Q&A Hero

Q: ​When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it a. ​can match up two parties but cannot take a position in the swap. b. ​can match up two parties or can take a position in the swap. c. ​cannot match up two parties and cannot take a position in the swap. d. ​cannot match up two parties but can take a position in the swap.

Q: If a financial institution that has more rate-sensitive liabilities than assets negotiates a rate-capped swap, its ____ payments will be capped, and it will ____ an up-front premium in exchange for the cap. a. outflow; receive b. outflow; pay c. inflow; pay d. inflow; receive

Q: General Motors (GM) signs a new labor agreement that its workers will receive a 5% wage increase next year. This transaction affects GM's financial statements in the current year.

Q: ​The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates. a. ​favorably; rising b. ​favorably; falling c. ​adversely; rising d. ​adversely; falling

Q: A transaction is an exchange or event that directly affects the assets, liabilities, or stockholders' equity of a company.

Q: Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest ratesensitive ____ than ____ and therefore were adversely affected by ____ interest rates. a. assets; liabilities; increasing b. liabilities; assets; decreasing c. liabilities; assets; increasing d. None of these are correct.

Q: Match the term with its definition. (There are more definitions than terms.) TERM _____ (1) Duality Of Effects _____ (2) Journal Entry _____ (3) Posting _____ (4) Debit _____ (5) Chart Of Accounts _____ (6) T-Account _____ (7) Credit _____ (8) Cost Principle DEFINTION A. A journal entry that lowers the balance of the account. B. When journal entries are recorded in the appropriate T-account. C. The concept that a company must keep separate accounts by time period. D. A simplified version of an account in the General Ledger. E. The mechanism used to record each transaction in the General Journal. F. When a company's balance sheet has been verified by an outside auditor. G. The concept that any transaction must have at least two effects on the accounting equation. H. When a dollar value is assigned to an item recorded in the accounting system. I. Compares balance sheet items from two different time periods. J. An amount that is posted on the left side of a T-account or ledger. K. The principle that a company should use the least optimistic measure, when uncertainty exists. L. Assets are initially recorded at the amount paid to acquire them. M. A journal entry that raises the balance of the account. N. A balance sheet where assets appear on the top, liabilities in the middle and stockholders' equity appears on the bottom. O. An amount that is posted on the right side of a T-account. P. A summary of account names and numbers.

Q: Match the term with its definition. (There are more definitions than terms.) TERM _____ (1) dr _____ (2) cr _____ (3) Classified Balance Sheet _____ (4) Common Stock _____ (5) Accounting Equation _____ (6) Transaction _____ (7) Accounts Payable _____ (8) Journal Entry DEFINTION A. The account credited when cash is received in exchange for stock issued. B. Another name for stockholders' equity or shareholders' equity. C. An exchange or event that has a direct impact on a company's financial statements. D. A balance sheet that has not yet been publicly released. E. When a company becomes included in the Fortune 500. F. A method of recording a transaction in debit/credit format. G. A transaction that is triggered automatically merely by the passage of time. H. The abbreviation for an item posted on the left side of a T-account. I. The expression that assets must equal liabilities plus stockholders' equity. J. The value of a company's public relations campaign. K. Amounts owed to suppliers for goods or services bought on credit. L. An event that has no effect on the balance sheet and is not recorded in the financial statements. M. Liabilities divided by assets. N. A balance sheet that has assets and liabilities categorized as current vs. noncurrent. O. The abbreviation for an item posted on the right side of a T-account.

Q: Financial institutions with ____ interest ratesensitive liabilities than assets are ____ affected by rising interest rates. a. more; adversely b. fewer; adversely c. more; favorably d. None of these are correct.

Q: For each of the following, indicate how the event would most likely be categorized. EVENT ______ (1) A company sells $2 million in goods for immediate payment. ______ (2) The company uses up office supplies. ______ (3) The stock market rises 10% and the value of a company's stock increases. ______ (4) A company pays cash to an inventor for the legal rights to produce a new product. ______ (5) Management promises to pay workers an overtime bonus as required by their union contract. ______ (6) A company uses up supplies to manufacture a product. ______ (7) A company receives $1 million in orders but no down payments. CATEGORY EE External Exchange IE Internal Event NT No Transaction

Q: ​In a period when interest rates are expected to rise, ____ institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be ____ under these conditions. a. ​many; lower b. ​many; higher c. ​few; lower d. ​few; higher

Q: Match each account name with the category that it would be included under in classified balance sheet. ACCOUNT ______ (1) Equipment ______ (2) Common Stock ______ (3) Supplies ______ (4) Retained Earnings ______ (5) Accounts Receivable ______ (6) Accounts Payable CATEGORY CA Current Asset NCA Noncurrent Asset CL Current Liability NCL Noncurrent Liability SE Stockholders' Equity

Q: ​An equity swap involves the exchange of a. ​preferred stock for common stock. b. ​interest payments for an equity position in the counterparty's firm. c. ​interest payments for payments linked to the degree of change in a stock index. d. ​interest payments for newly issued stock by financial institutions.

Q: Listed below are components of several transactions. In the blank to the left indicate whether a debit (dr) or credit (cr) would be required to record the component of the transaction. _____ (1) Increase in Cash. _____ (2) Increase in Accounts Payable. _____ (3) Decrease in Notes Payable. _____ (4) Increase in Inventory. _____ (5) Increase in Common Stock. _____ (6) Decrease in Equipment.

Q: ​A(n) ____ swap allows the party making fixed-rate payments to terminate the swap prior to maturity. a. ​forward b. ​extendable c. ​callable d. ​putable

Q: ____ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party. a. Basis b. Credit c. Sovereign d. None of these are correct.

Q: A journal entry to record the purchase of supplies for $400 cash was properly prepared. The debit in the entry was properly posted to the related account. However, the credit in the entry was mistakenly recorded as a credit to the Supplies account. Required: Determine the impact of this error on the accounting equation.

Q: ​The option on a putable swap would most likely be exercised if interest rates a. ​rise. b. ​fall. c. ​remain constant. d. ​remain somewhat stable.

Q: On March 3, Year 3, your company purchases supplies on account for $4,000. Payment is due on April 2, Year 3. Required: Part a. Is this an accounting transaction on March 3, Year 3? Why or why not? Part b. When this transaction is recorded, what accounts are affected and by how much each?

Q: ​A firm is involved in an agreement whereby it makes payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has a. ​purchased an interest rate cap. b. ​sold an interest rate cap. c. ​purchased an interest rate floor. d. ​sold an interest rate floor.

Q: On January 1, Year 3, New Works, Inc.'s assets were $300,000 and its stockholders' equity was $140,000. During the year, assets increased $15,000 and liabilities decreased $10,000. Required: Determine the amount of stockholders' equity at December 31, Year 3.

Q: Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Average each year over a three-year period. The notional principal is $1 million. If the Dow depreciates by 1 percent over the year, Hewitt will a. have to make a payment of $70,000. b. have to make a payment of $90,000. c. receive a payment of $70,000. d. receive a payment of $90,000. e. None of these are correct.

Q: ​Which of the following statements is incorrect? a. ​Interest rate swaps are sometimes used by financial institutions and other firms for speculative purposes. b. ​A primary reason for the popularity of interest rate swaps is the existence of market imperfections. c. ​Swaps are necessary for some financial institutions to obtain the maturities or rate sensitivities on funds that they desire. d. ​Most financial institutions that anticipate that interest rates will move in an unfavorable direction do not hedge their positions.

Q: The company's total assets are $36,000. The following is a listing of the companys accounts and account balances as of December 31, Year 3. This company doesn't have any other accounts. Accounts Payable $ 7,000 Accounts Receivable 8,000 Supplies 1,000 Equipment 22,000 Common Stock 10,000 Cash Unknown Retained Earnings Unknown Required: Part a. Determine the balance of the Cash account. Part b. Determine the balance of the Retained Earnings account.

Q: ​A(n) ____ swap allows the party making fixed payments to extend the swap period. a. ​forward b. ​extendable c. ​callable d. ​putable

Q: CheapBooks Incorporated (CBI) had the following business activities: 1. Stockholders invest $25,000 cash in the corporation. 2. CBI purchased $400 of office supplies on credit. 3. CBI purchased office equipment for $7,000, paying $2,500 in cash and signing a 30-day note payable for the remainder. 4. CBI paid $200 cash on account for office supplies purchased in transaction 2. 5. CBI purchased two acres of land for $10,000, signing a 2-year note payable. 6. CBI sold one acre of land at one-half of the total cost of the two acres, receiving the full amount or $5,000 in cash. 7. CBI made a payment of $5,000 on its 2-year note. Required: Prepare the journal entries that would be used to record the transactions. (Reference each journal entry to the transaction number, shown above).

Q: During the month, a company enters into the following transactions: Buys $4,000 of supplies on account. Pays $5,000 cash for new equipment. Pays off $3,000 of accounts payable. Pays off $1,500 of notes payable. Required: Part a. Show the effect of these transactions on the basic accounting equation. Part b. Prepare the journal entries that would be used to record the transactions.

Q: ​A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time. a. ​plain vanilla b. ​zero-coupon-for-floating c. ​forward d. ​seasoned vanilla e. ​putable

Q: The following is a list of account balances for Pick-A-Pet, Inc., as of June 30, Year 3: Accounts Payable $349,200 Accounts Receivable 419,200 Cash 732,600 Common Stock 662,100 Equipment 58,400 Logo and Trademarks 421,600 Notes Payable 268,900 Retained Earnings 117,900 Software 118,500 The company entered into the following transactions during July Year 3. Stockholders contribute $300,000 cash for additional ownership shares and the company pays $550,000 in cash and borrows $150,000 from a bank to buy new equipment. No other transactions took place during July, Year 3. Required: Part a. Prepare a classified balance sheet for the company at June 30, Year 3. Part b. Show the effects of the July transactions on the basic accounting equation. Part c. Prepare the journal entries that would be used to record the transactions.

Q: Assume a U.S. savings institution funds its fixed-rate mortgages by attracting short-term deposits. If it engages in an interest rate swap, but the index on the swap does not move in perfect tandem with its cost of deposits, this reflects a. sovereign risk. b. basis risk. c. credit risk. d. None of these are correct.

Q: Soar Inc. enters into the following transactions: Stockholders contribute $10,000 cash to a company in exchange for common stock. The company purchases $5,000 to buy new equipment by paying cash. The company pays $3,000 to suppliers on account. Required: Part a. Show the effect of these transactions on the basic accounting equation. Part b. Prepare the journal entries that would be used to record the transactions.

Q: The Bank of Moronto has negotiated a plain vanilla swap whereby it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the next three years. In the first year, LIBOR is 8 percent; in the second year, 9 percent; in the third year, LIBOR is 7 percent. What is the total net payment the Bank of Moronto makes over the three-year period if the notional principal is $10 million? a. -$600,000 b. $600,000 c. $450,000 d. -$450,000 e. None of these are correct.

Q: The most likely users of plain vanilla swaps would be a. commercial banks that focus on short-term consumer loans. b. savings institutions. c. manufacturing companies. d. municipal governments.

Q: Selected accounts for Moonbills Corporation appear below. Required: For each account, indicate the following: Part a. In the first column at the right, indicate the nature of each account, using the following abbreviations: Asset A, Liability L, Stockholders' Equity SE. Part b. In the second column, indicate the normal balance by inserting dr (for debit) or cr (for credit). (Part a) Type of Account (Part b) Normal Balance 1. Supplies............................................. 2. Notes Payable.................................... 3. Income Tax Payable.......................... 4. Equipment.......................................... 5. Accounts Payable.............................. 6. Accounts Receivable......................... 7. Common Stock.................................. 8. Cash................................................... 9. Retained Earnings.............................. 10. Land...................................................

Q: An interest rate swap agreement indicates the ____ value, which represents the principal amount to which interest rates are applied to determine the interest payments involved. a. vanilla b. LIBOR c. programmed d. notional

Q: Consider the following account balances of Purrfect Pets, Inc., as of June 30, Year 3: Accounts Payable $119,400 Retained Earnings $ 54,700 Equipment 421,600 Notes Payable, due Year 5 343,200 Common Stock 200,000 Accounts Receivable 202,500 Income Tax Payable 3,900 Cash 97,100 Required: Prepare a classified balance sheet at June 30, Year 3.

Q: ​In a ____, a buyer makes periodic payments to a seller in exchange for protection against the possible default of debt securities specified in the contract. a. ​default option contract b. ​default futures contract c. ​bankruptcy contract d. ​credit default swap

Q: Which of the following statements is correct? A) A current ratio of 1.60 means the companys current assets are probably not sufficient to pay its current liabilities. B) The separate entity assumption requires that the financial activities of the owners of a company be reported on the companys balance sheet. C) The cost principle states that recording activities at cost will result in the balance sheet representing the true value of the company. D) A transaction is recorded if it has a measurable financial effect on the assets, liabilities or stockholders equity of a business.

Q: ​A(n) ____ swap involves an exchange of interest payments over a swap period that does not begin until a specified future point in time. a. ​forward b. ​extendable c. ​callable d. ​putable

Q: Oats, Inc. has $14,000 in Cash, $37,000 in Accounts Receivable, $2,500 in Supplies, $52,000 in Accounts Payable and $12,400 in Wages Payable. If Oats uses Cash to pay off $8,000 of the Wages Payable, which of the following statements is correct? A) The companys current ratio will not change since current assets decreased by the same amount that current liabilities increased. B) The company will look more favorable to creditors. C) The company has a greater ability to pay current liabilities. D) The companys current ratio will decrease.

Q: Use the information above to answer the following question. What is the amount of the current ratio (round to two decimal places)? A) 8.05 B) 6.44 C) 5.22 D) 1.00

Q: Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps. a. caps b. floors c. collars d. All of these are correct.

Q: Use the information above to answer the following question. What is the amount of Total Liabilities on the Balance Sheet? A) $240,116. B) $37,308. C) $35,599. D) $20,916.

Q: Which of the following is NOT a typical provision of an interest rate swap? a. the notional principal value to which the interest rates are applied to determine the interest payments involved b. the fixed interest rate c. the formula and type of index used to determine the floating interest rate d. the underwriter of the bond e. All of these are provisions of an interest rate swap.

Q: Use the information above to answer the following question. What is the amount of Total Assets on the balance sheet? A) $240,116. B) $214,300. C) $442,924. D) $480,232.

Q: ​In a swap arrangement, the most common index used for floating-rate payments is the a. ​coupon rate on existing bonds. b. ​stock dividend rate based on a U.S. stock index. c. ​London Interbank Offer Rate (LIBOR). d. ​Treasury bond yield.

Q: Which of the following statements about the current ratio is not correct? A) When making comparisons across companies, its far easier to express the relationship as a ratio. B) The current ratio is used to evaluate a companys ability to pay current obligations. C) Having more current assets than current liabilities will yield a current ratio less than 1.0. D) A high current ratio suggests good liquidity.

Q: ​If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments. a. ​fixed-rate; floating-rate b. ​fixed-rate euro; fixed-rate dollar c. ​stock dividend; fixed-rate d. ​stock dividend; floating-rate

Q: If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterparty is likely adversely affected by ____ interest rates. a. increase; increasing b. increase; declining c. decrease; declining d. decrease; increasing e. None of these are correct.

Q: Use the information above to answer the following question. Which of the following statements is not correct? A) Total Assets are $1,929,800. B) Total Stockholders equity is $1,130,260. C) Noncurrent liabilities are $130,260. D) The amount of current assets is 2.5 times the amount of current liabilities.

Q: ​A ____ swap involves the exchange of fixed-rate payments for floating-rate payments that are capped. a. ​rate-capped b. ​zero-coupon-for-floating c. ​callable d. ​putable

Q: Use the information above to answer the following question. What is the total amount of current liabilities? A) $649,540. B) $4,059,625. C) $771,920. D) $799,540.

Q: ____ risk prevents an interest rate swap from completely eliminating a financial institution's exposure to interest rate risk. a. Credit b. Basis c. Sovereign d. None of these are correct.

Q: Use the information above to answer the following question. What is the total amount of noncurrent assets? A) $493,590. B) $824,310. C) $649,540. D) $305,950.

Q: The advantage of a rate-capped interest rate swap (relative to a plain vanilla swap) to the party exchanging fixed payments for floating payments is that a. there is a minimum limit set on the interest rate payments received. b. there is a maximum limit set on the interest payments it will provide. c. it receives an up-front fee. d. None of these are correct.

Q: Which concept should be applied when reporting a piece of land that was bought for $50,000 five years ago, and which would probably now sell for $80,000? A) The cost principle B) The accounting equation C) The separate entity concept D) The monetary concept

Q: A(n) ____ swap provides the party making the floating-rate payments with a right to terminate the swap. a. callable b. extendable c. plain vanilla d. putable e. None of these are correct.

Q: Which of the following would a company be most likely to overstate if the company was trying to mislead potential creditors as to its ability to pay debts as they become due? A) Accounts Receivable B) Notes Payable C) Salaries Expense D) Accounts Payable

Q: A financial institution may participate in the swaps markets by a. serving as an intermediary by matching up parties that wish to engage in a swap. b. engaging in swaps to reduce interest rate risk. c. assuming the credit risk involved in a swap by guaranteeing that the payments will be made. d. serving as an intermediary by matching up parties that wish to engage in a swap AND engaging in swaps to reduce interest rate risk.

Q: Your company's president donates a large amount of her own money to charity and receives significant publicity that includes the company's name. How would the benefits of this publicity appear on the balance sheet? A) It would appear as a current asset. B) It would appear as Common Stock. C) It would appear as a noncurrent asset. D) It would not appear on the balance sheet.

Q: How will a companys current ratio be affected when the company receives $20,000 from owners and issues common stock to them? A) The current ratio will increase because current assets increase. B) The current ratio will increase because current liabilities decrease. C) There will be no change in the companys current ratio. D) The current ratio will decrease because current liabilities increase.

Q: Which of the following is a reason why financial institutions engage in interest rate swaps? a. to reduce interest rate risk b. to act as an intermediary c. to act as a dealer in swaps d. All of these are reasons why financial institutions engage in swaps.

Q: How will a companys current ratio be affected by the purchase of equipment for cash? A) The current ratio will increase because current assets increase. B) The current ratio will decrease because current liabilities increase. C) The current ratio will decrease because current assets decrease. D) The current ratio will remain unchanged.

Q: ​The option on a callable swap would most likely be exercised if interest rates a. ​rise. b. ​fall. c. ​remain constant. d. ​remain somewhat stable.

Q: Savings institutions participate in the swap market primarily to a. serve as an intermediary by matching up two parties in a swap. b. serve as a dealer by taking the counterparty position in a swap. c. reduce interest rate risk. d. None of these are correct.

Q: In Year 2, the Denim Company bought an acre of land that cost $15,000. In Year 5, another company purchased a nearby acre of land for $28,000 and a different company purchased another nearby acre of land for $26,000. As a result, an appraiser estimated hat the acre owned by Denim had increased in value to $27,000. If Denim prepares a balance sheet at the end of Year 5, the acre of land that it owns should be reported at: A) $15,000. B) $28,000. C) $18,000. D) the average of all of the amounts.

Q: An advantage of a ____ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments. a. callable swap b. putable swap c. zero-coupon-for-floating swap d. forward swap

Q: Which of the following statements about the concepts underlying the balance sheet is correct? A) A company bought land for $5 million dollars 10 years ago. The land is now worth $15 million. The company should increase the book value of this asset on its balance sheet to reflect its current value. B) All events affecting the current value of a company are reported on the balance sheet. C) According to the cost principle, assets are valued at their replacement cost. D) If an assets value increases, the increase in value is generally not recorded under GAAP.

Q: ​An arrangement that enables firms to exchange currencies at periodic intervals is called a(n) a. ​currency swap. b. ​interest rate swap. c. ​swap exchange. d. ​Eurobond swap.

Q: Which of the following statements about transaction analysis is not correct? A) A transaction is an exchange or event that has a direct and measurable financial effect. B) Every transaction has at least two effects. C) Cash is the account credited when a bank loan is repaid. D) Notes Payable is the account debited when money is borrowed from a bank using a promissory note.

Q: Use the information above to answer the following question. Which of the following is an accurate description of the economic events involving Accounts Receivable as documented in the T-account above? A) Sales to customers on account exceeded the payments received from customers on account. B) Payments received from customers on account exceeded the sales made to customers on account. C) The company paid off its debt more than it incurred new debt. D) The company incurred more debt than it paid off.

Q: Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. LIBOR is 9 percent, 12 percent, and 13 percent at the end of each of the next three years, respectively. The total payments received (or paid) by Lizard, including the initial fee, are $____. a. 500,000 b. -500,000 c. -1,500,000 d. 1,500,000 e. None of these are correct.

Q: Use the information above to answer the following question. The amount of total current assets that will be reported on the companys balance sheet at the end of the year is: A) $362,600. B) $368,500. C) $139,500. D) $327,000.

Q: ​Financial institutions primarily use interest rate swaps in a way that will ____ exposure to interest rate risk and ____ potential returns. a. ​increase; increase b. ​increase; reduce c. ​reduce; increase d. ​reduce; reduce

Q: Which of the following sequences indicates the correct order of steps in the accounting cycle? A) Post to T-accounts, prepare journal entries, prepare trial balance, and prepare financial statements. B) Post to T-accounts, prepare journal entries, prepare financial statements, and prepare trial balance. C) Prepare Journal entries, post to T-accounts, prepare trial balance, and prepare financial statements. D) Prepare Journal entries, post to T-accounts, prepare financial statements, and prepare trial balance.

Q: The most common proxy for the benchmark rate from which a floating-rate payment is determined is the prime rate. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

Q: Use the information above to answer the following question. How much financing did the stockholders of Purrfect Pets, Inc. directly contribute to the company? A) $117,900. B) $662,100. C) $780,000. D) $1,398,100.

Q: Use the information above to answer the following question. Which line items would be classified as noncurrent on a classified balance sheet? A) Cash; Supplies; Accounts Payable B) Equipment; Other Assets; Notes Payable C) Supplies; Equipment; Notes Payable D) Accounts Receivable; Equipment; Other Assets

Q: During the credit crisis, many mortgage-backed securities defaulted, generating large profits for sellers of credit default swaps and large losses for buyers of the swaps. a. True b. False

Q: Interest rate swaps are rarely used by companies that issue bonds. a. True b. False