1) Firms account for changes in accounting principles required by a
new reporting standard in accordance with the guidance specified in
the standard.
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2) A profitable firm can never run out of cash.
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3) Describe the relationship between the balance sheet and the income
statement.
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4) Under both U.S. GAAP and IFRS, the following formula calculates the
Net Pension Expense (or Credit) for a defined benefit pension
plan:
Interest Cost (the increase in the obligation because of the
passage of time)
+ Service Cost (the increase in the obligation because of an
additional year of employee service)
– Expected Return on Pension Investments
+/- Amortization of Performance and Actuarial Gains and Losses
+/- Amortization of Prior Service Cost
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5) 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.
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6) Management can sell securities with unrealized holding gains (or
losses) and transfer through net income to Retained Earnings the
entire unrealized holding gain (or loss)that is, management can
affect the timing of gain or loss recognition in net income for
both securities available-for-sale and trading securities.
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7) Management operates the productive capacity of the firm to generate
earnings.
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8) Acquisition and disposition of trading securities are usually
financing activities.
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9) Retained earnings represent the net assets (total assets – total
liabilities) a firm derives
from its earnings that exceed the dividends.
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10) Retained earnings measures the cumulative excess of net income over
dividends for the life of a firm. Cumulative means that retained
earnings aggregates all undistributed earnings.
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11) U.S. disclosure rules require that a LIFO firm must disclose ending
inventory either at its current cost or on a FIFO cost-flow basis.
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12) Explain the accounting for notes and bonds.
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13) The balance sheet portrays the effects of a firms investing and
financing decisions. In analyzing these decisions, what two
principles guide financing decisions?
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14) In most cases U.S. GAAP requires firms to allocate the full issue
price of Convertible Bonds or Convertible Preferred Stock to the
bonds or preferred stock and none of the price to the conversion
feature.
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15) The summary of significant accounting principles, a required part
of the financial statement notes, must include a statement about
the parents consolidation policy. If an investor does not
consolidate a significant majority-owned subsidiary, the notes will
disclose that fact.
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16) For various reasons, a single economic entity may exist in the form
of a parent and several legally separate subsidiaries, often
referred to as an affiliated group.
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17) The statement of cash flows provides information that helps the
reader in (1) assessing the impact of operations on liquidity and
(2) assessing the relations among cash flows from operating,
investing, and financing activities. Explain.
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18) Short-term marketable equity securities were acquired on July 1,
Year 1 for $23,000, and classified as available-for-sale. On
December 31, Year 1, the securities had a market value of $24,000,
determined as follows:
| Cost | Fair Market Value | |
| July 1, Year 1 | December 31, Year 1 | |
| Security AA | $9,000 | $7,000 |
| Security BB | 5,000 | 10,000 |
| Security CC | 9,000 | 7,000 |
| Total | $23,000 | $24,000 |
What adjustment is required to reflect December 31, Year 1
fair value?
A.unrealized holding gain on available-for-sale securities of
$1,000, reported in other comprehensive income
B.unrealized holding gain on available-for-sale securities of
$1,000, reported in the income statement
C.realized holding gain on available-for-sale securities of $1,000,
reported in the income statement
D.realized holding gain on available-for-sale securities of $1,000,
reported in other comprehensive income
E.realized holding gain on available-for-sale securities of $1,000,
reported in retained earnings
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19) When accounting for a fair value hedge of a recognized asset or
liability, on the date a firm enters the derivative contract and
designates that contract as a fair value hedge,
A.no amount appears on the balance sheet for the derivative if the
firm neither makes nor receives an initial payment
B.it recognizes the derivative as an asset if it makes an initial
payment
C.it recognizes the derivative as a liability if it receives an
initial payment
D.all of the above
E.none of the above
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20) The capital provided by common shareholders during the period used
for calculating the return on common equity equals
A.the average par value of common stock, capital contributed in
excess of par value on common stock, retained earnings, and any
other common shareholders equity accounts for the period
B.average preferred shareholders equity less average total
shareholders equity
C.the ending par value of common stock, capital contributed in
excess of par value on common stock, retained earnings, and any
other common shareholders equity accounts for the period
D.ending preferred shareholders equity less ending total
shareholders equity
E.choices a and b
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21) Using accounts receivable to achieve off-balance-sheet financing.
Marvel Appliance Store has $100,000 of accounts receivable on its
books on January 2, 2013. These receivables are due on December 31,
The firm wants to use these accounts receivables to obtain
financing.
a. Prepare journal entries during 2013 for the transactions in
parts (i) and (ii) below:
(1) The firm borrows $100,000 from its bank, using the accounts
receivable as collateral. The loan is repayable on December 31,
2013, with interest at 8%.
(2) The firm sells the accounts receivable to the bank for $92,593.
It collects amounts due from customers on these accounts and remits
the cash to the bank.
b. Compare and contrast the income statement and balance sheet
effects of these two transactions.
c. How should Marvel Appliance Store structure this transaction to
ensure that it qualifies as a sale instead of a collateralized
loan?
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22) Of the three cost-flow assumptions, when inventory costs have been
rising and inventory amounts increasing, LIFO results in balance
sheet figures that are _____, cost of goods sold will _____, and
_____ reported net income
A.closest to current cost, be out of date, highest
B.out of date, closest to current cost, highest
C.closest to current cost, be out of date, lowest
D.out of date, closest to current cost, lowest
E.closest to current cost, closest to current cost, highest
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23) Various laws and contracts govern the rights and obligations of a
shareholder. Which of the following is/are not true?
A.The corporation laws of the jurisdiction in which incorporation
takes place govern the rights and obligations of a shareholder
B.The articles of incorporation or the corporate charter sets out
the agreement between the firm and the jurisdiction in which the
business incorporates
C.The board of directors adopts bylaws, which are the rules and
regulations governing the internal affairs of the corporation
D.The U.S. Government grants to the firm the privileges of
operating as a corporation for certain stated purposes and of
obtaining its capital through the issue of shares of stock
E.none of the above
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24) The accounts receivable turnover ratio equals
A.profit margin divided by average accounts receivable at the end
of the period
B.gross margin divided by average accounts receivable at the end of
the period
C.sales revenue divided by ending accounts receivable at the end of
the period
D.sales revenue divided by average accounts receivable during the
period
E.gross margin divided by average accounts receivable during the
period
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25) The amount of cash flow from operations indicates:
A.the extent to which operating activities generate more cash than
they use
B.the extent to which revenues exceed expenses
C.the extent to which liabilities exceed shareholders equity
D.the extent to which more cash is generated from investing
activities than financing activities
E.how much free cash flow a company has
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26) The qualitative characteristics describe the attributes that
enhance the usefulness of financial reporting information. The
FASBs conceptual framework sets forth the qualitative
characteristic of _____ envisions that the nature of the
information is relevant and that its effect is large enough to
influence a decision. As standard setters make decisions about
financial reporting standards, they consider the costs and benefits
of those standards. They assess whether the benefits to users of
financial reports from a particular financial reporting requirement
exceed the costs of providing the information.
A.relevance
B.reliability
C.comparability
D.materiality
E.understandability
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27) Which of the following is/are not true?
A.Convertible preferred shares give the holder of preferred shares
the right to convert the preferred shares into a specified number
of common shares under certain specified conditions
B.Changes in the market price of convertible preferred shares will
often parallel changes in the market price of common shares because
of the conversion option
C.Convertible preferred shares provide the security holders with
the possibility of capital appreciation by converting the preferred
shares into common shares if the market price of the common shares
rises sufficiently
D.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
E.none of the above
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28) As a general principle, under the accrual basis of accounting, the
firm recognizes revenue when the transaction meets which of the
following conditions?
A.Revenue is recognized when there is completion of the earnings
process, only
B.Revenue is recognized when there is receipt of assets from the
customer, only
C.Revenue is recognized when there is completion of the earnings
process and receipt of assets from the customer
D.Revenue is recognized when there is expiration of the warranty
period, only
E.Revenue is recognized when there is receipt of the final payment,
only
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29) The qualitative characteristics describe the attributes that
enhance the usefulness of financial reporting information. The
IASBs conceptual framework sets forth the qualitative
characteristic of _____ which refers to the attribute that users of
financial reports will perceive the significance of a reported item
to their decisions. Such perception involves comprehending the
economic effects of a firms actions and the measurement and
reporting of those economic effects in the financial reports.
A.relevance
B.reliability
C.comparability
D.materiality
E.understandability
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30) U.S. GAAP and IFRS require separate income statement display of
income from continuing operations and _____earnings that will not
continue because the firm either sold, or made a decision to sell,
a portion of its business). Such a requirement aids users of the
income statement in predicting future earnings.
A.income from discontinued operations
B.extraordinary items
C.changes in accounting principles
D.sale of individual assets
E.none of the above
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31) Corporations sometimes distribute assets other than cash when
paying a dividend. Which of the following is not true?
A.Such a dividend is known as a dividend in kind
B.Such a dividend is never known as a property dividend
C.The amount debited to Retained Earnings equals the fair value of
the assets distributed
D.When this fair value differs from the carrying value of the
assets distributed, the firm recognizes a gain or loss in net
income
E.The accounting for property dividends resembles that for cash
dividends, except that when the firm pays the dividend, it credits
the asset given up, rather than Cash
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32) Firms compute income tax payable for a period using _____ as the
base.
A.book income
B.total income
C.permanent income
D.taxable income
E.gross income
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33) The direct write-off method
A.recognizes losses from uncollectible accounts in the period when
a firm decides that specific customers’ accounts are
uncollectible
B.does not usually recognize the loss from uncollectible accounts
in the period in which the sale occurs and the firm recognizes
revenue
C.provides firms with an opportunity to manage earnings each period
by deciding when particular customers’ accounts become
uncollectible
D.all of the above
E.none of the above
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34) Which of the following is/are not one of the conditions of a
capital lease?
A.transfer of ownership to the lessor at the end of the lease
term
B.transfer of ownership to the lessee appears likely because of a
“bargain” purchase option
C.lease extends for at least 75 percent of the asset’s life
D.present value of the minimum contractual lease payments equals or
exceeds 90 percent of the fair market value of the asset at the
time the lessee signs the lease
E.all of the above
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35) Based on the following summary of shareholders’ equity accounts,
answer the following questions. No dividends were paid during the
Year 1 and Year 2.
| December 31, Year 1 | December 31, Year 2 | |
| Common stock, $5 par value | $1,000,000 | $1,250,000 |
| Additional paid-in capital | 1,500,000 | 2,000,000 |
| Net unrealized loss on investment | ||
| in marketable equity securities | (100,000) | (150,000) |
| Retained earnings | 2,000,000 | 2,500,000 |
| Less: Cost of treasury shares | (200,000) | (224,000) |
| Total shareholders’ equity | $4,200,000 | $5,376,000 |
a. What is net income during Year 2?
b. How many additional common shares were issued in Year 2?
c. What was the cost per share of the treasury stock acquired
during Year 2? 2,000 additional shares were acquired during the
year.
d. What price was paid for the additional common shares issued in
Year 2?
e. What happened to the portfolio of long-term marketable equity
securities?
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36) Many firms sell to customers on account as a strategy to stimulate
sales. Comparing accounts receivable turnovers over time or between
firms requires an analysis of
A.the growth rate in sales
B.the amount of interest revenue generated
C.the cost of administering the credit-granting activity
D.the losses from uncollectible accounts
E.all of the above
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37) U.S. GAAP and IFRS provide criteria for distinguishing operating
leases from capital leases. Which of the following is not true?
A.The criteria attempt to identify the entity, whether lessor or
lessee, that enjoys the benefits and incurs the risk of the leased
asset
B.When the lessor enjoys the benefits and bears the risk, the lease
is an operating lease
C.When the lessee enjoys the benefits and bears the risk, the lease
is an operating lease
D.IFRS provides more general criteria for identifying the entity
enjoying the rewards and incurring the risk
E.Firms cannot currently apply the fair value option to capital
leases
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38) The direct write-off method
A.must be used for income tax reporting in the United States
B.is the method preferred by U.S. GAAP for financial reporting
C.prevents management of earnings by the firm
D.does not misstate the amount of accounts receivable on the
balance sheet
E.none of the above
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39) Management and shareholders may desire to have legally separate
corporations because
A.it may insulate a profitable corporation from an unprofitable
corporation’s insolvency and creditors
B.it may simplify compliance with state tax and regulation
requirements
C.it may allow a company to enter a new line of business with a
minimum of investment and risk
D.all of the above
E.none of the above
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40) In U.S. GAAP, which of the following accurately describe(s) the
effects of transactions involving investments on the statement of
cash flows?
A.If investor acquired the debt at a price below par, then cash
flow from operations includes only the interest coupon received
B.If the holder acquired the debt at a price below par, then cash
flow from operations will include the amount of interest revenue
for the period, with source of the remainder of the cash received
appearing as a [dis-]investing activity, the same as the proceeds
of selling an investment
C.When using the indirect method, add back realized holding losses,
and subtract realized holding gains included in income for the
period to derive cash flow from operations
D.Investors cash flow from operations increases by only the amount
of dividends received. In the indirect method, deduct the investors
share of the undistributed earnings of the investee
E.all of the above
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41) Which of the following is not true?
A.Owners of preferred stock have a claim on the assets of a firm
that is senior to the claim of common shareholders
B.Preferred shares carry special rights
C.The senior status and special rights may induce certain investors
to purchase preferred shares of a firm, even though they would be
unwilling to purchase common shares of the same firm
D.The senior status and special rights increase the risks of
preferred shareholders relative to common shareholders
E.Preferred shares vary with respect to the rights and obligations
of the issuing firm and of the investor in the preferred shares
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42) Which of the following is not true concerning the FASB and the IASB
conceptual frameworks?
A.Both the FASB and the IASB rely on a conceptual framework to
guide their standard-setting decisions
B.The conceptual framework is not a rigorous set of principles from
which standard setters can logically deduce appropriate financial
reporting standards
C.The purpose of a conceptual framework is to guide
standard-setting decisions in order to enhance the quality and
consistency of those decisions
D.The FASB and the IASB have separately developed their conceptual
frameworks, and those frameworks are very different
E.The two standard-setting bodies are currently working to develop
a common conceptual framework for financial reporting
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43) A document or agreement giving the terms of the bond and the rights
and duties of the borrower and other parties to the contract that
provides some protection to the bondholders and typically limits
the borrower’s right to declare dividends, to make other
distributions to owners, and to acquire other businesses is known
as a
A.bond sinking fund agreement
B.serial bond funding agreement
C.bond indenture
D.creditor indenture
E.business trust indenture
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44) 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 other comprehensive income
D.Firms amortize the amounts in the contingency reserve for
underfunded/overfunded retirement plans over the expected period of
benefit as an adjustment to retirement plan cost
E.all of the above
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