Question

73. Days in the Operating Cycle equals:
    1. Days in Inventory - Days in Receivables + Days in Payables
    2. Days in Inventory + Days in Receivables – Days in Payables
    3. Days in Inventory + Days in Receivables + Days in Payables
    4. Days in Inventory - Days in Receivables – Days in Payables

74. The ending Retained Earnings balance of ABC increased by $1.5 million from the beginning of the year. The company's net income earned during the year is $3.5 million. What is the amount of dividends ABC declared and paid?
    1. $3.5 million.                B) $2.0 million.                C) $1.5 million.                D) $5.0 million.

75. Which of the following is NOT an example of aggressive accounting practices?
    1. Recording contingent losses that are probable.
    2. Increasing the useful life used in calculating depreciation.
    3. Recording research and development costs as assets.
    4. Using a lower estimate of bad debts.

76. ABC issued callable bonds on January 1, 2018. ABC's accountant has projected the following amortization schedule from issuance until maturity:

Date	Cash Paid	Interest Expense	Increase in Carrying Value	Carrying Value
1/1/2018				$194,758
6/30/2018	$7,000	$7,790	$790	195,548
12/31/2018	7,000	7,822	822	196,370
6/30/2019	7,000	7,855	855	197,225
12/31/2019	7,000	7,889	889	198,114
6/30/2020	7,000	7,925	925	199,039
12/31/2020	7,000	7,961	961	200,000

What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

A) 6%.                              B) 3.5%.                           C) 7%.                              D) 3%.

77. Par value of shares is
    1. an important number for common stock but a garbage number for preferred shares
    2. an important number for both common and preferred shares
    3. a garbage number for common stock but an important number for preferred shares
    4. a garbage number for both common and preferred shares

Answer 1

Answer: B. Days in Inventory + Days in Receivables – Days in Payables

The days in operating cycle refers to the number of days it takes an organization from paying for inventory to collecting cash from the sale of inventory. It is thus calculated by adding the days in inventory and days in receivables and deducting the days in payables.

Answer: B) $2.0 million

Increase in retained earnings = Net income during the year – Dividends declared and paid

Thus, dividends declared and paid = Net income – Increase in retained earnings = $3.5 million - $1.5 million = $2.0 million.

Answer: A. Recording contingent losses that are probable

Aggressive accounting practices are used to inflate the net income by understating expenses or covering up losses. Increasing the useful life of assets, recording research and development costs as assets, and using a lower estimate of bad debts, all result in understating expenses and hence are aggressive accounting practices. However, recording contingent losses that are probable results in overstatement of expenses and hence is not an aggressive accounting practice.

Answer: C) 7%

Annual interest paid = $7000 x 2 = $14000

Maturity value of bonds = $200000

Annual stated interest rate = $14000/$200000 = 7%

Answer: B. an important number for both common and preferred shares

The capital stock is reported at its par value and hence it is an important number for both common and preferred stock.