ACC 634

1) Firms may not issue equity interests with different rights, such as
one class of common stock with 10 votes per share and another class
of common stock with one vote per share.

Answer:

2) A balance sheet prepared according to U.S. GAAP lists liabilities
starting with those that the firm will discharge soonest (the most
current or closest to maturity liabilities) and ending with those
that it will pay latest (the most noncurrent or distant to maturity
liabilities).

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3) Firms can currently apply the fair value option to capital leases.

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4) Describe the accounting for minority, active investments.

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5) In IFRS, probable as recognition criterion for liabilities with
uncertain amount and/or timing means more likely than
notapproximately 51%.

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6) How does a lessor account for leases?

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7) Investors often apply multiples to earnings per common share and
book value per common share in deciding on a reasonable market
price for a firms shares.

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8) Firms communicate the results of their business activities in the
annual report to shareholders.

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9) Describe what is meant by a reporting entity.

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10) U.S. GAAP and IFRS require firms to disclose the fair value of
financial instruments in a note to the financial statements. What
should such a note include?

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11) Discuss the treatment of expenditures as assets versus immediate
expenses.

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12) What distinguishes noncurrent assets from current assets?

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13) Realization is the presumption that a firm will remain in operation
long enough to carry out its current plans. and in the normal
course of its operations, realize changes in the fair values of its
assets either by using those assets or selling them.

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14) Education Power is a charitable organization that promotes
educational opportunities for inner city children and adults.
Describe how the four common key activities would differ for this
organization as opposed to a for-profit business entity.

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15) Which of the following is/are not true regarding U.S. GAAP and IFRS
requirements for income tax accounting for financial reporting
purposes?
A.Income taxes expense equals income taxes currently payable
B.A temporary difference that implies a future tax deduction gives
rise to a deferred tax asset
C.A temporary difference that implies a future increase in income
tax payable gives rise to a deferred tax liability
D.The accountant computes income tax expense using pretax amounts
for financial reporting
E.A permanent difference never affects income tax expense for any
period

Answer:

16) Which of the following is not true regarding the issuance of a
stock dividend?
A.The stock dividend has little economic substance for
shareholders
B.The stock dividend does not change each shareholders ownership
interest or proportionate voting power
C.The stock dividend results in decreases to book value per common
share, but the total book value of each shareholders interest
remains unchanged
D.The total market value of an individuals shares should not
change
E.The stock dividend does not change the number of shares each
shareholder owns

Answer:

17) Which of the following is not true concerning the FASB and the IASB
conceptual frameworks?
A.Both the FASB and the IASB rely on a conceptual framework to
guide their standard-setting decisions
B.The conceptual framework is not a rigorous set of principles from
which standard setters can logically deduce appropriate financial
reporting standards
C.The purpose of a conceptual framework is to guide
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 refusing to develop a common
conceptual framework for financial reporting

Answer:

18) Which of the following is/are true about amounts received from
shareholders for the firms shares when the firm first issued
them?
A.The firm assigns the par value of a share of stock at an amount
it chooses
B.Par values are typically small, often $1 or less per share
C.Par values are rarely equal the amounts the firm receives when it
issues the shares
D.The sum of the par value amount and the additional paid-in
capital amount is the total amount received from shareholders
E.All of these answers are true

Answer:

19) Which of the following is/are true regarding long-lived assets with
a finite life?
A.The firm consumes the assets services over time in generating
revenues
B.The balance sheet carrying value decreases over time as the firm
recognizes the cost of the asset as an expense
C.A portion of the acquisition cost is recognized as an expense
each period
D.Management must estimate the assets finite life
E.all of the above

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20) Income from continuing operations includes
A.gain on the sales of used equipment that is replaced in the
current year
B.loss from a discontinued operation
C.loss from an earthquake
D.gain on a change in accounting principle
E.loss resulting from prohibitions under new regulations

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21) Which of the following is/are elements of a derivative?
A.Many derivatives require no initial investment, that is, no
initial cash payment to the counterparty
B.A derivative may have zero initial cost, but potentially large
positive or negative fair values later
C.Both U.S. GAAP and IFRS require that firms record derivatives at
their fair values on the balance sheet date
D.The firm usually acquires a derivative by exchanging promises
with a counterparty, such as a commercial or investment bank. The
exchange of promises is a mutually unexecuted contract
E.all of the above

Answer:

22) U.S. GAAP classifies securities that are neither debt securities
held to maturity or trading securities as
A.securities available-for-sale
B.securities held for short term profit potential
C.securities held for speculation
D.securities held for speculation
E.derivative securities

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23) The distinction between recognition and realization is essential to
accrual accounting, hence the importance accorded to recognition
criteria. Firms recognize items that qualify for inclusion in the
financial statements when they enter the financial statements. In
the case of value decreases, the firm
A.recognizes the decreases as impairment expenses when it realizes
the collection of the reduced cash flows
B.recognizes the decreases as cost of goods sold when the decreases
occur before it realizes the collection of the reduced cash
flows
C.recognizes the decreases as impairment expenses when the
decreases occur before it realizes the collection of the reduced
cash flows
D.recognizes the decreases as cost of goods sold when it realizes
the collection of the reduced cash flows
E.None of these answer choices is correct

Answer:

24) A firm sells its headquarters building at a gain. This means that
at the time of sale
A.the cash or other assets received were greater than the buildings
book value
B.the cash or assets received in a transaction were less than the
carrying value of the assets given up
C.the cash or other assets received were greater than the building
carrying value
D.the cash or assets received in a transaction were less than the
buildings book value
E.Both choices a and c are correct

Answer:

25) King Products Corporation

King Products Corporation
Statement of Financial Position
(in thousands)

(CMA adapted, Dec 96 #16) Refer to the King Products Corporation
example. King Products Corporation’s accounts receivable turnover
for the fiscal year ended at June 30, Year 6, was
A.4.9
B.5.9
C.6.7
D.8.0
E.none of the above

Answer:

26) Which of the following is/are true?
A.Revenues measure the inflow of net assets from operating
activities
B.Expenses measure the outflow of net assets consumed in the
process of generating revenues
C.Recognizing revenues and expenses always involves a simultaneous
entry in an asset and/or liability account
D.Adjusting entries almost always involve an entry in at least one
income statement and one balance sheet account
E.All of the above are true

Answer:

27) Which of the following is not true 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 increases carrying value, then the
firm reports a gain in income equal to the amount of the increase
in carrying value during the current period
E.The cash flow from operations section shows an addition for the
amount of the gain equal to the amount of the increase in carrying
value of a derivative during the current period

Answer:

28) Clayborne Company reported the following changes in the balance
sheet accounts between Year 1 and Year 2. No dividends are paid
during the year, land was sold at its book value of $30,000 and any
change in the patent account is due to amortization.

Required:

Given the changes in the balance sheet for Year 2,
state:

a., b.

Answer:

29) The sales, all on account, of Hendricks Company in Year 1, its
first year of operations, were $800,000. Collections totaled
$600,000. On December 31, Year 1, Hendricks Company estimated that
3 percent of all sales would probably be uncollectible. On that
date, specific accounts in the amount of $18,000 were written
off.

Hendricks Company’s unadjusted trial balance (after all
nonadjusting entries were made and after all write-offs of specific
accounts receivable identified during Year 2 as being
uncollectible) on December 31, Year 2, includes the following
accounts and balances:

On December 31, Year 2, Hendricks Company carried out an
aging of its accounts receivable balances and estimated that the
Year 2 ending balance of accounts receivable contained $26,000 of
probable uncollectibles. It made adjusting entries appropriate for
this estimate. Some of the $900,000 sales during Year 2 were for
cash and some were on account; these data purposefully omit the
amounts.

Required:


a. What was the balance in the Accounts Receivable account at the
end of Year 1? Give the amount and whether debit or credit.
b. What was the balance in the Allowance for Uncollectible Accounts
at the end of Year 1? Give the amount and whether debit or
credit.
c. What was bad debt expense (Revenue Contra for Uncollectibles)
for Year 2?
d. What was the amount of specific accounts receivable written off
as being uncollectible during Year 2?
e. What were total cash collections in Year 2 from customers (for
cash sales and collections from customers who had purchased on
account in either Year 1 or Year 2)?
f. What was the net balance of accounts receivable included in the
balance sheet asset total for December 31, Year 2?

Answer:

30) Discuss how the analyst can disaggregate ROA into the product of
two other ratios to study changes in ROA.

Answer:

31) U.S. GAAP requires the disclosure of the direct exchange (with no
cash consideration) of a tract of land for manufacturing equipment
to be used in the company’s operations
A.as an operating activity
B.as an investing activity
C.as a financing activity
D.as an exchange activity
E.in a separate schedule or note, but does not appear in the
statement of cash flows as an operating activity, investing
activity, or a financing activity

Answer:

32) The accounting for employee stock options involves
A.the measurement of the fair value of 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 market price
volatility of the stock, the expected dividends, and the risk-free
interest rate
B.calculating total compensation cost as the number of options the
firm expects to vest times the fair value per option
C.factoring in the firms use of their historical experience on
forfeitures due to employees terminating employment prior to
vesting to estimate the expected number of options that will
vest
D.amortizing the fair value of the stock options on the date of the
grant over the requisite service period, which is the expected
period of benefit
E.all of the above

Answer:

33) On January 1, Year 1, Young Company purchased a machine for $6,000.
It had an estimated salvage value of $1,200 and a life of six
years. The straight-line method of depreciation was used. At
midyear in Year 4, Young sold the machine for $4,500 cash.

Required:

Answer:

34) Other comprehensive income for a reporting period include(s)
A.changes in the fair value of marketable equity securities
available for sale
B.changes in the fair value of derivatives used as cash flow
hedges
C.gains and losses related to retirement plans not yet recognized
in measuring retirement benefits expense
D.all of the above
E.none of the above

Answer:

35) FASB board members make standard-setting decisions guided by a
conceptual framework that addresses the qualitative characteristics
of accounting information. Which of the qualitative characteristics
of accounting information holds that the information should
facilitate comparisons across firms and over time?
A.Relevance
B.Reliability
C.Comparability
D.Subjective
E.all of the above

Answer:

36) When a firm reacquires common shares under the Par Value Method for
Repurchased Shares:
A.the Treasury StockCommon account has a credit balance that
reduces the amount of Marketable Securities reported on the balance
sheet
B.the accountant debits the Treasury StockCommon account for the
par value of the repurchased shares, debits Additional Paid-In
Capital for the difference between the original issue price of the
shares and par value, and plugs Retained Earnings for any
difference between the repurchase price
C.the accountant debits the Common Stock account for the par value
of the repurchased shares, debits Additional Paid-In Capital for
the difference between the original issue price of the shares and
par value, and plugs Retained Earnings for any difference between
the repurchase price
D.the Treasury StockCommon account has a credit balance and
therefore reduces total shareholders equity
E.the accountant credits the Common Stock account for the par value
of the repurchased shares, credits Additional Paid-In Capital for
the difference between the original issue price of the shares and
par value, and plugs Retained Earnings for any difference between
the repurchase price

Answer:

37) The intermingling of performance of one period with that of
preceding or succeeding periods is characteristic of which basis of
accounting?
Cash basisAccrual basis
A.Yes Yes
B.YesNo
C.NoYes
D.NoNo

Answer:

38) Which of the following is not true regarding firms use of net
assets (assets minus liabilities)?
A.Firms use net assets to generate more net assets through the
earnings
B.Firms typically retain some or all of the net assets generated by
earnings, causing net assets to increase, along with retained
earnings, which is the component of shareholders equity showing the
cause of that increase in net assets
C.The retention of net assets generated by earnings generally
increases the market price of the firms common shares
D.Some firms pay periodic dividends to the common shareholders out
of net assets
E.Regardless of whether a firm has more than one class of common
stock and their dividend rights differ, each common shareholder
always receives the same dividend per share as all other common
shareholders

Answer:

39) In preparing the statement of cash flows for Year 4, internal
records indicate that depreciation on manufacturing facilities
totaled $800. The firm included this amount in cost of goods sold
in the income statement for Year 4. None of the of depreciation
required an operating cash flow during Year 4. The T-account work
sheet entry adds back the $800 of depreciation on manufacturing
facilities. Accountants treat depreciation charges on manufacturing
facilities as
A.a period expense
B.an opportunity cost
C.a product cost
D.a cost of capital
E.a marginal cost

Answer:

40) Using the amortization procedure, the holder of the debt securities
(the investor) records interest revenue each period at an amount
equal to the _____ at the start of the period multiplied by the
_____ applicable to that debt on the day the firm acquired the
debt. The bonds are classified as held to maturity.
A.carrying value of the debt; market rate of interest
B.market value of the debt; market rate of interest
C.carrying value of the debt; applicable federal rate of
interest
D.present value of the debt; market rate of interest
E.present value of the debt; applicable federal rate of interest

Answer:

41) In U.S. GAAP, which of the following accurately describes the
effects of transactions involving investments on the statement of
cash flows using the fair value method for securities available for
sale and cash flow hedges?
A.Realized gains and losses appear in Retained Earnings. Unrealized
gains and losses appear in net income
B.Realized gains and losses appear in Other Comprehensive Income.
Unrealized gains and losses appear in net income
C.Realized gains and losses appear Shareholders equity. Unrealized
gains and losses appear in Other Comprehensive Income
D.Realized gains and losses appear in Retained Earnings. Unrealized
gains and losses appear in Other Comprehensive Income
E.Realized gains and losses appear in net income. Unrealized gains
and losses appear in Other Comprehensive Income

Answer:

42) Which of the following is/are not a shortcoming of the direct
write-off method?
A.It provides firms with an opportunity to manage earnings each
period by deciding when particular customers’ accounts become
uncollectible
B.It does not usually recognize the loss from uncollectible
accounts in the period in which the sale occurs and the firm
recognizes revenue
C.The amount of accounts receivable on the balance sheet does not
reflect the amount a firm expects to collect in cash
D.It is the method required for income tax reporting in the United
States
E.none of the above

Answer:

43) In a rising stock market, the result of any subsequent sale of a
firms previously issued common shares from one investor to another
(such as occurs on public stock exchanges):
A.the total paid-in capital amount reported on a balance sheet will
usually be less than the current market value of the common
shares
B.the total paid-in capital amount reported on a balance sheet will
usually be greater than the current market value of the common
shares
C.the total paid-in capital amount reported on a balance sheet will
usually be equal to the current market value of the common
shares
D.the total paid-in capital amount reported on a balance sheet will
be eliminated
E.None of these answer choices is correct

Answer:

44) Measures for assessing short-term liquidity risk include all of the
following except:
A.current ratio
B.quick ratio
C.cash flow from operations to current liabilities ratio
D.working capital turnover ratios
E.price earnings ratio

Answer:

45) Which of the following is/are not true?
A.Common and preferred stock usually have a par or stated value
B.Firms report amounts received from issuing common stock in excess
of the par or stated value as Additional Paid-In Capital or a
similar account title
C.Firms report amounts received from issuing common stock in excess
of the par or stated value as Additional Paid-In Capital, or
Capital in Excess of Par Value or a similar account title
D.The amounts in Additional Paid-In Capital for a firm usually
exceeds the amounts in Common Stock, indicating that the firm
issued common stock for substantially more than par value, a common
practice among publicly traded firms
E.none of the above

Answer:

46) U.S. GAAP and IFRS require complex procedures in accounting for
income taxes. For example, firms provide for estimated
uncollectible accounts when they recognize sales on account but
delay the tax deduction until later, when firms judge that
particular customers accounts are uncollectible. In this example,
a
A.deferred tax asset arises
B.deferred tax liability arises
C.firm recognizes a revenue earlier for financial reporting than
for tax reporting
D.firm recognizes a revenue earlier for tax reporting than for
financial reporting
E.firm recognizes an expense earlier for tax reporting than for
financial reporting

Answer:

47) 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 #16) Refer to the Robo Corporation example.
Robo Corporation’s financial statements at December 31, Year 4,
A.include a contingent liability of $500,000
B.disclose the purchase commitment
C.include a liability of $575,000
D.do not mention this commitment
E.none of the above

Answer:

48) Which of the following is/are intangible assets with a finite
useful life?
A.Customer List and User Base
B.Trade Names and Trademarks
C.Developed Technologies
D.Network Access Agreements
E.all of the above

Answer:

49) The actual earnings from pension plan investments include
A.interest, only
B.interest and dividends, only
C.interest, dividends, and realized changes in the fair value of
plan investments, only
D.interest, dividends, realized and unrealized changes in the fair
value of plan investments
E.interest, dividends, and unrealized changes in the fair value of
plan investments, only

Answer:

50) The conversion of nonparticipating preferred stock into common
stock should be presented in a statement of cash flows as a(n)
A.operating activity
B.investing activity
C.financing activity
D.noncash exchange
E.None of these answers is correct

Answer:

51) Fix-It Hardware

Fix-It Hardware began the month of November with 150 large brass
switchplates on hand at a cost of $4.00 each. These switchplates
sell for $7.00 each. The following schedule presents the sales and
purchases of this item during the month of November.

(CMA adapted, Dec 92 #27) Refer to the Fix-It Hardware example. If
Fix-It uses weighted average inventory pricing, the gross profit
for November would be
A.$1,046
B.$1,482
C.$1,516
D.$1,574
E.$1,146

Answer: