1) Acquired in-process research and development (IPR&D) is never
deductible for tax purposes and results in an increased effective
tax rate.
Answer:
2) Culinary Delites, a European food retailer engaged in the following
three transactions during 2013: (1) purchased and received
inventory costing 978 million on account from various suppliers;
(2) returned inventory costing 57 million because of damage that
occurred during shipment; (3) paid the various suppliers the total
amount due. Indicate the effects of each of these three
transactions on the balance sheet equation. Culinary Delites
applies IFRS and reports its results in millions of euros ().
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3) What is the relationship between a T-account and a journal entry?
Answer:
4) Operating risk arises from the asset side of the business, and
financing risk arises from debt.
Answer:
5) Authoritative accounting guidance precludes the recognition of some
resources as assets and some obligations as liabilities.
Answer:
6) Discuss the presentation of long-lived assets in the balance sheet
and income statement.
Answer:
7) Firms that use International Financial Reporting Standards (IFRS)
may, but need not, list their assets from least liquid to most
liquid, with the same ordering used to list liabilities.
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8) Explain the accounting for leases.
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9) How do firms report accounts receivable?
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10) Backup Corp. received a charter authorizing 120,000 shares of
common stock at $15 par value per share. During the first year of
operations, 40,000 shares were sold at $28 per share. 600 shares
were issued in payment of a current operating debt of $18,600. In
the first year, the net income was $142,000.
During the year, dividends of $36,000 were paid to stockholders. At
the end of the year, total liabilities were $82,000. Use the given
data to compute the following items at the end of the first year
(show all computations):
| (1) | Total liabilities and stockholders’ equity |
| (2) | Stockholders’ equity |
| (3) | Contributed capital |
| (4) | Issued capital stock (par) |
| (5) | Outstanding capital stock (par) |
| (6) | Unissued capital stock (number of shares) |
| (7) | Paid-In capital in excess of par value |
Answer:
11) The equation that describes the relationship between the balance
sheet and the income statement through the Retained Earnings
account is as follows:
Retained Earnings (beginning) + Net Income – Dividends = Retained
Earnings (ending)
Answer:
12) Describe the complexities of permanent and temporary differences on
the financial reporting requirements for income taxes.
Answer:
13) Describe comprehensive income, net income, and other comprehensive
income.
Answer:
14) Complete the shareholders’ equity section for each of the following
independent situations.
| CASE A | CASE B | CASE C | |
| Common stock, 10,000 shares | A | C | E |
| Additional paid-in capital | 25,000 | D | 30,000 |
| Retained earnings | 45,000 | 25,000 | 20,000 |
| Total shareholders’ equity | 80,000 | 100,000 | F |
| Par value per share | B | 1.50 | 2.50 |
Answer:
15) Describe what a consolidated income statement shows.
Answer:
16) If firms expect to receive cash more than one year after the time
of recognizing revenue, they measure revenues at the present value
of the amount of cash they expect to receive.
Answer:
17) U.S. GAAP and IFRS do not require firms to disclose the fair value
of long-term notes and bonds in notes to the financial statements.
Answer:
18) The future value of held-to-maturity debt securities reflects the
economic opportunity cost of continuing to hold the securities.
Answer:
19) Common and preferred stock usually do not have a par or stated
value.
Answer:
20) Assets are classified as current for reporting purposes when
A.shares of common stock in a company’s important supplier are
acquired to ensure continued availability of raw materials
B.shares of common stock in another company are acquired to
diversify operations
C.expenditures are made in developing new technologies or
advertising products
D.they are reasonably expected to be turned into cash or to be sold
or consumed during the normal operating cycle of the business
E.they are reasonably expected to be turned into cash or to be sold
or consumed within the next three years
Answer:
21) Business firms have several reasons for preferring to operate as a
group of legally separate corporations, rather than as a single
entity. From the standpoint of the parent company, the more
important reasons for maintaining legally separate subsidiary
companies include which of the following?
A.To reduce the parents legal or operational risk
B.To reduce the costs of dealing with jurisdiction-specific
differences in corporate laws and tax rules
C.To expand or diversify
D.To reduce the costs of divesting assets
E.all of the above
Answer:
22) Indicate whether each of the following independent transactions is
a capital (C) or operating (O) lease.
a. __________ A firm signs a 5-year lease for equipment with a
7-year life.
b. __________ A firm signs a lease for property with a fair market
value of $20,000. The present value of the lease payments is
$16,000.
c. __________ A firm signs a lease for equipment which will allow
the lessee to purchase the equipment at the end of the lease for
one-half the fair market value.
d. __________ A firm signs a 16-year lease for equipment with a
20-year life.
e. __________ A firm signs a lease for property with a fair value
of $90,000. The present value of the lease payments is $85,000.
Answer:
23) A firm may factor its accounts receivable to a bank or other
financial institution in exchange for cash. Which of the following
is/are not true?
A.The lender physically controls the receivables and collects cash
from customers
B.Accounts receivable that the firm has factored do not appear on
the balance sheet
C.The firm has sold the accounts receivable
D.The firm should disclose the factoring arrangement in its
financial reports
E.None of the above
Answer:
24) The first step in theprocedure for preparing the statement of cash
flows using a T-account work sheet is to
A.obtain a balance sheet for the beginning of the period of the
statement of cash flows
B.obtain a balance sheet for the ending of the period spanned by
the statement of cash flows
C.obtain a balance sheet for the beginning and the end of the
period spanned by the statement of cash flows
D.obtain an income statement for the beginning of the period of the
statement of cash flows
E.obtain an income statement for the end of the period of the
statement of cash flows
Answer:
25) A firm uses cash to _____ These amounts appear as cash flow from
financing activities in the statement of cash flows.
A.pay dividends to shareholders
B.repay borrowing
C.reacquire outstanding common shares
D.reacquire outstanding preferred shares
E.all of the above
Answer:
26) What is the key difference between the direct method and indirect
method for preparing the Statement of Cash Flows?
A.presentation of Cash from Operations
B.presentation of Cash from Investing
C.presentation of Cash from Financing
D.presentation of Cash from Investing and Cash from Financing
E.presentation of Cash from Operations, Cash from Investing and
Cash from Financing
Answer:
27) Firms communicate the results of their business activities in the
_____.
A.annual report to shareholders
B.weekly press releases
C.monthly press releases
D.annual press releases
E.annual income tax returns
Answer:
28) U.S. GAAP requires firms to recognize an impairment loss on a
nonamortized intangible other than goodwill whenever the carrying
value of the asset exceeds its
A.undiscounted cash flows less cost to sell
B.replacement cost less cost to sell
C.undiscounted cash flows
D.present value of future cash flows
E.fair value
Answer:
29) What is a probable future economic benefit that a firm controls
because of a past event or transaction?
A.asset
B.liability
C.shareholders equity
D.revenue
E.expense
Answer:
30) What affect(s) the market price of common stock shares?
A.changes in international tensions
B.economy-wide factors
C.specific industry factors
D.changes in exchange rates
E.all of the above
Answer:
31) 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 auditors
decisions in order to enhance the quality and consistency of the
audits
D.The FASB and the IASB have separately developed their conceptual
frameworks, and those frameworks are similar
E.The two standard-setting bodies are currently working to develop
a common conceptual framework for financial reporting
Answer:
32) Accrual accounting requires frequent, ongoing changes in estimates.
Which of the following is/are true?
A.As time passes and conditions change, new information becomes
available that causes management to change the estimates required
to apply accounting principles
B.Firms do not recalculate revenues and expenses of previous
periods to incorporate new information involving estimates
C.Changes in estimates do not always relate to recurring accrual
accounting measurements
D.Examples of changes in estimates include the amount of
uncollectible accounts and the useful lives of depreciable
assets
E.all of the above
Answer:
33) Focus Company sells merchandise with a one year warranty. In 2013,
sales consisted of 2,500 units. It is estimated that warranty
repairs will average $10 per unit sold, and 30% of the repairs will
be made in 2013 and 70% in 2014. In the 2013 income statement,
Focus should show warranty expense of
A.$25,000
B.$7,500
C.$17,500
D.$0
E.$12,500
Answer:
34) The extent to which a firm adjusts net income for changes in
noncurrent assets and noncurrent liabilities in deriving cash flow
from operations under the indirect method depends on the nature of
its operations Firms that grow or diversify by acquiring minority
ownership positions in other businesses will often show
A.an addition to net income for equity in undistributed
earnings
B.a subtraction from net income for equity in undistributed
earnings
C.an addition to net income for equity in distributed earnings
D.a subtraction from net income for equity in distributed
earnings
E.a subtraction from retained earnings for equity in undistributed
earnings
Answer:
35) At the beginning of the year, a firm leased equipment on a capital
lease, capitalizing $60,000 in its lease receivable account. The
contract calls for December 31 payments of $15,000. The lessors
annual reporting period ends December 31 and the contract reflects
10% interest. The lessee made the first payment as required. The
direct method statement of cash flows for the lessor should reflect
which of the following in the first year of the lease contract
(ignore noncash disclosures)?
A.$6,000 operating cash flow; $9,000 investing cash flow
B.$15,000 operating cash flow
C.$6,000 operating cash flow; $9,000 addition reconciling
adjustment
D.$9,000 investing cash flow
E.None of these answers is correct
Answer:
36) Which of the following elements of financial statements is not a
component of comprehensive income?
A.Revenues
B.Expenses
C.Losses
D.Distributions to owners
E.All of these are components of comprehensive income.
Answer:
37) The _____ ratio indicates how fast firms sell their inventory
items, measured in terms of the rate of movement of goods into and
out of the firm.
A.asset turnover
B.inventory turnover
C.asset
D.inventory
E.cost of goods sold
Answer:
38) Firms that need cash for long-term purposes, such as acquiring
buildings and equipment or financing a business acquisition, and
that wish to use debt as a means of obtaining cash, will
A.borrow from commercial banks
B.borrow from insurance companies
C.borrow from financial institutions
D.issue bonds in the capital markets
E.all of the above
Answer:
39) The amortization of a customer list are
A.product costs
B.period costs
C.not required under U.S. GAAP
D.not required under IFRS
E.pay back costs
Answer:
40) The qualitative characteristics describe the attributes that
enhance the usefulness of financial reporting information. The
FASBs conceptual framework sets forth the qualitative
characteristic of _____ that refers to financial reporting that
treats similar items the same way and different items differently.
Consistency refers to financial reporting that treats an item the
same way over time.
A.relevance
B.reliability
C.comparability
D.materiality
E.understandability
Answer:
41) Cash flow hedges are
A.hedges of a recognized asset or liability (or an identified
portion of a recognized asset or liability), only
B.hedges of an unrecognized firm commitment (or an identified
portion of that commitment), only
C.hedges on some or all of the cash flows of a recognized asset or
liability, only
D.hedges on some or all of the cash flows of forecasted
transactions, only
E.hedges on some or all of the cash flows of a recognized asset or
liability, and hedges on some or all of the cash flows of
forecasted transactions
Answer:
42) An impairment loss on all intangibles that do not require
amortization, except goodwill, arises when
A.the book value of the assets exceed the undiscounted cash
flows
B.the book value of the assets exceed the market value
C.the market value of the assets exceed the undiscounted cash
flows
D.the book value of the assets exceed the discounted cash flows
E.the book value of the assets exceed the liquidation value
Answer:
43) The adjustment for changes in operating working capital accounts
depends in part on a firms rate of growth. Some firms use suppliers
or other creditors to finance these working capital needs, which
are
A.classified as operating activities
B.classified as financing activities
C.classified as investing activities
D.disclosed in a supplementary schedule or notes to the financial
statements
E.disclose such changes in managements discussion and analysis
Answer:
44) The income statement of Peoples Motors Corporation, a U.S.
automotive manufacturer, for the year ended December 31, 20×1,
reported revenues of $207,000, cost of sales of $165,000, other
operating expenses, including income taxes of $50,000, and net
financing income, after taxes, of $6,000. Compute the amount of net
income or loss that Peoples Motors reported for 20×1.
A.net income of $0
B.net income of $2,000
C.net loss of $2,000
D.net income of $8,000
E.net loss of $8,000
Answer:
45) A liability arises when a firm
A.signs a new labor union contract which includes a 6% pay raise
for its union employees
B.issues a purchase order for 100,000 units of inventory from a
supplier over the next two years
C.receives inventory previously ordered
D.Both answers b and c are correct
E.None of these answer choices is correct
Answer:
46) Assets are classified as current for reporting purposes when
A.shares of common stock in a company’s important supplier are
acquired to ensure continued availability of raw materials
B.shares of common stock in another company are acquired to
diversify operations
C.expenditures are made in developing new technologies or
advertising products
D.they are reasonably expected to be turned into cash or to be sold
or consumed during the normal operating cycle of the business
E.None of these answer choices is correct
Answer:
47) U.S. GAAP requires firms holding securities available-for-sale to
value the securities on the balance sheet after acquisition at
A.an amount based on acquisition cost
B.market value, with changes in market value of securities held at
the end of the accounting period reported each period in income
C.market value, with changes in market value of securities held at
the end of the accounting period not affecting reported income
until the firm sells, or otherwise disposes of, the securities
D.market value, with changes in market value of securities held at
the end of the accounting period reported each period in retained
earnings
E.present value of future cash flows, with changes in market value
of securities held at the end of the accounting period reported
each period in retained earnings
Answer:
48) The joint efforts of the FASB and the IASB to set forth qualitative
characteristics of financial reporting information have led to
which of the following tentative enhancing qualitative
characteristics?
A.comparability, only
B.verifiability, only
C.understandability, only
D.timeliness, only
E.comparability, verifiability, timeliness, and understandability
Answer:
49) In IFRS, preferred stock subject to mandatory redemption is
disclosed
A.between liabilities and shareholders equity
B.as a liability
C.as a shareholders equity
D.as a revenue
E.as an expense
Answer:
50) Revenue and expense accounts
A.are permanent accounts
B.are temporary accounts
C.reflect cumulative changes in each account since the organization
of the firm
D.record all cash receipts and cash disbursements
E.none of the above
Answer:
51) The intermingling of performance of one period with that of
preceding or succeeding periods is characteristic of which basis of
accounting?
Cash basisAccrual basis
A.Yes Yes
B.YesNo
C.NoYes
D.NoNo
Answer:
52) Recent changes in the financial reporting environment include which
of the following?
A.The adoption or planned adoption of IFRS, or standards based on
IFRS, for financial reporting in over 100 countries
B.The willingness of the Securities and Exchange Commission in the
United States to permit non-U.S. firms that list and trade their
securities in the United States to report using IFRS without a
reconciliation to U.S. GAAP
C.The requirement to measure certain assets and liabilities at fair
value instead of acquisition cost, and in some cases, to include
the changes in fair value in net income instead of other
comprehensive income
D.The codification of U.S. GAAP into a single body of
literature
E.all of the above
Answer:
53) Which of the following is true?
A.Employees receive stock rights as a form of compensation
B.Employees in general may not transfer or sell stock rights to
others
C.Shareholders may exercise the stock rights or sell them to
others
D.The stock rights usually do not trade in public markets
E.Firms grant stock rights to current employees
Answer:
54) Which of the following is/are true?
A.A firm that controls another entity prepares consolidated
financial statements with that entity
B.The consolidated financial statements reflect the results of the
legally separate entities as if they were a single entity
C.The consolidated financial statements eliminate intercompany
balance sheet and income statement accounts and intercompany profit
or loss on transactions between the entities
D.Consolidated balance sheets consolidate all of the assets and
liabilities of the controlled entity and then show the claim of
noncontrolling shareholders against consolidated net assets as part
of shareholders equity
E.all of the above
Answer:
55) The numerator of the rate of return on common shareholders’
equity
A.is the amount of earnings assignable to common shareholders’
equity after subtracting all amounts required to compensate other
providers of financing for the use of their funds
B.subtracts from net income any earnings allocable to preferred
stock equity, usually the dividends on preferred stock declared
during the period
C.does not subtract the dividends on common stock because such
dividends represent distributions to common shareholders of a
portion of the returns generated for them during the period
D.all of the above
E.none of the above
Answer: