ACC 302 Quiz 3

1) The date of the balance sheet appears at the bottom of the balance
sheet.

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2) Cash flows do not always fit unambiguously into only one of the
three categories: operating, investing and financing. Explain.

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3) U.S. GAAP permits firms to increase the balance sheet carrying
values of tangible and intangible long-lived assets when the fair
values of their assets increase.

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4) The balance sheet equation provides the analytical framework to
understand the effects of transactions and events on the financial
statements.

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5) Discuss the concepts underlying the statement of cash flows.

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6) Supplies and More, a firm specializing in building materials,
engaged in the following four transactions during 2014:

(1) purchased and received inventory costing $18,600 million, of
which $12,000 million was on account with the rest paid in
cash;
(2) purchased a machine for $4,800 million with cash;
(3) issued 2,000 shares of common stock for $6,000 million in
cash;
(4) issued shares of common stock to its suppliers for the
remaining amount due on purchases of inventory.

REQUIRED:
Indicate the effects of each of these four
transactions on the balance sheet equation. Supplies and More
applies U.S. GAAP financial reporting standards and reports its
results in millions of U.S. dollars ($).

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7) IFRS permits firms to remeasure property, plant, and equipment
upward for increases in fair value under certain conditions.

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8) Discuss the accounting for income taxes and the disclosure of
income taxes in the financial statements.

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9) The cash flow from operations section shows an addition for the
increase in the current asset accounts in an amount equal to the
firms expenditure to acquire a derivative.

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10) Firms may use the allowance method to account for estimated sales
discounts, returns, and allowances, as well as for warranties.

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11) The laws governing patent protection are both jurisdiction-specific
and subject to change, as is the process for obtaining approval to
market a new drug. As a general rule, the longer the drug approval
process, the longer is the useful life of the patent.

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12) In the acquisition method for a business combination, the excess of
the fair value of the consideration over the fair value of the
acquired firms identifiable assets net of identifiable liabilities
is goodwill.

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13) Adjusting entries may increase or decrease balances in balance
sheet accounts and income
statement accounts.

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14) Describe the relation between financial statement analysis and
investment decisions.

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15) The statement of cash flows begin with revenues; for this reason,
analysts often refer to revenue growth as top-line growth.

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16) A balance sheet prepared according to U.S. GAAP lists liabilities
starting with those that the firm will discharge soonest (the most
current or closest to maturity liabilities) and ending with those
that it will pay latest (the most noncurrent or distant to maturity
liabilities).

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17) On the statement of cash flows, cash sale of property, plant and
equipment used for the last 5 years in the company’s operations is
treated as an operating activity.

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18) Notes to the Year 2 financial statements of Care Corporation
indicate that income tax expense of $3,000 comprises $2,000
currently payable taxes and $1,000 deferred to future periods. Care
Corporation made the following entry during Year 2 to recognize
income tax expense:

Income Tax Expense . . . . . . . . . . . . . . 3,000
Income Tax Payable . . . . . . . . . . . . . . . . . . . . . . . .
2,000
Deferred Income Taxes Payable . . . . . . . . . . . . . . .
1,000

The $1,000 of deferred income taxes reduced net income but did not
require a cash outflow during Year 2. To explain the change in the
Deferred Income Taxes account, the T-account work sheet must
A.subtract deferred income taxes from net income to derive cash
flow from operations
B.add back deferred income taxes to net income to derive cash flow
from operations
C.add back deferred income taxes to net income to derive cash flow
from financing
D.subtract deferred income taxes from net income to derive cash
flow from financing
E.add back deferred income taxes to net income to derive cash flow
from investing

Answer:

19) Alsup Company

Alsup Company had the following transactions during the fiscal year
ended December 31, Year 4 .

Accounts receivable decreased from $115,000 on December 31, Year 3,
to $100,000
on December 31, Year 4 .
Alsups Board of Directors declared dividends on December 31, Year
4, of $.05
per share on the 2.8 million shares outstanding, payable to
shareholders of record
on January 31, Year 5 . The company did not declare or pay
dividends for fiscal year,
Year 3 .
Sold a truck with a net book value of $7,000 for $5,000 cash,
reporting a loss of $2,000.
Paid interest to bondholders of $780,000.
Cash increased from $106,000 on December 31, Year 3, to $284,000 on
December 31, Year 4 .

(CMA Dec 95 #4) Refer to the Alsup Company example. The total of
cash provided (used) by operating activities plus cash provided
(used) by investing activities plus cash provided (used) by
financing activities is
A.cash provided of $284,000
B.cash provided of $178,000
C.cash used of $178,000
D.cash used of $582,000
E.cash used of $284,000

Answer:

20) U.S. GAAP requires that the statement of cash flows disclose the
amount of cash flows arising frominvesting activities including
A.interest received on investments in bonds
B.interest paid on the company’s bonds
C.cash used for the acquisition of non-current assets
D.cash dividends paid on the company’s stock
E.cash dividends received on investments in other company’s stock

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21) Which of the following is a measurement attribute used in U.S. GAAP
to measure inventories whose usefulness (typically, in terms of
salability) to the firm has declined below the cost of the
inventories?
A.Current Replacement Cost
B.Net Realizable Value
C.Fair Value
D.Present Value of Future Net Cash Flows
E.Acquisition cost

Answer:

22) Ying Corporation, a Japanese construction firm, reported a balance
in Income Taxes Payable of 3,700 million at the beginning of 2013
and 14,300 million at the end of 2013. Net income before income
taxes for 2013 totaled 73,000 million. Assume that the firm is
subject to an income tax rate of 43%. Compute the amount of cash
payments made for income taxes during 2013. (Ying Corporation
applies Japanese accounting standards, and reports its results in
millions of yen (). In answering this question, assume that Ying
Corporation uses either U.S. GAAP or IFRS; for purposes of this
problem, this choice will not matter.)
A.10,600 million
B.17,090 million
C.20,790 million
D.73,000 million
E.none of the above

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23) Which of the following is true regarding the price-earnings
ratio?
A.price-earnings ratio = market price per share/earnings per
share
B.tables of stock prices and financial periodicals often present
price-earnings ratios
C.P/E ratios should use normal, ongoing earnings data in the
denominator
D.the analyst must interpret the published P/E ratios cautiously if
the firms net income includes unusual, nonrecurring gains and
losses
E.all of the above

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24) While the indirect method is prevalent in the construction of cash
flow statements in the U.S., why might a firm choose to construct
its cash flow statement using the direct method?
A.The direct method will always show a higher net change in
cash
B.The direct method is usually easier for users to understand
C.The direct method is required by some industries
D.The direct method will always make the firm’s management look
better
E.None of the above answer choices is correct

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25) Barry Company grows and ages tobacco. On January 2, 2013, the firm
has aging tobacco with a cost of $200,000 and a current market
value of $300,000. Barry Company wants to use this tobacco to
obtain financing. The firm uses a December 31 year-end.
a. Prepare journal entries during 2013 and 2014 for the
transactions in parts (i) and (ii) below:
(1) The firm borrows $300,000 from its bank, using the tobacco
inventory as collateral. The loan is repayable on December 31,
2014, with interest at 10% per year compounded annually. Assume
zero storage costs. The firm expects to sell the tobacco on
December 31, 2014, for $363,000.
(2) The firm sells the tobacco inventory to the bank for $300,000.
It promises to sell the inventory on behalf of the bank at the end
of two years and remit the proceeds to the bank.
b. Compare and contrast the income statement and balance sheet
effects of these two transactions.
c. How should Barry Company structure this transaction to ensure
that it qualifies as a sale instead of a collateralized loan?

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26) In year 1, Southern Construction agrees to construct a school
building for $12,000,000, receiving payments for the work of
$6,000,000 in both year 1 and year 2. Southern estimates that the
costs will be $4,000,000 in Year 1 and $6,000,000 in Year 2. If
Southern uses the percentage-of-completion method (based on total
costs), what amount of profit is recognized in each year of the
contract?
Year 1Year 2
A.$0 $2,000,000
B.$2,000,000 $0
C.$1,000,000 $1,000,000
D.$800,000 $1,200,000
E.$2,000,000 $1,000,000

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27) Debentures that the holder (lender) can exchange, possible after
some specific period of time has elapsed, for a specific number of
shares of common stock or, perhaps, preferred stock of the borrower
are called _____ bonds.
A.sinking fund
B.zero coupon
C.serial
D.convertible
E.callable

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28) Lakeside Company has not declared nor paid dividends on its
cumulative preferred stock in the last three years. These dividends
should be reported
A.in a note to the financial statements
B.as a reduction in stockholders’ equity
C.as a current liability
D.as a noncurrent liability
E.None of these choices is correct

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29) The _____ convention, links the timing of some expenses with
revenue recognition.
A.going concern
B.conservatism
C.matching
D.materiality
E.objectivity

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30) At the start of 20×4, Colonial Designs Allowance for Uncollectibles
balance is 120,000. During 20×4, Colonial Designs credit sales were
5,000,000; of this amount, it expected 2% will become
uncollectible. During 20×4, Colonial Designs wrote off 70,000 of
accounts receivable. At the end of 20×4, Colonial Designs
estimates, based on an aging of accounts, that the ending balance
in the Allowance for Uncollectibles should be 130,000.
A.Allowance for Uncollectibles . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 80,000
Accounts Receivable, net . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 80,000
B.Bad Debt Expense . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 70,000
Accounts Receivable, net . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 70,000
C.Allowance for Uncollectibles . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 70,000
Bad Debt Expense. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 70,000
D.Bad Debt Expense . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 80,000
Allowance for Uncollectibles . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 80,000
E.Allowance for Uncollectibles . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 80,000
Accounts Receivable, gross. . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 80,000

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31) Broke Inc is experiencing a cash flow problem finding that its cash
decreases, even though net income increases. Which of the following
is/are a possible reason(s)?
A.Lag between cash expenditures incurred in producing goods and
cash collections from customers once the firm sells those goods
B.The firm must generally produce more units than it sells during a
period of growth if it is to have sufficient quantities of
inventory on hand for future sales
C.Cash needed for a higher level of production exceeds the cash
received from the prior period’s sale
D.all of the above
E.none of the above

Answer:

32) Marco Insurance

Marco Insurance acquired shares of Penny Systems common stock on
December 28, 2013, for $400,000 and classified them as trading
securities. The fair value of these securities on December 31,
2013, was $402,000. Marco Insurance sold these shares on January 3,
2014, for $405,000.

(Refer to the Marco Insurance) The journal entries to record
acquisition of trading securities on December 28, 2013.
A.Cash……………………………………………..
400,000
Marketable
Securities……………………………….400,000
B.Other Comprehensive Income…………..400,000
Marketable
Securities……………………………….400,000
C.Marketable Securities……………………..400,000
Other Comprehensive Income………………….. 400,000
D.Marketable Securities……………………..400,000
Cash……………………………………………………….400,000
E.Marketable Securities……………………..400,000
Net Income……………………………………………..400,000

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33) The criteria for asset recognition include(s):
A.the firm owns or controls the right to use the item
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 can
be quantified with sufficient reliability
D.Answers a, b and c are correct
E.None of these answer choices is correct

Answer:

34) Any single event or transaction will have which of the following
effect(s) on the balance sheet?
A.It increases an asset and increases either a liability or
shareholders equity
B.It decreases an asset and decreases either a liability or
shareholders equity
C.It increases one asset and decreases another asset
D.It increases one liability or shareholders equity and decreases
another liability or shareholders equity
E.all of the above

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35) Which of the following is not a period expense?
A.administrative expenditures
B.expenditures on advertising
C.expenditures on research
D.cost of goods sold
E.all of the above are period expenses

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36) Under U.S. GAAP and IFRS, the firm measures the assets and
liabilities of a discontinued operation at the lower of their _____
It reports any gain or loss that results in the Discontinued
Operations section of the income statement. The Discontinued
Operations section also includes income or loss from operating the
unit for that year. Financial statements for prior years included
for comparative purposes classify those amounts also as a
discontinued operation.
A.carrying values or their fair values
B.net realizable values or their fair values
C.carrying values or the present value of future cash flows
D.net realizable values or the present value of future cash
flows
E.liquidation values or the present value of future cash flows

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37) Both U.S. GAAP and IFRS require the presentation of an income
statement and the presentation of the items of Other Comprehensive
Income. U.S. GAAP permits the following reporting format(s) except
for:
A.a single statement of comprehensive income that shows all the
changes in net assets except from transactions with owners
B.a two-statement presentation that includes an income statement
and a separate statement of comprehensive income
C.a separate display of the items comprising Other Comprehensive
Income within a statement of changes in shareholders equity
D.a separate display of the items comprising Other Comprehensive
Income within a statement of retained earnings
E.All of the above are acceptable reporting formats

Answer:

38) Acquired in-process research and development (IPR&D) is _____
for tax purposes and results in a(n) _____ effective tax rate.
A.never deductible; increased
B.never deductible; decreased
C.always deductible; increased
D.always deductible; decreased
E.deductible over a 15 year period; decreased

Answer:

39) In Year 1, the firm purchased a portfolio of marketable securities
for $1,000, which it holds as current assets. At the end of Year 1,
the portfolio had a market value of $800. During Year 2, the firm
sold some of the securities for $120 which had originally cost
$100, but which had a market value of $90 at the end of Year 1. At
the end of Year 2, the remaining securities had a market value of
$1,150.

Required:

Answer:

40) Given the large number of transactions affecting the Cash account
during a period, most firms prefer to prepare the statement of cash
flows after they have prepared
A.the funds flow statement and income statement
B.the balance sheet and funds flow statement
C.the income statement and the balance sheet
D.the statement of cash receipts and disbursements
E.none of the above

Answer:

41) Given the following information for the Siri Company, calculate the
ratios as requested.

a. Interest coverage ratio
b. Long-term debt ratio at December 31, Year 2
c. Total assets turnover

Answer:

42) U.S. GAAP and IFRS provide criteria for distinguishing operating
leases from capital leases. Which of the following is/are not
true?
A.U.S. GAAP provides fourteen criteria, any one of which qualifies
a lease as a capital lease
B.IFRS provides general criteria for identifying the entity
enjoying the rewards and incurring the risk
C.Firms cannot currently apply the fair value option to capital
leases
D.The FASB and the IASB have undertaken a joint project involving
the lessees accounting for leases which may result in treating all
leases as capital leases
E.all of the above

Answer:

43) IFRS uses the idea of a disposal group, a group of assets and
directly associated liabilities that a firm will dispose of as a
group in a single transaction. The disposal group notion of IFRS
envisions a larger unit than the component notion of U.S. GAAP. In
the year that a firm decides to sell or otherwise dispose of a unit
that qualifies as a discontinued operation, it aggregates the
assets and liabilities of that unit on the balance sheet into four
groups. Which of the following is not one of the groups?
A.current assets
B.noncurrent assets
C.current liabilities
D.noncurrent liabilities
E.contingent liabilities

Answer:

44) Which of the following is/are not true?
A.U.S. GAAP and IFRS do not require the employer to 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 Other Comprehensive Income over the
expected period of benefit as an adjustment to retirement plan
cost
E.all of the above

Answer:

45) The _____ method begins with net income for a period and then shows
adjustments to net income to convert revenues to cash received from
customers and to convert expenses to cash disbursed to various
suppliers of goods and services. Most companies use this
method.
A.direct
B.indirect
C.adjustment
D.income
E.free cash

Answer:

46) The balance sheet of Parler, a European Union communications firm,
shows current assets of 21,000 million, current liabilities of
16,849 million, shareholders equity of 17,654 million, and
noncurrent assets of 30,402 million. What is the amount of
noncurrent liabilities on Parlers balance sheet?

Answer:

47) Upon organization on January 1, 2013, Olley Inc. was authorized to
issue 200,000 shares of $10 par common stock in multiples of 100
shares. During 2013, 110,000 shares were sold at $65 per share;
6,000 shares were later reacquired as treasury stock at $72 per
share. A stock split of 2-for-1 on all issued shares was approved
on December 31, 2013.

Answer:

48) Cool Pools Construction installs swimming pools. They calculate
that warranty obligations are 3% of gross sales. For the year just
ending Cool Pools gross sales were $1,450,000. Due to previous
quarter recognitions, the Warranty Liability account has a credit
balance of $28,700.

REQUIRED:
Determine the years total warranty liability and journalize any
necessary value to establish the years liability at December 31st.

Answer:

49) Terrace Inc. uses the periodic LIFO cost flow assumption. During
the period 23 units were sold at a price of $30 per unit.
Transportation costs on the purchases totaled $252.

Required:

Prepare the journal entries to record the purchases and any
adjusting entries for the end of the period.

Answer:

50) Assume that P uses the equity method of accounting for its
investment in S. Solve for the unknown in each of the following
independent cases:

Answer: