Question 1

A decrease in the growth rate of the future compensation will cause an increase in pension cost.

Accepted Answer

A) True 
 B)False

Question 2

Three elements of pension expense for defined benefit plans are: service cost, interest cost and actual return on plan assets.

Accepted Answer

A) True 
 B)False

Question 3

Many of the postretirement health benefit plans offered by companies to their employees are unfunded, while all of their pension plans have some degree of funding. Which of the following statements is false?

Accepted Answer

A)  There is no legal requirement to fund postretirement health benefits, but there are legal requirements covering pension funding. 
B)  Contributions to pension plans are normally tax deductible, but contributions to postretirement health plans are not tax deductible. 
C)  Funds contributed to a pension plan can be withdrawn at any time, but funds contributed to a postretirement health plan cannot be withdrawn by law. 
D)  Taxes do not have to be paid on investment income earned by assets in pension plan, but they do normally have to be paid on postretirement health plans.

Question 4

Which of the following would be found listed as a liability on a company's balance sheet?

Accepted Answer

A)  Operating lease obligations 
B)  Projected benefit obligation 
C)  Purchase Commitment obligation 
D)  Postretirement benefits other than pension obligation

Question 5

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

Accepted Answer

The answer of What are the four important requirements when...

Question 6

Evaluating risk of long-term creditors (e.g. bondholders) involves more detail than evaluating the risk of equity holders.

Accepted Answer

A) True 
 B)False

Question 7

The majority of financing for most companies comes from which of the following sources?

Accepted Answer

A)  Owners and customers 
B)  Creditors and customers 
C)  Owners and managers 
D)  Creditors and owners

Question 8

Harms Inc. reported in its 2006 annual report the following information:
 $$\begin{array}{l}
\text { Plan Status: December 31, } 2006\
\begin{array} { | l | r | } 
\hline \text { Accumulated Benefit Obligation (ABO) } & \$ 90 \text { Million } \
\hline \text { Projected Benefit Obligation (PBO) } & \$ 95 \text { Million } \
\hline \text { Plan Assets (at fair value) } & \$ 80 \text { Million } \
\hline \text { Unrecognized transition asset } & \$ 11 \text { Million } \
\hline \text { Unrecognized actuarial losses } & \$ 1 \text { Million } \
\hline & \
\hline \text { Assumptions: } & \
\hline \text { discount rate } & 8 \% \
\hline \text { return on assets } & 9 \% \
\hline \text { compensation growth } &5\% \
\hline
\end{array}
\end{array}$$
-If Harms had decreased its compensation growth rate to 4.5% in 2006, the effect would have been:

Accepted Answer

A)  an increased ABO. 
B)  an increased PBO. 
C)  a decreased ABO. 
D)  a decreased PBO.

Question 9

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

Accepted Answer

A)  Operating leases 
B)  Capital leases 
C)  Issuance of convertible bonds 
D)  Issuance of common stock

Question 10

A company will record a contingent gain if the gain is probable and reasonably estimable.

Accepted Answer

A) True 
 B)False

Question 11

For a company to report a contingent loss it should be either probable or reasonably estimable.

Accepted Answer

A) True 
 B)False

Question 12

With respect to pension liabilities, which of the following statements are true?
I. The projected benefit obligation (PBO) is always greater than or equal to the accumulated benefit obligation (ABO).
II. The vested benefit obligation (VBO) is always as least as or as big as the accumulated benefit obligation (ABO).
III. If the PBO is greater than the plan assets, the plan is said to be overfunded.
IV. If the weighted-average assumed discount rate is increased, the PBO will decrease.

Accepted Answer

A)  I, III and IV 
B)  I and III 
C)  II and IV 
D)  I and IV

Question 13

When analyzing post retirement benefits, one should evaluate the actuarial assumptions and their effects on the financial statements.

Accepted Answer

A) True 
 B)False

Question 14

Treasury stock is:

Accepted Answer

A)  investments in government securities. 
B)  retained earnings that have been appropriated to make equity investments. 
C)  a company's own stock that it has repurchased. 
D)  assets held for safekeeping in company's vaults.

Question 15

Stockholders are the residual claimants of a company.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is reported in the equity section of the balance sheet?

Accepted Answer

A)  Redeemable Preferred stock 
B)  Treasury stock 
C)  Investment in affiliates 
D)  Debentures

Question 17

If a company increases the amount of debt it has, all other things being equal, the risk to the shareholders increases.

Accepted Answer

A) True 
 B)False

Question 18

If a company engages in off-balance sheet financing, generally the effect is:
I. to cause assets to be understated.
II. to increase leverage ratios.
III. to increase cash flows.
IV. to cause liabilities to be understated.

Accepted Answer

A)  I, II, III and IV 
B)  I, III and IV 
C)  I and IV 
D)  IV only

Question 19

Companies must report the economic pension cost in their financial statements.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A)  Ownership is transferred by the end of the lease agreement. 
B)  The lease contains an option to purchase the asset at a bargain price. 
C)  The present value of the lease payments at the beginning of the lease is 75% or more than the value of the asset. 
D)  The lease term is at least 75% of the economic life of the asset.

Exam 3: Analyzing Financing Activities

A decrease in the growth rate of the future compensation will cause an increase in pension cost.

Three elements of pension expense for defined benefit plans are: service cost, interest cost and actual return on plan assets.

Many of the postretirement health benefit plans offered by companies to their employees are unfunded, while all of their pension plans have some degree of funding. Which of the following statements is false?

Which of the following would be found listed as a liability on a company's balance sheet?

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

Evaluating risk of long-term creditors (e.g. bondholders) involves more detail than evaluating the risk of equity holders.

The majority of financing for most companies comes from which of the following sources?

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

A company will record a contingent gain if the gain is probable and reasonably estimable.

For a company to report a contingent loss it should be either probable or reasonably estimable.

When analyzing post retirement benefits, one should evaluate the actuarial assumptions and their effects on the financial statements.

Treasury stock is:

Stockholders are the residual claimants of a company.

Which of the following is reported in the equity section of the balance sheet?

If a company increases the amount of debt it has, all other things being equal, the risk to the shareholders increases.

If a company engages in off-balance sheet financing, generally the effect is: I. to cause assets to be understated. II. to increase leverage ratios. III. to increase cash flows. IV. to cause liabilities to be understated.

Companies must report the economic pension cost in their financial statements.

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