Acc 510 Quiz 1

1) Both U.S. GAAP and IFRS require that firms record derivatives at
their fair values on the balance sheet date.

Answer:

2) The beginning balance of the shareholders equity account Retained
Earnings plus net income from the income statement less dividends
equals the ending balance of Retained Earnings.

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3) Some analysts find the reciprocal of the fixed asset turnover ratio
helpful in comparing the operating characteristics of different
firms, because it measures dollars of fixed assets required to
generate one dollar of sales.

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4) All-American University, a U.S. university, provides tuition
support for up to eight semesters of undergraduate education for up
to two children of faculty and staff of the university. To qualify
for this tuition benefit, the faculty or staff member must have at
least seven contiguous years of full-time service and be a
full-time employee when the benefits are received. All-American
estimates that this tuition benefit helps retain and attract
employees. How should All-American treat its expenditures on these
tuition benefits each year?

Answer:

5) Fortune, an automobile manufacturer reports the following
information related to its health care plan for 2013 (amounts in
millions).

Give a single journal entry for the Fortune, to recognize
health care benefits expense, the health care plan contribution,
and the change in the net health care benefits asset or net health
care benefits liability for 2013. Be sure to consider needed
entries in Other Comprehensive Income, supporting the entry in this
account with amounts from the preceding disclosures. Ignore income
taxes.

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6) Interpreting a statement of cash flows requires an understanding of
the economic characteristics of the industries in which a firm
conducts its activities, including capital intensity, growth
characteristics, and similar factors.

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7) The accounting for warranties resembles the allowance method for
uncollectible accounts
receivable.

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8) The balance sheet perfectly describes both resources and financing
(claims on those resources).

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9) How is the acquisition cost treated over the life of tangible and
intangible assets?

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10) Firms classify the portion of bonds due within the next year as a
noncurrent liability.

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11) Marley Company had the following portfolio of securities at the end
of its first year of operations:

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12) Describe the similarities and differences between the allowance
method for uncollectibles
and the allowance method for warranties.

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13) The rationale for the equity method is that it better measures an
investors income from investing activities when, because of its
ownership interest, it can exert significant influence over the
operations and dividend policy of the investee.

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14) 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 fair value.

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15) Under U.S. GAAP, assets and liabilities are listed on the balance
sheet in order of decreasing liquidity, so the most liquid assets
(liabilities) are shown first, under their respective categories.

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16) Adjusting entries are part of the measurement of net income for the
period and financial position at the end of the period.

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17) Revenues from sales of goods or services to customers during a
period equal cash received from customers during that period.

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18) The balance sheet portrays the effects of a firms investing and
financing decisions.

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19) When the seller has received cash, but has not earned all of the
revenues represented by the cash by providing goods and services,
the seller has incurred an obligation to provide goods or services.
These liabilities
A.are referred to as deferred performance obligations
B.may use an account title of Advances from Customers
C.may use an account title of Deferred Revenues
D.may use an account title of Unearned Revenues
E.can be all of the above

Answer:

20) Firms receive cash inflows and disburse cash outflows for financing
activities such as to
A.acquire property, plant, and equipment
B.pay dividends to shareholders
C.purchase intellectual property
D.pay interest on borrowings
E.all of the above

Answer:

21) Identifying accounting principles.

Indicate the accounting principle or procedure apparently used to
record each of the following independent transactions. Also,
describe the transaction or event recorded in each case.
a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . X
Dividend Revenue. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . X

b. Unrealized Holding Loss on
Marketable Securities Available for Sale . . . . . . . . . . . . .
. . . . . . . X
Marketable Securities . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . X

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . X
Investment in Affiliated Company. . . . . . . . . . . . . . . . . .
. . . . X

Dividend declared and received from affiliated company.

d. Bad Debt Expense. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . X
Allowance for Uncollectibles . . . . . . . . . . . . . . . . . . .
. . . . . X

e. Rent Expense for Lease . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .X
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .

Investment in Affiliated Company. . . . . . . . . . . . . . . . . .
. . . . . . . . . X
Equity in Earnings of Affiliated Company . . . . . . . . . . . . .
. . . X

g. Allowance for Uncollectibles . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . X
Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . X

h. Loss from Price Decline of Inventories. . . . . . . . . . . . .
. . . . . . . . . . X
Merchandise Inventories . . . . . . . . . . . . . . . . . . . . . .
. . . . . . X

i. Liability Under Long-Term Lease . . . . . . . . . . . . . . . .
. . . . . . . . X
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . X
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . X

j. Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . X
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . X

k. Interest Rate Swap Contract. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . X
Gain on Remeasurement of Swap Contract
(Income Statement) . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . X

Answer:

22) Which of the following is/are not true regarding the classification
of redeemable preferred shares on the balance sheet?
A.The classification of redeemable preferred shares on the balance
sheet depends on the conditions for redemption
B.If only the issuing firm has the option to redeem, then the
preferred shares are part of its shareholders equity
C.If the issuing firm must redeem the preferred shares (so-called
mandatory redemption), either at a specified time or upon a
specified condition certain to occur, the issuing firm treats the
preferred shares as its shareholders equity
D.If the preferred shareholders have the option to require
redemption, then the preferred shares appear between liabilities
and shareholders equity under U.S. GAAP
E.If the preferred shareholders have the option to require
redemption, then the preferred shares appear as a liability under
IFRS

Answer:

23) Cowden Properties

Cowden Properties sold a condominium to Ms. Roberts for $90,000.
Cowden originally acquired the condo at a cost of $40,000 and made
improvements to the unit totaling $20,000. The contract for sale
required Ms. Roberts to pay the $90,000 as follows:

Year 1 – $ 5,000
Year 2 – $10,000
Year 3 – $30,000
Year 4 – $45,000

Refer to the Cowden Properties example. If Cowden uses the
cost-recovery-first method, how much profit is recognized in year
4?
A.$45,000
B.$40,000
C.$30,000
D.$20,000
E.$15,000

Answer:

24) U.S. GAAP requires firms holding minority, passive investments in
debt and equity securities as securities available-for-sale that
the firm intends to sell within one year to report them as
A.Investments in Securities in the Current asset section of the
balance sheet
B.Investments in Securities in the Long-term asset section of the
balance sheet
C.Marketable Securities in the Current asset section of the balance
sheet
D.Marketable Securities in the Long-term asset section of the
balance sheet
E.none of the above

Answer:

25) Subtraction of total operating expenses from sales yields:
A.net income
B.gross margin
C.operating profit
D.all of the above
E.none of the above

Answer:

26) Firms typically report cash flows from operations using the
A.direct method
B.indirect method
C.financial position method
D.variable method
E.funds flow method

Answer:

27) Pension plans are usually organized as a
A.trust
B.corporation
C.partnership
D.limited liability company
E.chartered company

Answer:

28) U.S. GAAP and IFRS provide criteria for distinguishing operating
leases from capital leases. Which of the following is not true?
A.The criteria attempt to identify the entity, whether lessor or
lessee, that enjoys the benefits and incurs the risk of the leased
asset
B.When the lessor enjoys the benefits and bears the risk, the lease
is a capital lease
C.When the lessee enjoys the benefits and bears the risk, the lease
is a capital lease
D.IFRS provides more general criteria for identifying the entity
enjoying the rewards and incurring the risk
E.Firms cannot currently apply the fair value option to capital
leases

Answer:

29) Using U.S. GAAP, a merchandising firm is trying to decide between
using LIFO or FIFO for an inventory cost flow assumption. The firm
had inventory purchases and sales over 3 years as
follows:

The firm estimates that using LIFO will cost the firm $50
for additional clerical work. The tax rate for all years is 30%.
Net income before cost of goods sold for each year is as
follows:

Year 1 – $1,000
Year 2 – $2,000
Year 3 – $2,500

Required:

Answer:

30) The cost of long-lived assets with an indefinite life
A.is not recognized as an expense each period
B.remains on the balance sheet at acquisition cost (unless an asset
impairment occurs)
C.is recognized as an expense each period
D.presents a balance sheet carrying value that decreases over time
as the firm recognizes the cost of the asset as an expense
E.includes both choices a and b

Answer:

31) How would total stockholders’ equity be affected by the declaration
of each of the following?

StockStock
DividendSplit
A.No effectIncrease
B.IncreaseDecrease
C.DecreaseDecrease
D.No effectNo effect
E.DecreaseIncrease

Answer:

32) 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 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
standard-setting decisions in order to enhance the quality and
consistency of those decisions
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:

33) Which of the following is/are true regarding stock warrants?
A.Firms issue stock warrants to the general investing public for
cash or attached to bonds
B.Holders of a bond or preferred stock with common stock warrants
attached can detach and redeem the warrants separately from the
bond or preferred stock
C.Holders of a bond or preferred stock with common stock warrants
attached receives
periodic interest or preferred dividends and holds a call option to
purchase common shares
D.U.S. GAAP and IFRS require the firm to measure the fair value of
the stock warrants separately from the value of the associated bond
or preferred stock and allocate the issue price between the two
securities
E.all of the above

Answer:

34) Jurisdiction-specific corporate laws limit directors freedom to
declare dividends. Which of the following is/are true?
A.The board may not declare dividends out of capital, that is,
debited against the contributed capital accounts, which result from
fund-raising transactions with owners
B.The board must declare them out of earnings by debiting them
against the Retained Earnings account, which results from earnings
transactions
C.Capital may mean the par or stated value of outstanding common
shares or the total amount paid in by shareholders
D.Some jurisdictions allow corporations to declare dividends out of
the earnings of the current period even if the Retained Earnings
account has a debit (negative) balance because of accumulated
losses from previous period
E.all of the above

Answer:

35) Springfield Company purchases new factory equipment. Per the terms
of the contract, Springfield must pay the freight charges, will
receive a manufacturers discount off the invoice price on the
equipment, and will have some setup expenses to pay. As a result,
the acquisition cost of equipment recorded on Springfields books
will be the sum of the invoice price
A.less any discounts, plus transportation costs, installation
charges, and any other costs incurred before the equipment is ready
for use
B.less any discounts and transportation costs, plus installation
charges and any other costs incurred after the equipment is ready
for use
C.plus transportation costs, installation charges, and any other
costs incurred before the equipment is ready for use
D.less transportation costs, installation charges, and any other
costs incurred after the equipment is ready for use
E.less any discounts and installation charges, plus transportation
charges and any other costs incurred after the equipment is ready
for use

Answer:

36) The accounting records of Calli Inc. indicate that the firm sold
for $1,800 during Year 2 a machine originally costing $6,000, with
accumulated depreciation of $4,600. The journal entry made to
record this sale was as follows:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . .. 1,800
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . 4,600
Loss on Disposal of Equipment . . . . . . . . . . . . . . . . . . .
. 400
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 6,000

In preparing the statement of cash flows using the work sheet, the
accountant
A.adds the $400 loss to net income in computing cash flow from
operations
B.subtracts the $400 loss from net income in computing cash flow
from operations
C.adds the $400 loss to net income in computing cash flow from
investing activities
D.subtracts the $400 loss from net income in computing cash flow
investing activities
E.subtracts the $400 loss from retained earnings in computing cash
flow investing activities

Answer:

37) What is the best definition of an accounting period?
A.Any 12-month period
B.The calendar year
C.The period between any two balance sheet dates
D.The period in which the major income-producing activity
occurs
E.The period between any two income statement dates

Answer:

38) The rate at which _____ turn(s) over measures how quickly a firm
collects cash.
A.accounts receivable
B.assets turnover
C.inventory
D.accounts payable
E.notes receivable

Answer:

39) Robo Corporation

Robo Corporation entered into noncancelable, long-term material
contracts with suppliers for the purchase of raw materials
beginning in the calendar Year 4. These contracts amounted to
$500,000 at December 31, Year 4, relating to raw materials with a
market price of $575,000. This amount was considered material for
Robo.

(CMA adapted, Dec 95 #17) Refer to the Robo Corporation example.
Assume the goods were received and the market price of the raw
materials amounts to $450,000. Robo Corporation’s financial
statements at December 31. Year 4, for this transaction should
A.not mention this commitment
B.reflect a liability of $500,000
C.reflect a liability of $50,000
D.reflect a liability of $450,000
E.reflect a liability of $400,000

Answer:

40) Which of the following is/are true regarding inventory?
A.Inventory refers to goods and other items that a firm owns and
holds for sale or for further processing as part of its
operations
B.Inventory is called stock in some countries
C.When the firm sells inventory, the carrying amount of that
inventory becomes an expense
D.Inventories are a major asset for merchandising and manufacturing
firms
E.all of the above

Answer:

41) The sales, all on account, of Clayton Company in Year 5, its first
year of operations, were $700,000. Collections totaled $500,000. On
December 31, Year 5, Clayton Company estimated that 2 percent of
all sales would probably be uncollectible. On that date, Clayton
Company wrote off specific accounts in the amount of $6,000.

Clayton Company’s unadjusted trial balance (after all nonadjusting
entries were made and after all write-offs of specific accounts
receivable identified during Year 6 as being uncollectible) on
December 31, Year 6, includes the following accounts and
balances:

On December 31, Year 6, Clayton Company carried out an
aging of its accounts receivable balances and estimated that the
Year 6 ending balance of accounts receivable contained $9,000 of
probable uncollectibles. It made adjusting entries appropriate for
this estimate. Some of the $800,000 sales during Year 6 were for
cash and some were on account; the omission of the amount is
purposeful.

Required:


a. What was the balance in the Accounts Receivable account at the
end of Year 5? Give the amount and whether debit or credit.
b. What was the balance in the Allowance for Uncollectible Accounts
account at the end of Year 5? Give the amount and whether debit or
credit.
c. What was bad debt expense [or, the amount of the Revenue Contra
for Uncollectibles] for Year 6?
d. What was the amount of specific accounts receivable written off
as being uncollectible during Year 6?
e. What were total cash collections in Year 6 from customers (for
cash sales and collections from customers who had purchased on
account in either Year 5 or Year 6)?
f. What was the net balance of accounts receivable included in the
balance sheet asset total for December 31, Year 6?
g. Consider the account, Allowance for Uncollectible Accounts. Is
that account best fully labeled as an Asset account, an Asset
Contra account, an Asset Adjunct account, or an Asset Control
account?
h. Assume the following facts, independent of the assumptions in
the preceding questions. Bobbin can estimate with reasonable
precision each of the following: uncollectible accounts on sales,
estimated future warranty costs for product warranties offered
along with its products, and estimated returns by customers who
exercise the option to return goods for a full refund. For which of
the following, if any, may Bobbin use an allowance method in
measuring periodic income: uncollectible accounts, product
warranties, and returns? Indicate none, all, or the specific
methods.

Answer:

42) U.S. GAAP requires firms holding debt and equity securities, as
well as derivatives, as trading securities 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.present value of future cash flows, with changes in present value
of future cash flows of securities held at the end of the
accounting period reported each period in income
E.present value of future cash flows, with changes in present value
of future cash flows of securities held at the end of the
accounting period not affecting reported income until the firm
sells, or otherwise disposes of, the securities

Answer:

43) Corporations often sell, or exchange for goods and services,
various call options on their shares. Which of the following is/are
not true?
A.A call option gives the holder the right to acquire shares of
common stock at a fixed or determinable price, called the strike
price or exercise price
B.If the market price of the shares increases above the exercise
price, the holder of the option can benefit by exercising the
option to purchase shares
C.The excess of the market price over the exercise price is the
options intrinsic value
D.Many firms pay part of the compensation of some employees by
issuing call options on their own shares referring to these
arrangements as employee stock options (ESOs)
E.none of the above

Answer:

44) Both U.S. GAAP and IFRS permit considerable flexibility with
respect to the display of information in the statement of cash
flows. Within the investing and financing cash flow categories, the
presentation for most items should _____.
A.not net cash inflows against cash outflows
B.net cash inflows against cash outflows
C.net cash inflows against net income
D.net cash inflows against free cash flows
E.net free cash flows against cash outflows

Answer:

45) Evenrude Corporation is a new company about to issue stock. The
corporation sells 2,000 shares of common stock (par value $2) at
$10 per share. The journal entry to record this transaction is:
A.Cash2,000
Common Stock 2,000
B.Cash20,000
Common Stock 4,000
Additional Paid-in Capital 16,000
C.Cash20,000
Owners’ Liability 16,000
Common Stock 4,000
D.Cash20,000
Accounts Payable 20,000
E.Cash20,000
Notes Payable 20,000

Answer:

46) Repairs and maintenance do not include
A.the costs of restoring an asset’s service potential after
breakdowns
B.expenditures that increase the asset’s life
C.routine costs such as for cleaning and adjusting
D.major tune-ups including labor and parts
E.All of the above are not considered to be repairs or maintenance

Answer:

47) On February 1, Year 1, Centra issues $100,000 semi-annual 12% bonds
at par plus accrued interest. The interest is payable on July 1 and
January 1 of each year. What entry is necessary to record the
issuance of the bonds on February 1?
A.Cash100,000
Bonds Payable100,000
B.Cash101,000
Bonds Payable 101,000
C.Cash100,000
Interest Payable 1,000
Bonds Payable 101,000
D.Cash 101,000
Bonds Payable 100,000
Interest Payable 1,000
E.none of the above

Answer:

48) Which of the following is not cash?
A.coins and currency
B.bank checks and money orders
C.bank deposits and time deposits
D.corporate stocks and bonds that the firm plans to hold for a
relatively short period of time
E.All of these answer choices are categorized as cash

Answer:

49) The typical _____ bond pays interest periodically, usually every
six months, during the life of the bond and repays the principal
amount borrowed at maturity.
A.derivative
B.multi-coupon
C.zero coupon
D.serial
E.debenture

Answer:

50) Which of the following is/are correct regarding the valuation of
inventory?
A.GAAP require firms to record inventories at acquisition cost
B.GAAP does not permit firms to revalue inventories above
acquisition cost
C.GAAP require firms to write down inventories when their
replacement cost, or market value, declines below acquisition
cost
D.all of the above
E.none of the above

Answer: