1) Net income for a particular period will likely differ from cash
flow from operations for the same period.
Answer:
2) U.S. GAAP and IFRS require firms to disclose unrealized gains and
losses that historically have bypassed the income statement in a
category called other comprehensive income.
Answer:
3) Accounting does not normally recognize mutually unexecuted
contracts as assets or liabilities.
Answer:
4) Some analysts focus attention on cash flow from operations,
thinking it as important as, or more important than, net income as
a performance measure. Interpreting cash from operations as a
measure of operating performance requires considering cash flows
along two dimensions: (1) their timing and (2) their classification
and disclosure in the statement and related notes. Explain.
Answer:
5) The measurement of cash is the present value of future cash flows
of the instruments included in this category.
Answer:
6) For many firms, the liability for the underfunded health care
obligation exceeds the liability for underfunded pensions.
Answer:
7) U.S. GAAP requires firms to expense research and development
(R&D) costs in the period incurred.
Answer:
8) Define liability. When is it recognized?
Answer:
9) The balance sheet amount of shareholders equity does not, and is
not intended to, provide the user of the financial reports with a
measure of the market value of common equity.
Answer:
10) Describe Asset recognition, definition, and measurement.
Answer:
11) Both U.S. GAAP and IFRS do not require the allowance method for
uncollectible accounts, which involves estimating the amount of
uncollectible accounts receivable associated with each accounting
periods credit sales.
Answer:
12) Both U.S. GAAP and IFRS require the disclosure of information about
the rights of each type of capital stock outstanding.
Answer:
13) Historically, recognition has described a preference for financial
reporting such that possible errors in measurement be in the
direction of understatement rather than overstatement of net income
and net assets.
Answer:
14) How do sellers measure revenue?
Answer:
15) Concerns over the quality of financial reporting have led, and
continue to lead, to government
initiatives in the United States including, the Sarbanes-Oxley Act
of 2002. Briefly describe the Sarbanes-Oxley Act of 2002.
Answer:
16) Gains and losses on derivatives not designated as hedges of a
specific risk, gains and losses on fair value hedges, and the
ineffective portion of cash flow hedges affect net income
simultaneously with changes in fair value.
Answer:
17) The historical amount reflects the acquisition cost of assets or
the amount of funds originally obtained from creditors or owners.
Answer:
18) The current replacement cost 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.
Answer:
19) The balance sheet begins with a list of assets and then lists
liabilities and shareholders equity.
Answer:
20) The following transactions relate to MicroChip, a manufacturer
located in Thailand. Indicate whether each transaction immediately
gives rise to an asset of the company under U.S. GAAP and
separately, under IFRS. If MicroChip recognizes an asset, state the
account title, the amount, and the classification of the asset on
the balance sheet as either a current asset or a noncurrent asset.
MicroChip reports its results in millions of baht (Bt).
a. MicroChip invests Bt800 million in a government bond. The
bond has a maturity value of Bt1,000 million in five years, and
MicroChip intends to hold the bond to maturity.
b. Two months prior to its year-end, MicroChip pays its insurer
Bt240 million to cover annual premiums on its European plants.
c. MicroChip pays a developer in another country Bt6 million
for an option to purchase a tract of land on which it intends to
build a warehouse to serve future markets. The price of the land is
Bt450 million.
d. MicroChip signs a four-year employment agreement with its
chief executive officer for a package valued at Bt17.4 million per
year. Of this amount, Bt3.1 million is base salary; the rest is
expected bonus and deferred compensation arrangements. The contract
period begins next month.
e. MicroChip spends Bt80 million on research and development
(R&D) related to new, circuitry; 60% of the total amount was
spent on pure research, the rest on development. The R&D is
successful, and the firm is able to acquire a patent on the new
circuitry. The cost of filing the paperwork and other procedures to
obtain the patent is Bt0.5 million.
f. MicroChip received notice that a component supplier had
shipped by freight components invoiced at Bt700 million with
payment due in 30 days. The supplier retains title to the
components until received by MicroChip.
Answer:
21) During Year 2, Lamar Corporation purchased $600,000 of merchandise
inventory. The cost of sales for year 2 was $660,000 and the ending
merchandise inventory at December 31, Year 2 was $60,000. What was
the inventory turnover for Year 2?
A.8.0
B.7.3
C.6.6
D.6.0
E.6.7
Answer:
22) Revenues from marketable securities and investments in securities,
interest expense on borrowings, and gains and losses from
peripheral activities appear as _____. The firm expects these
sources of earnings to continue.
A.income from continuing operations
B.income, gains, and losses from discontinued operations
C.extraordinary gains and losses
D.retained earnings
E.paid-in-capital
Answer:
23) U.S. GAAP and IFRS provide criteria for distinguishing operating
leases from capital leases. Which of the following is not true?
A.Under the capital, or finance, lease method, the lessor records
the signing of a capital lease the same as if the lessor sold the
leased asset for an installment note receivable
B.Under the capital, or finance, lease method, the lessee
recognizes interest expense on the lease liability, similar to
recognizing interest expense on long-term notes or bonds
C.Under the capital, or finance, lease method, the lessee amortizes
the leased asset, similar to recognizing depreciation on buildings
and equipment
D.Under the capital, or finance, lease method, 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
E.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
Answer:
24) Which of the following is not true about goodwill?
A.Goodwill reflects the value of knowledgeable employees
B.Goodwill reflects the value of a reputation for quality
products
C.Under IFRS, goodwill has an indefinite life, and firms do not
amortize the amount recognized as goodwill
D.Firms must test goodwill annually for a loss in value
E.Under U.S. GAAP, goodwill has an indefinite life, and firms
amortize the amount recognized as goodwill
Answer:
25) Which of the following is not a business activity?
A.Establishing goals and strategies
B.Obtaining financing
C.Making investments
D.Conducting operations
E.All of these choices are business activities
Answer:
26) Fix-It Hardware
Fix-It Hardware began the month of November with 150 large brass
switchplates on hand at a cost of $4.00 each. These switchplates
sell for $7.00 each. The following schedule presents the sales and
purchases of this item during the month of November.
| Purchases | |||
| Date of Transaction | Quantity Received | Unit Cost | Units Sold |
| November 5 | 100 | ||
| November 7 | 200 | $4.20 | |
| November 9 | 150 | ||
| November 11 | 200 | 4.40 | |
| November 17 | 220 | ||
| November 22 | 250 | 4.80 | |
| November 29 | 100 | ||
Refer to the Fix-It Hardware example. A growing firm is
contemplating switching from a FIFO to a LIFO cost flow assumption
for inventories and cost of goods sold because it has recently
experienced increasing manufacturing costs for its products and
anticipates a prolonged period of increasing quantities and
manufacturing costs in the future. The firm wishes to know which of
the following statements about the effect of the switch to LIFO
is/are correct, relative to remaining on FIFO (ignore income tax
effects):
A.the current ratio will be higher
B.the inventory turnover will be lower
C.the cost of goods sold to sales percentage will be lower
D.all of the above
E.none of the above
Answer:
27) In Year 8, Global Marketing Corporation had a net increase in
inventories of $50,000. The T-account work sheet for preparing the
statement of cash flows
A.adds this change in inventory in deriving cash flow from
operating activities
B.adds this change in inventory in deriving cash flow from
financing activities
C.subtracts this change in inventory in deriving cash flow from
operating activities
D.subtracts this change in inventory in deriving cash flow from
financing activities
E.subtracts this change in inventory in deriving cash flow from
investment activities
Answer:
28) Of the three cost-flow assumptions, when inventory costs have been
falling 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
Answer:
29) The following information is available from the comparative balance
sheets and related income statement of the Horner Company for the
year ended December 31, Year 7.
| December 31, | December 31, | |
| Year 6 | Year 7 | |
| Present value of lease obligation | $2,040,508.60 | $1,862,939.10 |
| Leasehold (net of accumulated amortization) | $1,987,224.30 | $1,766,421.60 |
| Interest expense on lease obligation for Year 7 | $122,430.52 | |
The company has only one lease contract outstanding, which
it entered into on January 1, Year 6. The contract called for 10
equal lease payments commencing on December 31, Year 6.
Required:
a. What was the interest rate used to value the lease?
b. What is the annual lease payment?
c. What was the present value of the lease obligation on January 1,
Year 6?
d. What was the amortization expense for Year 6?
Answer:
30) A T-account is a device or convention for organizing and
accumulating the accounting entries of transactions that affect an
individual account. Which of the following is/are true?
A.Increases in assets appear on the left side, and decreases in
assets appear on the right side of T-accounts
B.Increases in liabilities appear on the right side, and decreases
in liabilities appear on the left side of T-accounts
C.Increases in shareholders equity appear on the right side, and
decreases in shareholders equity appear on the left side of
T-accounts
D.All of the above are true
E.None of the above are true
Answer:
31) 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 lessee 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 lessor 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:
32) T-accounts are frequently used in textbooks, demonstration
problems, and examinations to accumulate information about the
effects of business transactions on individual balance sheet
accounts and to prepare the balance sheet. Alternatively, to
accomplish the same objectives, some instructors and students might
prefer to use
A.a computer spreadsheet program
B.P-accounts, only
C.a single-entry bookkeeping system
D.P&L-accounts
E.L-accounts, only
Answer:
33) Which of the following is the method of reporting amounts of cash
received from customers less cash disbursed to various suppliers,
employees, lenders for interest payments, and taxing authorities,
allowed by U.S. GAAP?
A.the direct method
B.the indirect method
C.both the direct method and the indirect method
D.the schedule of cash receipts and cash disbursements
E.the funds flow statement
Answer:
34) An understanding of the accounting for employee stock options
(ESOs) requires several definitions. Which of the following is not
true?
A.The grant date is the date employees exchange the option and cash
for shares of common stock
B.The vesting date is the first date employees can exercise their
stock options
C.A vesting period that depends only on the passage of time is a
service condition
D.A vesting period that depends on achieving a specified level of
profitability or meeting some other nonshare-price-based target is
a performance condition
E.A vesting period that depends on the firms stock price reaching a
specified target is a market condition
Answer:
35) Energy Corporation, a U.S. diversified power management company,
reported a balance in Retained Earnings of $2,800 million at the
beginning of 2013 and $3,300 million at the end of 2013. Based on
Energy Corporations financial reports for fiscal 2013, it reported
dividends declared and paid of $250 million for 2013. Compute the
amount of net income for 2013. (Energy Corporation applies U.S.
GAAP, and reports its results in millions of U.S. dollars.)
A.-$250 million
B.$250 million
C.$550 million
D.$750 million
E.none of the above
Answer:
36) The 2013 annual report of Travel Industries reports the following
data about its marketable securities held available-for-sale.
| Travel Industries | |||||||||||||
| Securities Available-for-Sale | |||||||||||||
| Data from 2013 Annual Report | |||||||||||||
| (Dollar Amounts in Millions) | |||||||||||||
| At Year End | During Year Ended 12/31 | ||||||||||||
| Gross Unrealized | Fair | Proceeds | Realized | ||||||||||
| Cost | Gains | (Losses) | Value | Year | of Sale | Gains | (Losses) | ||||||
| Dec. 31-12 | $517 | $81 | $(4) | $594 | 2012 | $410 | $13 | $2 | |||||
| Dec. 31-13 | 883 | 90 | (6) | 967 | 2013 | 431 | 10 | 2 | |||||
Required:
a. What was the cost of the securities available-for-sale that
Travel Industries sold during the year 2013?
b. What was the cost of the securities available-for-sale that
Travel Industries purchased during the year 2013?
c. What was Travel Industries’ Other Comprehensive Income related
to securities available-for-sale for 2013?
d. What were the total gains or losses, net, both realized and
unrealized on Travel Industries’ securities available-for-sale
during the year 2013?
Answer:
37) The faster a firm grows, the greater is the shortfall in cash and
the firm might borrow funds from the bank on a revolving credit
arrangement. Why?
A.Most of the cash outflows for expenses occur before the firm
receives the cash inflows from a sale
B.The lag between cash outflows and cash inflows can lead to cash
shortfalls
C.Cash disbursements to employees and suppliers precede cash
collections from customers
D.all of the above
E.none of the above
Answer:
38) Which section includes income derived from a firms primary business
activities as well as from activities peripherally related to
operations? (Assume the firm expects these sources of earnings to
continue.)
A.income from continuing operations
B.income, gains, and losses from discontinued operations
C.extraordinary gains and losses
D.retained earnings
E.paid-in-capital
Answer:
39) Llama Company signed a new $36,000 three-year lease beginning
October 1, Year 1, for a storage facility for holding merchandise
inventory. On October 1, Year 1, Llama Company recorded the first
year’s payment of $12,000 in the Prepaid Rent account. There was no
balance in the Prepaid Rent account prior to this entry. Llama
Company records adjustments only at the calendar year end. At
December 31, Year 1, the adjusting entry needed to accurately
reflect the correct balances in the Prepaid Rent and Rent Expense
accounts would be to debit:
A.Prepaid Rent for $12,000 and credit Rent Expense for $12,000
B.Rent Expense for $12,000 and credit Prepaid Rent for $12,000
C.Prepaid Rent for $3,000 and credit Rent Expense for $3,000
D.Rent Expense for $3,000 and credit Prepaid Rent for $3,000
E.Prepaid Rent for $9,000 and credit Rent Expense for $9,000
Answer:
40) The principle for cost inclusion is that the balance sheet amount
for inventory should include all costs incurred to
A.acquire goods, only
B.prepare the goods for sale, only
C.acquire goods and prepare them for sale
D.acquire goods, prepare them for sale, and transport them to the
buyer
E.acquire goods, prepare them for sale, and sales commissions
Answer:
41) When customers return goods for cash refunds or, if the customer
has not yet paid, for cancellation of the customers obligation to
pay, the firm records a sales
A.allowance
B.return
C.discount
D.credit
E.debit
Answer:
42) Which of the following is/are true?
A.U.S. GAAP and IFRS classify preferred stock subject to redemption
only at the option of the issuing firm as shareholders equity
B.U.S. GAAP and IFRS classify preferred stock subject to mandatory
redemption is a liability
C.U.S. GAAP classify preferred stock subject to redemption at the
option of the preferred shareholders appears between liabilities
and shareholders equity
D.IFRS classify preferred stock subject to redemption at the option
of the preferred shareholders appears as a liability
E.all of the above
Answer:
43) The stockholders’ equity of a firm can be defined as
A.net current assets
B.net noncurrent assets
C.a residual interest
D.total assets plus total liabilities
E.the owners’ claim to the assets and liabilities
Answer:
44) Which is a source of cash?
A.increase in inventory
B.decrease in bonds payable
C.decrease in accounts payable
D.decrease in accounts receivable
E.increase in prepaid assets
Answer:
45) A(n) _____ item is expected to generate cash over periods longer
than a year or use cash over periods longer than a year.
A.illiquid
B.appropriated
C.liquid
D.current
E.noncurrent
Answer:
46) For which type of investments would unrealized increases and
decreases be recorded directly in an owners’ equity account?
A.Equity method securities
B.Available-for-sale securities
C.Trading securities
D.Held-to-maturity securities
E.None of these answer choices is correct
Answer:
47) The statement of cash flows for Lights-On, a leading electric
utility for the year ended December 31, 20×2, showed a net cash
inflow from operations of $427,000 million and a net cash outflow
for financing of $21,800 million. The comparative balance sheets
showed a balance in cash of $32,700 at December 31, 20×1, and
$101,200 at December 31, 20×2. Compute the net amount of cash
provided or used by Lights-Ons investing activities for 20×2.
A.$68,500 million provided
B.$271,300 million used
C.$372,500 million provided
D.$336,700 million used
E.$236,700 million used
Answer:
48) U.S. GAAP requires which of the following disclosures about
marketable securities each period?
A.The aggregate fair value, gross unrealized holding gains, gross
unrealized holding losses, and amortized cost for debt securities
held to maturity and for debt and equity securities
available-for-sale
B.The proceeds from sales of securities available-for-sale, and the
gross realized gains and gross realized losses on those sales. The
statement of cash flows shows the cash expenditures to purchase
available-for-sale securities and the cash receipts from maturities
and sales of available-for-sale securities
C.The change during the period in the net unrealized holding gain
or loss on securities available-for-sale included in a separate
shareholders equity account
D.The change during the period in the net unrealized holding gain
or loss on trading securities included in earnings
E.all of the above
Answer:
49) 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:
50) Comparing firms using a common-size balance sheet rests on the
assumption that
A.the size or scale of a business does not affect the relation
between a given balance sheet item and total assets
B.the size or scale of a business does affect the relation between
a given balance sheet item and total assets
C.the large purchaser can negotiate better terms, including lower
per-unit prices
D.more negotiating power would appear on the large purchasers
balance sheet as proportionately smaller amounts reported for
inventory relative to the amounts reported by a smaller purchaser
with less negotiating power
E.more negotiating power would appear on the large purchasers
balance sheet as proportionately larger amounts reported for
accounts payable relative to the amounts reported by a smaller
purchaser with less negotiating power
Answer:
51) U.S. GAAP specifies criteria for a capital lease. Which of the
following is not one of the criteria?
A.The lease transfers ownership of the leased asset to the lessee
at the end of the lease term
B.Transfer of ownership at the end of the lease term seems likely
because the lessee has a bargain purchase option
C.The lease extends for at least 75% of the assets expected useful
life
D.The lease extends for at least 50% of the assets expected useful
life
E.The present value of the contractual minimum lease payments
equals or exceeds 90% of the fair value of the asset at the time
the lessee signs the lease using a discount rate appropriate for
the creditworthiness of the lessee
Answer:
52) The criteria for liability recognition include(s):
A.the item represents a present obligation, not a potential future
commitment or intent
B.the obligation must exist as a result of a past transaction or
exchange, called the obligating event
C.the obligation must require a probable future economic resource
that the firm has little or no discretion to avoid
D.the obligation must have a relevant measurement attribute that
the firm can quantify with sufficient reliability
E.All of these answers are correct
Answer:
53) According to U.S. GAAP, firms holding debt securities with a
positive intent and ability to hold to maturity display such
securities in the Investments section of the balance sheet at
A.amortized acquisition cost
B.market value
C.maturity value
D.future value of future cash flows
E.present value of future cash flows
Answer:
54) The total assets turnover ratio indicates
A.the sales generated from each dollar of assets
B.the portion of the sales dollar left over for the common
shareholders after covering all operating costs and subtracting
claims of creditors and preferred shareholders
C.the portion of the sales dollar left over for the preferred
shareholders after covering all operating costs and subtracting
claims of creditors and common shareholders
D.the proportion of total assets, or total financing, provided by
common shareholders contrasted with the financing provided by
creditors and preferred shareholders
E.the proportion of total assets, or total financing, provided by
preferred shareholders contrasted with the financing provided by
creditors and common shareholders
Answer:
55) _____ must be used by U.S. Securities and Exchange Commission (SEC)
registrants.
A.U.S. GAAP
B.International Financial Reporting Standards (IFRS)
C.U.S. GAAS
D.International GAAP
E.International GAAS
Answer:
56) Firms include trading securities in _____ in the _____ section of
the _____.
A.held-to-maturity securities; current assets; balance sheet
B.marketable securities; noncurrent assets; statement of cash
flows
C.marketable securities; current assets; balance sheet
D.held-to-maturity securities; noncurrent assets; balance sheet
E.held-to-maturity securities; current assets; statement of cash
flows
Answer:
57) Which of the following is/are true regarding the balance sheet?
A.The balance sheet does not provide all the information an analyst
wants or needs about a firms resources and the claims on those
resources
B.Authoritative accounting guidance precludes the recognition of
some resources on the balance sheet as assets and some obligations
as liabilities
C.Amounts reported on the balance sheet for assets, liabilities,
and shareholders equity do not necessarily reflect current market
conditions
D.Astute analysts recognize the features of the balance sheet and
adjust the reported numbers
E.All of these answer choices are correct
Answer: