BFIN 320 Finance Midterm
Exam Questions with Correct
Answers
1. Assumption of Arm's-Length Transactions
2. Cost Principle
3. Realization Principle
4. Matching Principle
5. Going Concern Assumption - Correct Answers: Important Accounting Principles
Assumes that the parties to a transaction are economically rational and are free to act independently of
each other. The piece you pay for something or the price for which you sell something is what gets
recorded on the financial statements. - Correct Answers: Assumption of Arm's-Length Transaction
The historical cost is assumed to represent the fair market value of the item at the time it was acquired
and is recorded as the book value. - Correct Answers: Cost Principle
Revenue is recognized only when the sale is virtually completed and the exchange value for the goods or
services can be reliably determined (most revenues are recognized at the time of sale whether or not
cash is actually received) - Correct Answers: Realization Principle
Revenue is first recognized and then is matched with the costs associated with producing revenue. -
Correct Answers: Matching Principle
The assumption that business will remain in operation for the foreseeable future. - Correct Answers:
Going Concern Assumption
Reports the firm's financial position at a particular point in time - Correct Answers: Balance Sheet
Assets that can reasonably be expected to be converted into cash within on year. - Correct Answers:
Current Assets
,Obligations payable within one year. - Correct Answers: Current Liabilities
Assets that the firm uses to generate most of its income and may be tangible or intangible. - Correct
Answers: Long-term Assets
An intangible asset that arises only when a firm purchases another firm. - Correct Answers: Goodwill
Allocates the cost of a limited-life asset to the periods in which the firm is assumed to benefit from the
asset. - Correct Answers: Depreciation
Include debt instruments due and payable beyond one year as well as other long-term obligations of the
firm. - Correct Answers: Long-term Liabilities
Total Assets = Total Liabilities + Stockholder's Equity
In order of liquidity
Cash/investments
AR
Inventory (usually the least liquid)
Property, Plant & Equipment - Correct Answers: Balance Sheet (arrangement)
Represent the true ownership of the firm - Correct Answers: Common Stock
Total Assets - Total Current Liabilities - Correct Answers: Net Working Capital = ?
A measure of a firm's ability to meet its short-term obligations as they come due. - Correct Answers: Net
Working Capital
1. The right to vote on corporate matters (election of board directors & other important decisions)
, 2. The preemptive right which allows stockholders to purchase any additional share of stock issued by
the corporation in proportion to the number of shares they currently own.
3. The right to receive dividends if they are paid
4. If the firm is liquidated, the right to all remaining corporate assets after all creditors and preferred
stockholders have been paid - Correct Answers: Rights of Common Stockholders
This account represents earning that have been retained and reinvested in the business over time rather
than being paid out as cash dividends. The difference between net income and dividends paid. - Correct
Answers: Retained Earnings
Represents stock that the firm has repurchased from investors, which the firm can reuse if it desires. -
Correct Answers: Treasury Stock
Pays dividends at a specific fixed rate (regardless of the firm's earnings). - Correct Answers: Preferred
Stock
Assets - Liabilities - Correct Answers: Stockholder's Equity = ?
The amount they (stocks) are worth today - Correct Answers: Market value
Summarizes the revenues, expenses, and profitability (or losses) of the firm over some period of time. -
Correct Answers: Income Statement
Arise from the products and services it creates through its business operations. - Correct Answers:
Revenues (Sales)
Various costs that the firm incurs to generate revenues - Correct Answers: Expenses
Reflects the firm's accomplishments (revenues) relative to its efforts (expense) during a time period. -
Correct Answers: Net Income
Net Income / # of common shares outstanding - Correct Answers: Earnings per share (EPS)
Exam Questions with Correct
Answers
1. Assumption of Arm's-Length Transactions
2. Cost Principle
3. Realization Principle
4. Matching Principle
5. Going Concern Assumption - Correct Answers: Important Accounting Principles
Assumes that the parties to a transaction are economically rational and are free to act independently of
each other. The piece you pay for something or the price for which you sell something is what gets
recorded on the financial statements. - Correct Answers: Assumption of Arm's-Length Transaction
The historical cost is assumed to represent the fair market value of the item at the time it was acquired
and is recorded as the book value. - Correct Answers: Cost Principle
Revenue is recognized only when the sale is virtually completed and the exchange value for the goods or
services can be reliably determined (most revenues are recognized at the time of sale whether or not
cash is actually received) - Correct Answers: Realization Principle
Revenue is first recognized and then is matched with the costs associated with producing revenue. -
Correct Answers: Matching Principle
The assumption that business will remain in operation for the foreseeable future. - Correct Answers:
Going Concern Assumption
Reports the firm's financial position at a particular point in time - Correct Answers: Balance Sheet
Assets that can reasonably be expected to be converted into cash within on year. - Correct Answers:
Current Assets
,Obligations payable within one year. - Correct Answers: Current Liabilities
Assets that the firm uses to generate most of its income and may be tangible or intangible. - Correct
Answers: Long-term Assets
An intangible asset that arises only when a firm purchases another firm. - Correct Answers: Goodwill
Allocates the cost of a limited-life asset to the periods in which the firm is assumed to benefit from the
asset. - Correct Answers: Depreciation
Include debt instruments due and payable beyond one year as well as other long-term obligations of the
firm. - Correct Answers: Long-term Liabilities
Total Assets = Total Liabilities + Stockholder's Equity
In order of liquidity
Cash/investments
AR
Inventory (usually the least liquid)
Property, Plant & Equipment - Correct Answers: Balance Sheet (arrangement)
Represent the true ownership of the firm - Correct Answers: Common Stock
Total Assets - Total Current Liabilities - Correct Answers: Net Working Capital = ?
A measure of a firm's ability to meet its short-term obligations as they come due. - Correct Answers: Net
Working Capital
1. The right to vote on corporate matters (election of board directors & other important decisions)
, 2. The preemptive right which allows stockholders to purchase any additional share of stock issued by
the corporation in proportion to the number of shares they currently own.
3. The right to receive dividends if they are paid
4. If the firm is liquidated, the right to all remaining corporate assets after all creditors and preferred
stockholders have been paid - Correct Answers: Rights of Common Stockholders
This account represents earning that have been retained and reinvested in the business over time rather
than being paid out as cash dividends. The difference between net income and dividends paid. - Correct
Answers: Retained Earnings
Represents stock that the firm has repurchased from investors, which the firm can reuse if it desires. -
Correct Answers: Treasury Stock
Pays dividends at a specific fixed rate (regardless of the firm's earnings). - Correct Answers: Preferred
Stock
Assets - Liabilities - Correct Answers: Stockholder's Equity = ?
The amount they (stocks) are worth today - Correct Answers: Market value
Summarizes the revenues, expenses, and profitability (or losses) of the firm over some period of time. -
Correct Answers: Income Statement
Arise from the products and services it creates through its business operations. - Correct Answers:
Revenues (Sales)
Various costs that the firm incurs to generate revenues - Correct Answers: Expenses
Reflects the firm's accomplishments (revenues) relative to its efforts (expense) during a time period. -
Correct Answers: Net Income
Net Income / # of common shares outstanding - Correct Answers: Earnings per share (EPS)
