned.
Question 21

Which of the following provides an absolute dollar measure?
Answer

internal rate of return

net present value

payback period

accounting rate of return
Question 22

The interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost is called the ____.
Answer

present value

discount rate

company cost of capital

payback period

internal rate of return
Question 23

The reason that a discount factor in Year 3 is less than a discount factor in Year 2 is that
Answer

cash flows are uneven.

compounding does not occur.

cash flows are even.

present value is positive.

a dollar received in 3 years is worth less than a dollar received in 2 years.
Question 24

Which of the following is a drawback of the payback period?
Answer

It ignores a project's total profitability.

It uses a set discount rate.

It considers total profitability, requiring the forecasting of all future cash flows.

It uses before-tax cash flows rather than after-tax cash flows.

It uses operating income rather than cash flows.
Question 25

A formula for the accounting rate of return is
Answer

average income/initial investment.

initial investment/annual cash flow.

annual cash flow/initial investment.

initial investment/average income.

(average income + initial investment)/initial investment

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