1) U.S. GAAP and IFRS on accounting for repurchases and reissuances of
treasury shares follow the principle that treasury stock purchases
and sales are operating transactions and therefore debits Cash (for
economic gains) or credits Cash (for economic losses).
Answer:
2) Comprehensive income equals net income as reported on the income
statement plus (minus) the increase (decrease) in other
comprehensive income for the year.
Answer:
3) For buildings, common depreciation practice assumes a zero salvage
value on the assumption that the costs a firm will incur in tearing
down the building will approximate the sales value of the scrap
materials recovered.
Answer:
4) Usually firms treat small-percentage distributions, say less than a
25% increase in the number of shares, as stock dividends and larger
ones as stock splits.
Answer:
5) Balance sheet relations. George Group, an investment management
company, reported the following data for four recent years. Compute
the missing balance sheet amounts for each of the four years. (In
answering this question, assume that George Group uses U.S.
GAAP.)
2015 2014 2013 2012
Current Assets $12,000 ? ? $7,000
Noncurrent Assets _____ ? 18,000 11,000
9,700
Total Assets ? 28,000
? ?
Current Liabilities ? $4,000 $1,500 $1,700
Noncurrent Liabilities 6,000 ? ? 3,500
Shareholders Equity 10,000 16,000 9,000
?
Total Liabilities and
Shareholders
Equity $19,000 $28,000 $18,500
$16,700
(George Group; balance sheet relations.)
Answer:
6) What is goodwill and how is it classified in terms of the
accounting equation?
Answer:
7) U.S. GAAP and IFRS view investments of less than 20% of the voting
shares of another company as minority, passive investments in most
cases.
Answer:
8) Preferred stock subject to redemption at the option of the
preferred shareholders appears between liabilities and shareholders
equity in U.S. GAAP and as a liability in IFRS.
Answer:
9) Why is a Statement of Cash Flows needed?
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10) How are period expenses recognized and measured?
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11) Realization is the presumption that a firm will remain in operation
long enough to carry out its current plans, and in the normal
course of its operations, realize changes in the fair values of its
assets either by using those assets or selling them.
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12) If Moore pays a $600 insurance premium for a one-year policy on
January 31 for coverage from February 1 of Year1 through January 31
of Year 2, the journal entry to be made at the end of February Year
1 would include a debit to Insurance Expense for $600.
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13) The FASB and the IASB are reconsidering the definition of an asset
and the criteria for
asset recognition.
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14) Firms cannot apply the fair value option to derivatives.
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15) During Year 5, Taylor Corporation signed a long-term lease for a
building. It classified the lease as a capital lease and recorded
it in the accounts as follows:
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 3,000
Capitalized Lease Obligation . . . . . . . . . . . . . . . . . . .
. . . . . . . 3,000
The transaction requires
A.inclusion in the statement of cash flows as an operating
activity, only
B.inclusion in the statement of cash flows as an investing
activity, only
C.inclusion in the statement of cash flows as a financing activity,
only
D.disclosure in a supplementary schedule or notes to the financial
statements
E.disclosure in managements discussion and analysis
Answer:
16) On August 1, Covington Motors pays £18,000 for insurance
coverage for the next 12 months. On August 1, the firm records the
following journal entry:
A.Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 18,000
Insurance Expense . . . .. . . . . . . . . . . . . . . . . . . . .
. . .. . . . . . . . . . . . . . . 18,000
B.Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 18,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 18,000
C.Insurance Expense. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 18,000
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 18,000
D.Liability for Prepaid Insurance . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 18,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 18,000
E.Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . .
. . . .. . . . . . . . . . . . . . 18,000
Liability for Prepaid Insurance . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .. . . . 18,000
Answer:
17) Firms almost always report asset impairment charges or
restructuring charges in _____.
A.income from continuing operations
B.income, gains, and losses from discontinued operations
C.extraordinary gains and losses
D.retained earnings
E.paid-in-capital
Answer:
18) _____ arise from relatively infrequent transactions, and there can
be no assurance that they will recur in any future period.
A.Gains/Losses
B.Revenues
C.Expenses
D.Assets
E.Liabilities
Answer:
19) Tokyo Motor Company (Tokyo), a Japanese car manufacturer, reported
Sales of Products of 22,670 billion for the year ended March 31,
2014. The Cost of Products Sold was 18,356 billion. Assume that
Tokyo made all sales on credit. Select the correct journal entries
that Tokyo made during the fiscal year ended March 31, 2014,
related to these transactions. [Tokyo applies U.S. GAAP, and
reports its results in millions of yen ().]
A.Accounts Receivable 22,670 billion
Inventories 22,670 billion
Cost of Goods Sold 18,356 billion
Revenues 18,356 billion
B.Accounts Receivable 18,356 billion
Inventories 18,356 billion
Cost of Goods Sold 22,670 billion
Revenues 22,670 billion
C.Accounts Receivable 18,356 billion
Revenues 18,356 billion
Cost of Goods Sold 22,670 billion
Inventories 22,670 billion
D.Accounts Receivable 22,670 billion
Revenues 22,670 billion
Cost of Goods Sold 18,356 billion
Inventories 18,356 billion
E.none of the above
Answer:
20) The original depreciation or amortization schedule for long-lived
assets sometimes requires changing. Which of the following is/are
not true?
A.Each period a firm must evaluate its estimates of service life
and assess if these estimates require changing in light of new
information
B.Each period a firm must evaluate its estimates of salvage value
and assess if these estimates require changing in light of new
information
C.The firm makes no adjustment for the inaccurate estimates but
spreads the remaining carrying value less the new estimate of
salvage value over the new estimate of the remaining service life
of the asset
D.If changing from the old estimates to the new estimates would
have a material impact, the firm must change the depreciation or
amortization schedule retroactively
E.none of the above
Answer:
21) The computation of the pension liability for a defined benefit plan
uses actuarial estimates or actuarial assumptions of
A.estimated interest rates
B.estimated employee mortality, only
C.estimated employee turnover, only
D.estimated employee turnover, mortality, and interest rates
E.actual employee turnover, mortality, and interest rates
Answer:
22) Managing inventory turnover involves balancing which of the
following consideration(s) in setting the optimum level of
inventory and, thus, the rate of inventory turnover?
A.For a given amount of gross margin on the goods, firms prefer to
sell as many goods as possible with a minimum of assets tied up in
inventories
B.An increase in the rate of inventory turnover between periods
indicates reduced costs of financing the investment in
inventory
C.Management does not want to have so little inventory on hand that
shortages result in lost sales
D.Increases in the rate of inventory turnover caused by inventory
shortages could signal a loss of customers
E.All of the above
Answer:
23) Noncurrent assets are expected to be converted to cash over
A.a month
B.a quarter
C.a half of a year
D.a year
E.a period of time greater than a year
Answer:
24) The U.S. government will pay AirSys $2,500,000 each six months,
equal to 2.5% of the $100 million face amount of the treasury bonds
(5% annual coupon rate, paid in two installments each year), and
will repay the $100 million at the end of five years. At the time
AirSys purchases the bonds, the market prices these bonds to yield
AirSys 6% annually (3% each six months). The bonds are classified
as held to maturity. AirSys will pay an amount equal to _____ for
the bonds.
A.present value of an annuity of $2.5 million for 10 periods plus
the present value of $100 million paid at the end of 10 periods,
both cash flows discounted at 3% per period
B.present value of an annuity of $5.0 million for 5 periods plus
the present value of $100 million paid at the end of 5 periods,
both cash flows discounted at 6% per period
C.present value of an annuity of $2.5 million for 10 periods plus
the present value of $100 million paid at the end of 10 periods,
both cash flows discounted at 2.5% per period
D.present value of an annuity of $5.0 million for 5 periods plus
the present value of $100 million paid at the end of 5 periods,
both cash flows discounted at 5% per period
E.the future value of cash flows totaling $125 million
Answer:
25) The equity method of accounting for an investment in the common
stock of another company should be used when the investment
A.is composed of common stock and it is the investor’s intent to
vote the common stock
B.ensures a source of supply such as raw materials
C.enables the investor to exercise significant influence over the
investee
D.gives the investor voting control over the investee
E.None of these answer choices is correct
Answer:
26) Which of the following is/are not true regarding maintenance?
A.Maintenance includes routine costs such as for cleaning and
adjusting
B.Maintenance includes the costs of restoring an assets service
potential after breakdowns or other damage
C.Maintenance does not extend the estimated service life or
increase its productive capacity of an asset beyond original
expectations
D.U.S. GAAP and IFRS treat maintenance expenditures as expenses of
the period when the firm makes the expenditure
E.Distinguishing repairs from maintenance is difficult but
typically not necessary because expenditures for both are period
expenses
Answer:
27) Ratios provide little information unless the analyst places them in
a context. After calculating the ratios, the analyst must compare
them with some standard. Which of the following is/are possible
standard(s)?
A.The planned ratio for the period
B.The corresponding ratio during the preceding period for the same
firm
C.The corresponding ratio for a similar firm in the same
industry
D.The average ratio for other firms in the same industry
E.All of the above are possible standards
Answer:
28) The FASBs conceptual framework defines a(n) _____ as a probable
future sacrifice of economic resources arising from present
obligations of a particular entity to transfer assets or provide
services to other entities in the future as a result of past
transactions or events.
A.asset
B.liability
C.equity
D.revenue
E.expense
Answer:
29) The consolidated income statement shows
A.all of the parents and the subsidiarys revenues less all of the
parents and the subsidiarys expenses, plus or minus intercompany
sales, expenses, gains, and losses, which equals consolidated
income
B.The consolidated income statement shows the portion of this
consolidated income to which the noncontrolling shareholders have a
claim, typically an amount equal to the subsidiarys net income
multiplied by the noncontrolling shareholders ownership
percentage
C.The consolidated income statement shows the portion of this
consolidated income to which the parent company shareholders have a
claim
D.all of the above
E.none of the above
Answer:
30) Both U.S. GAAP and IFRS specify the asset measurement basis for
financial reporting and _____ is the initial measurement attribute
for most assets.
A.Current Replacement Cost
B.Net Realizable Value
C.Fair Value
D.Present Value of Future Net Cash Flows
E.Acquisition cost
Answer:
31) The principal objective of accounting reports as currently prepared
is to present ______ the results of operations and the financial
condition of the firm.
A.fairly
B.accurately
C.objectively
D.subjectively
E.correctly
Answer:
32) Which of the following is/are true regarding majority, active
investments?
A.An investor acquires shares of an investee so that the investor
can control the investee both at the broad policy-making level and
at the day-to-day operational level
B.U.S. GAAP views ownership of more than 50% of an investee as
implying an ability to control the investee, unless evidence
indicates to the contrary
C.IFRS views ownership of more than 50% of an investee as implying
an ability to control the investee, unless evidence indicates to
the contrary
D.An investor cannot exercise control of a majority-owned investee
if a court effectively controls the investee in bankruptcy
proceedings or if the investee is a foreign company whose
government restricts the withdrawal of assets from the country
E.all of the above
Answer:
33) Which of the following is/are true?
A.Under U.S. GAAP, firms must test property, plant, and equipment
for possible asset impairment when conditions indicate that a
significant decrease in fair value has occurred
B.Under U.S. GAAP, firms initially compare the undiscounted cash
flows expected from the asset to the assets carrying value
C.Under U.S. GAAP, a fixed asset impairment occurs when the assets
carrying value exceeds the undiscounted cash flows
D.Under U.S. GAAP, the amount of the recognized impairment loss is
the excess of the carrying value over the fair value of the
asset
E.all of the above
Answer:
34) Depreciation is the accounting term used to refer to
A.the periodic write-off of the acquisition cost of a tangible
long-lived asset with a finite service life
B.the periodic write-off of the current fair market value of a
tangible long-lived asset with a finite service life
C.the periodic write-off of the acquisition cost of an intangible
long-lived asset with a finite service life
D.the periodic write-off of the current fair market value of a
intangible long-lived asset with a finite service life
E.the periodic write-off of intangible assets
Answer:
35) Many analysts focus attention on cash flow from operations,
thinking it as important as, or more important than, net income. A
common misconception is that the management has little opportunity
to manipulate transactions affecting the statement of cash flows.
The manipulation possibilities arise from
A.the amounts of cash flows
B.the timing of cash flows
C.the classification and disclosure in the statement and related
notes
D.both choices b and c
E.none of the above
Answer:
36) Which of the following is not presented in an income statement?
A.Net Sales
B.Other Expenses
C.Net income
D.Dividends
E.Provision for Income Taxes
Answer:
37) Which of the following is/aretrue?
A.Derivatives designated as cash flow hedges or fair value hedges
receive special accounting treatment
B.The choice between the derivatives designation of cash flow
hedges or fair value hedges depends on the firms general hedging
strategy and its purpose in acquiring the particular derivative
instrument
C.According to U.S. GAAP, if a firm does not designate a particular
derivative as either a fair value hedge or a cash flow hedge, the
firm must account for the derivative as if it were a trading
security
D.According to IFRS, if a firm does not designate a particular
derivative as either a fair value hedge or a cash flow hedge, the
firm must account for the derivative as a security at fair value
through profit and loss
E.all of the above
Answer:
38) In preparing a T-account work sheet, a master T-account for cash
appears at the top of the work sheet. This master T-account has
three sections, labeled
A.Operations, Investing, and Financing
B.Working Capital, Investing, and Financing
C.Operations, Working Capital, and Financing
D.Operations, Working Capital, and Investing
E.Operations, Exchanges, and Investing
Answer:
39) The matching convention assigns _____ to the related _____.
A.expenses; revenues
B.revenues; revenues
C.assets; liabilities
D.liabilities; assets
E.assets; shareholders equity
Answer:
40) Which method of preparing the statement of cash flows starts with
the components of income, the individual revenues and expenses, but
not gains and losses, then adds or subtracts the same balance sheet
changes involving the same operating accounts?
A.direct method
B.fixed method
C.indirect method
D.funds flow method
E.predetermined method
Answer:
41) What ratio(s) customarily include(s) in the numerator cash,
marketable securities, and accounts receivable, with the
denominator including all current liabilities?
A.current ratio
B.noncurrent ratio
C.acid test ratio
D.quick ratio
E.choices c and d
Answer:
42) The sum of the par value amount and the additional paid-in capital
amount is the total amount received from shareholders for the
shares when the firm first issued them. This total amount is also
called _____.
A.contributed capital
B.paid-in capital
C.treasury stock
D.Both answer choices a and b are correct
E.None of these answer choices is correct
Answer:
43) For each of the following items, indicate whether the item meets
all of the criteria in the definition of a liability [Yes or No].
If so, how does the firm value it? If not, why not?
a. Bonds payable.
b. Interest accrued but not paid on a note.
c. Confirmed orders from customers for goods and services to be
delivered later.
d. Advances from customers for goods and services to be delivered
later.
e. Promises by an airline to provide flights in the future in
exchange for miles flown,
if customers accumulate a certain number of miles at regular
fares.
f. Product warranties.
g. Contractual promises to purchase specific quantities of natural
gas for each
of the next 10 years.
h. Damages the company must pay if it loses a pending lawsuit.
i. Future costs of restoring strip-mining sites after completing
mining operations.
Answer:
44) Roseland Company uses the periodic method of accounting for
inventory. Unfortunately, the sales manager of Roseland Company
failed to record a valid sale on account of merchandise that had
been shipped to a customer prior to the end of the current year.
However, he did exclude the merchandise from inventory at the end
of the current year. As a result of this error, Roseland
Company’s
A.total assets are overstated for the current year
B.total expenses are understated for the current year
C.net income is overstated for the current year
D.total assets are understated at the end of the current year
E.none of the above
Answer:
45) Consolidated financial statements are typically prepared when one
company has
A.accounted for its investment in another company by the equity
method
B.significant influence over the operating and financial policies
of another company
C.the controlling financial interest in another company
D.a substantial equity interest in the net assets of another
company
E.All of these answer choices are correct
Answer: