1) The managers of a business prepare financial statements to present
meaningful information
about that businesss activities to external users.
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2) Firms typically report cash flows from operations using the direct
method.
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3) Common terminology describes items whose cash receipts or payments
the firm expects will occur within one year as current assets or
current liabilities, respectively.
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4) In assessing the financial condition of a firm, an astute analyst
recognizes that historical costs are reflected on the balance sheet
and adjusts the reported numbers.
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5) Common terminology refers to the calculations for amortizing a
financial instrument to its maturity value over time as the imputed
interest method.
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6) Firms must expense when incurred the transactions cost of acquiring
a firm in a business combination under both U.S. GAAP and IFRS.
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7) Discuss internal and external users of accounting information. What
areas of accounting provide them with information? Give an example
of the type of report each type of user might use.
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8) The FASB and IASB are working jointly to develop a revised,
coordinated set of financial
reporting objectives.
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9) How does disposal of an asset through sale, abandonment, or
trade-in on another asset affect net income?
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10) When the coupon rate equals the historical market interest rate or
initial yield to maturity, then the initial issue price equals the
face value of the bonds.
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11) The accounting and reporting of health care, life insurance, and
other postretirement plans follow the concepts and procedures for
defined benefit pension plans.
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12) Discuss inventory accounting concepts and issues.
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13) What is conservatism?
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14) Cash equivalents represent long-term, highly liquid investments in
which a firm has temporarily placed excess cash.
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15) What are the general principles for measuring financial
instruments?
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16) The U.S. Internal Revenue Service requires that firms recognize bad
debt expense only when they conclude an account is not collectible.
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17) Who are the users of financial statements and what do they need?
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18) U.S. GAAP and IFRS permit firms to account for notes and bonds
under which of the following approach(es)?
A.Amortized Cost
B.Fair Value
C.Amortized Cost and Future Value
D.Non-amortized cost and Fair Value
E.Amortized Cost and Fair Value
Answer:
19) U.S. GAAP and IFRS require firms to recognize as assets
identifiable intangibles acquired in external market transactions.
Which of the following is/are true?
A.The exchange between an independent buyer and seller provides
evidence of the existence of expected future benefits, and the
exchange price provides evidence of the fair value of those
benefits
B.In external market transactions, identifiable intangibles include
patents, trademarks, customer lists, and other economic resources
ready for use, as well as in-process technologies with uncertain
future benefits
C.In external market transactions, identifiable intangible assets
have either finite lives or indefinite lives
D.In external market transactions, firms must amortize intangible
assets with finite lives, generally using the straight-line
method
E.all of the above
Answer:
20) Which of the following is not true?
A.For accounting purposes, goodwill arises only when a firm
acquires another entity in an external market transaction and pays
more for that entity than the fair value of the identifiable assets
net of identifiable liabilities
B.Goodwill is the excess of the amount paid for the acquired
company over the fair value of identifiable net assets
C.Goodwill, because it includes unidentifiable intangible
resources, has an indefinite life
D.Indefinite does not mean infinite, only not knowable
E.Firms amortize goodwill
Answer:
21) As part of a company’s normal course of business, errors,
omissions, and changes occur in the financial statements. Certain
items may be reported on the income statement, some may directly
adjust the balance in retained earnings, while others do not affect
the current period’s income statement or retained earnings.
Required:
| a. |
Consider a change in estimate, such as the useful life of an asset moving from five to eight years. How is this handled on the income statement and/or through the retained earnings account? |
| b. |
Consider an error/omission, such as merchandise inventory being left out of the final yearly count. How is this handled on the income statement and/or through the retained earnings account? |
Answer:
22) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations among cash flows from
operating, investing, and financing activities. During the _____
cash outflow exceeds cash inflow from operations because operations
are not yet earning profits while the firm must invest in accounts
receivable and inventories. Investing activities result in a net
cash outflow to build productive capacity. Firms must rely on
external financing during this phase to overcome the negative cash
flow from operations and investing.
A.introduction phase
B.growth phase
C.mature phase
D.late maturity phase
E.decline phase
Answer:
23) Sao Paulo Trains Inc., incorporated in Brazil, manufactures
high-speed trains. In this industry, the time to manufacture
products usually exceeds one year. Assume that Sao Paulo Trains
recently signed a 8 billion contract to provide 10 new high-speed
trains to a customer in the European Union. The customer has paid a
deposit of 500 million and will pay the remainder in equal
installments over the next four years. When should Sao Paulo Trains
recognize the revenue from this contract?
A.at the time Sao Paulo Trains signs the contract and receives 500
million cash from the customer
B.assuming that Sao Paulo Trains can reliably estimate both the
revenue from the contract and the costs to complete the contract,
it will recognize revenue (as well as the costs associated with
delivering on the contract) over the contract life
C.Sao Paulo Trains will recognize all of the revenue (as well as
all of the costs associated with delivering on the contract) at the
completion of the contract
D.at the time Sao Paulo Trains signs the contract and receives the
cash payments from the customer
E.none of the above
Answer:
24) _____ are probable future sacrifices of economic benefits arising
from present obligations of a particular entity to transfer assets
or provide services to other entities in the future as a result of
a past event or transaction.
A.Assets
B.Liabilities
C.Shareholders equity
D.Revenues
E.Expenses
Answer:
25) In what way are stock rights generally different from stock
warrants?
A.Stock rights are generally granted to current shareholders
only
B.Stock rights are non-transferable
C.Stock warrants are only issued with bonds
D.Stock warrants are only issued with preferred stocks
E.Rights and warrants differ in no way; they convey the same rights
Answer:
26) U.S. GAAP view investments of less than 20 percent of the voting
stock of another company as
A.minority, passive investments
B.minority, active investments
C.majority, passive investments
D.majority, active investments
E.a controlled entity
Answer:
27) Which of the following is/are not true?
A.Stock rights give their holder the right to acquire shares of
stock at a specified price
B.Firms grant stock rights to current shareholders
C.Shareholders may exercise the stock rights or sell them to
others
D.The stock rights usually trade in public markets
E.Employees receive stock rights as a form of compensation
Answer:
28) The FASBs conceptual framework does not include which of the
following as financial reporting objectives?
A.Provide information useful for making suboptimal investment and
credit decisions
B.Provide information to help current and potential investors and
creditors assess the amount, timing, and uncertainty of future cash
flows
C.Provide information about the economic resources of a firm and
the claims on those resources
D.Provide information about a firms operating performance during a
period
E.Provide information about how an enterprises lenders obtains and
use cash
Answer:
29) A firm may retire an asset from service by trading it in on a new
asset. U.S. GAAP and IFRS require that firms record a trade-in that
lacks commercial substance at
A.present value of future cash flows.
B.replacement value
C.liquidation value
D.the carrying value of the exchanged asset
E.undiscounted cash flows
Answer:
30) Grand Metropolitan is a consumer foods company headquartered in the
United Kingdom. It has followed the common practice in the U.K. of
treating expenditures on product development, quality control, and
advertising as an expense each year. Grand Metropolitan has now
decided to recognize the full value of its brand names as an asset
on the balance sheet as of September 30, Year 6. To keep the
balance sheet in balance and in accordance with U.K. practice,
Grand Metropolitan will likely
A.decrease some other asset
B.increase a current liability
C.increase a noncurrent liability
D.increase shareholders’ equity
E.decrease shareholders’ equity
Answer:
31) _____ is a private-sector financial accounting standard setter that
promulgates accounting standards that are required or permitted to
be used in over 100 countries, but has no enforcement powers.
A.Financial Accounting Standards Board (FASB)
B.International Accounting Standards Board (IASB)
C.Public Company Accounting Oversight Board (PCAOB)
D.U.S. Securities and Exchange Commission (SEC)
E.Governmental Accountability Office (GAO)
Answer:
32) Treasury stock or treasury shares are shares a firm has previously
issued and later reacquired. Reasons for reacquiring outstanding
common stock include which of the following?
A.to use in option arrangements, only
B.to invest excess cash, only
C.to defend against an unfriendly takeover bid, only
D.to distribute cash to shareholders in a tax-advantaged way,
only
E.to use in option arrangements, to invest excess cash, to defend
against an unfriendly takeover bid, and to distribute cash to
shareholders in a tax-advantaged way
Answer:
33) _____ measures the amount of sales generated from a particular
level of investments in fixed assets.
A.Fixed asset ratio
B.Fixed asset turnover ratio
C.Asset ratio
D.Fixed asset ratio
E.Inventory turnover ratio
Answer:
34) A stock split accomplished by altering the par value in direct
proportion to the number of new shares
A.does not require a journal entry
B.decreases Additional Paid-In Capital or Retained Earnings
C.increases Additional Paid-In Capital or Retained Earnings
D.decreases Cash or Retained Earnings
E.increases Cash or Retained Earnings
Answer:
35) In any given accounting period, the amount a firm reports as income
before income taxes for financial reporting in comparison to the
amount of taxable income that appears on its income tax return may
differ due to temporary differences. Temporary differences
include
A.bad debt expense, only
B.depreciation on long-lived assets, only
C.interest revenue on municipal bonds, only
D.certain fines and penalties, only
E.bad debt expense and depreciation on long-lived assets
Answer:
36) In the first month of operations, Rock City Manufacturing had the
following transactions:
a. Incorporated on April 1, Year 1. Issued 10,000 shares of $1 par
value common stock for $30,000.
b. Acquired factory equipment for $6,000 cash on April 2. Equipment
has a 5 year life with a $600 salvage value.
c. On April 4, purchased $10,000 of raw materials with cash.
d. Paid $4,000 for April and May rent on administrative offices on
April 5.
e. On April 8, issued raw materials of $8,000 to production
department.
f. On April 10, purchased $5,000 additional raw materials on
account.
g. Paid $5,000 in payroll on April 14; $4,000 to factory workers,
$1,000 to salesmen.
h. Paid utilities of $1,000 on April 15; $800 for factory and $200
for administrative office.
i. Units completed during the month and transferred to the finished
goods total $7,000.
j. Sales for the month totaled $10,000; all were credit sales.
k. Cost of goods sold for the month is $6,500.
(Note: Rock City Manufacturing treats all raw materials used in
production, as well as all wages incurred for production, as direct
in nature and such costs are not included in manufacturing
overhead.)
Required:
| a. |
Prepare journal entries for the above transactions, including any adjusting entries. |
| b. |
Prepare a balance sheet and income statement for April, Year 1. |
Answer:
37) Which of the following is not true?
A.Gains (losses) are increases (decreases) in net assets from
peripheral or incidental transactions of an entity and from other
transactions and events affecting the entity except those that
result from revenues (expenses) or investments by (distributions
to) owners
B.Firms usually report gains and losses from sales of assets or
settlements of liabilities at a net amount; that is, equal to the
difference between the net asset received and the carrying value of
the asset sold or between the net asset given and the carrying
value of the liability settled
C.Gains and losses may arise from the remeasurement of assets and
liabilities
D.Firms realize gains and losses when they sell or exchange assets
or settle liabilities in market transactions
E.Firms realize gains and losses when those items enter the
measurement of net income or other comprehensive income
Answer:
38) Clayton Drug Company purchases a patent from its creator. Which of
the following is/are true?
A.A patent has a legal life of up to 40 years
B.Managements expectations of technological change may lead to a
higher economic life than the legal life
C.Clayton should amortize the acquisition cost of the patent over
its expected useful life, equal to the shorter of the economic life
and the legal life
D.Clayton should amortize the acquisition cost of the patent over
its legal life
E.Clayton should amortize the acquisition cost of the patent over
its economic life
Answer:
39) Healthy Lawn Maintenance Company
Healthy Lawn Maintenance Company started a lawn services business
on January 1, 2013 . It sends invoices to its customers for lawn
maintenance services at the end of each month, and expects the
customer to pay within 30 days. During 2013, Healthy Lawn
Maintenance billed its customers a total of $2,000,000 for services
rendered during the year. It made journal entries at the end of
each month.
(Use the Healthy Lawn information to answer this question.) The
aggregate effect of these entries during 2013 is as follows:
A.Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 2,000,000
Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 2,000,000
B.Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 2,000,000
Accounts Receivable, Net . . . . . . . . . . .. . . . . . . . . . .
. . . . . . . . . . 2,000,000
C.Accounts Receivable, Net . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 2,000,000
Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 2,000,000
D.Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . .
. . . . . . . . 2,000,000
Sales Revenue . . . . . . . . . . . . . . . . . . . . .. . . . . .
. . . . . . . . . . . . . . 2,000,000
E.Notes Receivable, Gross . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 2,000,000
Sales Revenue . . . . . . . . . . . . . . . . . . . . .. . . . . .
. . . . . . . . . . . . . . 2,000,000
Answer:
40) To carry out their plans, firms require financing, that is, funds
from owners and creditors. Owners provide funds to a firm and in
return receive ownership interests. For a corporation, the
ownership interests are:
A.Common Stock Shares
B.Corporate Bonds
C.Notes Receivable
D.Notes Payable
E.Certificates of Deposit
Answer:
41) Corporations sometimes distribute assets other than cash when
paying a dividend. Which of the following is/are true?
A.Such a dividend is known as a dividend in kind or a property
dividend
B.The accounting for property dividends resembles that for cash
dividends, except that when the firm pays the dividend, it credits
the asset given up, rather than Cash
C.The amount debited to Retained Earnings equals the fair value of
the assets distributed
D.When this fair value differs from the carrying value of the
assets distributed, the firm recognizes a gain or loss in net
income
E.all of the above
Answer:
42) Which is a use of cash?
A.an increase in inventory
B.a decrease in accounts receivable
C.decrease in equipment
D.an increase in accounts payable
E.an increase in bonds payable
Answer:
43) Who evaluates the accounting system, including its ability to
record transactions properly and its operational effectiveness, and
also determines whether the financial reports prepared conform to
the requirements of the applicable authoritative guidance?
A.management
B.general counsel
C.independent auditor
D.financial vice-president
E.controller
Answer:
44) The first section of the statement of cash flows derives cash flow
from _____ activities. The _____ method reports the amounts of cash
received from customers less cash disbursed to suppliers,
employees, lenders, and taxing authorities.
A.operating; direct
B.operating; indirect
C.investing; direct
D.investing; indirect
E.financing: direct
Answer:
45) ALT Company, as tenant, acquired for $600,000, paid in a single
amount, the right to use an entire office building for the next ten
years. ALT expects to rent out the floors in the building to
various commercial tenants. As tenant, ALT accounts for its lease
as a capital lease amortizing the leasehold asset on a
straight-line basis over ten years. ALT, as landlord, signed
operating leases with the tenants for all of the rentable space.
The rents total $150,000 received at the end of each year for the
next ten years, $1.5 million in total.
Required:
a. Under current GAAP, can ALT treat the same property as a capital
lease and an operating lease?
b. What is the book value of this property after two years?
Assume, independent of your answer to the preceding question, that
the book value of the property after two years is $400,000. On that
date, some of the tenants go bankrupt and ALT believes it will be
unable to rent their now-vacant space, which will remain empty for
the remaining eight years. The fair market value of the remaining
leasehold with still-solvent, rent-paying tenants is $300,000.
c. If the remaining tenants will pay $800,000 in total, with
present value $310,000, what entry, if any, will ALT make?
d. If the remaining tenants will pay $320,000 in total, with
present value $290,000, what entry, if any, will ALT make?
Answer:
46) Examples of factors from the operating environment that would
affect a firms goals and
strategies include which of the following?
A.goals and strategies of the firms competitors
B.barriers to entry of the firms industry, such as patents or large
investments in buildings and equipment
C.nature of the demand for the firms products and services
D.existence and nature of government regulation
E.all of the above
Answer:
47) Many firms provide similar types of airline services with similar
types of assets. They each received unqualified opinions from their
independent auditors. Yet, Flash Airlines appears to apply its
accounting principles more aggressively in income-enhancing ways
relative to its competitors. The choices for Flash Airlines in
applying generally accepted accounting principles under the accrual
basis of accounting include(s):
A.depreciable lives for buildings and equipment
B.estimated uncollectibles for accounts receivable
C.estimated warranty costs
D.all of the above
E.none of the above
Answer:
48) Of the three cost-flow assumptions, when prices rise FIFO results
in balance sheet figures that are _____, cost of goods sold will
_____, and _____ reported net income
A.closest to current cost, be out of date, highest
B.out of date, closest to current cost, highest
C.closest to current cost, be out of date, lowest
D.out of date, closest to current cost, lowest
E.closest to current cost, closest to current cost, highest
Answer: