BCOR 1010 Practice Test

1. Describe the importance of a firm using GAAP. How does this aid the public accountants and investors? How does GAAP guide the actions on a firm?

2. A bank is attempting to decide whether to loan to a firm, what statements of financial position will they be considering?

3. Please explain the accounting equation, accounting cycle, and double entry bookkeeping. How does it relate to accounting and why is it important?

4. What are the ways firms can finance operations? What are the advantages and disadvantages of raising capital using these methods?

Define the following: Current ratio Asset Turnover ratio: Debt ratio: Return on Equity: Profit Margin: EPS ratio:

5. How do ratios assist investors in deciding where to allocate their capital?

6. How does the Federal Reserve control the money supply in the economy?

7. What are the different market influences, which guide investment decisions? 8. Order the following accounts into their respective categories on the balance sheet. (Some items may not be on the balance sheet) Rent Expense Accounts Receivable Common Stock Land Sales Operating Income L-T Investment Cash Retained Earnings Gross Profit Taxes Payable Inventory Depreciation Exp. Wages Payable Interest Payable Revenue Accounts Payable Utilities Expense Trademark/Patents Contributed Capital Plant Note Payable (3 yr.) Cost of Goods Sold Prepaid Expense Furniture Interest Expense Marketable Securities Equipment

BCOR1010 Practice Test-Answer Key

1. Describe the importance of a firm using GAAP. How does this aid the public accountants and investors? How does GAAP guide the actions on a firm? -It makes the health of firms comparable to each other and legitimate -Public accountants and investors can trust the balance sheets and income statements because they were made using the same practices which means that even if two companies are completely different they can still compare the financial positions of both. -GAAP allows firms to specific actions concerning rules for ways to compile balance sheets and income statements.

2. A bank is attempting to decide whether to approve loan for a firm, what statements of financial position will they be considering? - Although all aspects of the firm will be considered the primary document that will be taken into account is the Balance Sheet. This is because it allows them to look at the amount of assets comparable to their equity and debt. Also debt ratios, profit margin ratios, and current ratio will be compared to the ratios of other firms ratios in the industry to measure the economic health of the company.

3. Please explain the accounting equation, accounting cycle, and double entry bookkeeping. How does it relate to accounting and why is it important? Accounting equation, Assets = Liabilities + Owners Equity this equation must remained balanced at any point during the accounting cycle. The accounting cycle is the There are four steps in the accounting cycle; examining source documents, recording transactions in an accounting journal, posting recorded transactions in journal entry form, and preparing financial statements. In the third step an accountant must post transactions. If, upon totaling the trail balances, they do not match (balance each other) they must look for mistakes. This is where double entry bookkeeping comes in, because it keeps the accounts balanced. Double entry bookkeeping- is a system of recording and classifying business transactions so that the financial statements remain balanced.

4. What are the ways firms can finance operations? What are the advantages and disadvantages of raising capital using these methods? Debt finance- higher risk higher expected return -Loan or Bond -the interest on this makes it extremely risky Equity Financing-lower risk lower expected return, more conservative approach -Sale of Stock -Public(common stock) or Private (private investors, venture capitalist) This option is not as risky, but you lose ownership in the firm. Tradeoff risk, return, and ownership. Dilution occurs when you sell more stock. -Reinvestment of retained earnings in to firm

Define the following: Current ratio: current assets/current liabilities

Asset Turnover ratio: total assets/sales

Debt ratio: total assets/total debt

Return on Equity: Net income/ common equity

Profit Margin: Net income/ sales

EPS ratio: Net Income / Number of shares

5. How do ratios assist investors in deciding where to allocate their capital? It allows a comparison of companies in the same industry. Profitability ratios shows underlying operation in the firm and its ability to make money, the assets in the firm, as well as return on their investment. The debt ration shows total debt over assets and total equity are inverses of each other, which allows you to determine the amount of financing between the comparison of these two.

6. How does the Federal Reserve control the money supply in the economy? 1- reserve requirements 2- Discount rate 3- Buying and selling of marketable securities

7. What are the different market influences, which guide investment decisions? 1- Previous performance of corporations in the market 2- Discount Rate 3- Press Releases

8. Order the following accounts into their respective categories on the balance sheet. (Some items may not be on the balance sheet) Rent Expense Accounts Receivable Common Stock Land Sales Operating Income L-T Investment Cash Retained Earnings Gross Profit Taxes Payable Inventory Depreciation Exp. Wages Payable Interest Payable Revenue Accounts Payable Utilities Expense Trademark/Patents Contributed Capital Plant Note Payable (3 yr.) Cost of Goods Sold Prepaid Expense Furniture Interest Expense Marketable Securities Equipment

_____ Balance Sheet Current AssetsCash Accounts Receivable Inventory Marketable Securities Prepaid Expense Non Current AssetsLand Trademark Patents Plant Furniture Equipment Accumulated Depreciation Long Term Investment (L-T) Total Assets Current LiabilitiesTaxes Payable Wages Payable Interest Payable Accounts Payable Non Current Liabilities Long term debt note payable(3yrs)

Owners Equity Common Stock Preferred Stock Retained Earnings Contributed Capital

Total Liabilities and Owners Equity