1) The governing board, or board of directors, is responsible for selecting, compensating, and overseeing managers; for establishing dividend policy; and for making decisions on major issues such as acquisitions of other firms and divestitures of lines of business.
Answer:
2) Describe income recognition after the sale when substantial
performance remains.
Answer:
3) Firms often acquire derivative instruments to hedge interest rate,
exchange rate, commodity price, and other risks.
Answer:
4) Firms using the direct approach for the statement of cash flows
must also present a reconciliation of cash flow from operations to
net income.
Answer:
5) Inventory turnover equals cost of goods sold divided by the average
inventory during the period.
Answer:
6) The cash change equation for preparing the statement of cash flows
using a T-account work sheet is: Assets = Liabilities +
Shareholders Equity
Answer:
7) There are three formats available for both U.S. GAAP and IFRS
reporting of the items that are included in Other Comprehensive
Income.
Answer:
8) U.S. GAAP specifies that, in the context of inventories, market
means replacement cost, except that market may not exceed net
realizable value and may not be less than net realizable value
reduced by a normal profit margin.
Answer:
9) Explain how common-size balance sheets are used by analysts.
Answer:
10) What disclosures are required for leases?
Answer:
11) The last step in the accounting record-keeping process is preparing
the statement of cash flows from balance sheet amounts and from
details of transactions affecting the cash account.
Answer:
12) Expenses measure the outflow of net assets consumed in the process
of generating revenues.
Answer:
13) Raines Corporation entered into a five-year lease for a computer on
January 1, Year 3 . The lease requires Raines to make equal
payments of $20,000 on January 1 each year for the five years of
the lease, with the first payment made on January 1, Year 3 .
Raines borrowing rate is 10 percent. Raines uses the straight-line
depreciation method for financial reporting. It estimates a zero
salvage value. The accounting period is the calendar year. Round
amounts to the nearest dollar.
Required:
a. Give the journal entries that Raines would make during Year 3 if
this lease were considered an operating lease for financial
reporting.
b. Repeat [a] but assume the lease is a capital lease for financial
reporting.
c. Assume that this lease is considered a capital lease for
financial reporting. Calculate depreciation expense for financial
reporting purposes for Year 3 and Year 4 .
d. Compute the total expenses (ignore income taxes) that Raines
would recognize over the 5-year term of the lease, assuming it is
an operating lease.
e. Repeat [d] but assume the lease is a capital lease.
Answer:
14) 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 #14) Refer to the Devlin Company example.
Assuming there are no preferred stock dividends in arrears, Devlin
Company’s return on common shareholders’ equity for the year ended
May 31, Year 7, was
A.6.3 percent
B.7.5 percent
C.7.8 percent
D.10.5 percent
E.15.5 percent
Answer:
15) The typical benefit formula for a defined benefit plan takes into
account the employees
A.length of service, only
B.salary, only
C.length of service and salary
D.marital status, only
E.length of service, salary, and marital status
Answer:
16) Which of the following is/aretrue regarding the fair value option
for marketable securities and derivatives?
A.Subsequent to the acquisition of a derivative, the firm may
report changes in fair value of derivatives in Other Comprehensive
Income
B.Subsequent to the acquisition of a derivative, the firm may
report changes in fair value of derivatives, but they have no
effect on any lines of the statement of cash flows
C.Firms using the fair value option mark the carrying value of the
asset to fair value each period
D.If the change in fair value of the derivative decreases carrying
value, then the firm reports the amount of that decrease as a loss
during the current period
E.all of the above
Answer:
17) Depreciation and amortization expenses appear in the income
statement, and are sometimes
A.disclosed separately
B.included in selling and administrative expenses
C.included as part of cost of goods sold expense
D.all of the above
E.none of the above
Answer:
18) (CMA Jun 96 #6) All-Things Inc. manufactures a variety of consumer
products. The company’s founders have managed the company for
thirty years and are now interested in retiring. Consequently, they
are seeking to sell the company. Trial Associates is looking into
the acquisition of All-Things and has requested the latest
financial statements and selected financial ratios in order to
evaluate All-Things’ financial stability and operating efficiency.
The summary information provided by All-Things is presented
below.
|
All-Things Inc. Income StatementFor the Year Ended May 31,Year 6 (in thousands) |
|
| Sales (net) | $30,500 |
| Interest income | 500 |
| Total revenue | $31,000 |
| Costs and expenses: | |
| Cost of goods sold | 17,600 |
| Selling and administrative expense | 3,550 |
| Depreciation and amortization expense | 1,890 |
| Interest expense | 900 |
| Total costs and expenses | $23,940 |
| Income before taxes | 7,060 |
| Income taxes | 2,900 |
| Net income | $4,160 |
Selected Financial Ratios
| 5-Year | |||
| All-Things | Industry | ||
| Year 4 | Year 5 | Average | |
| Current ratio | 1.62 | 1.61 | 1.63 |
| Acid-test ratio | .63 | .64 | .68 |
| Total asset turnover | 1.83 | 1.84 | 1.84 |
| Inventory turnover | 3.21 | 3.17 | 3.18 |
| Times interest earned | 8.50 | 8.55 | 8.45 |
|
Total debt to net worth (Total debt / Total shareholders’ equity) |
1.02 | .86 | 1.03 |
| Net profit margin | 12.1% | 13.2% | 13.0% |
|
All-Things Inc.Comparative Statement of Financial PositionAs of May 31 (In thousands) |
||
| Year 6 | Year 7 | |
| Cash | $400 | $500 |
| Marketable securities (at cost) | 500 | 200 |
| Accounts receivable (net) | 3,200 | 2,900 |
| Inventory | 5,800 | 5,400 |
| Total current assets | $9,900 | $9,000 |
| Property, plant, and equipment (net) | 7,100 | 7,000 |
| Total assets | $17,000 | $16,000 |
| Accounts payable | $3,700 | $3,400 |
| Income taxes payable | 900 | 800 |
| Accrued expenses | 1,700 | 1,400 |
| Total current liabilities | $6,300 | $5,600 |
| Long-term debt | 2,000 | 1,800 |
| Total liabilities | $8,300 | $7,400 |
| Common stock ($1 par value) | 2,700 | 2,700 |
| Paid-in-capital in excess of par | 1,000 | 1,000 |
| Retained earnings | 5,000 | 4,900 |
| Total shareholders’ equity | $8,700 | $8,600 |
| Total liabilities and shareholders’ equity | $17,000 | $16,000 |
Required:
a. Calculate a new set of ratios for the fiscal Year 6 for
All-Things Inc. based on the financial statements presented.
b. Briefly explain the analytical use of each of the seven ratios
presented, describing what the investors can learn about All-Things
Inc.’s financial stability and operating efficiency.
c. Identify two limitations of ratio analysis.
Answer:
19) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations between cash flows from
operating, investing, and financing activities. During the maturity
phase
A.cash inflow exceeds cash outflow for operations
B.cash outflow exceeds cash inflow for operations
C.cash outflow exceeds cash inflow for investing activities
D.cash inflow exceeds cash outflow for financing activities
E.cash inflow exceeds cash outflow for investing activities
Answer:
20) Income before taxes for financial reporting usually differs from
taxable income reported to tax authorities. Which of the following
is/are true?
A.Some of the differences may arise because of permanent
differences (items that affect income for financial reporting but
never affect taxable income, or vice versa)
B.Some of the differences may arise because of temporary
differences (items that affect income for financial reporting in a
different period than for tax reporting)
C.The difference between income tax expense and income tax payable
represents the tax effects of temporary differences: either the
firm will receive future benefits (deferred tax assets) or it must
pay future taxes (deferred tax liabilities)
D.U.S. GAAP and IFRS require firms to measure income tax expense
based on income for financial reporting (excluding permanent
differences) and the income tax authorities impose taxes on taxable
income
E.all of the above
Answer:
21) U.S. GAAP classifies all of the following as operating activitieson
the statement of cash flows except
A.cash outflows to pay sales employees
B.cash inflows from the property rental
C.cash outflows to shareholders for dividends
D.cash outflows to purchase merchandise for resale
E.cash inflows from sales to customers
Answer:
22) Which of the following is not true regarding investments in
securities available-for-sale?
A.The unrealized holding gain or holding loss increases or
decreases Other Comprehensive Income (a shareholders equity
account)
B.The Other Comprehensive Income (a shareholders equity account) is
closed to Accumulated Other Comprehensive Income (another
shareholders equity account) at the end of the period
C.The amortization of any difference between the purchase price and
the maturity value of the debt makes interest revenue on these debt
securities differ from the cash receipts for debt service
payments
D.Accumulated Other Comprehensive Income includes the sum of all
increases and decreases in fair value of securities
available-for-sale that have not yet appeared in net income
E.Holding gains and losses on securities available-for-sale affect
net income every accounting period
Answer:
23) If a corporation issues 1,000 shares of $1 par value common stock
at $5 per share, how should the transaction be accounted for?
A.debit cash for $5,000 and credit common stock for $5,000
B.debit cash for $5,000 and credit common stock for $1,000 and
credit additional paid-in capital for $4,000
C.debit cash for $5,000 and credit common stock for $1,000 and
credit retained earnings for $4,000
D.credit cash for $5,000 and debit common stock for $5,000
E.debit common stock for $1,000 and debit retained earnings for
$4,000 and credit cash for $5,000
Answer:
24) When the bond indenture provides that stated amounts of principal
will become due during the term of the bond, the bond is called a
_____ bond.
A.sinking fund
B.serial
C.callable
D.refunded
E.convertible
Answer:
25) Which of the following is/are true concerning an employee stock
options benefit element?
A.One cannot measure the amount of the benefit element before the
exercise date
B.Stock options with exercise prices less than the current market
price of the stock have a higher value, other things equal, than
stock options with exercise prices exceeding the current market
price of the stock.
C.Stock options that are in the money have a higher value, other
things equal, than stock options that are out of the money
D.choices a and b, only
E.choices a, b, and c
Answer:
26) The rate at which accounts receivable turnover
A.indicates how quickly a firm collects cash
B.equals sales revenue divided by average accounts receivable
C.is often expressed in terms of the average number of days that
elapse between the time the firm makes the sale and the time it
later collects the cash
D.all of the above
E.none of the above
Answer:
27) The U.S. GAAP and IASB require that firms record derivatives on the
balance sheet date at
A.historical cost
B.fair value
C.amortized acquisition cost
D.future value of present cash flows
E.present value of future cash flows
Answer:
28) Assets of one firm can correspond to the liabilities of another
firm. For example,
an account receivable on the sellers balance sheet is an account
payable on the buyers
balance sheet.
Required: For each of the following items, indicate whether it is
an asset or a liability
and give the corresponding account title on the balance sheet of
the other party to the
transaction:
a. Bonds Payable.
b. Interest Receivable.
c. Prepaid Insurance.
d. Rental Fees Received in Advance.
e. Advances from Customers.
Answer:
29) Benezra S.A., a large Brazilian petrochemical company, reported a
balance of R$1,600 million in Accounts Receivable at the beginning
of 2013 and R$1,500 million at the end of 2013. Its income
statement reported total Sales Revenue of R$12,000 million for
2013. Assuming that Benezra makes all sales on account, compute the
amount of cash collected from customers during 2013. Benezra
applies Brazilian accounting standards, and reports its results in
thousands of reals (R$), the Brazilian currency. (In answering this
question, assume that Benezra uses either U.S. GAAP or IFRS; for
purposes of this problem, this choice will not matter.)
A.12,000
B.11,900
C.12,100
D.13,600
E.13,500
Answer:
30) Treasury stock or treasury shares are shares a firm has previously
issued and later reacquired. Which of the following is/are
true?
A.Treasury shares do not receive dividends, only
B.Treasury shares do not have voting rights, only
C.Treasury shares do not enter the calculation of earnings per
share, only
D.Treasury shares do not receive dividends, do not have voting
rights, and do not enter the calculation of earnings per share
E.none of the above
Answer:
31) Firms engage in transactions that subject them to specific
financial risks. Most firms face risksthat is, variability of
outcomefrom changes in interest rates, foreign exchange rates, and
commodity prices. Firms can purchase financial instruments to
reduce these business risks, that is, to reduce the volatility of
certain outcomes. Some of these instruments trade in relatively
active markets, like marketable securities, while others have
specialized terms and do not trade at all. The general term used
for the types of financial instruments that firms might buy to
mitigate the risks is a(n)
A.swaps
B.derivative
C.forwards
D.futures
E.options
Answer:
32) The income statement
A.measures the increase (or decrease) in net assets from selling
goods and services for more (or less) than their costs
B.displays the firms sources and uses of cash
C.reports the balance in cash at the beginning and end of the
year
D.helps a reader understand how a firm obtains and uses cash
E.includes all of the above
Answer:
33) A firm makes investments to obtain productive capacity to carry out
its business activities.
Investing activities involve acquiring all of the following
except:
A.land, buildings, and equipment
B.patents, licenses, and other contractual rights
C.common shares or bonds of other firms
D.long-term notes receivable of other firms
E.common shares or bonds of the firm
Answer:
34) (CMA adapted, Dec 92 #18) The mining industry frequently recognizes
revenue using the completion of production method. This method is
acceptable under the revenue recognition principle because
Sales prices areAssets areProduction cost
reasonablyreadilycan be readily
assuredrealizabledetermined
A.Yes Yes No
B.Yes No Yes
C.No Yes No
D.No No Yes
E.No Yes Yes
Answer:
35) The firm recognizes an expense when the following condition(s)
hold(s)
A.The consumption of the asset results from a transaction that
leads to the recognition of revenue
B.The consumption of the asset results from the passage of time
C.The expenditures on advertising must be recognized as expense in
the period of expenditure
D.The expenditures on research must be recognized as expense in the
period of expenditure
E.all of the above
Answer:
36) In Year 7, Nortel Manufacturing issued $100,000 semi-annual 12%
bonds at par. Interest is payable on July 1 and January 1. What
entry is necessary at December 31, Year 9?
A.Interest Expense 6,000
Cash6,000
B.Interest Expense 6,000
Bonds Payable6,000
C.Interest Expense 6,000
Interest Payable6,000
D.Interest Expense12,000
Interest Payable12,000
E.Cash 6,000
Interest Payable 6,000
Answer:
37) The traditional use of the term _____ financial statements refers
to projected financial statements based on some set of assumptions
about the future. One set of assumptions might be that historical
patterns (for example, growth rates or rates of return) will
continue.
A.what-if
B.estimated
C.planned
D.pro forma
E.future
Answer: