KEY-Final Examination A- age 3 61 7 Finance (FINE) 6. A Terminal Loss occurs whe
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KEY-Final Examination A- age 3 61 7 Finance (FINE) 6. A Terminal Loss occurs when the selling price of a company's assets is A) B) C) D) Equal to the underpreciated capital cost (UCC) Higher than the UCC Less than the UCC Higher than the book value of the asset 7. Which of the following usually increases as sales revenue increases? A) Depreciation B Capital assets C) Accounts receivable D) Long-term liabilities 8. The primary role of pro forma statements is to A) Model the external impacts on a course of action B) Predicts the financial outcome of a course of action C) Allocate the resources to business aims and objectives Represent the financial impact of courses of action 9. A cash budget is a document that is A) B) C) D) On the basis of the accounting matching principal To reflect the timing of cash flows To meet external auditing requirements Based on book values of assets 10. Repayment of a mortgage A source of cash inflow from financing activities A source of cash outflow from financing activities A source of cash inflow from investing activities A source of cash outflow from investing activities A) B) C) D) Which of the following represents the most appropriate description of horizontal analysis? An analyst prepares pro forma financial statements for the next five years An analyst compares financial ratios of a company over the last five years An analyst compares financial ratios for the current year for two companies )An analyst develops ratios to determine how much the company needs to borro A) B)Explanation / Answer
6. A terminal loss occurs when the selling price of a company's assets is (C) LESS THAN UCC.
When a particular category of depreciable property has undepreciated balance when in fact there is no asset held in that particular category, such a situation gives rise to TERMINAL LOSS. So suppose the sale price is less than UCC, it means that there is still UCC balance remaining in that category of depreciable property when in fact the asset has been sold. This situation describes terminal loss.
7. Usually (C) Accounts Receivable increases as sales revenue increases.
Out of the options given, depreciation, capital assets and long term liabilities have no direct connection with increase in sales. However when sales revenue increase, one can expect that the overall credit sales might also increase along with the cash sales portion. Therefore we can reasonably expect accounts receivable to increase as sales revenue increases.
8. The primary role of pro forma statements is to (D) represent the financial impact of a course of action.
Pro forma statements help the manager to gauge the effect of a future action. For example if the company is considering a major expansion, it might want to see its financial impact on the financial statements and therefore it might go for preparation of pro forma statements. Pro forma statements consider hypothetical scenarios to gauge how actual financial statements would look like in those scenarios.
9. A cash budget is a document that is to (B) reflect the timings of cash flows.
Cash budget deals with cash movements over a certain time period. It is not concerned with book values or rather any value of any asset. Cash budget is maintained by a Company for its own internal purposes and is not an external audit requirement. Cash budget helps the company understand its liquidity position and project is future cash flow. It is purely cash related and there is no matching concept application involved.
10. Repayment of mortgage is (B) source of cash outflow from financing activities.
Taking a Mortgage loan is a financing activity and therefore repayment of the same is also financing activity. When one takes loan there is an inflow of cash and similarly repaying loan involves cash outflow.
11. Option (C) An analyst compares financial ratios for the current year for 2 companies is the most appropriate description of horizontal analysis as it does not involve future or past period. It involves comparing 2 companies for the same time period.
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