Exam 2

Question 1

Securities that are held with the intent of selling them sometime in the future.

Answer 1

Available-for-sale securities

Question 2

Financial statements that present the assets and liabilities controlled by the parent company and the total revenues and expenses of the subsidiary companies.

Answer 2

Consolidated financial statements

Question 3

Ownership of more than 50% of the common stock of another entity.

Answer 3

Controlling interest

Question 4

An accounting method in which the investment in common stock is recorded at cost and revenue is recognized only when cash dividends are received.

Answer 4

Cost method

Question 5

Investments in government and corporation bonds.

Answer 5

Debt investments

Question 6

An accounting method in which the investment in common stock is initially recorded at cost, and the investment account is the adjusted annually to show the investors equity in the investee.

Answer 6

Equity method

Question 7

Amount for which a security could be sold in a normal market.

Answer 7

Fair value

Question 8

Debt securities that the investor has the intent and ability to hold to maturity.

Answer 8

Held to maturity securities

Question 9

A group of stocks and/or debt securities in different corporations held for investment purposes.

Answer 9

Investment portfolio

Question 10

Investments that are not readily marketable or that management does not intend to convert into cash within the next year or operating cycle, whichever is longer.

Answer 10

Long-term investments

Question 11

A method of accounting for certain investments that requires that they be adjusted to their fair value at the end of each period.

Answer 11

Mark-to-market

Question 12

A company that owns more than 50% of the common stock of another entity.

Answer 12

Parent company

Question 13

Investments that are readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.

Answer 13

Short-term investments (marketable securities)

Question 14

Investments in the capital stock of corporations.

Answer 14

Stock investments

Question 15

A company in which more than 50% of its stock is owned by another company.

Answer 15

Subsidiry (affiliated) company

Question 16

Securities bought and held primarily for sale in the near term to generate income on short-term price differences.

Answer 16

Trading securities.

Question 17

A measure used to evaluate a company’s liquidity and short-term debt-paying ability; calculated as Current assets/Current liabilities

Answer 17

Current ratio

Question 18

A measure of the liquidity of inventory. Measures the nuber of times average inventory was sold during the period; computed as Cost of goods sold/Averge inventory

Answer 18

Inventory turnover

Question 19

A measure of the average number of days that inventory is held; computed as 365 days/Inventory turnover

Answer 19

Days in inventory

Question 20

A measure of the liquidity of receivables; computed as Net credit sales/Average net accounts receivable

Answer 20

Accounts Receivable Turnover

Question 21

The average number of days that receivables are outstanding; calculated - 365 days/Accounts receivable turnover

Answer 21

Average collection period

Question 22

A measure of the percentage of total financing provided by creditors; computed as Total liabilities/Total assets

Answer 22

Debt to assets ratio

Question 23

A measure of a company’s solvency and ability to meet interdty psyments as they come due; calculated as the sum of Net income + Interest expense + Income tax expense/Interest expense

Answer 23

Times interest earned

Question 24

A measure of solvency. Cash remaining from operating activities after adjusting for capital expenditures and dividends paid. Net cash provided by operating activities - Capital expenditures - Cash dividends

Answer 24

Free cash flow

Question 25

A measure of the dollars of net income earned for each dollar invested by the owners; computed as Income available to common stockholders (Net income - Preferred dividends)/Average common stockholders' equity

Answer 25

Return on common stockholders' equity

Question 26

A profitability measure that indicates the amount of net income generated by each dollar of assets; calculated as Net Income/Average total assets

Answer 26

Return on assets

Question 27

A measure of the net income generated by each dollar of net sales; computed as Net income/Net sales

Answer 27

Profit margin

Question 28

A meaure of how efficiently a company uses its assets to generate net sales; computed as Net sales/Average total assets

Answer 28

Asset turnover

Question 29

Gross profit expressed as a percentage of net sales; computed as Gross profit/Net sales

Answer 29

Gross profit rate

Question 30

The net income earned by each share of outstanding common stock; computed as Net income - preferred dividends/Weighted-average common shares outstanding

Answer 30

Earnings per share

Question 31

A comparison of the market price of each share of common stock to the earnings per share; computed as the Market price per share/Earning per share

Answer 31

Price-earnings ratio

Question 32

A measure of the percentage of earnings distributed in the form of cash dividends; calculated as Cash dividends paid on common stock/Net income

Answer 32

Payout ratio

Question 33

Securities that are held with the intent of selling them sometime in the future.

Answer 33

Available-for-sale securities.

Question 34

Use of an accounting principle in the current year that is different from the one used in the preceding year.

Answer 34

Change in accounting principle.

Question 35

The sum of net income and other comprehensive income items.

Answer 35

Comprehensive income.

Question 36

The disposal of a significant component of a business.

Answer 36

Discontinued operations.

Question 37

A technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place, expressed as either a dollar amount or a percentage.

Answer 37

Horizontal analysis

Question 38

Borrowing money at a lower rate of interest than can be earned by using the borrowed money; also referred to as a trading on the equity.

Answer 38

Leveraging

Question 39

Measures of the short-term ability of the company to pay its maturing current obligations and to meet unexpecgted needs for cash.

Answer 39

Liquidity ratios

Question 40

Measures of the income or operating success of a company for a given period of time.

Answer 40

Profitability ratios

Question 41

A measure of income that usually excludes items that a company considers unusual or non-recurring.

Answer 41

Pro forma income

Question 42

Indicates the level of full and transparent information that is provided to users of the financial statements.

Answer 42

Quality of earnings

Question 43

The mathematical relationship between one quantity and another. The relatioship may be expressed either as a percentage, a rate, or a simple proportion.

Answer 43

Ratio

Question 44

A technique for evaluating financial statements that expresses the relationship between selected financial statement data.

Answer 44

Ratio analysis

Question 45

Measures of the ability of a company to survive over a long period of time, particularly to pay interest as it comes due and to repay the balance of debt at its maturity.

Answer 45

Solvency ratios

Question 46

The most likely level of income to be obtined by a company in the future.

Answer 46

Sustainable income

Question 47

Borrowing money at a lower rate of interest than can be earned by using the borrowed money; also referred to as leveraging.

Answer 47

Trading on the equity

Question 48

Securities bought and held primarily for sale in the near term to generate income on short-term price differences.

Answer 48

Trading securities

Question 49

A technique for evaluating financial statement data that expresses each item in a financial statement as a percentage of a base amount.

Answer 49

Vertical analysis

Question 50

A method of preparing a statement of cash flows that shows operating cash receipts and payments. It is prepared by adjusting each item in the income statement from the accrual basis to the cash basis.

Answer 50

Direct method

Question 51

Cash flow activities that include (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.

Answer 51

Financin activities

Question 52

Net cash provided by operating activities adjusted for capital expenditures and cash dividends paid.

Answer 52

Free cash flow

Question 53

A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities.

Answer 53

Indirect method

Question 54

Cash flow activities that include (a) purchasing and disposing of investments and property, plant, and equipment using cash and (b) lending money and collecting the loans.

Answer 54

Investing activities

Question 55

Cash flow activities that include the cash effects of transactions that generate revenues and expenses and thus enter into the determination of net income.

Answer 55

Operating activities

Question 56

A basic financial statement that provides information about the cash receipts, cash payments, and net change in cash during a period, resulting from operating, investing, and financing activities.

Answer 56

Statement of cash flows