Following are a series of statements regarding topics discussed in this chapter.
Required:
Indicate whether each statement is true (T) or false (F).
(a) Corporations pay taxes based on the amount of income before income taxes.
(b) A company that changes from one accounting principle to another generally must report an extraordinary item in its income statement in the year of the change.
(c) The market price to book value ratio indicates how much investors are willing to pay for each $1 of a company’s net assets.
(d) If a corporation’s common stock has a much higher price-earnings ratio than its historical norm, sophisticated investors will typically view that stock as ‘‘bargain’’ priced.
(e) If Company A owns 35 percent of Company B’s common stock, Company A should use the equity method of accounting and consolidate both companies’ financial statements at year-end.
(f) Decision makers commonly use activity ratios to evaluate a company’s liquidity.
(g) Common-sized financial statements can be used to identify important structural changes in a company’s operating results and financial condition over a period of time.
(h) Financial lever age works to the advantage of company owners when the interest rate paid on borrowed funds exceeds the rate of return earned on those funds.
(i) The study of percentage changes in financial statement items over a period of time is known as trend analysis.
(j) Earnings quality generally refers to the degree of correlation between a firm’s economic income and its reported earnings determined by generally accepted accounting principles.
(k) In a common-sized balance sheet, each line item is expressed as a percentage of current assets.
(l) At date of original issuance, Company P buys $100,000 of Company F’s long-term bonds for $97,500. Both companies will have a contra account on their financial statements: Company P has Discount on Bond Investment and Company F has Discount on Bonds Payable.
(m) When a company sells a business segment, the company may report both an income and a loss amount in its discontinued operations section of the income statement.