Question : Multiple Choice Questions 1.Which one of the following will result from : 1253500

Multiple Choice Questions

1.Which one of the following will result from receiving cash upon issuing long-term debt?

a. Increase of the company’s indebtedness

b. Decrease of the current ratio

c. Increase of retained earnings

d. Increase of total shareholders’ equity

2.If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which one of the following actions would increase the likelihood of violating the debt covenant?

a. Issuing capital stock

b.Skip current cash dividends

c.Acquire money by issuing a non-interest-bearing note payable

d. Acquire money by collecting accounts receivable

3.If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which of the following actions would help avoid a violation of the covenant?

a.Purchase long-term investments

b. Increase current cash dividends declared

c.Exchange bonds payable for common stock

d. Acquire money by selling land at its balance sheet value

4.The debt/equity ratio will increase if a company

a. pays off its long-term debt.

b. decides to pay cash for more of its capital purchases.

c. purchases long-term investments for cash.

d. declares more current cash dividends.

5.A non-interest-bearing obligation

a.requires recognition of interest expense over the life of the obligation.

b.is an example of an installment obligation.

c. requires collateral.

d. is free of interest expense.

6.The difference in computing the effective interest rate for non-interest-bearing obligations as compared to installment obligations is

a.one has an interest rate of zero, while the other is determined using present value factors.

b.one uses the ‘present value of a single sum’ table and the other uses the ‘present value of an ordinary annuity’ table.

c.one is based on the market rate of interest, while the other is based on a stated rate of interest.

d.determined by the length of the debt maturity period.

7.Interest expense recognized over the life of an obligation is the difference between cash received at the time of issuance and cash paid over the life of the obligation for

a.dividends declared.

b.convertible bonds.

c.non-interest-bearing obligations.

d.receivables due from customers.

8.Payments on an installment obligation typically include the payment of

a. principal only.

b. both principal and interest.

c. interest only.

d.interest, but only if collateral is involved.

9.Which one of the following is needed in order to find the present value of an obligation?

a.The discount rate of the associated cash flows

b.All debt covenants that are a component of the obligation

c.The gross profit rate of the borrower

d.The rate of inflation during the year

10.How is interest expense calculated according to GAAP?

a. Stated rate of interest x maturity value.

b. Effective interest rate x maturity value of the obligation.

c. Effective interest rate x balance sheet value.

d. Stated rate of interest x balance sheet value.