1) IFRS permits firms to classify cash from interest and dividend
revenue as operating, investing, or financing activities, provided
the classification is consistently applied across periods.
Answer:
2) The disposal of equipment for an amount of cash greater than the
carrying value of the equipment results in a cash receipt equal to
the carrying value of the equipment plus the gain on the disposal,
which appears in net income.
Answer:
3) When firms issue common stock for assets other than cash, the firm
records the shares exchanged for noncash assets at the fair value
of the shares given or, if the firm cannot make a reasonable
estimate, at the fair value of the assets received.
Answer:
4) What are the effect of the operating and capital lease methods on
the financial statements of the lessor?
Answer:
5) What is shareholders equity?
Answer:
6) Why do corporate directors usually declare dividends less than the
legal maximum and thereby allow retained earnings to increase as a
matter of corporate financial policy?
Answer:
7) Why are ratios useful?
Answer:
8) In recent years, many partnerships and sole proprietorships have
become limited liability companies (LLCs), or limited liability
partnerships (LLPs), to limit their owners personal liability for
business debts and other obligations.
Answer:
9) The product life-cycle concept from microeconomics and marketing
provides useful insights
into the relations among cash flows from operating, investing, and
financing activities.
Answer:
10) Understanding financial reports requires an understanding of the
activities of the business. Describe at least three operating
activities that firms use to generate earnings.
Answer:
11) U.S. GAAP and IFRS provide firms considerable flexibility in
choosing their depreciation method(s).
Answer:
12) Which of the following is/are true?
A.The seller measures revenue as the amount of cash, or the
cash-equivalent value of other assets, that it receives from
customers
B.The seller measures revenue amounts as the exchange price between
buyer and seller at the time of sale
C.If the firm has not performed all of its obligations, it may make
adjustments in the form of sales discounts and allowances
D.If the firm has not performed all of its obligations, it may make
adjustments in the form of sales returns
E.all of the above are true
Answer:
13) A firm with securities outstanding that holders can convert into,
or exchange for, shares of common stock may report two
earnings-per-share amounts:
A.primary and diluted earnings per share
B.basic and diluted earnings per share
C.primary and secondary earnings per share
D.basic and secondary earnings per share
E.primary and decreased earnings per share
Answer:
14) Loren Companys balance sheet shows a trade name acquired as part of
a business combination with a carrying value of $30 million. The
trade name has an indefinite life and therefore Loren does not
amortize it. Negative publicity regarding the product carrying the
trade name has reduced its fair value to $24 million and its value
in use to $22 million. The entry is as follows:
A.Loss on Impairment . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .. . . . 8,000,000
Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .. . . . . . . . . . . . . . 8,000,000
B.Loss on Impairment . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .. . . . 6,000,000
Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .. . . . . . . . . . . . . . 6,000,000
C.Loss on Impairment . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .. . . . 4,000,000
Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .. . . . . . . . . . . . . . 4,000,000
D.Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .. . . . . . . . 6,000,000
Loss on Impairment . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 6,000,000
E.Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .. . . . . . . . 8,000,000
Loss on Impairment . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 8,000,000
Answer:
15) The provisions of IFRS require firms to classify marketable
securities into which of the following categories?
A.Held to maturity investments for which a firm has both the intent
and the ability to hold to maturityshown on the balance sheet at an
amount based on acquisition cost, but subject to impairment
B.Debt and equity securities held as financial assets at fair value
through profit or loss, shown on the balance sheet at fair value,
with changes in fair value of securities held at the end of the
accounting period reported each period in net income
C.Debt and equity securities held as available-for-sale financial
assets, shown on the balance sheet at fair value, with unrealized
changes in fair value of securities held at the end of the
accounting period included in other comprehensive income, and
realized changes in fair value included in net income when a firm
sells the securities
D.all of the above
E.choices a and b, only
Answer:
16) Magic Corp. purchased new equipment during the year but neglected
to record depreciation. What is the effect of this omission on each
of the named accounts?
AccumulatedRetainedDepreciation
DepreciationEarningsExpense
A.UnderstatedOverstatedUnderstated
B.UnderstatedNo effectOverstated
C.OverstatedUnderstatedUnderstated
D.OverstatedNo effectOverstated
E.OverstatedUnderstated Overstated
Answer:
17) 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 four 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 operating leases
E.all of the above
Answer:
18) Cash equivalents includes short-term,
A.highly liquid investments with maturities of three months or
less
B.highly liquid investments with maturities of six months or
less
C.highly liquid investments with maturities of one year months or
less
D.investments with maturities of three months or less
E.investments with maturities of six months or less
Answer:
19) At December 31, Year 1, Bolton Corporation has par value common
stock with a par value of $1.50 per share, Additional paid-in
capital of $60,000, total shareholders’ equity of $100,000, and
retained earnings of $25,000. What is the number of common stock
shares?
A.5,000
B.10,000
C.15,000
D.20,000
E.25,000
Answer:
20) Which of the following is/are correct?
A.Discontinued operations are shown as the last category after
income from continuing operations
B.The discontinued operations section of the income statement
consists only of the gain or loss on disposal of the discontinued
component net of the tax effect
C.The discontinued operations section of the income statement
consists only of the income or loss from operating the discontinued
component net of the tax effect
D.The discontinued operations section of the income statement
consists of the income or loss from operating the discontinued
component net of the tax effect as well as the gain or loss on
disposal of the discontinued component net of the tax effect
E.None of these answer choices is correct
Answer:
21) _____ accounts provide disaggregated information concerning the net
amount of an asset, liability, or shareholders’ equity item. Note
that the use of such accounts does not affect the total of assets,
liabilities, shareholders’ equity, revenues, or expenses, but only
the balances in various accounts that comprise the totals for these
items.
A.Reversing
B.Temporary
C.Contra
D.Closing
E.None of the above
Answer:
22) The U.S. government will pay Edie Company $2,500,000 each six
months, equal to 2.5% of the $100 million face amount of the
treasury bonds (5% annual coupon rate, paid in two installments
each year), and will repay the $100 million at the end of five
years. At the time Edie Company purchases the bonds, the market
prices these bonds to yield Edie Company 6% annually (3% each six
months). The bonds are classified as held to maturity and Edie
Company would classify this investment as a(n) _____on its _____
because it intends to hold the securities for _____
A.current asset; balance sheet; less than one year
B.current asset; income statement; less than one year
C.noncurrent asset; balance sheet; more than one year
D.noncurrent asset; income statement; more than one year
E.current asset; statement of cash flows; less than one year
Answer:
23) Measures of profitability for a firm engaging in operations selling
merchandise in its stores to generate net income do not
include:
A.rate of return on assets
B.rate of return on common shareholders equity
C.earnings per share of common stock
D.inventory turnover ratio
E.none of the above
Answer:
24) A cereal company issues coupons that can be exchanged for boxes of
cereal. It issues two million coupons that promise the retailer who
redeems the coupons $1 per coupon. The probability of redemption of
any one coupon is 10%. What is the amount of the liability that the
company recognizes?
A.$2,000
B.$20,000
C.$100,000
D.$200,000
E.$2,000,000
Answer:
25) Intangible assets make up 40 percent of the total assets of a
particular firm. This firm is most likely to be:
A.a pharmaceutical firm that invests in internal research and
development to create new drugs
B.a consumer products company that invests in advertising to create
brand recognition
C.an information processing company that develops computer software
to use in its business
D.a restaurant business that has grown by acquiring other
restaurant chains
E.All of these answer choices are correct
Answer:
26) (CMA adapted, Jun 94 #6) Accounting systems vary widely from one
business to another, depending on the size of the firm, the volume
of data to be handled, and the nature of the business. An
accounting system should provide information for management
decision-making and generate reports on the enterprise’s financial
condition and operations. The accounting profession relies on
general-purpose financial statements to provide information to
users; the intent of these general-purpose statements is to provide
the most useful information possible to diverse user groups at
minimal cost. The principal financial statements used for public
reporting purposes are the statement of earnings (income
statement), statement of financial position (balance sheet), and
statement of cash flows.
Required:
a. Financial statements should provide information that is useful
to users. Describe the level of sophistication expected of the
external users of financial statements.
b. For each of the financial statements listed below, define its
purpose and briefly explain how it meets the needs of external
users.
1> Statement of earnings.
2> Statement of financial position.
3> Statement of cash flows.
c. Footnotes and responsibility for the financial statements
1> Explain the role of the notes to the financial
statements.
2> Explain management’s responsibility for the financial
statements.
3> Explain the auditor’s responsibility for the financial
statements.
Answer:
27) Rotor Corporation issues $10,000,000 face value, 10-year, 6%
semiannual coupon bonds
on January 1, 2013. The bonds require coupon payments on June 30
and December 31 of
each year. The market initially priced the bonds to yield 6%
compounded semiannually.
The current market yield on these bonds was 6.2% compounded
semiannually on June 30,
2013, and 6.6% compounded semiannually on December 31, 2008. Rotor
Corporation
computes interest expense for each six-month period using the
market yield at the beginning
of the period.
Required:
a. Compute the carrying value of these bonds on January 1, June 30,
and December 31
of 2013, using the fair value option. You may interpolate in the
interest tables or use a
calculator or use a spreadsheet program to compute the compound
interest factors not
provided in the tables.
b. Compute the total amount of interest expense and unrealized gain
or loss for the first
six months of 2013. Do not attempt to separate this amount into
interest expense and
holding gain or loss.
c. Compute the total amount of interest expense and unrealized gain
or loss for the second
six months of 2013. Do not attempt to separate this amount into
interest expense and
holding gain or loss.
Answer:
28) Jamison Corporation issued preferred stock totaling $10,000,000
during Year 4. The statement of cash flows classifies the
transaction as a(n)
A.operating activity
B.investing activity
C.financing activity
D.exchange transaction
E.equity transaction
Answer:
29) 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 #17) Refer to the Devlin Company example.
Devlin Company’s rate of return on assets for the year ended May
31, Year 7, was
A.7.2 percent
B.7.5 percent
C.8.2 percent
D.11.2 percent
E.11.9 percent
Answer:
30) Notes, bonds, leases and derivatives are _____.
A.present values of future cash flows
B.financial instruments
C.collateralized debt obligations
D.unsecured debt obligations
E.investment trusts
Answer:
31) Prepare entries to record the following transactions using the
allowance method for uncollectible accounts.
a. The firm assumes that approximately 1% of total sales on account
will prove uncollectible. Sales for Year 1 are $1,000,000. All
sales are on account.
b. On July 7, Year 2, it is determined that an account of $2,000
will not be collected.
c. On August 14, Year 2, it is determined that an account of $3,000
will not be collected.
d. On December 31, Year 2, the company estimates that 2% of total
credit sales of $2,000,000 will be uncollectible.
e. On February 1, Year 3, it is determined that accounts of $6,000
will not be collected.
f. On March 2, Year 3, $1,000 is collected on an account that had
previously been written off as uncollectible in (e). It is
determined that the account was originally written off in error.
Answer:
32) Eaton Company has some assets that provide more and better services
in the early years of their lives and require increasing amounts of
maintenance as they grow older. The _____ method(s), which
recognize larger depreciation charges in early years and smaller
depreciation charges in later years, can be justified.
A.declining-balance
B.accelerated depreciation
C.sum-of-the-years-digits
D.all of the above
E.none of the above
Answer:
33) Which of the following is not true?
A.Gains (losses) are increases (decreases) in assets from
peripheral or incidental transactions of an entity and from other
transactions and events affecting the entity except those that
result from revenues (expenses) or investments by (distributions
to) owners
B. Firms usually report gains and losses from sales of assets or
settlements of liabilities at a net amount; that is, equal to the
difference between the net asset received and the carrying value of
the asset sold or between the net asset given and the carrying
value of the liability settled
C.Gains and losses may arise from the remeasurement of assets and
liabilities
D.Firms realize gains and losses when they sell or exchange assets
or settle liabilities in market transactions
E.Firms recognize gains and losses when those items enter the
measurement of net income or other comprehensive income
Answer:
34) 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 four 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 can 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:
35) 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 information that can make a
difference in a resource allocation decision by helping users to
form predictions about the outcomes of future events and to confirm
or correct prior information or expectations. Receiving information
in a timely manner (referred to as timeliness) so that it can
influence decisions is an aspect of this qualitative
characteristic
A.relevance
B.reliability
C.comparability
D.materiality
E.understandability
Answer:
36) The usual criterion for preparing consolidated financial statements
is voting control in the form of majority ownership of common
stock. However, for some entities common stock ownership does not
indicate control because the common stock of the entity lacks one
or more of the economic characteristics associated with equity. U.
S. GAAP refers to such entities as a _____ entity.
A.variable interest
B.special interest
C.thinly capitalized
D.securitized financial
E.nonsecuritized financial
Answer:
37) The rate of return on assets relates the results of operating
performance to the investments of a firm without regard to how the
firm financed those investments. The ratio is calculated as
follows:
A. Net Income + Interest Expense Net of Income Tax Savings
———————————————————————–
Average Total Assets
B. Net Income
———————————————————————–
Average Total Assets
C. Net Income + Interest Expense
———————————————————————–
Average Total Assets
D. Net Income + Interest Expense Net of Income Tax Savings
———————————————————————–
Ending Total Assets
E. Net Income
———————————————————————–
Ending Total Assets
Answer:
38) In U.S. GAAP, 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:
39) The term capital can mean
A.cash, only
B.long-term assets, only
C.all sources of funding, only
D.shareholders equity, only
E.cash, long-term assets, all sources of funding, or shareholders
equity
Answer:
40) Which of the following is/are true regarding stock rights?
A.U.S. GAAP does not require recognition of the rights on the date
of the grant
B.Firms often issue stock rights to raise new capital from current
shareholders
C.Shareholders may exercise the stock rights or sell them to
others
D.IFRS does not require recognition of the rights on the date of
the grant
E.all of the above
Answer:
41) Firms account for leases using either the operating lease method or
the capital (finance) lease method. Which of the following is
true?
A.The operating lease method treats leases as executory
contracts
B.The operating lease method recognizes a leased asset on the
lessees statement of cash flows
C.The operating lease method recognizes a lease liability on the
lessees balance sheet
D.Under the operating lease method, the lessor does not recognize
rent revenue as the lessee uses the leased asset over time
E.Under the operating lease method, the lessee does not recognize
rent expense as the lessee uses the leased asset over time
Answer:
42) The counter-argument for (1) not measuring held-to-maturity debt
securities at amortized cost and (2) recognizing most changes in
fair value during the contractual term of the debt include any
change in the _____ could change the investors willingness or
ability to hold the securities until maturity.
A.economic circumstances
B.interest rates
C.investors need for cash
D.credit risk of the borrower
E.all of the above
Answer:
43) Which of the following is/are not a component of comprehensive
income?
A.Asset revaluation reserve
B.Net income
C.Foreign currency translation adjustment
D.Minimum pension liability adjustment
E.All of these are components of comprehensive income
Answer:
44) Firms sometimes acquire debt securities with the intention of
holding these securities until maturity. U.S. GAAP and IFRS require
firms to measure marketable securities for which firms have an
intent and ability to hold to maturity by _____. A firm initially
records these debt securities at acquisition cost. This acquisition
cost will differ from the maturity value of the debt if the coupon
rate on the bonds differs from the _____.
A.the imputed interest method; required market yield on the bonds
at the time the firm acquired them
B.the straight-line method; required market yield on the bonds at
the time the firm acquired them
C.the effective interest method; required market yield on the bonds
at the time the firm acquired them
D.the effective interest method; required market yield on the bonds
at the time the bonds were originally issued
E.the straight-line method; required market yield on the bonds at
the time the bonds were originally issued
Answer:
45) Which of the following is/are true concerning accumulated other
comprehensive income?
A.Firms measure marketable equity securities classified as
available for sale at fair value and record the unrealized changes
in fair value as an element of other comprehensive income
B.Firms remeasure derivatives designated as cash flow hedges to
fair value at the end of each period and report the unrealized gain
or loss in other comprehensive income
C.Firms translate the reported results of their foreign operations
from local currencies into U.S. dollars in order to prepare
consolidated financial statements
D.Firms must include gains and losses from changes in actuarial
assumptions, actuarial performance, and prior service cost in other
comprehensive income prior to their amortization as an adjustment
to pension expense
E.all of the above
Answer:
46) U.S. GAAP and IFRS require firms to account for debt securities
designated as held to maturity by not recognizing _____ but might
recognize _____.
A.increases in fair value (unrealized gains); decreases in fair
value (unrealized losses)
B.decreases in fair value (unrealized losses); increases in fair
value (unrealized gains)
C.increases in future value (unrealized gains); decreases in future
value (unrealized losses)
D.decreases in future value (unrealized losses); increases in
future value (unrealized gains)
E.increases in future value (realized gains); decreases in future
value (realized losses)
Answer:
47) Which of the following concepts best characterizes the accrual
basis of accounting?
A.Conservatism
B.Matching
C.Understandability
D.Going concern
E.Unit of measurement
Answer:
48) Fabulous Engine Company
Fabulous Engine Company is a wholesaler of marine engine parts. The
activity of carburetor 2642J during the month of March is presented
below.
| Balance or | Unit | |||
| Date | Transaction | Units | Unit Cost | Sales Price |
| March1 | Inventory | 3,200 | $64.30 | $86.50 |
| 4 | Purchase | 3,400 | 64.75 | 87.00 |
| 14 | Sales | 3,600 | 87.25 | |
| 25 | Purchase | 3,500 | 66.00 | 87.25 |
| 28 | Sales | 3,450 | 88.00 | |
(CMA adapted, Jun 96 #13) Refer to the Fabulous Engine Company
example. If Fabulous uses a last-in, first-out periodic inventory
system, the total cost of the inventory for carburetor 2642J at
March 31 is
A.$196,115
B.$197,488
C.$201,300
D.$263,825
E.$296,115
Answer:
49) U.S. GAAP requires the classification of
A.the cash outflow for interest expense as an operating activity
and the dividends that a firm pays to its shareholders as a
financing activity
B.the cash outflow for interest expense and the dividends that a
firm pays to its shareholders as a financing activity
C.the cash outflow for interest expense and the dividends that a
firm pays to its shareholders as an investing activity
D.the cash outflow for interest expense and the dividends that a
firm pays to its shareholders as an operating activity
E.the cash inflow for interest expense and the dividends that a
firm pays to its shareholders as an operating activity
Answer:
50) U.S. GAAP and IFRS account for notes and nonconvertible bonds
payable similarly.Which of the following is/are not true?
A.Firms initially record long-term notes and bonds at their issue
price, the present value of the future contractual cash flows
discounted at the market interest rate for the bonds at the time of
issue
B.The market interest rate at the time of issue is the rate that
discounts the contractual cash flows to the initial issue price
C.If the market interest rate equals the coupon rate for the bonds,
the firm will issue the bonds for face value
D.If the market interest rate exceeds the coupon rate, the firm
will issue the bonds for more than face value
E.If the coupon rate exceeds the market interest rate, the firm
will issue the bonds for more than face value
Answer:
51) Both U.S. GAAP and IFRS require firms to report the cumulative
effect of other comprehensive income in a balance sheet account
called Accumulated
A.Comprehensive Income
B.Net Comprehensive Income
C.Other Comprehensive Income
D.Comprehensive Net Income
E.None of the above
Answer: