1) Notes to the financial statements provide additional information
about income tax expense and deferred tax assets and deferred tax
liabilities. Firms do not report which of the following?
A.components of income before income taxes
B.components of income tax expense
C.reconciliation from statutory to effective tax rate
D.components of deferred tax assets and liabilities
E.components of taxable income after income taxes
Answer:
2) On the date of initial issuance of a financial instrument , the
market value will equal
A.the initial issue proceeds [the amount borrowed]
B.the sum of the future cash flows
C.the maturity value of the instrument
D.the par value of the instrument
E.the par value of the instrument minus the premium or plus a
discount
Answer:
3) Which of the following is/are true?
A.Acquisition cost for a merchandising firm includes the costs
incurred to purchase and transport the inventory prior to sale
B.Acquisition cost for a manufacturing firm includes the direct
material, direct labor, and manufacturing overhead cost to produce
the inventory
C.If the market values of inventory items decline below acquisition
cost prior to sale, firms must reduce their balance sheet carrying
values using the lower of cost or market method
D.U.S. GAAP uses a combination of replacement cost and net
realizable values to measure market value
E.all of the above
Answer:
4) Prepaid assets are valued on the balance sheet at
A.cost paid to acquire the asset
B.acquisition cost less accumulated depreciation
C.cost less expired portion
D.replacement cost
E.present value of future cash flows
Answer:
5) Here is data from Cellular Communications, Inc.
| December 31 | ||
| BALANCE SHEET ITEMS | Year 7 | Year 6 |
| Accounts Payable | $5,219 | $7,873 |
| Accounts Receivable | 58,363 | 48,645 |
| Bonds Payable (due Year 20) | 10,313 | 4,602 |
| Cash | 821 | 668 |
| Common Stock | 560 | 540 |
| Income Taxes Payable | 414 | 580 |
| Inventories | 33,305 | 30,752 |
| Other Current Assets | 2,681 | 742 |
| Other Current Liabilities | 185 | 1,115 |
| Other Noncurrent Assets | 90 | 152 |
| Property, Plant, and Equipment | 21,881 | 15,972 |
| Retained Earnings | 99,969 | 81,627 |
| Salaries Payable | 481 | 594 |
| INCOME STATEMENT ITEMS | Year 7 |
| Administrative Expense | $20,588 |
| Cost of Goods Sold | 246,864 |
| Income Tax Expense | 7,267 |
| Interest Expense | 1,803 |
| Sales Revenue | 361,026 |
| Salary and Wage Expense | 21,367 |
| Selling Expense | 44,795 |
Required:
a. Prepare a comparative balance sheet for Cellular Communications
Inc. as of December 31, Year 6 and Year 7 . Classify each balance
sheet item into one of the following categories: current assets,
noncurrent assets, current liabilities, noncurrent liabilities, and
shareholders’ equity.
b. Prepare an income statement for Cellular Communications Inc. for
Year 7 .
c. Prepare a schedule explaining the change in retained earnings
between the beginning and the end of Year 7.
d. Compare the amounts on Cellular Communications Inc. balance
sheet on December 31, Year 6, and December 31, Year 7 . Identify
the major changes and suggest possible explanations for the
changes.
Answer:
6) A manufacturing firm has manufacturing costs which become product
costs. These manufacturing costs do not include:
A.direct material costs (or raw material costs)
B.direct labor costs
C.manufacturing overhead costs (sometimes called indirect
manufacturing costs)
D.expenditures for administrative staff
E.expenditures for supervisors salaries, factory utilities,
property taxes, insurance, and depreciation on manufacturing plant
and equipment
Answer:
7) Sales discounts and allowances include:
A.allowances for unsatisfactory merchandise
B.discounts for prompt payment
C.allowances for satisfactory merchandise
D.interest charges for late payment
E.choices a and b
Answer:
8) (CMA adapted, Dec 89 #8) On January 1, Year 1, Toga Corporation
granted stock options to top management. The options were
exercisable within 4 years from the date of grant only if the
employee was still in Toga’s employ. When computing year-end
earnings per share at December 31, Year 1, Toga should
A.exclude the options until the year they are exercisable
B.include the options in diluted earnings per share if they are
dilutive
C.include the options in diluted earnings per share if they are
antidilutive
D.ignore the options because they are not considered common stock
equivalents
E.recognize the value of the options each year in the income
statement until they are exercised
Answer:
9) Which of the following is/are true?
A.Stock rights give their holder the right to acquire shares of
stock at a specified price
B.Firms grant stock rights to current shareholders
C.Shareholders may exercise the stock rights or sell them to
others
D.The stock rights usually trade in public markets
E.all of the above
Answer:
10) Authoritative guidance requires firms that account for notes and
bonds using the _____ market interest rate to report the carrying
values, or book values, on the balance sheet and to disclose the
_____ of these notes and bonds in notes to the financial
statements.
A.average; historical market interest rates
B.historical; future value
C.current; future value
D.historical, fair value
E.current; historical market interest rates
Answer:
11) On January 1, Year 3, All Business Machines (ABM) issued 1,000
shares of its common stock for a building. Real estate appraisers
estimated the building to have a market value of $55,000 on the
date of acquisition. The common stock of ABM sold for $50 per share
on the date of the acquisition. On January 1, Year 3, ABM paid $650
in real estate transfer taxes, $500 in real estate legal fees for
recording the transaction, $1,750 in property taxes for Year 3, and
$2,000 for a two-year insurance policy beginning January 1, Year 3.
At what amount should the building appear in the Building account
of ABM on January 1, Year 3?
A.$51,150
B.$52,900
C.$56,150
D.$59,900
E.$61,900
Answer:
12) A firm issues convertible bonds that pay 8% interest and receives
$100,000. The firm could have issued nonconvertible bonds that pay
8% interest but would have received only $80,000 in bond proceeds.
What journal entry is necessary under GAAP to record the issuance
of the convertible bonds?
A.Cash100,000
Convertible Bonds Payable80,000
Additional Paid-in Capital 20,000
B.Cash100,000
Convertible Bonds Payable 80,000
Convertible Bond income 20,000
C.Cash100,000
Convertible Bonds Payable100,000
D.Convertible Bonds Payable100,000
Cash 100,000
E.No entry is required
Answer:
13) Some analysts calculate the inventory turnover ratio by dividing
sales, rather than cost of goods sold, by the average inventory.
Which of the following regarding the inventory turnover ratio
is/are not true?
A.Using sales in the numerator, will lead to incorrect measures of
the inventory turnover ratio for calculating the average number of
days that inventory is on hand until sale
B.As long as the ratio of selling price to cost of goods sold
remains relatively constant, either measure will identify changes
in the trend of the inventory turnover ratio
C.Using sales in the numerator, will lead to correct measures of
the inventory turnover ratio for calculating the average number of
days that inventory is on hand until sale
D.Choices a and b
E.None of the above
Answer:
14) 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
Answer:
15) (CMA adapted, Jun 96 #18) The book value per share calculation of a
corporation is usually significantly different from the market
value of the stock’s selling price due to the
A.use of accrual accounting in preparing financial statements
B.use of the matching principle in preparing financial
statements
C.omission of the number of preferred shares outstanding at year
end in the calculation
D.use of historical costs in preparing financial statements
E.none of the above
Answer:
16) The seller of merchandise often offers a reduction from the invoice
price for prompt payment, this is called a
A.sales discount
B.purchase allowance
C.incentive discount
D.prompt payment discount
E.all of the above
Answer:
17) The typical last step in financial statement analysis and valuation
(after selecting assumptions) is:
A.Understand the Purpose and Content of the Principal Financial
Statements and Related Notes
B.Identify the Industry Economic Characteristics and Firms
Strategy
C.Calculate and Interpret Profitability and Risk Ratios
D.Prepare Pro Forma, or Projected, Financial Statements
E.Value the Firm
Answer:
18) Which of the following is/are true?
A.The percentage-of-sales procedure (1) estimates the amount of
uncollectible accounts that will likely occur over time in
connection with sales of each period and (2) makes an entry
debiting Bad Debt expense and crediting Allowance for Uncollectible
Accounts
B.The aging-of-accounts-receivable procedure (1) estimates the
amount of outstanding accounts receivable that the firm does not
expect to collect and (2) adjusts the balance in the Allowance for
Uncollectible Accounts so that, after the entry to recognize
estimated uncollectibles, the balance in the account will equal the
amount that the firm does not expect to collect
C.The percentage-of-sales and the aging-of-accounts-receivable
procedures should produce a balance in the Allowance for
Uncollectible Accounts that is approximately the same at the end of
each period
D.all of the above
E.none of the above
Answer:
19) When a capital lease for equipment is signed, the lessee records a
liability called
A.lease liability
B.future value of capital lease payments
C.equipment
D.equipment leasehold
E.present value of capital lease payments
Answer:
20) The capital lease method classifies the portion of the lease
payment related to interest expense as an ________use of cash and
the portion related to a reduction in the lease liability as a
_________ use of cash.
A.operating; investing
B.operating; financing
C.financing; investing
D.investing; financing
E.financing; operating
Answer:
21) All corporations issue
A.common stock
B.preferred stock
C.treasury stock
D.convertible stock
E.putable stock
Answer:
22) Devlin Company
|
Devlin Company Statement of Financial Positionas of May 31 (in thousands) |
||
| Assets | Year 7 | Year 6 |
| Current assets | ||
| Cash | $45 | $38 |
| Trading securities | 30 | 20 |
| Accounts receivable (net) | 68 | 48 |
| Inventories | 90 | 80 |
| Prepaid expenses | 22 | 30 |
| Total current assets | $255 | $216 |
| Investments, at equity | 38 | 30 |
| Property, plant, and equipment (net) | 375 | 400 |
| Intangible assets (net) | 80 | 45 |
| Total assets | $748 | $691 |
| Liabilities and shareholders’ equity | ||
| Current liabilities | ||
| Notes payable | $35 | $18 |
| Accounts payable | 70 | 42 |
| Accrued expenses | 5 | 4 |
| Income taxes payable | 15 | 16 |
| Total current liabilities | 125 | 80 |
| Long-term debt | 35 | 35 |
| Deferred taxes | 3 | 2 |
| Total liabilities | $163 | $117 |
| Shareholders’ equity | ||
| Preferred stock, 6%, $100 par value, cumulative | 150 | 150 |
| Common stock, $10 par value | 225 | 195 |
| Additional paid-in capital-common stock | 114 | 100 |
| Retained earnings | 96 | 129 |
| Total shareholders’ equity | $585 | $574 |
| Total liabilities and shareholders’ equity | $748 | $691 |
|
Devlin Company Income StatementFor the year ended May 31 (in thousands) |
||
| Year 7 | Year 6 | |
| Net sales | $480 | $460 |
| Costs and expenses | ||
| Cost of goods sold | 330 | 315 |
| Selling, general, and administrative | 52 | 51 |
| Interest expense | 8 | 9 |
| Income before taxes | $90 | $85 |
| Income taxes | 36 | 34 |
| Net income | $54 | $51 |
(CMA adapted, Jun 97 #15) Refer to the Devlin Company example.
Devlin Company’s inventory turnover for the year ended May 31, Year
7, was
A.3.67 times
B.3.88 times
C.5.33 times
D.5.65 times
E.5.95 times
Answer:
23) City Bicycle
City Bicycle , a cycling store has a beginning inventory of one
bi-level touring bicycle 1, for which it paid $2,500. Suppose that
during the period the store purchases bi-level touring bicycle 2
for $2,900 and bi-level touring bicycle 3 for $3,000, and that it
sells one bicycle for $5,500. The three bicycles are physically
identical; the store acquired them at different times as their
acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the
specific identification system, and uses serial numbers or product
bar codes to identify bi-level touring bicycle 2 as the unit sold.
The cost of goods sold is _____, and the ending inventory is
_____.
A.$2,900; $5,500
B.$2,500; $5,900
C.$3,000; $5,400
D.$2,800; $5,600
E.cannot be determined with the information given
Answer:
24) The income statement provides information for assessing the
operating profitability of a firm. One tool used for analysis is
the common-size income statement that expresses
A.each expense and net income as a percentage of revenues
B.each revenue and net income as a percentage of expenses
C.each expense and net income as a percentage of total assets
D.each expense and net income as a percentage of shareholders’
equity
E.each revenue and net income as a percentage of shareholders’
equity
Answer:
25) The _____ of an asset is the amount a firm would have to pay to
obtain another asset with identical service potential; it is an
entry value that reflects economic conditions at the measurement
date.
A.Current Replacement Cost
B.Net Realizable Value
C.Fair Value
D.Present Value of Future Net Cash Flows.
E.Acquisition cost
Answer:
26) 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 #2) Refer to the Alsup Company example. Alsup Company
uses the direct method to prepare its statement of cash flows at
December 31, Year 4. The interest that is paid to bondholders would
be reported in the
A.Financing Section, as a use or outflow of cash
B.Operating Section, as a use or outflow of cash
C.Investing Section, as a use or outflow of cash
D.Debt Section, as a use or outflow of cash
E.Financing Section, as a source or inflow of cash
Answer:
27) In a statement of cash flows, interest payments to lenders should
be classified as cash outflows for
A.operating activities
B.financing activities
C.investing activities
D.lending activities
E.exchange transactions
Answer:
28) Ratios used to evaluate the allowance for uncollectibles are
A.Bad Debt Expense to Sales Revenue and the ratio of the Accounts
Receivable, Gross to Allowance for Uncollectibles to Accounts
B.Sales Revenue to Bad Debt Expense and the ratio of the Accounts
Receivable, Gross to Allowance for Uncollectibles to Accounts
C.Sales Revenue to Bad Debt Expense and the ratio of the Allowance
for Uncollectibles to Accounts Receivable, Gross
D.Bad Debt Expense to Sales Revenue and the ratio of the Allowance
for Uncollectibles to Accounts Receivable, Gross
E.none of the above
Answer: