1) Many off-balance-sheet financings fall into one of two categories
that accounting typically does not recognize as liabilities:
executory contracts and contingent obligations.
Answer:
2) The issuing firm benefits from issuing convertible preferred
shares, because these shares carry a lower dividend rate than
purchasers otherwise would have required to buy the shares for a
given price.
Answer:
3) The capital lease method classifies all of the lease payment each
period as an operating
use of cash on the statement of cash flows.
Answer:
4) Chicago Company has two divisions, A and B. The operations and cash
flows of these two divisions are clearly distinguishable. On July
1, 2014, the company decided to dispose of the assets and
liabilities of Division B. It is probable that the disposal will be
completed early next year. The revenues and expenses of Chicago
Company for 2014 and for the preceding two years are as
follows:
| 2014 | 2013 | 2012 | |
| Sales-Division A | 40,000 | 36,800 | 34,000 |
| Sales-Division B | 30,000 | 32,400 | 36,000 |
| Total non tax expenses-A | 28,000 | 32,400 | 30,000 |
| Total non tax expenses-B | 31,800 | 30,000 | 30,800 |
During the latter part of 2014, Chicago disposed of a
portion of Division B and recognized a pretax loss of $10,000 on
the disposal. The income tax rate for Chicago Company is 40%.
Prepare the comparative income statements for Chicago Company for
the years 2012, 2013, and 2014.
Answer:
5) An analyst examines changes in a firms ratios over the three-year
perioda so-called cross-section analysis.
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6) Describe the accounts receivable recognition process.
Answer:
7) Darling Company ages its accounts receivable to estimate bad debts
for financial statement purposes. President Darling is at a meeting
with creditors and needs to know his total accounts receivable
balance. Unfortunately, Darling picked up the wrong computer report
and has, instead, a summary printout of the company’s estimated bad
debts as follows:
| Age of Receivable | Bad Debt | % uncollectible |
| 0-30 days | $1,750 | 0.5% |
| 31-60 days | 1,500 | 1.5% |
| 61-120 days | 4,000 | 8.0% |
| more than 120 days | 17,500 | 70.0% |
Calculate the accounts receivable balance based on Darlings
bad debt summary.
Answer:
8) Describe the accounting for employee stock options (ESOs).
Answer:
9) The last step in the accounting record-keeping process is preparing
the balance sheet from amounts in the balance sheet accounts.
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10) Cost is the economic sacrifice made to acquire goods or services.
Answer:
11) When the accountant transfers the balance in each temporary revenue
and expense account
to the Retained Earnings account, this procedure is known as the
closing of accounts.
Answer:
12) U.S. GAAP specifies criteria for a capital lease. Which of the
following is not one of the criteria?
A.The lease transfers ownership of the leased asset to the lessee
at the end of the lease term
B.Transfer of ownership at the end of the lease term seems likely
because the lessee has a bargain purchase option
C.The lease extends for at least 75% of the assets expected useful
life
D.The present value of the contractual minimum lease payments
equals or exceeds 75% of the fair value of the asset at the time
the lessee signs the lease using a discount rate appropriate for
the creditworthiness of the lessee
E.The present value of the contractual minimum lease payments
equals or exceeds 90% of the fair value of the asset at the time
the lessee signs the lease using a discount rate appropriate for
the creditworthiness of the lessee
Answer:
13) On December 10 of the current year, XTREME Sports Inc. receives an
advance of $50,000 from a hockey team for 20,000 custom-made shirts
with the teams logo, which the team intends to distribute to fans
entering a hockey game during the first week in January. XTREME
Sports Inc. completes the manufacturing of the shirts on December
30, intending to ship them on December 31 before its accounting
period ends. Unfortunately, a snowstorm on December 31 prevented
their shipment. XTREME Sports Inc. recorded this transaction as a
sale for December, and reduced its inventory accordingly. It set
the items aside in its shipping room on December 31 with a clear
sign to its own personnel conducting a physical inventory on that
date and to its auditors who were observing the count that the
items were not to be counted as inventory. These actions
A.are in accordance with U.S. GAAP
B.are in accordance with IFRS
C.violate ethical principles
D.are in accordance with U.S. GAAP, but not IFRS
E.are in accordance with IFRS, but not U.S. GAAP
Answer:
14) ValleyView Company
ValleyView Company acquires common stock of Kansas Enterprises for
$400,000 on November 1, 2013, and designates this investment as
available-for-sale. The fair value of these shares is $435,000 on
December 31, 2013 . ValleyView sells these shares on August 15,
2014, for $480,000.
(Refer to ValleyView.) The journal entry to record acquisition of
securities available-for-sale on November 1, 2013 is:
A.Cash . . . . . . . . . . . . . . . . . . . . . .400,000
Marketable Securities . . . . . . . . . . . . . .400,000
B.Cash . . . . . . . . . . . . . . . . . . . . . .400,000
Common Stock . . . . . . . . . . . . . . . . . 400,000
C.Common Stock . . . . . . . . . . . . . 400,000
Cash . . . . . . . . . . . . . . . . . . . . . . . 400,000
D.Marketable Securities . . . . . . . . 400,000
Cash . . . . . . . . . . . . . . . . . . . . . . . 400,000
E.Marketable Securities . . . . . . . . 400,000
Common Stock . . . . . . . . . . . . . . . . . 400,000
Answer:
15) Which of the following is/aretrue concerning convertible bonds or
convertible preferred stock?
A.Convertible bonds and convertible preferred stock permit the
owner either to hold the security as a bond or preferred stock or
to convert the security into shares of common stock
B.The owner cannot detach and transfer, or separately exercise, the
conversion option
C.The issue price of a convertible bond or convertible preferred
stock is payment for both debt or preferred stock and for the
conversion option, but no one can observe the fair value of these
separate components
D.U.S. GAAP requires firms to allocate the full issue price to the
bonds or preferred stock and none of the price to the conversion
feature
E.all of the above
Answer:
16) The rate which indicates how quickly a firm collects cash is the
_____ turnover ratio.
A.cash
B.accounts receivable
C.sales receipts
D.inventory
E.asset
Answer:
17) Current liabilities
A.are obligations that a firm expects to pay or discharge during
the normal operating cycle of the firm, usually one year
B.include liabilities to merchandise suppliers, employees, and
governmental units
C.include notes and bonds payable to the extent that they will
require the use of current assets within the next year
D.include all of the above
E.None of the above answers is correct
Answer:
18) Mother’s Company has current assets of $900,000 and current
liabilities of $1,000,000. Mother’s Company’s current ratio would
be increased by
A.borrowing $100,000 on a line-of-credit (short-term loan)
B.purchase of merchandise inventory costing $100,000 cash
C.purchase of marketable equity securities for $100,000 cash
D.paying $100,000 of wages payable
E.none of the above
Answer:
19) Which of the following is/are not true regarding the classification
of redeemable preferred shares on the balance sheet?
A.The classification of redeemable preferred shares on the balance
sheet depends on the conditions for redemption
B.If only the issuing firm has the option to redeem, then the
preferred shares are part of its shareholders equity
C.If the issuing firm must redeem the preferred shares (so-called
mandatory redemption), either at a specified time or upon a
specified condition certain to occur, the issuing firm treats the
preferred shares as its shareholders equity
D.If the preferred shareholders have the option to require
redemption, then the preferred shares appear as a liability under
U.S. GAAP
E.If the preferred shareholders have the option to require
redemption, then the preferred shares appear as a liability under
IFRS
Answer:
20) (CMA adapted, Jun 87 #4) The major segments of the statement of
retained earnings for a period are
A.dividends declared, prior period adjustments, and changes due to
treasury stock transactions
B.prior period adjustments, before tax income or loss, income tax,
and dividends paid
C.net income or loss from operations, dividends paid, and
extraordinary gains and losses
D.net income or loss, prior period adjustments, and dividends paid
and/or declared
E.net income or loss, prior period adjustments, and dividends paid
and/or declared, and changes due to treasury stock transactions
Answer:
21) U.S. GAAP requires firms to disclose which of the following
information with respect to derivatives?
A.A description of the firms risk management strategy and how
particular derivatives help accomplish the firms hedging
objectives
B.For fair value and cash flow hedges, firms must disclose the net
gain or loss recognized in earnings resulting from the hedges
ineffectiveness
C.For cash flow hedges, firms must describe the transactions or
events that will result in reclassifying gains and losses from
accumulated other comprehensive income to net income and the
estimated amount of such reclassifications during the next 12
months
D.The net amount of gains and losses recognized in earnings because
a hedged firm commitment no longer qualifies as a fair value hedge
or a hedged forecasted transaction no longer qualifies as a cash
flow hedge
E.all of the above
Answer:
22) A firm classifies liabilities which fall due after the operating
cycle, usually greater than one year, as
A.a current liability
B.a long-term asset
C.a noncurrent liability
D.part of shareholders’ equity
E.contingent liability
Answer:
23) To avoid double counting P’s investment in S, P must eliminate
A.the investment in S and S’s separate company shareholders’
equity
B.all debt on S’s separate company financial statements
C.any dividends paid against the cash account
D.all intercompany transactions
E.all of the above
Answer:
24) Investments in long-lived assets, with useful lives (or service
lives) that can extend for several or many years such as land,
buildings, and equipment represent _____ capital.
A.sunk
B.hard
C.physical
D.intangible
E.soft
Answer:
25) U.S. GAAP requires that the statement of cash flows explain the
changes in the firm’s
A.cash and cash equivalents during the accounting period
B.resources and obligations during the accounting period
C.components of income from operations during the accounting
period
D.accounts receivable and accounts payable during the accounting
period
E.All of the above are required
Answer:
26) Revenue recognition is among the most complex issues in financial
reporting. The quantity and complexity of the authoritative
guidance for recognizing revenues result(s) from
A.misreporting of revenues
B.reporting revenues before the firm earns them
C.reporting nonexistent revenues
D.firms bundling products and services and selling them in
multiple-element arrangements
E.all of the above
Answer:
27) Ratio analysis is one tool management may use to examine a firm’s
profitability and risk. Another tool often used by management are
pro forma financial statements.
Required:
| a. | Describe the purpose of pro forma financial statements. |
| b. |
Describe how pro forma financial statements may be constructed. |
Answer:
28) Which of the following is/are true regarding the T-account?
A.the name or title of the account appears on the horizontal
line
B.dates and other information can appear in T-accounts
C.one side of the space formed by the vertical line records
increases in the item and the other side records decreases
D.all of the above
E.none of the above
Answer:
29) Recognition of revenue usually occurs when
A.the firm pays for the related expenses
B.the revenue is earned, such as at the time of the sale or
delivery of the goods
C.a signed, legally binding contract is received
D.an advance payment for the goods is received
E.none of the above
Answer:
30) Which of the following is/are a criteria for asset recognition
under the FASBs and IASBs conceptual framework?
A.The firm owns or controls the right to use the asset
B.The right to use the item arises as a result of a past
transaction or exchange
C.The future benefit has a relevant measurement attribute that a
firm can quantify with sufficient reliability.
D.all of the above
E.none of the above
Answer:
31) On September 1, 2013, Marker Corporation declared and issued a 20
percent common stock dividend. Prior to this date, Marker had
20,000 shares of $2 par value common stock that were both issued
and outstanding. The market value of Markers stock was $20 per
share at the time the dividend was issued. As a result of this
stock dividend, Markers total stockholders’ equity
A.decreased by $40,000
B.decreased by $400,000
C.increased by $400,000
D.increased by $40,000
E.did not change
Answer:
32) The income statement is not also called the statement of
A.operations
B.operating activity
C.profit and loss
D.receipts and disbursements
E.All of the above are different names assigned to the income
statement
Answer:
33) The operating lease method is appropriate when the lessor enjoys
most of the _____ and bears most of the _____ of ownership.
A.risks; rewards
B.rewards; risks
C.cash receipts; cash disbursements
D.cash disbursements; cash receipts
E.cash receipts; risks
Answer:
34) Which of the following is/are true about accounting for errors and
changes in accounting principles and changes in accounting
estimates?
A.Firms account for material errors in previously issued financial
statements by retrospectively restating net income of prior periods
and adjusting the beginning balance in Retained Earnings of the
current period
B.If practical, firms account for voluntary changes in accounting
principles, such as from a LIFO to a FIFO cost-flow assumption for
inventories, by retrospectively restating net income of prior
periods and adjusting the beginning balance in Retained Earnings of
the current period
C.Firms account for changes in accounting principles required by a
new reporting standard in accordance with the guidance specified in
the standard
D.Firms account for changes in estimates, such as for depreciable
lives, uncollectible accounts, or warranty cost, prospectively, in
current and future periods earnings
E.all of the above
Answer:
35) On January 1, Year 4, Jones Realty Company issued 8 percent term
bonds with a face amount of $1 million due January 1, Year 14.
Interest is payable semi-annually on January 1 and July 1. On the
date of issue, investors were willing to accept an effective
interest rate of 6 percent. Assume the bonds were issued on January
1, Year 4. for $1,148,959. Using the effective interest
amortization method, Jones Realty Company recorded interest expense
for the six months ended June 30, Year 4, in the amount of
A.$40,000
B.$80,000
C.$68,938
D.$34,469
E.none of the above
Answer:
36) The Allen Company has decided to construct its own warehouse
facility. The construction will be partially financed through a
construction loan and the remainder will be financed from
internally generated funds. The companys accountants have collected
the following information concerning the construction.
| Average Balance | Construction | Other | |
| Year | Construction Account | Debt @ 14% | Debt @ 10% |
| 1 | $1,000,000 | $1,000,000 | $1,500,000 |
| 2 | $2,000,000 | $1,700,000 | $1,700,000 |
| 3 | $2,500,000 | $2,000,000 | $1,300,000 |
Required:
Determine the amount, if any, of capitalized interest cost for each
year.
a. Year 1
b. Year 2
c. Year 3
Answer:
37) Estimating _____ presents the most difficult task in the
depreciation and amortization calculation. A change in this
estimate will change the depreciation and amortization amounts
going forward.
A.disposal costs
B.salvage value
C.acquisition costs
D.service lives
E.ordinary wear and tear from use
Answer:
38) Which of the following is/are not true?
A.Firms may periodically distribute net assets generated by
earnings to shareholders as a dividend
B.Firms reduce net assets and retained earnings for the dividend
distribution
C.Retained earnings on the balance sheet provides a measure of the
cumulative net assets generated by earnings in excess of dividends
declared
D.The sale of property, plant, and equipment represents the primary
source of funds for most successful businesses
E.none of the above
Answer:
39) If cash decreases by $10,000 during the year, liabilities decrease
by $5,000, and shareholders’ equity increases by $5,000, what is
the total change in noncash assets for the year?
A.a decrease of $5,000
B.an increase of $10,000
C.a decrease of $10,000
D.an increase of $5,000
E.an increase of $15,000
Answer:
40) Minority, passive investments are initially recorded at the
A.acquisition cost
B.fair market value of the net assets
C.lower of cost or market
D.present value of future cash flows
E.future value of present cash flows
Answer:
41) Which of the following is not true regarding the
lower-of-cost-or-market basis for inventory valuation?
A.It is a conservative accounting policy
B.It recognizes losses from decreases in market value before a sale
occurs
C.It recognizes gains from increases in market value above original
acquisition cost only when a sale occurs
D.It reports inventories on the balance sheet at amounts that are
never greater, but may be less, than acquisition cost
E.It reports inventories on the balance sheet at amounts that are
equal to the acquisition cost less a normal profit margin
Answer:
42) Identifying accounting principles. Indicate the accounting
principle or method described in each of the following
statements.
a. This inventory cost-flow assumption results in reporting the
largest net income during periods of rising acquisition costs and
nondecreasing inventory levels.
b. This method of accounting for uncollectible accounts recognizes
the implied income reduction in the period of sale.
c. This method of accounting for long-term investments in the
common stock of other corporations usually requires an adjustment
to net income to calculate cash flow from operations under the
indirect method in the statement of cash flows.
d. This method of accounting for long-term leases by the lessee
gives rise to a noncurrent liability.
e. This method of recognizing interest expense on bonds provides a
uniform annual rate of interest expense over the life of the
bond.
f. The accounting for this type of hedging instrument designated as
a hedge results in a change in other comprehensive income each
period.
g. This method of accounting for intercorporate investments in
securities can result in a decrease in the investors total
shareholders equity without affecting the Retained Earnings
account.
h. This method of recognizing income from a long-term contract
generally results in the least amount of fluctuation in earnings
over several periods.
i. When a firm identifies specific customers accounts as
uncollectible and writes them off, this method of accounting
results in no change in working capital.
j. The accounting for this type of hedging instrument designated as
a hedge affects net
income each period but not other comprehensive income.
k. This method of accounting for long-term leases of equipment by
the lessor shows on the income statement an amount for depreciation
expense.
l. This inventory cost-flow assumption results in inventory balance
sheet amounts closest to current replacement cost.
m. This method of accounting for long-term investments in common
stock results in recognizing revenue for dividends received or
receivable.
n. This method of depreciation generally results in the largest
amounts for depreciable assets on the balance sheet during the
first several years of an assets life.
o. This inventory cost-flow assumption results in reporting the
smallest net income during
periods of falling acquisition costs.
p. This method of accounting for long-term leases of equipment by
the lessee results in
showing an amount for rent expense on the income statement.
q. This inventory cost-flow assumption results in inventory balance
sheet amounts that may differ significantly from current
replacement cost.
r. This method of accounting for long-term leases of equipment by
the lessor results in showing revenue at the time of signing a
lease.
s. This inventory cost-flow assumption can result in substantial
changes in the relation between cost of goods sold and sales if
inventory quantities decrease during a period.
Answer: