1) Items classified as operating expenses reflect managements judgment
that the item is a cost of the core business.
Answer:
2) Items classified as operating expenses reflect managements judgment
that the item is a cost of the core business.
Answer:
3) Describe the depreciation and amortization methods used in
accounting.
Answer:
4) The income statement links the beginning and ending balance sheets.
Answer:
5) When a firm has securities outstanding that, if exchanged for
shares of common stock, would decrease basic earnings per share by
30% or more, generally accepted accounting principles require a
dual presentation: basic earnings per share and diluted earnings
per share.
Answer:
6) Firms use the par value method when management and the governing
board do not intend to reissue shares within a reasonable amount of
time or when jurisdiction-specific corporation laws define
reacquired shares as retired shares.
Answer:
7) Analysts use measures of long-term liquidity risk to evaluate a
firms ability to meet interest and principal payments on long-term
debt and similar obligations as they come due. If a firm cannot
make the payments on time, it becomes insolvent and may have to
reorganize or liquidate.
Answer:
8) State the purpose of consolidated financial statements. Define
which subsidiaries must be included in consolidated financial
statements.
Answer:
9) Measurement of trading securities at fair value reflects income
when it occurs in the form of a change in fair value, not when the
investor realizes a gain or loss at the time of sale.
Answer:
10) Discuss any ethical issues raised by the following actions.
Answer:
11) Discuss the application of the allowance method for sales returns.
Answer:
12) Performance measured using the cash basis is not sensitive to the
timing of cash expenditures.
Answer:
13) How are hedging gains and losses treated?
Answer:
14) A potential investor can easily ascertain market value of common
equity for a given publicly traded firm by looking up the most
recent share price (as reported in various online services) and
then multiplying this share price times the number of common shares
outstanding, as reported on the balance sheet.
Answer:
15) Income statement accounts are temporary accounts and, as such, will
have beginning and ending balances of zero.
Answer:
16) Parent Computer Corporation acquired significant influence over
Child Computer Company on January 2 by purchasing 20 percent of its
outstanding stock for $100 million. Parent attributes the entire
excess of cost over book value acquired to a patent, which it
amortizes over 10 years. Child Computer had earnings of $100
million and declared dividends of $30 million during the year. The
accounts receivable of Parent Computer Corporation at December 31
included $600,000 due from Child Computer. Parent Computer
Corporation accounts for its investment in Child Computer using the
equity method. Parent Computer Corporation considers reducing its
ownership from 20 percent to 19.5 percent so that it no longer has
to use the equity method. Comment on the ethical implications of
this possibility.
Answer:
17) Discuss why firms may issue capital stock (preferred or common) for
cash or for noncash assets. Discuss the issuance of capital stock
for services received.
Answer:
18) Discusses the four measures for assessing short-term liquidity
risk.
Answer:
19) Intercompany sales
A.do not need to be eliminated as long as the sales have been
completed to an outside party
B.must be eliminated from both the sales and cost of goods sold
accounts
C.do not need to be eliminated if made at arm’s length values
D.must be eliminated only if not in the ordinary course of trade or
business
E.do not need to be eliminated
Answer:
20) Preferred shares may provide for redemption by the issuing firm in
the future. Redeemable preferred shares carry which of the
following redemption rights or obligations?
A.The issuing firm has the right to redeem the preferred stock
under certain conditions
B.Mandatorily redeemable preferred stock has attributes of both
long-term debt and shareholders equity with the specified
redemption time analogous to the maturity date of long-term
debt
C.Some preferred stock is redeemable at the option of the holder
with the owner of the preferred stock having the right to require
the issuing firm to repurchase the shares
D.all of the above
E.none of the above
Answer:
21) (CMA adapted, Jun 86 #5) A bond issue sold at a premium is valued
on the statement of financial position at the
A.maturity value
B.maturity value plus the unamortized portion of the premium
C.maturity value less the unamortized portion of the premium
D.current market value
E.par value
Answer:
22) DPC, an electric utility, has $100 million of bonds payable
outstanding that mature in five years. The utility acquires U.S.
government securities whose periodic interest payments and maturity
value exactly equal those on the utilitys outstanding bonds. The
firm intends to use the cash received from the government bonds to
make required interest and principal payments on its own bonds. The
electric utility could also have used its cash to purchase its
bonds in the marketplace. Based on the above, DPC should treat
these securities as
A.debt securities held as securities available-for-sale
B.debt securities held as trading securities
C.debt securities held to maturity
D.equity securities held as trading securities
E.equity securities held as securities available-for-sale
Answer:
23) As part of their normal course of business, companies sometimes
sell off entire divisions or segments. The accounting treatment for
such sales is composed of two components and a reporting
format.
Required:
a. Describe the accounting treatment and reporting format used for
such sales.
b. Discuss why such sales are separated from other parts of the
income statement.
Answer:
24) Downy Airlines discloses the funded status of pension plans and the
health and life insurance plans for two recent years. Both the
pension plan and other benefit plans are underfunded. The
underfunded amounts for these plans appear in
A.current assets and noncurrent assets on the balance sheet
B.current liabilities and noncurrent liabilities on the balance
sheet
C.shareholders equity on the balance sheet
D.revenue on the income statement
E.expenses on the income statement
Answer:
25) Which of the following is correct?
A.Retained Earnings normally has a debit balance
B.Retained Earnings normally has a credit balance
C.Retained Earnings is closed at the end of the fiscal year
D.Retained Earnings is a nominal account
E.None of these answer choices is correct
Answer:
26) The _____ shows the relation between net income and cash flows from
operations, and changes in assets and liabilities that involve cash
flows.
A.balance sheet
B.statement of cash flows
C.income statement
D.funds flow statement
E.cash receipts and cash disbursement statement
Answer:
27) Prepare entries to record the following transactions using the
direct write-off method for uncollectibles.
a. The firm assumes that approximately 1% of total sales on account
will prove uncollectible. Sales for Year 1 are $1,000,000. All
sales are on account.
b. On July 7, Year 2, it is determined that an account of $2,000
will not be collected.
c. On August 14, Year 2, it is determined that an account of $3,000
will not be collected.
d. On December 31, Year 2, the company estimates that 2% of total
credit sales of $2,000,000 will be uncollectible.
e. On February 1, Year 3, it is determined that accounts of $6,000
will not be collected.
f. On March 2, Year 3, $1,000 is collected on an account that had
previously been written off as uncollectible in (e). It is
determined that the account was originally written off in error.
Answer:
28) What is calculated as follows?
Profit Margin for ROA Total Assets
? = (before interest expense x Turnover
and related income Ratio
tax savings) Ratio
A.return on net assets
B.return on sales margin
C.return on gross margin
D.return on assets
E.return on net income
Answer:
29) When the market interest rate exceeds the coupon rate; the market
price of the bond
A.will be more than par
B.will be less than par
C.will be equal to par
D.is not affected
E.none of the above
Answer:
30) The balance sheet indicates that Paul Corporation owns 40 percent
of the common stock of Sun Company. During Year 2, Sun Company
earned $12,000 and paid $4,000 of dividends. Paul Corporation made
the following entries on its books during the year.
Investment in Company B . . . . . . . . . . . . . . . . . . . . .
4,800
Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . .
. . . . . . . . 4,800
Net income of Paul Corporation includes $4,800 of equity income. It
received only $1,600 of cash.
The T-account work sheet for preparing the statement of cash
flows
A.adds $3,200 to net income in deriving cash from operations
B.subtracts $1,600 from net income in deriving cash from
operations
C.adds $1,600 to net income in deriving cash from operations
D.subtracts $3,200 from net income in deriving cash from
operations
E.adds $3,200 to retained earnings in deriving cash from investing
Answer:
31) _____ are economic resources with the potential to provide future
economic benefits to a firm.
A.Revenues
B.Expenses
C.Liabilities
D.Assets
E.Shareholder Equity
Answer:
32) Alfonsio Corp. has an extensive stock option program for its
employees. Prepare journal entries to record the following
transactions:
a. On July 1, Year 1, Alfonsio issues 10,000 stock options to
employees when the market price per share is $5. The option allows
the holder the right to acquire shares at $6 per share. Par value
of the common shares is $1.
b. On July 31, Year 1, 1,000 stock options previously granted when
the market value per share was $4 expire.
c. On August 31, Year 1, 4,000 stock options were exercised when
the market value per share was $5. The options allowed the holder
to acquire the shares at $4 per share and the options were granted
when the market price per share was $3.
Answer:
33) Which of the following is/are not a period expense?
A.salaries and commissions of the sales staff
B.costs to produce catalogs
C.marketing costs, such as advertising
D.costs to produce sales literature
E.direct labor
Answer:
34) Shareholders of Forest Glen Corporation have received $35,000 in
dividends in the current year. At year end the corporation has
total assets of $500,000, total liabilities equal to $300,000, and
contributed capital totaling $100,000. If retained earnings at the
beginning of the year was $80,000, what was Forest Glen’s net
income for the current year?
A.$80,000
B.$215,000
C.$55,000
D.$10,000
E.$45,000
Answer:
35) IFRS specifies that, in the context of inventories, market
means
A.replacement cost, only
B.net realizable value, only
C.replacement cost, except that market may not exceed net
realizable value and may not be less than net realizable value
reduced by a normal profit margin
D.replacement cost, except that market may not exceed net
realizable value and may not be less than present value of future
cash flows
E.replacement cost, except that market may not exceed net
realizable value and may not be less than the total amount of
undiscounted future cash flows
Answer:
36) Some employers specify the benefit that employees will receive
during retirement. The employer must contribute sufficient amounts
to the pension plan so that those contributions plus earnings from
investments made with those contributions will be sufficient to pay
the specified benefit. Such plans are referred to as
A.defined benefit pension plans
B.defined contribution pension plans
C.deferred compensation plans
D.529 Plans
E.individual retirement accounts
Answer:
37) Which of the following is/are not true concerning pension
plans?
A.The plan administrator serves in a fiduciary capacity for the
benefit of employees
B.The employer cannot access assets in the pension plan except
under specific conditions that vary, as a matter of pension law, by
jurisdiction
C.The employer does not consolidate the assets and liabilities of
the pension plan with its own assets and liabilities
D.The total amount of cash that the employer contributes to the
pension plan over time is never the total amount of pension expense
that the employer must recognize in measuring net income
E.none of the above
Answer:
38) Before preparing the balance sheet and income statement, an
accountant would use what accounting record to first record the
firm’s transactions?
A.the trial balance
B.the adjusting entry
C.the general ledger
D.the journal
E.the subsidiary ledger
Answer:
39) (CMA adapted, Jun 94 #4) Spring Corporation, a public company, has
prepared all of its year-end financial statements with the
exception of the statement of cash flows. Presented below is
condensed financial information for the years ended May 31, Year 3
and Year 4, as well as supplemental data on certain transactions
that occurred during the year ended May 31, Year 4 .
|
Spring Corporation Statement of Financial Positionat May 31, Year 3 and Year 4 |
||
| Year 3 | Year 4 | |
| Cash | $ 4,300 | $ 5,100 |
| Accounts receivable | 3,700 | 4,200 |
| Inventories | 34,200 | 31,700 |
| Prepaid expenses | 1,800 | 2,100 |
| Land | 38,000 | 27,000 |
| Buildings (net) | 126,800 | 117,700 |
| Equipment (net) | 50,500 | 66,800 |
| Leased equipment | – | 7,700 |
| Total assets | $259,300 | $262,300 |
| Accounts payable | $ 5,900 | $ 3,400 |
| Income taxes payable | 2,600 | 2,100 |
| Obligation under capital lease | – | 7,700 |
| Bonds payable | 50,000 | 60,000 |
| Deferred income taxes | 2,200 | 2,400 |
| Common stock, $10 par | 125,000 | 135,000 |
| Paid-in capital in excess of par | 12,000 | 14,000 |
| Retained earnings | 61,600 | 37,700 |
| Total liabilities and shareholders’ equity | $259,300 | $262,300 |
|
Spring CorporationIncome StatementFor the Year Ended May 31, Year 4 |
||
| Sales | $127,900 | |
| Cost of goods sold | $69,800 | |
| Selling expense | 21,000 | |
| Administrative expense | 20,000 | |
| Deprec. expense-buildings | 700 | |
| Deprec. expense-equipment | 1,200 | |
| Bond interest expense | 4,000 | 116,700 |
| Income before gain & tax | $ 11,200 | |
| Gain on sale of land | 3,500 | |
| Less: Income tax expense | 800 | |
| Income from operations | $ 13,900 | |
| Extraordinary loss (net of tax) | 2,600 | |
| Net income | $ 11,300 | |
|
Spring CorporationRetained Earnings Statementat May 31, Year 4 |
|
| Beginning retained earnings | $61,600 |
| Net income | 11,300 |
| Stock dividends | (12,000) |
| Cash dividends | (23,200) |
| Ending retained earnings | $37,700 |
Supplemental InformationFor Fiscal Year Ended May
31, Year 4
(a) Land costing $11,000 was sold for $14.500, resulting in a
$3,500 gain.
(b) During the year, a fire completely destroyed a building with an
original cost of $24,000 and a net book value of $8,400. The
insurance settlement resulted in after-tax cash proceeds of $5,800
and an extraordinary loss (net of income taxes) of $2,600.
(c) Equipment was purchased for cash at a cost $17,500.
(d) On May 31, Year 4, the company leased equipment under a
long-term capital lease, recording the lease at $7,700.
(e) At the end of the year, bonds payable with a face value of
$10,000 were issued at par.
(f) A stock dividend was declared and issued during the year. The
dividend involved 1,000 shares of $10 par common stock; the market
value of the stock on the date of issuance was $12 per share.
(g) Taxable Income was less than pretax accounting income for the
year, resulting in an increase in deferred income taxes payable of
$200.
Required:
Using the indirect method, prepare the Statement of Cash
Flows for Spring Corporation for the year ended May 31, Year 4. The
statement should comply with the requirements of Statements of
Financial Accounting Standards No. 95, ‘Statement of Cash Flows,’
and be supported by appropriate calculations.
Answer:
40) Assume that U.S. GAAP and IFRS require firms to remeasure the
amount of a particular asset from $12 million to $8 million because
of economic events. Which of the following journal entries should
the company make?
A.Miscellaneous Expense 4,000,000
Asset 4,000,000
B.Other Comprehensive Income 4,000,000
Miscellaneous Revenue 4,000,000
C.Other Comprehensive Income 4,000,000
Asset 4,000,000
D.Asset 4,000,000
Other Comprehensive Income 4,000,000
E.None of these answer choices is correct
Answer:
41) Which of the following is/are true regarding the financing of a
charitable organization?
A.may obtain some or all of its financing from donations
(contributions)
B.does not issue common stock or other forms of shareholders
equity
C.does not have retained earnings
D.all of the above are true
E.none of the above are true
Answer:
42) Which of the following is/are not a period expense?
A.administrative expenditures
B.expenditures on advertising
C.rent on a warehouse for the current month
D.cost of goods sold
E.all of the above are period expenses
Answer:
43) The _____ basis of accounting typically recognizes revenue when a
firm sells goods (manufacturing and retailing firms) or renders
services (service firms), and recognizes expenses in the period
when the firm recognizes the revenues that the costs helped
produce.
A.cash
B.accrual
C.funds flow
D.tax
E.none of the above
Answer:
44) Firms account for leases using either the operating lease method or
the capital (finance) lease method. Which of the following is not
true?
A.The capital, or finance, lease method treats leases equivalent to
installment purchases or sales, where the lessee borrows funds from
the lessor to purchase the asset and the lessor recognizes profit
at the time of sale
B.The lessor records the leased asset and the lease liability on
the balance sheet at the present value of the contractual cash
flows at the time of signing the lease
C.The lessee amortizes the leased asset, similar to recognizing
depreciation on buildings and equipment
D.The lessee recognizes interest expense on the lease liability,
similar to recognizing interest expense on long-term notes or
bonds
E.The lessor records the signing of a capital lease the same as if
the lessor sold the leased asset for an installment note receivable
Answer:
45) Using either the FIFO and LIFO cost flow assumption will result in
the same cost of goods sold when
A.the number of units in beginning and ending inventory are the
same
B.two consecutive years are combined
C.the prices of the goods do not change
D.lower-of-cost-or-market is applied
E.none of the above
Answer:
46) Jurisdiction-specific corporate laws limit directors freedom to
declare dividends. Which of the following is/are not true?
A.The board may declare dividends out of capital, that is, debited
against the contributed capital accounts, which result from
fund-raising transactions with owners
B.The board may declare dividends out of earnings by debiting them
against the Retained Earnings account, which results from earnings
transactions
C.Capital may mean the par or stated value of outstanding common
shares or the total amount paid in by shareholders
D.Some jurisdictions allow corporations to declare dividends out of
the earnings of the current period even if the Retained Earnings
account has a debit (negative) balance because of accumulated
losses from previous period
E.none of the above
Answer:
47) The acquisition cost for nonmonetary assets includes
A.invoice price, only
B.invoice price and transportation costs, only
C.invoice price, transportation costs, and installation costs,
only
D.invoice price, transportation costs, installation costs, and
handling charges, only
E.invoice price, transportation costs, installation costs, handling
charges, and first years maintenance cost
Answer:
48) Firms that are temporarily short of cash and unable to borrow from
usual sources can convert accounts receivable into cash by
A.assigning accounts receivable and forwarding amounts collected to
the lending institution
B.pledging its accounts receivable to the lending agency as
collateral for a loan
C.factoring the accounts receivable to a bank or financing company
to obtain cash
D.all of the above
E.none of the above
Answer:
49) Bolton Co. leases workout equipment to health clubs. On January 1,
Year 1, Bolton Co. leases to Powerhouse Gym, equipment valued at
$150,000, for 2 years. The equipment has a 12-year life with zero
salvage value. The lease payments equal $2,500 per year, payable on
the last day of the year.
Required:
a.Identify the type of lease. Give reasons for your conclusion.
b.State the correct entries to be made by the lessor for this
lease. You may assume straight-line depreciation is used by Bolton.
Answer:
50) The _____ uses only sales revenues and net income and an analyst
nearly always can calculate, regardless of format and display
differences in income statement presentations.
A.acid test or quick ratio
B.current ratio
C.asset turnover ratio
D.profit margin percentage
E.revenue turnover ratio
Answer:
51) Which of the following is not an example of a period expense?
A.the presidents salary
B.insurance for the home office
C.accounting and information systems costs
D.support activity costs such as legal services, employee training,
and corporate planning.
E.the factory foremans salary
Answer:
52) The first section of the statement of cash flows derives cash flow
from operations. Both U.S. GAAP and IFRS permit firms to report
cash flow from operations using the __________.
A.direct method, only
B.indirect method, only
C.direct and indirect methods
D.adjustment method, only
E.income method, only
Answer:
53) Accountants and financial analysts criticize earnings per share as
a measure of profitability because it does
A.not consider the amount of shareholders equity required to
generate that level of earnings
B.not consider the amount of liabilities required to generate that
level of earnings
C.consider the amount of assets required to generate that level of
earnings
D.not consider the amount of assets required to generate that level
of earnings
E.consider the amount of liabilities required to generate that
level of earnings
Answer: