2211 Words Nov 6th, 2012 9 Pages
Mid-term Examination with Answers – Mgt. 624

Please complete and send/bring completed exam by February 25 before class. All questions are True/False or multiple-choice. Please make sure to include the rationale for the answer(s) you give – no need to cite a reference – just your reasoning for your answer. You may any source except help from another human being (no loose definitions of human being!) or old exam answers. Have fun and hopefully solidify your learning to date.

1. If a company reports retained earnings of $175.3 million on its balance sheet, it must also report $175.3 million in cash.

Answer: False
Rationale: The accounting equation requires total assets to equal total liabilities plus stockholders’ equity.
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All else being equal, higher financial leverage will decrease a company’s debt rating and increase the interest rate it must pay. Answer: True
Rationale: Higher levels of financial leverage increase the probability of default and of bankruptcy. This reduces credit ratings and increases costs for borrowed funds.

11. Bed Bath and Beyond has a 60-day return policy. The company can report revenue on the full amount as soon as the merchandise is sold.

Answer: False
Rationale: Revenue will be recognized as soon as the merchandise is sold but only for the portion that the company estimates will not be returned within the 60-day return period. The estimated returns are netted against sales and set up as a liability (reserve).

12. In 2009, Dow Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be expensed.

Answer: True
Rationale: If the project is an R & D project, R&D costs must be expensed under GAAP unless they have alternative future uses. If not, then the asset should be depreciated over the life of the project. If these assets do, indeed, have alternative future uses, they will be capitalized and depreciated over their normal useful life.

13. Overestimating the allowance for uncollectible accounts receivable can shift income from the current period into one or more future periods.

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