Wall Street Prep2 ALL ANSWERS 100% CORRECT SPRING FALL-2022 LATEST EDITION GUARANTEED GRADE A+

Question 1 The regulating body that oversees the development of accounting standards in the U.S. is: SFAS GAAP FASB IASB Your answer is correct. FASB formulates accounting standards through the issuance of Statements of Financial Accounting Standards (SFAS). These statements make up the body of accounting rules known as the Generally Accepted Accounting Principles (GAAP). IASB oversees international financial reporting standards (IFRS). See Lesson: Introduction Question 2 Which of the following statements is TRUE? GAAP requires that firms show recorded values for acquired intangible assets such as patents and trademarks on their financial statements GAAP requires that firms show recorded values for intangible assets such as employee and customer loyalty GAAP requires that financial statements accurately reflects the market value of internally-developed trademarks such as the value of the Coca-Cola brand name All of the above Your answer is incorrect. GAAP requires that firms only show measurable activities, such as the value of acquired intangible assets. Assets such as employee, customer loyalty and internally-developed trademarks are not shown on financial statements because they’re difficult to quantify. See Lesson: Basic Accounting Principles Question 3 Which of the following statements is TRUE? Publicly traded US companies are required to file four 10-Q's and one 10-K annually All US companies are required to file three 10-Q's and one 10-K annually Publicly traded US companies are required to file three 10-Q's and one 10-K annually Publicly traded US companies are required to file one 10-K annually; 10-Q's are typically filed but are technically voluntary Your answer is incorrect. Publicly-traded US companies must file three quarterly (10-Q) reports at the end of their 1Q, 2Q and 3Q, and a 10-K at the end of their fiscal year. See Lesson: Financial Reportings & Important Filings Question 4 The income statement is designed to measure: the liquidity of a firm how solvent a company has been the income position of a firm at a point in time Cash inflows/outflows generated over a period of time the accrual-based accounting profits of a firm over a period of time Your answer is correct. The income statement is designed to show the operations of the business (revenues and associated expenses). The balance sheet is designed to show a firm’s financial position, while the cash flow statement shows the amount of cash generated by a firm. See Lesson: Basic Accounting Principles Question 5 The Matching Principle states that: Costs associated with making a product must be recognized at the end of the production process Costs associated with making a product must be recognized immediately as incurred Costs associated with making a product must be recognized during the same period as revenue generated from that product Costs associated with making a product must be recorded during the same period as the sales, general, and administrative expenses that are also associated with the product Your answer is incorrect. Under the matching principle, costs associated with making a product must be recorded during the same period as revenue generated from that product. See Lesson: Basic Accounting Principles Question 6 During the current year, accounts receivable increased from $27,000 to $41,000 and sales were $225,000. Based on this information, how much cash did the company collect from its customers during the year? $239,000 $225,000 $211,000 $252,000 $266,000 Your answer is incorrect. Accounts receivable increased by $14,000, implying that the company did not collect that amount in cash, so cash sales were $225,000-$14,000 = $211,000. See Lesson: Cash, Receivables & Prepaid Expenses Question 7 Use the following information provided to answer the question below: Computer resellers Co. purchases $10,000 worth of computers from Dell on 9/30/14. Computer resellers Co. receives a credit card order for $5,000 for the purchase of one quarter of the computers on 11/1/14. The computers are shipped to the customer on 11/30/14 Computer Sales Co. cashes the $5,000 check on 12/31/14 Based on the accrual method of accounting, computer resellers should recognize revenue on which date? 9/30/14 11/1/14 11/30/14 12/31/14 Your answer is incorrect. According to the revenue recognition principle, a company cannot record revenue until that order is shipped to a customer (only then is the revenue actually earned) and collection from that customer, who used a credit card, is reasonably assured. See Lesson: Revenue Recognition Question 8 Cash interest expense payments lead to: Lower cash from operations Lower cash from investing activities Lower cash from financing activities Lower debt balances Higher retained earnings Your answer is correct. Cash interest expense lowers net income which in turn lowers cash from operations. See Lesson: The Lemonade Stand, Part 4 Question 9 Which of the following is NOT a required SEC filing? 10-Q 10-K Annual Report Form 14-A Your answer is correct. Companies are not required to file an annual report with the SEC. They create this report as part of their marketing efforts to introduce the firm, its performance and financials to investors and the general public. See Lesson: Financial Reportings & Important Filings Question 10 Non-recurring unusual or infrequent items (such as a restructuring charge) are: Reported net of tax after net income from continuing operations (i.e., below the line) Reported pre-tax before net income from continuing operation (i.e., above the line) Reported net of tax after net income as discontinued operations Amortized over the useful life of the non-recurring asset Your answer is incorrect. Unusual or infrequent items are usually reported pre-tax before net income. Extraordinary charges, discontinued operations, and changes due to accounting practices are reported after-tax after net income. See Lesson: Nonrecurring Items Overview Question 11 Which of the following is FALSE regarding revenue recognition? Revenues must be recorded when they are earned and measurable Under the percentage of completion method, revenues are recognized on the basis of the total work completed during the accounting period Revenue is earned when either an order is shipped or collection from a customer is reasonably assured Under the completed contract method, revenues are recognized only when the entire project has been completed Your answer is correct. According to the revenue recognition principle, a company cannot record revenue until that order is shipped to a customer (only then, is the revenue actually earned) AND collection from that customer is reasonably assured. See Lesson: Basic Accounting Principles Question 12 The book value of equity in a business will grow when: a company generates interest income a company issues less dividends than net income during the period a company generates more cash sales than credit sales I only II only III only I and II only I, II, and III Your answer is correct. The book value of equity will grow via returned earnings when a company generates interest income and when a company generates more net income than dividends. Both credit and cash sales impact equity identically. See Lesson: Equity Question 13 Return on assets helps users of financial statements evaluate a company’s: Profitability Liquidity Solvency Cash flow Reliability Your answer is correct. Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets and how efficiently it is using its assets to generate earnings. See Lesson: Financial Statement Analysis Review Question 14 During 2014, Widge-widge reported the following revenues and expenses: Revenues: $10,000 Expenses included: $1,000 of raw material costs $3,000 in new equipment purchased at year-end $1,000 in executive salaries $2,000 in factory labor $800 in legal expenses $300 in sales commissions $400 in travel expenses $500 in product delivery costs $200 in office supplies What is Widge-widge's gross profit margin? 35% 70% 63% 65% Your answer is incorrect. Gross profit = Revenues – COGS = Revenues – Raw materials – factory labor – product delivery costs = $10,000 – $1,000 – $2,000 – $500 = $10,000 - $3,500 = $6,500 Gross profit margin (GPM) = (Revenues – Expenses)/Revenues = $6,500 / $10,000 = 65% See Lesson: COGS & Gross Profit Question 15 During 2014, Widge-widge reported the following revenues and expenses: Revenues: $10,000 Expenses included: $1,000 of raw material costs $3,000 in new equipment purchased at year-end $1,000 in executive salaries $2,000 in factory labor $800 in legal expenses $300 in sales commissions $400 in travel expenses $500 in product delivery costs $200 in office supplies What is Widge-widge's operating (EBIT) profit margin? 8% 30% 38% 58% Your answer is incorrect. Operating profit (EBIT) = Revenues – operating expenses (COGS and SG&A) = $10,000 – $1,000 – $2,000 – $800 – $300 – $400 – $500 – $200 = $10,000 - $6,200 = $3,800 EBIT margin = EBIT / Revenues = $3,800 / $10,000 = 38% See Lesson: Selling, General & Administrative, Research & Development Expenses Question 16 Company A has just purchased some new equipment worth $120,000. This equipment is expected to be productive for 4 years and the company expects to be able to sell it at the end of 4 years for $20,000. Using the information above, please calculate the 2nd year depreciation expense using the straight-line method, and the ending PP&E balance after the 2nd year for Company A. Straight-line $30,000; PP&E $50,000 Straight-line $25,000; PP&E $70,000 Straight-line $30,000; PP&E $95,000 Straight-line $25,000; PP&E $60,000 Your answer is correct. Annual depreciation expense = (book value – salvage value) / useful life = $120,000 - $20,000) / 4 years = $25,000 Year 2 PP&E balance = $120,000 – $25,000 (year 1 depreciation) - $25,000 (year 2 depreciation) = $70,000 See Lesson: Depreciation Question 17 Which of the following statements about amortization is FALSE? Amortization is an expense reported on the income statement and often disclosed on the cash flow statement Amortization is the systematic allocation of the cost of acquired intangible assets over time Amortization is used to allocate the cost of intangible assets such as patents, trademarks, and goodwill Amortization is not recognized under most circumstances for internally- developed intangible assets because they cannot be objectively valued Your answer is correct. Amortization is used to allocate the cost of intangible assets such as patents, trademarks, and goodwill, however, are not amortized. See Lesson: Amortization Question 18 Wade Blasingame Co. has the following: Revenues: $25,000 COGS: $10,000 Restructuring expense: $500 D&A: $2,000 Gain from legal settlement: $1,000 Accounts Receivable: $600 R&D: $1,000 Debt: $50,000 SG&A: $5,000 Capex: $2,000 Interest Rate: 10% Net Income: $1,500 Dividend Payout Ratio: 25% What is the company's tax rate? 20% 35% 40% 50% Your answer is incorrect. Pre-tax income = Revenues – COGS – Restructuring expense – D&A + gain from legal settlement – R&D – SG&A – interest expense (debt x interest rate) = $2,500 Tax rate = Taxes (pre-tax income – net income) / pre-tax income Taxes = Pre-tax income – net income = $2,500 - $1,500 = $1,000 Tax rate = taxes / pre-tax income = $1,000 / $2,500 = 40% See Lesson: The Lemonade Stand, Part 1 Question 19 Wade Blasingame Co. has the following: Revenues: $25,000 COGS: $10,000 Restructuring expense: $500 D&A: $2,000 Gain from legal settlement: $1,000 Accounts Receivable: $600 R&D: $1,000 Debt: $50,000 SG&A: $5,000 Capex: $2,000 Interest Rate: 10% Net Income: $1,500 Dividend Payout Ratio: 25% After excluding for non-recurring items, what is the company's operating (EBIT) margin? 28% 30% 32% 36% Your answer is correct. EBIT = Revenues – COGS – D&A – R&D – SG&A = $7,000 EBIT margin = EBIT / Revenues = $7,000 / $25,000 = 28% See Lesson: The Lemonade Stand, Part 1 Question 20 Wade Blasingame Co. has the following: Revenues: $25,000 COGS: $10,000 Restructuring expense: $500 D&A: $2,000 Gain from legal settlement: $1,000 Accounts Receivable: $600 R&D: $1,000 Debt: $50,000 SG&A: $5,000 Capex: $2,000 Interest Rate: 10% Net Income: $1,500 Dividend Payout Ratio: 25% After excluding for non-recurring items, what is the company's EBITDA? 45000 7500 9000 10000 Your answer is correct. EBITDA = Revenues – COGS – R&D – SG&A = $9,000 See Lesson: The Lemonade Stand, Part 1 Question 21 Hendrix Malmsteen Corp. (HMC) owns 20% in Van Vai Vaughan Corp. (VVV). VVV reported earnings of $50 million in 2016. The 20% ownership stake allows for significant influence in VVV. Should HMC record anything in its own income statement to reflect this ownership? If so, what amount and what is the method of recording called? If not, why not? Assume US GAAP to answer this question. Yes; $50 million; Consolidated Method Yes: $10 million; Proportional Consolidation Method No; because the ownership stake is not greater than 50% Yes; $10 million; Equity Method Your answer is correct. Companies can use the equity method to account for their 20%-50% investments in other companies. Accordingly, Hendrix Malmsteen can record $10 million (20% of $50m) in equity income from affiliates. See Lesson: Equity Method, Part 1 Question 22 Harry Co. owns 75% in Lloyd Corp., which just reported pretax earnings of $160 million and after tax earnings of $100 million for the year. What should Harry Co. record in the "Non-controlling Interests" line of its income statement? $75 million $25 million $40 million $60 million Your answer is correct. Companies can use consolidation method to account for their 50+% investment in other companies. Accordingly, Harry Co. can record all of Lloyd Corp’s net income ($100m) on its income statement, but must also reflect a non-controlling interest expense of $25 million (25% it doesn’t own x $100 million net income). See Lesson: Consolidation Method & Noncontrolling Interests, Part 1 Question 23 Which of the following statements is FALSE? EBITDA does not take into account certain cash outflows such as capex or working capital EBITDA can be manipulated since there is no standard for EBITDA reporting by GAAP EBITDA does not allow for "apples-to-apples" comparison between companies using different depreciation methods EBITDA may be inappropriate to use in various capital-intensive industries Your answer is incorrect. Since EBITDA is defined as earnings before interest, taxes, and depreciation and amortization, different depreciation methods do not affect EBITDA. See Lesson: EBIT, EBITDA & Income Statement Summary Question 24 On Dec. 31, 2014, Turner Tables Inc. (TTI) had basic shares outstanding of 200 million. During 2015, the following took place: 3/31/15 - TTI issued 50 million new shares 6/30/15 - TTI repurchased 20 million shares Calculate the weighted average shares outstanding for 2015. 215 million 217.5 million 227.5 million 230 million Your answer is incorrect. We must calculate outstanding shares weighted based on how long they have been outstanding. Company has 200 million shares x 100% of the year outstanding + 50 million shares x ¾ of the year outstanding – 20 million shares x ½ year outstanding = 200 million + 37.5 million – 10 million = 227.5 million weighted average shares outstanding. See Lesson: Equity Question 25 On December 31, 2014, Iron Eagle Company has: $150 million in net income (after preferred dividends) 20 million basic weighted average shares outstanding 5M stock options (assume 0$ exercise price) $100 million convertible preferred stock, convertible into 2 million shares and paying a 10% dividend Assuming conversion of the preferred stock and the exercise of all 5M stock options for the purpose of calculating diluted EPS, calculate Basic EPS and Diluted EPS using the information in the bullets above. $7.50 basic; $5.56 diluted $7.50 basic; $5.93 diluted $7.00 basic; $5.19 diluted $7.00 basic; $5.60 diluted Your answer is incorrect. Basic EPS: Net income (after preferred dividends) / weighted average basic shares outstanding $150 million / 20 million shares = $7.50 Diluted EPS: Net income (assuming no preferred dividends since they have been converted into common shares) / diluted shares outstanding Net income = $150 million + $10 million (10% dividend on $100 million convertible preferred stock that will not be paid out since convertible preferred stock will be converted into common shares) = $160 million Diluted shares outstanding = 20 million + 5 million (from exercise of stock options + 2 million (from conversion of preferred stock) = 27 million diluted shares Diluted EPS = $160 million / 27 million diluted shares = $5.93 See Lesson: Net Income, EPS & Dividends Question 26 During 2016, Cabo Wabo Tequila recorded: Depreciation expense of $50 million Amortization expense of $25 million What is the combined effect of Depreciation and Amortization on the balance sheet? Cash decreases by $75 million; Retained earnings decrease by $75 million PP&E and Intangibles decrease by $75 million in total; Retained earnings decrease by $75 million PP&E and Intangibles increase by $75 million in total; Retained earnings decrease by $75 million Cash decreases by $75 million; PP&E and Intangibles increase by $75 million in total Your answer is incorrect. Expenses reduce retained earnings, and in this case, D&A will lead to a combined $75 million decrease in retained earnings. On the other side of the balance sheet, PP&E and intangibles assets will also be reduced by a combined $75 million. See Lesson: Intangible Assets & Goodwill Question 27 TRUE or FALSE: Every single income item on the income statement, down to Net Income, increases retained earnings? True False Your answer is incorrect. Every line item on the income statement affects retained earnings – income increases retained earnings, while expenses reduce them. See Lesson: How the Income Statement Connects to the Balance Sheet Question 28 Please identify the most likely classification for these items: Computers to be sold sitting in a warehouse Accrued year end bonuses to be paid to factory workers Company Headquarters 2-year bank loan 1 Long Term Asset 2. Current Asset 3. Long Term Asset 4. Long Term Liability 1 Current Asset 2. Long Term Liability 3. Long Term Asset 4. Long Term Liability 1 Long Term Asset 2. Current Liability 3. Long Term Asset 4. Long Term Liability 1 Current Asset 2. Current Liability 3. Long Term Asset 4. Long Term Liability Your answer is correct. Computers to be sold sitting in a warehouse are considered inventories and are therefore current asset. Accrued year end bonuses to be paid to factory workers are considered current liability as bonus has been earned but not paid out until year end. Company Headquarters is a long-term asset (PP&E). 2-year bank loan is a long-term liability since the bank loan is due in more than a year. See Lessons: All lesson in Chapter 4, Assets and Chapter 5, Liabilities & Equity Question 29 The following items are for Otis Day Co.: Revenues = $10 million Beginning Inventories = $5 million Gross Profit = $4 million Ending Inventories = $7 million SG&A = $3 million Calculate the amount of inventories that were purchased during the year: $ 2 million $6 million $8 million $12 million Your answer is incorrect. COGS = revenues – gross profit = $10 million – $4million = $6 million Recall that inventories, beginning + purchases of inventories – COGS = inventories, year-end = $5m + purchase of inventories – $6 million = $7 million Purchase of inventories = $8 million See Lesson: Inventory Question 30