1) How does the statement of cash flows explain the reasons for the
change in cash between balance sheet dates?
Answer:
2) Patents, licenses, and other contractual rights are tangible, in
the sense that the rights have a physical existence.
Answer:
3) The FASBs and IASBS qualitative characteristics describe the
attributes that enhance the usefulness of financing reporting
information. What are they?
Answer:
4) Compute the missing balance sheet amounts in each of the three
independent cases that follow:
| CASE A | CASE B | CASE C | |
| Noncurrent assets | $460,000 | $90,000 | $280,000 |
| Shareholders’ equity | A | 870,000 | 340,000 |
| Total assets | B | E | 500,000 |
| Current liabilities | 270,000 | 20,000 | I |
| Current assets | 250,000 | F | J |
| Noncurrent liabilities | 100,000 | G | K |
| Total liabilities and shareholders’ equity | C | 990,000 | L |
| Current assets minus current liabilities | D | H | 200,000 |
Answer:
5) U.S. GAAP and IFRS do not 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.
Answer:
6) Expenditures on advertising and research must be recognized as
expense in the period of expenditure, regardless of the firms
expectation of future benefits.
Answer:
7) Depreciation allocates the assets cost to the periods of benefit in
some systematic and rational way, and it attempts to track changes
in the assets fair value.
Answer:
8) The T-account looks like the letter T, with a horizontal line
bisected by a vertical line. Increases in assets appear on the left
side, and decreases in assets appear on the right side of
T-accounts.
Answer:
9) If a corporation becomes insolvent, creditors can claim the assets
of the individual owners.
Answer:
10) Expenditures for maintenance or repair of tangible long-lived
assets are treated as asset improvements and subsequently
depreciated.
Answer:
11) Corporations often sell, or exchange for goods and services,
various call options on their shares. Describe the process of
issuing call options.
Answer:
12) With the exception of internally developed software costs, U.S.
GAAP requires that the firm expense both research and development
expenditures as incurred.
Answer:
13) Explain the roles, duties, and responsibilities of managers and
governing boards of reporting entities.
Answer:
14) The value of a stock option results from the benefit element and
the time value element.
Answer:
15) The Sarbanes-Oxley Act of 2002 requires the AICPA to register firms conducting independent audits.
Answer:
16) Permanent differences between pretax book income and taxable income
arise from tax-exempt interest revenue and certain fines.
Answer:
17) Market value generally means replacement cost, the amount the firm
would have to pay to replace the inventory.
Answer:
18) The balance sheet provides all the information an analyst wants or
needs about a firms resources and the claims on those resources.
Answer:
19) When accounting for a cash flow hedge of a recognized asset or
liability, which of the following is/are true?
A.If the derivative is not highly effective in neutralizing the
gain or loss on the hedged item, then the firm must reclassify the
ineffective portion to net income immediately and not wait until
the gain or loss on the hedged items affects net income
B.The firm reports the hedged asset and liability and the hedging
instrument separately on the balance sheet and the cumulative
amount of net changes in fair value of the hedging instrument in
accumulated other comprehensive income
C.The firm removes the hedged asset or liability and its related
derivative from the accounts at the time of settlement
D.The firm reclassifies gains and losses from other comprehensive
income to net income when the gain or loss on the hedged item
affects net income
E.all of the above
Answer:
20) Darwin, an athletic shoe company, reports the following information
about its income taxes for three recent years (amounts in
millions):
Components of Income Tax Expense 2015 2014
2013
Currently Payable $775.6 $622.8 $495.4
Deferred (26.0) 25.4 9.0
Total Income Tax Expense $749.6 $648.2 $504.4
===== ====== =====
a. Give the journal entries to record income tax expense for 2013,
2014, and 2015.
b. Describe the likely reasons for the pattern of taxes currently
payable and deferred for each year. Assume that the deferred taxes
relate primarily to retirement benefits. The effective tax rate was
relatively stable for the three years.
Answer:
21) If a statement of cash flow showed that a firm had a small cash
loss from operating activities, a large cash outflow from investing
activities, and a large cash inflow from financing activities, you
would expect the firm to be at what stage of development?.
A.a new, rapidly growing firm
B.a profitable, growing firm
C.a mature, stable firm
D.a firm in early decline
E.an unprofitable, long-term declining firm
Answer:
22) The term cash flowsrefers to changes in
A.cash, only
B.cash and cash equivalents
C.working capital
D.cash and marketable securities
E.funds
Answer:
23) The FASB and the IASB refer to the approach that uses the current
market interest rate instead of the historical market interest rate
to discount the remaining cash flows from financial instruments as
the
A.future value option
B.current value option
C.liquidation value option
D.fair value option
E.accurate value option
Answer:
24) Which of the following is/are elements of a derivative?
A.A derivative has one or more underlyings. An underlying is an
observable variable such as a specified interest rate, or commodity
price, or foreign exchange rate
B.A derivative has one or more notional amounts. A notional amount
is a number of currency units, bushels, shares, or other units
specified in the contract
C.A derivative sometimes requires no initial investment
D.Derivatives typically require, or permit, net settlement, which
means that when the counterparties settle the derivative contract,
one of the contracting parties pays the other the fair value of the
contract
E.all of the above
Answer:
25) Financial statement analysis often assess the profitability and
risk of an organization. Specific ratios target each of these areas
to answer questions such as “How profitable is this company?” or
“How risky (liquid) is an investment in this company?”
Required:
| a. |
Discuss three ratios that address how profitable a company might be. |
| b. |
Discuss three ratios that address how risky (liquid) a company might be. |
Answer:
26) Which of the following is/are true?
A.U.S. GAAP and IFRS require firms to recognize the cost of
retirement benefits (pensions, health care, life insurance) as an
expense while employees work, not when they receive payments or
other benefits during retirement
B.Employers often contribute cash to a trust, an entity legally
separate from the employer, to fund their retirement
obligations
C.The accounting records of the trust established to fund the
retirement obligations are separate from the accounting records of
the employer, and the amounts on the two sets of books usually
differ
D.Payments to employees come from both the employers contributions
and investment returns of the trust established to fund the
retirement obligations
E.all of the above
Answer:
27) After the firm estimates the amount of uncollectible accounts
associated with the credit sales of each period, it makes an
adjusting entry to debit _____ and credit _____.
A.Bad Debt Expense; Accounts Receivable, Net
B.Bad Debt Expense; Accounts Receivable, Gross
C.Allowance for Uncollectibles; Bad Debt Expense
D.Bad Debt Expense; Allowance for Uncollectibles
E.Allowance for Uncollectibles; Accounts Receivable, Gross
Answer:
28) For a firm to recognize an asset
A.a resource must represent a future economic benefit that the firm
controls as a result of a past transaction or exchange
B.the firm must be able to measure the resource with sufficient
reliability
C.must impose a future economic sacrifice because of a past event
or transaction that the firm has little or no discretion to
avoid
D.Both choices a and b are correct
E.None of these answer choices is correct
Answer:
29) Electro Corporation extends credit to its customers to purchase
appliances, furniture, and other goods. Electro Corporation could
borrow from a bank using its accounts receivable as collateral,
thereby placing debt on the balance sheet. Electro Corporation
would then use the cash collections from the receivables to repay
the bank loan with interest. Instead, Electro Corporation sells the
accounts receivable to the bank for an amount that is less than the
cash the bank expects to collect from receivables purchased. The
amount takes account of expected defaults, which would reduce the
cash generated by the receivables. This difference between the
amount paid to Electro Corporation by the bank for the receivables
and the amount that the bank expects to collect from the
receivables provides the bank with its expected return. Electro
Corporation must transfer additional uncollected receivables to the
lender/purchaser bank under either of two conditions: (1) if any
receivables become uncollectible, and (2) if interest rates rise
above a specified level. Which of the following is/are true?
A.Electro Corporation bears both credit risk and interest rate risk
and should treat the transfer of receivables as a loan, with debt
appearing on its balance sheet
B.Electro Corporation bears both credit risk and interest rate risk
and should not treat the transfer of receivables as a loan, with no
debt appearing on its balance sheet
C.Electro Corporation does not bear credit risk or interest rate
risk and should not treat the transfer of receivables as a loan,
with no debt appearing on its balance sheet
D.Electro Corporation has no further obligation and will treat this
transaction as a sale, with no incremental debt on the balance
sheet
E.Electro Corporation bears credit risk but no interest rate risk
and should treat the transfer of receivables as a loan, with debt
appearing on its balance sheet
Answer:
30) Analysts deciding between investments must consider the comparative
risks. Which of the following factors affect the risk of business
firms?
A.Economy-wide factors, such as increased inflation or interest
rates, unemployment, and recessions
B.Industry-wide factors, such as increased competition, lack of
availability of raw materials, changes in technology, and increased
government regulatory actions, such as anti-trust or clean
environment policies
C.Firm-specific factors, such as labor strikes, loss of facilities
due to fire or other casualty, and poor health of key managerial
personnel
D.The amount of liquid resources available to the firm to run
smoothly and effectively
E.all of the above
Answer:
31) Collette and Cohen incorporate as CC Designs, Inc. on January 1,
Year 1. CC Designs creates custom wall finishes and sells painting
products. The following transactions occur during
January.
a. Cohen contributes cash of $75,000 and receives 15,000 shares of
$1 par value stock.
b. Collette contributes $35,000 cash, office furniture with a value
of $5,000, and computer equipment with a value of $10,000 and
receives 15,000 shares of $1 par value stock. The furniture and
equipment is expected to last 5 years and has no salvage value.
c. On January 2, $10,000 of painting products are purchased. CC
paid $8,000 cash with the remaining amount on account.
d. During January, painting products are sold for $8,000 cash. The
cost of the products is $2,000.
e. Additional painting products with a value of $5,000 are sold,
with a cost of $1,500, but the cash is not collected as of January
31st. It is expected that the $5,000 will be collected in full by
February 15th.
f. Cohen is paid a salary of $2,000.
g. CC paid $1,200 for January and February rent.
Required:
Prepare appropriate accrual basis journal
entries.
Answer:
32) 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
introduction phase
A.cash inflow exceeds cash outflow for operations
B.cash outflow exceeds cash inflow for operations
C.cash inflow exceeds cash outflow for investing activities
D.cash outflow exceeds cash inflow for financing activities
E.cash inflow exceeds cash outflow for financing activities
Answer:
33) Firms must designate each derivative as a hedging instrument, or
else accounting views the derivative as a nonhedging instrument.
Furthermore, firms must designate each hedging instrument as either
a fair value hedge or a cash flow hedge. The accounting for cash
flow hedges
A.remeasures both the hedged item and the derivative to fair value
each period and recognize any unrealized gains and losses in net
income
B.remeasures the derivative to fair value each period and include
the unrealized gain or loss in other comprehensive income to the
extent that the derivative instrument is effective in neutralizing
risk. When the firm settles the hedged item, transfer the
previously unrealized gain or loss from other comprehensive income
to net income
C.remeasures the derivative to fair value each period and include
the unrealized gain or loss in net income
D.all of the above
E.none of the above
Answer:
34) Which of the following is/are not true?
A.A derivative is a financial instrument whose value changes in
response to changes in an underlying observable variable, such as a
stock price, an interest rate, a currency exchange rate, or a
commodity price
B.Unlike equity securities, which have no definite settlement date,
firms settle a derivative at a date that the terms of the
instrument specify
C.A derivative requires an investment that is small, relative to
the investment in a contract that is similarly exposed to changes
in market factors, or requires no investment at all
D.Firms use derivative instruments to hedge the risks that arise
from changes in interest rates, foreign exchange rates, and
commodity prices
E.The general idea behind hedging is that changes in the fair value
of the derivative instrument map the changes in the fair value of
an asset or liability or changes in future cash flows, thereby
multiplying the effects of those changes
Answer:
35) What (other than a transactions spreadsheet ) serves the function
of accumulating information about the effect of business
transactions on each balance sheet and income statement
account?
A.Journals
B.P&L-accounts
C.T-accounts
D.Subsidiary Ledgers
E.Library
Answer:
36) The amount reported on the balance sheet throughout the life of a
loan (that is, its carrying value) equals
A.the future value of the remaining cash flows discounted at the
historical market interest rate
B.the present value of the remaining cash flows discounted at the
historical market interest rate
C.the future value of the remaining cash flows discounted at the
current market interest rate
D.the present value of the remaining cash flows discounted at the
current market interest rate
E.the future value of the remaining cash flows discounted at the
fair market interest rate
Answer:
37) U.S. GAAP and IFRS distinguish three categories of long-lived
assets for purposes of measuring and recognizing impairment losses.
The second category addresses intangibles, other than goodwill, not
subject to amortization. This category does not include:
A.brand names
B.trademarks
C.franchise rights
D.renewable licenses
E.none of the above
Answer:
38) Assume that a firm uses the accrual basis of accounting. Indicate
the amount of expense the firm recognizes during the month of
November for each independent transaction.
a. Rent of $3,600 is paid on November 1 for the months November
through January.
b. Inventory costing $2,500 is ordered on account. The invoice is
received on November 25 and the goods are received on December
c. Insurance premium of $900 is paid for a full year of coverage
starting November 1.
d. On December 3, an invoice for November utilities of $325 is
received.
e. On November 1, supplies costing $2,200 are purchased. At
November 30, $500 of supplies remained on hand.
Answer:
39) The percentage-of-completion method
A.is affected by the actual schedule of cash collection
B.cannot be used if the contract specifies that the contractor will
receive the entire contract price only on completing
construction
C.measures the proportion of total work carried out during the
accounting period either from engineers’ estimates of the degree of
completion or from the ratio of costs incurred to date to the total
costs expected for the entire contract
D.is not a method allowed by U.S. GAAP
E.none of the above
Answer:
40) 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 lessor amortizes
the leased asset, similar to recognizing depreciation on buildings
and equipment
D.Under the capital, or finance, lease method, 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
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:
41) Firms occasionally issue stock options in order to
A.compensate employees
B.compensate managers
C.motivate employees to take actions that will increase the market
value of the firm’s common shares
D.conserve cash
E.all of the above
Answer:
42) Sharp Inc. manufactures high quality sunglasses that carry the
endorsements of several sports personalities. In an effort to
achieve sales targets for the fourth quarter of the year, Sharp
Inc. pressured its independent distributors to make unusually large
orders of the sunglasses. Low-priced imitations of these sunglasses
hit the market soon thereafter, causing the distributors to
accumulate large inventories. The distributors shipped these
sunglasses back to Sharp Inc. Sharp Inc.stored the returned
sunglasses in a remote warehouse out of the view of its auditors
and did not record them as returned goods. The actions
A.are in accordance with U.S. GAAP
B.are in accordance with IFRS
C.violate ethical principles
D.are in accordance with U.S. GAAP, but not IFRS
E.are in accordance with IFRS, but not U.S. GAAP
Answer:
43) Martin Company acquired $500,000 face value of the outstanding
bonds of Tory Company on January 1, 2012. The bonds pay interest
semiannually on June 30 and December 31 at an annual rate of 7% and
mature on December 31, 2014. The bonds were priced on the market on
January 1, 2012, to yield 6% compounded semiannually. Martin
Company classifies these bonds as held to maturity.
a. Compute the amount that Martin Company paid for these bonds,
excluding commissions and taxes.
b. Prepare an amortization table for these bonds.
c. Give the journal entries that Martin Company would make to
account for these bonds during 2012 .
d. Give the journal entries that Martin Company would make to
account for these bonds on December 31, 2014 .
Answer:
44) Paula Company measures its investments in available-for-sale
marketable securities
A.at cost on the balance sheet and recognizes income only when it
receives a dividend (revenue) or sells some of the securities at a
gain or loss
B.at fair value on the income statement and recognizes income when
it receives a dividend (revenue)
C.at cost on the balance sheet and recognizes income only when it
receives a dividend (revenue)
D.at fair value on the balance sheet and recognizes income only
when it receives a dividend (revenue) or sells some of the
securities at a gain or loss
E.at cost on the balance sheet and recognizes income only when it
sells some of the securities at a gain or loss
Answer:
45) (CMA adapted, Dec 92 #10) There are many similarities between
lessee and lessor accounting for the capitalization of leases.
Which one of the following is a criterion for the capitalization of
a lease by a lessee?
A.The lease transfers ownership of the property to the lessee by
the end of the lease term
B.The lease term is at least 90% of the remaining life of the asset
at the beginning of the lease
C.The present value of the minimum lease payments is 75% or more of
the fair market value of the leased asset
D.Future costs are reasonably predictable
E.The lease term is at least 60% of the remaining life of the asset
at the beginning of the lease
Answer:
46) The _____ shows assets, liabilities and shareholders equity as of a
specific date, similar to a snapshot.
A.balance sheet
B.income statement
C.statement of cash flows
D.statement of sources and uses of funds
E.statement of cash receipts and disbursements
Answer:
47) Flake Corporation sets up a pension plan that is legally separate
from Flake. The pension plan specifies the eligibility of
employees, the types of promises to employees, the method of
funding, and the pension plan administrator. Flake Corporation
specifies the benefit that employees will receive during
retirement. Employer contributions plus earnings from investments
made with those contributions pay the specified benefit. Common
terminology refers to such plans as ____________. The assets in the
plan will usually not equal the liabilities of the plan, resulting
in an overfunded or underfunded plan.
A.defined benefit pension plans
B.defined contribution pension plans
C.accumulated benefit pension plans
D.accumulated contribution pension plans
E.unqualified pension plans
Answer:
48) Firms initially record property, plant, and equipment, sometimes
referred to as fixed assets, at acquisition cost, the cash paid or
the fair value of other consideration given in exchange for the
asset. Which of the following is not true?
A.Acquisition cost includes all costs necessary to prepare the
asset for its intended use
B.Firms capitalize into the assets carrying amount subsequent
expenditures that extend the service life or increase the benefits
of a fixed asset beyond those initially anticipated
C.Buildings and equipment have a finite life, so firms must
depreciate their acquisition cost less estimated salvage over the
expected service life
D.Firms may use a straight-line method or accelerated depreciation
methods
E.If new information becomes available that indicates that the
expected service life or estimated salvage value differs
significantly from that initially anticipated, the firm revises its
depreciation claimed in prior years and restates the financial
statements
Answer:
49) C-Swiss, a Swedish firm specializing in communication networks,
reported a balance in Inventories of SEK21,500 million at the
beginning of 2013 and SEK22,500 million at the end of 2013. During
2013, C-Swiss reported SEK114,100 million in Cost of Sales. How
much was C-Swisss inventory purchases during 2013? [Assume that all
of C-Swisss inventory purchases are made on account and C-Swiss
applies IFRS, as well as reports its results in millions of Swedish
kronor (SEK).]
A.SEK115,300 million
B.SEK115,200 million
C.SEK115,100 million
D.SEK113,100 million
E.none of the above
Answer:
50) U.S. GAAP and IFRS distinguish three categories of long-lived
assets for purposes of measuring and recognizing impairment losses.
The first category addresses long-lived assets except intangible
assets not subject to amortization and goodwill. This category does
not include:
A.property, plant, and equipment
B.patents
C.franchise rights
D.land
E.brand names and trademarks
Answer:
51) Which of the following is not true? Firms recognize revenue
A.when they have completed an earnings process or performed most or
all of their obligations to customers, usually the delivery of a
product or service
B.when they have received cash
C.using the percentage-of-completion method when the firms sell
products under long-term contracts, such as construction
companies
D.using the completed contract method [U.S. GAAP, only] when firms
cannot reasonably estimate revenues and costs
E.using a variant of the cost-recovery method [IFRS, only] when
firms cannot reasonably estimate revenues and costs
Answer:
52) Under accrual accounting, revenues are recognized when
A.the firm has performed all, or most of, the services it expects
to provide
B.the firm has received cash, or some other asset such as a
receivable, whose cash-equivalent value it can measure with
reasonable precision
C.the firm has significant uncertainty about the amount and timing
of the cash inflows and outflows from the sales transaction
D.both a and b must be present
E.none of the above
Answer:
53) To be classified as a current asset, marketable securities must be
readily convertible into cash and
A.traded on the New York Stock Exchange
B.must be sold prior to the longer of 6 months or the number of
months until fiscal year-end
C.have a short-term maturity
D.management must intend to convert the securities to cash when
necessary
E.be issued by the U.S. Treasury
Answer:
54) Which of the following is/are not true concerning an employee stock
options time value element?
A.The time value element results from the possibility of increases
in the market price of the stock during the exercise period.
B.Time value is larer the longer the exercise period and the more
volatile the market price of the stock
C.A stock option whose exercise price exceeds the current market
price has economic value because of the possibility that the market
price will exceed the exercise price on the exercise date
D.A stock option whose exercise price has zero intrinsic value has
economic value because of the possibility that on the exercise date
there would be positive intrinsic value
E.Stock options with exercise prices exceeding the current market
price of the stock have a higher value, other things equal, than
stock options with exercise prices less than the current market
price of the stock
Answer:
55) Regarding employee stock options, which of the following is/are not
true?
A.Firms compute a fair-value-based measure of employee stock
options on the date of the grant using an option-pricing model that
incorporates information about the current market price, the
exercise price, the expected time between grant and exercise, the
expected volatility of the stock, the expected dividends, and the
risk-free interest rate
B.Total compensation cost is the number of options the firm expects
to vest times the value per option
C.Firms amortize total compensation cost over the requisite service
period, which is the expected period of benefit
D.The requisite service period is usually the period between the
grant date and the vesting date
E.Firms typically remeasure most types of stock options after the
initial grant date
Answer:
56) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations between cash flows from
operating, investing, and financing activities. In the United
States, which phase best describes:
Biotechnology firms Consumer foods companies Steel
manufacturers
A. growth mature decline
B. mature decline growth
C. growth growth decline
D. growth growth mature
E. decline mature growth
Answer:
57) On August 1, Covington Motors pays £18,000 for insurance
coverage for the next 12 months. On August 1, the firm records the
following journal entry:
Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 18,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
At the end of each of the next 12 months, the firm records the
following adjusting entry:
A.Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 1,500
Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .. . . . . . . . . . . . . . . 1,500
B.Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 1,500
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 1,500
C.Insurance Expense. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 1,500
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 1,500
D.Liability for Prepaid Insurance . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .1,500
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 1,500
E.Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . .
. . . .. . . . . . . . . . . . . . 1,500
Liability for Prepaid Insurance . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 1,500
Answer: