1) As time passes, firms gain information about both actual warranty
usage and actual warranty
expenditures.
Answer:
2) Firms initially record trading securities at fair value, excluding
transactions costs (which firms expense as they incur them).
Answer:
3) The acquisition of equipment by assuming a mortgage is a
transaction that firms cannot report in their statement of cash
flows but must report in a supplemental schedule or note.
Answer:
4) Discuss the indirect and direct methods in deriving cash flow from
operations.
Answer:
5) Current liabilities represent obligations a firm expects to pay
within one year.
Answer:
6) Expenses provide future benefits, and assets measure the
consumption of those benefits.
Answer:
7) Explain the accounting for errors and changes in accounting
principles and changes in accounting estimates.
Answer:
8) Of the three cost-flow assumptions, FIFO results in balance sheet
figures that are closest to current cost because the latest
purchases dominate the ending inventory amounts.
Answer:
9) What happens when the original depreciation or amortization
schedule for long-lived assets requires changing?
Answer:
10) Describe accrual and cash accounting.
Answer:
11) The accounting procedures for the marketing and administrative
costs of manufacturing firms resemble those for merchandising
firms.
Answer:
12) Acquisition cost includes all costs required to prepare an asset
for its intended use.
Answer:
13) Describe what bond provisions exist.
Answer:
14) The accounting records for Pockets Restaurant Supply contained the
following data for the current year:
| Sales | $547,500 |
| Cost of goods sold | 223,800 |
| Interest revenue | 6,500 |
| Rent revenue | 3,600 |
| Administrative expense | 141,300 |
| Selling expense | 133,600 |
| Interest expense | 15,400 |
| Income tax expense | 8,100 |
| Loss on sale of warehouse | 6,500 |
Required:
Prepare both a single-step and a multi-step income statement for
Campbell’s for the current year.
Answer:
15) Gains and losses on disposals of property, plant, and equipment and
intangible assets appear on the income statement, often in Other
income and expense.
Answer:
16) The amounts reported on the balance sheet for assets, liabilities,
and shareholders equity reflect current market conditions.
Answer:
17) Describe T-accounts and how they are used.
Answer:
18) Describe the accounting for pension plan benefits.
Answer:
19) The cost recovery method matches the costs of generating revenue
with cash receipts until the seller recovers all its costs.
Answer:
20) In return for promising to make future payments, a firm receives
cash or other assets with a measurable cash-equivalent value. The
firm records a long-term liability for that amount and determines
the market interest rate by finding the
A.internal rate of return
B.external rate of return
C.applicable federal rate
D.prime lending rate published in The Wall Street Journal
E.federal funds rate
Answer:
21) Comprehensive income as defined by the FASB
A.must be reported on the face of the income statement
B.includes all changes in equity during a period except those
resulting from investments by and distributions to owners
C.is the net change in owners’ equity for the period
D.means the same as net income
E.None of these answer choices is correct
Answer:
22) A friend of yours has prepared the following balance sheet for his
bicycle shop but it has a problem. He thought his total assets did
not reflect the assets available to the firm. He has asked you to
take a look at this balance sheet and help him out.
|
Eric’s Bike Shop, Inc.Balance SheetAs of December 31, Year 1 |
|
| Assets | |
| Current Assets: | |
| Cash | $15,000 |
| Merchandise Inventory | 30,000 |
| Merchandise Sold, at cost | 37,500 |
| Prepaid Insurance | 1,000 |
| Advance from Customer | (1,000) |
| Total Current Assets | $82,500 |
| Property, Plant, and Equipment: | |
| Equipment | 8,000 |
| Less Note Payable | (5,000) |
| Total Assets | $85,500 |
| Liabilities and Shareholders’ Equity | |
| Current Liabilities: | |
| Bike Sales | $55,000 |
| Accounts Payable | 2,000 |
| Accumulated Depreciation | 700 |
| Rent Payable | 1,000 |
| Total Current Liabilities | $58,700 |
| Shareholders’ Equity: | |
| Common Stock 1,000 shares at $10 par value | $10,000 |
| Additional Paid-in Capital | 7,500 |
| Retained Earnings | 9,300 |
| Total Shareholders’ Equity | $26,800 |
| Total Liabilities and Shareholders’ Equity | $85,500 |
Required:
a. Prepare a corrected balance sheet for Eric’s Bike Shop, Inc.
b. Draft a memo to Eric explaining the errors you corrected.
Include your reasons.
Answer:
23) The statement of cash flows reports the amount of cash flow from a
firm’s
A.divestiture, and acquisition activities
B.operating, divestiture, and acquisition activities
C.funding and disbursement activities
D.operating, investing, and financing activities
E.operating, funding and disbursement activities
Answer:
24) When accounting for a cash flow hedge of an recognized asset or
liability, which of the following is/are true?
A.A firm recognizes the hedged asset or liability on the balance
sheet and its measurement depends on the required accounting for
the particular asset or liability
B.A firm recognizes the derivative as an asset on the date of
acquisition to the extent it makes an initial investment or as a
liability to the extent it receives cash. Otherwise, no amount
appears on the balance sheet for the derivative
C.At the end of each period, the firm remeasures the derivative
instrument (the hedging instrument) to fair value and includes the
resulting loss or gain in other comprehensive income
D.The firm reclassifies gains and losses from other comprehensive
income to net income when the gain or loss on the hedged item
affects net income
E.all of the above
Answer:
25) Indicate the effects (increase, decrease, no effect) of the
following independent transactions on (1) the profit margin ratio,
(2) the plant asset turnover, and (3) the inventory
turnover.
Profit Margin Plant Asset Inventory
Ratio Turnover Turnover
a. Payment of various repair expenses __________ __________
__________
b. Purchase of inventory on account __________ __________
__________
c. Purchase of equipment __________ __________ __________
d. Payment of bonds payable __________ __________ __________
Answer:
26) The rationale for the equity method is that it better measures an
investors income from investing activities when, because of its
ownership interest, it
A.can exert control over the operations and dividend policy of the
investee
B.can exert significant influence over the operations and dividend
policy of the investee
C.cannot exert significant influence over the operations and
dividend policy of the investee
D.can exert control over the operations and dividend policy of the
investor
E.can exert significant influence over the operations and dividend
policy of the investor
Answer:
27) Firms recognize expenditures to acquire intangibles externally from
third parties as _____ if the intangibles are either separable or
arise from contractual or other legal rights.
A.assets
B.liabilities
C.retained earnings
D.revenue
E.expenses
Answer:
28) Which of the following can be a counterparty in a derivative
transaction?
A.investment bank
B.commercial bank
C.major supplier
D.all of the above
E.none of the above
Answer:
29) Key factors in preparing a balance sheet is/are deciding
A.whether items meet the definitions for assets and liabilities
B.whether items meet the recognition criteria for assets and
liabilities
C.how to measure the items
D.Answers a, b, and c are correct
E.None of these answer choices is correct
Answer:
30) Conceptual guidance in U.S. GAAP refers to the selling entity
having earned the revenues (that is, having completed the earnings
process). IFRS refers to
A.transferring the risks and rewards of ownership to customers (in
the case of revenues involving goods).
B.having rendered services (in the case of revenues involving
services)
C.measuring the costs of any obligations that the seller has not
performed at the time it recognizes revenue with reasonable
reliability
D.all of the above
E.none of the above
Answer:
31) Which of the following is/are true regarding accounting
liabilities?
A.All accounting liabilities are obligations
B.Not all obligations are accounting liabilities
C.An item must meet the definition of a liability
D.An item must recognition criteria
E.All of these answers are correct
Answer:
32) Management can take deliberate steps to produce a financial
statement that presents a better current ratio at the balance sheet
date than the average, or normal, current ratio during the rest of
the year. Analysts refer to such actions as window dressing:
A.near the end of its accounting period a firm might delay normal
purchases on account
B.hasten the collections of a loan receivable, classified as
noncurrent assets, and use the proceeds to reduce current
liabilities
C.near the end of its accounting period a firm might accelerate
normal purchases on account
D.hasten the collections of a loan receivable, classified as
current assets, and use the proceeds to reduce long-term
liabilities
E.choices a and b
Answer:
33) The entry to record amortization of a customer list in the amount
of $4,500 is as follows:
A.Amortization (or Selling) Expense . . . . . . . . . . . . . . . .
. . . . . . . 4,500
Customer List . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 4,500
B.Finished Goods Inventory . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 4,500
Customer List . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 4,500
C.Work-in-Process Inventory . . . . . . . . . . . . . . . . . . . .
. . . . . . . 4,500
Customer List . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 4,500
D.Amortization (or Selling) Expense . . . . . . . . . . . . . . . .
. . . . . . . 4,500
Allowance for Amortization of Customer List . . . . . . . . . . . .
. . .. . . . . 4,500
E.Work-in-Process Inventory . . . . . . . . . . . . . . . . . . . .
. . . . . . . 4,500
Allowance for Amortization of Customer List . . . . . . . . . . . .
. . .. . . . . 4,500
Answer:
34) The annual report of Sign Corporation for Year 1 reports capital
leases requiring payments totaling $228 million over future years,
including $58 million payable at the end of Year 2. The interest
rate on these obligations is 12 percent and their present value
(discounted at 12 percent) at the end of Year 1 was $181 million.
The assets financed by capital leases appear on the Year 1 year-end
balance sheet at $220 million. Assume no new leases were entered
into during Year 2 and that leasehold assets have a remaining
useful life of 10 years at the start of Year 2, but no salvage
value. Ignore income taxes.
Required:
a. What would be the total expense for Year 2 for the leasehold
assets and the financing thereof?
b. What would be the total cash expenditure during Year 2 related
to the leasehold assets and the financing thereof?
c. What would be the balance sheet amount for leasehold assets at
the end of Year 2?
d. What would be the balance sheet amount for lease obligations at
the end of Year 2?
Answer:
35) Youngstown Company sells merchandise with a one year warranty.
Sales consisted of 2,500 units in 2013 and 2,000 units in 2014. It
is estimated that warranty repairs will average $10 per unit sold,
and 30% of the repairs will be made in 2013 and 70% in 2014 for the
2013 sales. Similarly, 30% of repairs will be made in 2014 and 70%
in 2015 for the 2014 sales. In the 2014 income statement, how much
of the warranty expense shown will be due to 2013 sales?
A.$7,500
B.$17,500
C.$25,000
D.$0
E.$12,500
Answer:
36) The accounting for fair value hedges is similar under both U.S.
GAAP and IFRS. Which of the following is/aretrue?
A.Firms remeasure both the hedged item and the related derivative
instrument (the hedging instrument) to fair value each period
B.Firms remeasure both the hedged item and the related derivative
instrument (the hedging instrument) to recognize gains and losses
from changes in the fair value of both in net income
C.If the hedge is fully effective, the gain (loss) on the
derivative will precisely offset the loss (gain) on the asset or
liability hedged. The net effect on earnings is zero
D.If the hedge is not fully effective, the net gain or loss
increases or decreases earnings to the degree the offset is
incomplete
E.all of the above
Answer:
37) Which of the following is/are not true?
A.An employer must recognize changes in the funded status of a
defined benefit retirement plan on its balance sheet each
period
B.U.S. GAAP and IFRS do not require the employer to recognize
changes in the funded status of a defined benefit retirement plan
immediately in net income
C.Changes in the net funded status of a defined benefit retirement
plan because investment performance differs from expectations, or
because of changes in actuarial assumptions, or in the retirement
benefit formula, initially affect net income
D.Firms amortize the amounts in Other Comprehensive Income over the
expected period of benefit as an adjustment to retirement plan
cost
E.all of the above
Answer:
38) In any given accounting period, the amount a firm reports as income
before income taxes for financial reporting in comparison to the
amount of taxable income that appears on its income tax return may
differ due to permanent differences. Permanent differences
include
A.interest revenue on municipal bonds
B.depreciation on long-lived assets
C.bad debt expense
D.warranty expense
E.none of the above
Answer:
39) The accounting for stock options is complex because firms often
include
A.service, only
B.combinations of service and performance, only
C.combinations of service, performance, and market conditions,
only
D.combinations of service, performance, and market conditions and
firms can restructure their plans
E.none of the above
Answer:
40) Publicly held firms that apply U.S. GAAP or IFRS must show earnings
per common share data. Firms reporting multiple categories of
income items must disclose earnings per common share
A.in the body of the statement of cash flows
B.in the body of the balance sheet
C.for the total, only
D.for each reported category
E.in the footnotes to the financial statements
Answer:
41) The last step in the accounting record-keeping process is:
A.making adjusting journal entries to the accounts to correct
errors and to reflect the financial statement impacts of items that
occur because of usage or the passage of time
B.preparing the income statement for the period from amounts in the
income statement accounts
C.closing the temporary income statement accounts to retained
earnings
D.preparing the balance sheet from amounts in the balance sheet
accounts
E.preparing the statement of cash flows from balance sheet amounts
and from details of transactions affecting the cash account
Answer:
42) Subtracting nonoperating expenses from operating income yields:
A.income tax expense
B.profit before income taxes
C.net income
D.gross profit
E.none of the above
Answer:
43) Using lower cost borrowed funds and earning a higher rate of return
on those funds than their cost
A.increases the return to the common shareholders
B.is a phenomenon called financial leverage
C.requires the common shareholders to take on more risk in their
investment
D.all of the above
E.none of the above
Answer:
44) Common terminology, but not definitions in U.S. GAAP and IFRS,
often refers to the difference between sales and cost of sales as
gross
A.sales
B.profit
C.operations
D.all of the above
E.none of the above
Answer:
45) Which of the following is/are true regarding firms use of net
assets (assets minus liabilities)?
A.Firms use net assets to generate more net assets through the
earnings
B.Firms typically retain some or all of the net assets generated by
earnings, causing net assets to increase, along with retained
earnings, which is the component of shareholders equity showing the
cause of that increase in net assets
C.The retention of net assets generated by earnings generally
increases the market price of the firms common shares
D.Some firms pay periodic dividends to the common shareholders out
of net assets
E.all of the above
Answer:
46) One firm may have a lower earnings per share simply because it has
a
A.smaller dollar amount of common and preferred shares
outstanding
B.smaller number of common shares outstanding
C.larger number of common shares outstanding
D.smaller number of common and preferred shares outstanding
E.larger number of common and preferred shares outstanding
Answer:
47) Which of the following is/are not true?
A.Firms sometimes issue bonds with stock warrants attached and
allocate the amount received between the bonds and the warrants
based on their respective fair values
B.When firms issue convertible bonds U.S. GAAP requires firms to
allocate the full issue price between the bonds and the conversion
feature
C.IFRS requires firms to allocate the issue price between the bonds
and the conversion feature
D.Under IFRS, the firm allocates the issue price of bonds with
terms similar to those issued but without the conversion feature to
the bonds and the remainder of the issue price to the conversion
option
E.all of the above
Answer:
48) Increased earnings
A.are reflected as an increase in cash flow
B.do not always generate an increase in cash flow
C.result in a decrease in cash flow only if dividends are paid
D.are the starting point for the direct method cash flow
statement
E.include none of the above
Answer:
49) During Year 9, Hart Motors Corp. had a net $100,000 decrease in
Warranties Payable. The T-account work sheet for preparing the
statement of cash flows
A.adds this decrease in Warranties Payable so that cash flow from
operations reports cash expenditures, not expenses
B.subtracts this decrease in Warranties Payable so that cash flow
from operations reports cash expenditures, not expenses
C.adds this decrease in Warranties Payable so that cash flow from
operations reports cash expenses, not expenditures
D.subtracts this decrease in Warranties Payable so that cash flow
from operations reports cash expenses, not expenditures
E.subtracts this decrease in Warranties Payable so that cash flow
from financing reports cash expenses, not expenditures
Answer:
50) The method that recognizes losses from uncollectible accounts in
the period when a firm decides that specific customers’ accounts
are uncollectible is called the
A.direct write-off method
B.allowance method
C.percentage of sales method
D.bad debt determination method
E.indirect write-off method
Answer: