1) Allowance for Uncollectibles contra account appears among the _____
on a firms balance sheet as a(n) _____.
A.liability; subtraction
B.liability; addition
C.assets; addition
D.assets; subtraction
E.shareholders equity; subtraction
Answer:
2) (CMA adapted, Dec 95 #27) Somali Inc. is a profitable company with
the goal to maximize cash flow. A valid reason for Somali not to
adopt the last-in, first-out (LIFO) method of inventory valuation
is the
A.prices are rising
B.prices are falling
C.company has high administrative costs
D.reduction effect on inventory
E.difficulty in segregating goods in the warehouse
Answer:
3) The effect of patent amortization on cash flow is conceptually
identical to that of
A.common stock
B.preferred stock
C.depreciation
D.research and development
E.treasury stock
Answer:
4) Certain merchandise that a firm may acquire may be inventory or
supplies. Accounting treats them differently as to the matching
criteria used.
Required:
| a. |
Describe the situation where merchandise would be considered inventory. How would the firm account for the costs of the merchandise? |
| b. |
Describe the situation where merchandise would be considered supplies. How would the firm account for the costs of the merchandise? |
Answer:
5) Which of the following is not true regarding stock rights?
A.U.S. GAAP does not require recognition of the rights on the date
of the grant
B.The granting of stock rights to current shareholders requires
several accounting entries
C.Shareholders may exercise the stock rights or sell them to
others
D.IFRS does not require recognition of the rights on the date of
the grant
E.When holders exercise the stock rights, the firm records the
issue of shares at the price paid just as it records the issue of
new shares for cash
Answer:
6) Any subsequent sale of a firms previously issued common shares from
one investor to another (such as occurs on public stock
exchanges):
A.increases the recorded amounts of shareholders equity
B.decreases the recorded amounts of shareholders equity
C.has as no effect on the recorded amounts of shareholders
equity
D.increases or decreases the recorded amounts of shareholders
equity depending on the facts and circumstances
E.None of these answer choices is correct
Answer:
7) Firms can use free cash flow to
A.repay borrowing
B.pay a dividend
C.repurchase common shares
D.add to cash on the balance sheet
E.all of the above
Answer:
8) In some cases, particularly when the reissue of treasury stock
results from the exercise of employee stock options, the amount
paid by the firm to reacquire the treasury shares exceeds the
subsequent reissue price. If the firm uses the cost method, it
debits the balance to
A.Additional Paid-In Capital account so long as that account has a
sufficiently large credit balance. To the extent the required debit
exceeds the credit balance in the Additional Paid-In Capital
account, the firm reduces that account to zero and debits the
excess to Retained Earnings
B.Additional Paid-In Capital
C.Retained Earnings
D.Net Income
E.Accumulated Other Comprehensive Income
Answer:
9) First Communications Group is a communication services firm whose
employees provide advertising, market research, public relations,
and other services world-wide. Other than relatively small amounts
of equipment, it owns virtually no property, plant, and equipment
(it leases most of its office space). Which of the following is/are
true?
A.First Communications Group has a low fixed asset intensity
B.First Communications Group has a low debt-equity ratio
C.First Communications Group creates value from employees services,
not from operating assets, so there is neither the need nor the
ability to borrow long-term using property, plant, and equipment as
collateral
D.all of the above are true
E.none of the above
Answer:
10) (CMA adapted, Jun 90 #21) Regarding the information for Ramer
Company and Matson Company, assume that some of the ratios and data
for Ramer and Matson are affected by income taxes. Assuming no
interperiod income tax allocation, which of the following items
would be directly affected by income taxes for the period?
A.debt-equity ratio and dividend payout ratio
B.current ratio and debt-equity ratio
C.return on investment and earnings per share
D.interest coverage ratio and current ratio
E.none of the above
Answer:
11) Which of the following is/are an appropriate presentation of
treasury stock?
A.As a marketable security
B.As a deduction at cost from total stockholders’ equity
C.As a deduction at cost from total contingent liabilities
D.As a deduction at par from total stockholders’ equity
E.None of these choices is appropriate
Answer:
12) In the first month of operations (April Year 1) of the QuickClean
Company, a service business, the following events occurred.
a. Issued stock for $100,000; 20,000 shares with a $1 par
value.
b. Purchased equipment with a useful life of ten years for
$12,000.
c. Purchased a building with a useful life of 20 years for
$24,000.
d. Bought office supplies for $2,400. Supplies are expected to last
one year.
e. Paid salaries of $10,000.
f. Borrowed $15,000 from bank on last day of the month. 12%
interest rate payable in 90 days.
g. Sold services for $20,000 on account.
h. Collected $15,000 of receivables.
i. Recorded expense accruals of $4,000 at end of month.
Required:
Prepare a balance sheet and statement of cash flow using the
indirect method for the first month of operations.
Answer:
13) Which of the following is/are not true?
A.For buildings, common 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
B.Tangible assets, with the exception of buildings, may have
substantial salvage value
C.Intangible assets related to a contractual right, such as landing
rights at an airport or franchise rights to sell a franchisers
products, generally expire at a specific time and therefore have
zero residual value
D.Identifiable intangibles acquired in a business combination that
are separable, such as customer lists or brand names, may have
significant salvage values
E.none of the above
Answer:
14) Purchaser Corporation acquires 30% of the outstanding voting common
shares of the Investee Corporation for $600,000. Purchaser
Corporation acquires the investment in Investee Corporation by
buying previously issued shares of Investee Corporation from other
investors. When Purchaser Corporation acquired 30% of Investee
Corporations common shares for $600,000, Investee Corporations
total shareholders equity was $1.5 million. Purchaser Corporations
cost exceeds the carrying value of the net assets acquired by
$150,000 [ $600,000 – (0.30 x $1,500,000)].
Purchaser Corporation attributes the $150,000 excess purchase price
as follows: $100,000 to remeasure buildings and equipment to fair
value and $50,000 to goodwill. Which of the following is/are
true?
A.Purchaser Corporation does not reclassify this excess out of its
Investment in Stock of Investee Corporation account to Buildings
and Equipment and to Goodwill
B.Purchaser Corporation must amortize (or depreciate) any amount
attributed to assets with limited lives
C.Purchaser Corporation must depreciate the $100,000 attributed to
buildings and equipment over their remaining useful lives
D.U.S. GAAP and IFRS do not permit the investor to amortize the
excess purchase price attributed to goodwill and other assets with
indefinite lives. Instead, the investor must test the investment
account annually for possible impairment
E.all of the above
Answer:
15) Purchaser Corporation acquires 30% of the outstanding voting common
shares of the Investee Corporation for $600,000. Purchaser
Corporation acquires the investment in Investee Corporation by
buying previously issued shares of Investee Corporation from other
investors.
When Purchaser Corporation acquired 30% of Investee Corporations
common shares for $600,000, Investee Corporations total
shareholders equity was $1.5 million. Purchaser Corporations cost
exceeds the carrying value of the net assets acquired by $150,000 [
$600,000 – (0.30 x $1,500,000)]. What is/are the accounting
procedure(s) for this premium?
A.The investors accounting for the excess purchase price embedded
in the Investment in Stock of Investee Corporation account is
similar to the treatment of an excess purchase price in a business
combination
B.The investor identifies any recorded assets and liabilities with
fair values that differ from their carrying values, as well as any
unrecorded assets and liabilities
C.The investor attributes the excess purchase price to the assets
and liabilities with fair values that differ from their carrying
values, as well as any unrecorded assets and liabilities, based on
the investors proportionate ownership interest
D.The investor attributes the excess purchase price to the assets
and liabilities with fair values that differ from their carrying
values, as well as any unrecorded assets and liabilities, based on
the investors proportionate ownership interest and any remaining
excess purchase price to goodwill
E.all of the above
Answer:
16) The rate of return on common shareholders’ equity
A.will exceed the rate of return on assets whenever the rate of
return on assets exceeds the after-tax cost of borrowing and any
dividends required for preferred shareholders
B.will not exceed the rate of return on assets whenever the rate of
return on assets exceeds the after-tax cost of borrowing and any
dividends required for preferred shareholders
C.will always exceed the rate of return on assets
D.will never exceed the rate of return on assets
E.none of the above
Answer:
17) U.S. GAAP requires that the statement of cash flows disclose the
amount of cash flows arising fromfinancing activities including
A.short-term and long-term borrowing and repaying short-term or
long-term borrowing
B.issuing of common or preferred stock and reacquiring shares of
outstanding common or preferred stock
C.payment of dividends to stockholders
D.all of the above
E.none of the above
Answer:
18) The first step in the accounting record-keeping process is:
A.recording each transaction in a file or other record in the form
of a journal entry
B.posting the amounts from the journal entries to individual
balance sheet and income statement accounts in a general ledger
C.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
D.preparing the income statement for the period from amounts in the
income statement accounts
E.preparing the balance sheet from amounts in the balance sheet
accounts
Answer:
19) Regarding employee stock options, which of the following is/are not
true?
A.Firms compute a fair-value-based measure of employee stock
options on the date of the grant using an option-pricing model that
incorporates information about the current market price, the
exercise price, the expected time between grant and exercise, the
expected volatility of the stock, the expected dividends, and the
risk-free interest rate
B.Total compensation cost is the number of options the firm expects
to vest times the value per option
C.Firms amortize total compensation cost over the requisite service
period, which is the expected period of benefit
D.The requisite service period is usually the period between the
grant date and the redemption date
E.Firms do not typically remeasure most types of stock options
after the initial grant date
Answer:
20) General Semiconductor is a European-based designer and manufacturer
of semiconductors. It manufactures semiconductors in fixed-asset
intensive plants. The moderate fraction of its total assets that
are property, plant, and equipment results from depreciating its
technology-intensive manufacturing facilities over periods as short
as four years. Which of the following is/are true?
A.General Semiconductor has small long-term debt and debt-equity
ratios
B.General Semiconductor incurs substantial technology risk from
product obsolescence, with product life cycles of less than two
years
C.Heavy reliance on debt financing would add financing risk and
thereby increase borrowing costs even more
D.All of the above are true
E.none of the above
Answer:
21) (CMA adapted, Dec 95 #5) The conceptual framework of accounting
theory governs the recognition of revenue and expenses. Revenue is
generally recognized at the point of sale; however, under special
circumstances, bases other than the point of sale are used for the
recognition of revenue. Costs are generally recognized as expenses
at the time of product sale; however, there are guidelines for
recognizing expenses by other criteria. Accountants must be
familiar with these concepts when determining the earnings of a
company.
Required:
a. Explain why the point of sale is generally used as the basis for
revenue recognition.
b. Two other acceptable bases for the recognition of revenue are:
(a) recognizing revenue when cash is received; and (b) recognizing
revenue periodically during production. For each of these two
alternatives,
1> Discuss the accounting methods used and the rationale for
their use.
2> Give an example of the circumstances when each method should
be used.
c. For each of the following circumstances, explain the rationale
for expense recognition.
1> Recognizing costs as expenses at the time of sale.
2> Treating costs as expenses of a period rather than assigning
the costs to an asset.
3> Assigning expenses to specific accounting periods on the
basis of the systematic and rational allocation of asset costs.
Answer:
22) Towson Corporation acquired 1,000,000 shares of its own common
stock for $10,000,000 during Year 2. The statement of cash flows
classifies the transaction as a(n)
A.exchange transaction
B.investing activity
C.financing activity
D.operating activity
E.equity activity
Answer:
23) Rapidly growing firms must often _____ to finance their
acquisitions of noncurrent assets.
A.sell existing noncurrent assets
B.borrow funds
C.issue common shares
D.choices b and c
E.choices a, b and c
Answer:
24) At the end of a manufacturing company’s accounting period,
Work-in-Process is generally
A.zero because all units are in finished goods inventory
B.the product costs incurred for units not yet transferred to
finished goods inventory
C.an amount which includes all raw materials purchased but not yet
sold as finished goods
D.all product and period costs for units not yet completed
E.none of the above
Answer:
25) Which financial statement reports operating performance for a
specific period of time?
A.Balance sheet
B.Income statement
C.Statement of changes in shareholders’ equity
D.Statement of retained earnings
E.Statement of Cash Flows
Answer:
26) A firm classifies mortgages, notes, bonds, and leases which were
used to acquire its long-term assets that fall due after the
operating cycle, (usually greater than one year) as
A.a current liabilities
B.a long-term asset
C.a long-term liabilities
D.part of shareholders’ equity
E.contingent liabilities
Answer:
27) The transactions listed below relate to the JB Corporation.
Indicate whether or not each transaction immediately gives rise to
an asset or liability of JB Corporation under generally accepted
accounting principles. If accounting recognizes an asset or a
liability, give the account title and amount.
a. JB Corporation issues $1 par value common stock for $10,000,000,
its market value.
b. JB Corporation purchases a machine for $20,000, freight of $675,
and installation costs of $1,500.
c. JB Corporation owes $5,000 for utilities at the end of the year.
The firm has 10 days before payment is due without paying a late
fee.
d. JB Corporation receives a 30-day, 10% loan of $10,000 from a
local bank.
e. JB Corporation acquires property with an appraised value of
$2,000,000 for its stock.
f. JB Corporation receives an order for merchandise totaling $5,000
from a customer. The merchandise will be shipped next week.
Answer:
28) A _____ year ends on a date that is determined by the firm, perhaps
based on its business model (for example, many retailers choose the
end of January).
A.physical
B.natural
C.fiscal
D.business cycle
E.normal
Answer:
29) Quan Restaurant
On January 1, Year 7, Quan Restaurant is planning to enter as the
lessee into the two lease agreements described below. Each lease is
noncancelable, and Quan does not receive title to either leased
property during or at the end of the lease term. All payments
required under these agreements are due on January 1 each
year.
| Lessor | Hadaway Inc. | Cutter Electronics |
| Type of property | Oven | Computer |
| Yearly rental (not including executory costs) | $15,000 | $4,000 |
| Lease term | 10 years | 3 years |
| Economic life | 15 years | 5 years |
| Purchase option | None | $3,000 |
| Renewal option | None | None |
| Fair market value at inception of lease | $125,000 | $10,200 |
| Unguaranteed residual value | None | $2,000 |
| Lessee’s incremental borrowing rate | 10% | 10% |
| Executory costs paid by | Lessee | Lessor |
| Annual executory costs | $800 | $500 |
| Present value factor at 10% (of an annuity due) | 6.76 | 2.74 |
(CMA adapted, Dec 93 #28) Refer to the Quan Restaurant example.
Quan Restaurant should treat the lease agreement with Cutter
Electronics as a(n)
A.operating lease, charging $3,400 in rental expense and $500 in
executory costs to annual operations
B.operating lease, charging $4,000 in rental expense and $500 in
executory costs to annual operations
C.operating lease, charging $3,500 in rental expense and $500 in
executory costs to annual operations
D.capital lease
E.operating lease, charging $3,500 in rental expense and $400 in
executory costs to annual operations
Answer:
30) The direct method of reporting
A.is preferred by U.S. GAAP
B.shows a reconciliation between net income and cash flow from
operations either at the bottom of the statement of cash flows or
in a separate note
C.reports the amounts of cash received from customers less cash
disbursed to various suppliers, employees, lenders for interest
payments, and taxing authorities
D.includes all of the above
E.includes none of the above
Answer: