Exam 3: Analyzing Financing Activities

On January 1, a company entered into a capital lease resulting in an obligation of $20,000 being recorded on the balance sheet. Estimated economic life of the leased asset is ten years with an expected salvage value of zero at the end of ten years. The company will depreciate this asset on a straight-line basis over its economic life. The lessor's implicit interest was 10 percent. At the end of the first year of the lease, the cash flow from financing activities section of the lessee's statement of cash flows showed a use of cash of $2,200 applicable to the lease. How much did the company pay the lessor in the first year of the lease?

The net deferrals are included in the balance sheet as part of:

Which of the following is an example of off-balance sheet financing?

If a company increases its expected rate of compensation increase for the purposes of calculating its pension obligations, the accumulated benefit obligation and the projected benefit obligation will both increase.

What are the four important requirements when structuring a valid SPE? How were they abused by Enron?

Which of the following statements about stock dividends is true?

A company which leases a piece of machinery (the lessee) will record it as a sales-type lease if the lessor makes a profit on the lease.

Harms Inc. reported in its 2006 annual report the following information: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\underline{\text { Plan Status: December 31, } 2006}$ Accumulated Benefit Obligation (ABO) \ 90 million Projected Benefit Obligation (PBO) 95 million Plan Assets (at fair value) 80 million Unrecognized transition asset 11 million Unrecognized actuarial losses 1 million Assumptions: Discount rate 8\% Return on assets 9\% Compensation growth 5\% -Funded status at the end of 2006 was:

Warden Corp. has a postretirement health benefit plan for its employees. As of December 31, 2006, the accumulated postretirement benefit obligation (APBO) is $250 million and the postretirement health benefit cost for the year was $23 million. The plan assets are $10 million. Warden chose to recognize its unfunded liability immediately. Warden also has a pension plan, which is fully funded. a. What reasons are there for the minimal funding of the postretirement health benefits plans versus the full funding of the pension plan? b. In 2006 Warden makes the following changes. • Increases its expected rate of return on plan assets. • Increases the expected compensation growth rate. • Increases its discount rate. Explain the effect of each of these on i. economic cost as of the end of 2007. ii. reported cost for 2007.

A company's current ratio is 1.5. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio and return on assets ratio?

Operating leases can inflate both return on investment and asset turnover ratios.

Reling Company reports the following information as of 12/31/05 10 \% cumulative preferred stock, par value \ 10 and liquidation value \ 11;20,000 shares authorized and issued: 10,000 shares outstanding \ 100,000 Common stock - authorized 50,000 and 40,000 outstanding; \ 1 par value \ 40,000 Additional paid-in capital \ 350,000 Retained earnings \ 230,000 -The book value per share of common stock is:

Which of the following is not a criterion for defining a lease as a capital lease?

If a company leases equipment to other companies and records these leases as operating leases rather than capital leases, its: I. recorded liabilities will be lower. II. recorded assets will be higher. III. total cash flows will be higher. IV. debt to equity ratios will be lower.

If a company issues new stock, this will always decrease book value per share.

Current liabilities should always be expected to be liquidated within one year.

Companies report the funded status of pension plans as a separate line item on the balance sheet.

Creditors of a business are more concerned with the future cash flows of a business than the future return on equity.

If the lease term is 75% or more of the economic life of the asset, the lease needs to be classified as a capital lease.

Which of the following is not an actuarial assumption underlying the computation of the pension obligation?