1) Of the three cost-flow assumptions, FIFO usually results in the
smallest net income when inventory costs are rising and the largest
net income when inventory costs are falling.
Answer:
2) Describe Current Replacement Cost, Net Realizable Value, Fair
Value, and the Present Value of Future Net Cash Flow use in valuing
assets.
Answer:
3) Why would a firm choose to acquire less than 50 percent of an
organization yet not desire to exercise significant influence
within the organization?
Answer:
4) The FASB and IASB are working jointly to develop a revised,
coordinated set of financial
reporting objectives. They envision that the proposed reporting
objectives would also specify that firms should prepare financial
reports from the perspective of its owners or a particular class of
owners (proprietary perspective).
Answer:
5) Revenues measure the inflow of net assets from operating
activities.
Answer:
6) Both U.S. GAAP and IFRS require firms to report certain information
about each of their operating segments. What segment information
and disclosures are required?
Answer:
7) U.S. GAAP and IFRS contain broad guidance on what the financial
statements must contain, but neither completely specifies the level
of detail or the names of accounts.
Answer:
8) The T-account looks like the letter T, with a horizontal line
bisected by a vertical line. Increases in shareholders equity
appear on the right side, and decreases in shareholders equity
appear on the left side of T-accounts.
Answer:
9) To assist users of financial reports in making over-time
comparisons, both U.S. GAAP and IFRS require firms to include
results for multiple reporting periods in each report.
Answer:
10) A firm initially records the purchase of marketable securities at
acquisition cost, which includes the purchase price plus any
commissions, taxes, and other appropriate costs incurred.
Answer:
11) The balance sheet imperfectly describes both resources and
financing (claims on those resources). Explain why applying asset
and liability definitions and recognition criteria under
U.S. GAAP and IFRS does not result in the balance sheet including
all economic benefits (resources) and obligations.
Answer:
12) In 2007 the U.S. SEC adopted new rules that permit _____ that list
and trade their securities in the United States to apply IFRS in
their financial reports filed with the SEC without any
reconciliation to U.S. GAAP.
A.U.S. SEC registrants
B.non-U.S. SEC registrants
C.EU SEC registrants
D.Chinese SEC registrants
E.all of the above
Answer:
13) (CMA adapted, Jun 97 #2) Morgan Aircraft Products is a
publicly-held corporation that manufactures airframe and engine
parts for the light aircraft producers and for the home-built
aircraft market. During Year 6, the Board of Directors decided to
expand into aircraft kit production. The company plans to complete
new facilities for the partial assembly of the kit airplanes by the
fourth quarter of Year 7 . In order to finance the new facilities,
Morgan authorized and issued 50,000 shares of 7.15 percent, $100
par value, non-participating, cumulative preferred stock for $110
per share on November 26, Year 6 . As of the current year end, the
company has paid all preferred stock dividends.
William McElroy, controller for Morgan, is responsible for the
preparation of the company’s financial statements. He has assigned
Alice York, assistant controller, to complete the shareholders’
equity statement and any related notes. In addition to the
preferred stock described above, York has assembled the following
information that she believes may affect shareholders’ equity at
May 31, Year 7 .
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7 percent, $50 par value, cumulative preferred stock with 100,000 shares authorized and 30,000 shares issued and outstanding. The shares were sold for $57 per share. The dividends are current as of the end of the year. |
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$1 par value common stock with 1,000,000 shares authorized and 307,160 shares issued. The shares were sold for an average of $6.20 per share. |
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9,500 shares of common treasury stock is held by the company at an average cost of $5.86 per share. |
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Retained earnings at May 31, Year 7, after closing, was $25,330,000. |
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The cumulative unrealized translation adjustment at May 31, Year 7, had a $1,400,000 credit balance. |
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Unrealized holding gain on available-for-sale securities was $442,000. |
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Unrealized holding loss on trading securities was $289,000. |
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Retained earnings have been appropriated for treasury stock and an amount of $2,000,000 for contingencies. |
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McElroy has agreed to meet with York to discuss the first
draft of the shareholders’ equity statement.
Required:
a. Define retained earnings.
b. List and explain three reasons that would cause a company to
appropriate retained earnings.
c. Prepare the portion of the shareholders’ equity section of the
balance sheet, in good form and including notes, for Morgan
Aircraft Products at May 31, Year 7 . Be sure to support your
answer with appropriate schedules and calculations. Indicate the
reason for omitting any accounts listed by Alice York above from
the shareholders’ equity statement.
Answer:
14) The accrual basis of accounting is often contrasted with the cash
basis of accounting. Which of the following is/are true of the cash
basis of accounting?
A.The cash basis is not subject to manipulation
B.Most larger companies use the cash basis of accounting
C.The cash basis of accounting provides a strong basis to determine
the total assets of the company
D.The cash basis provides an inferior picture of operating
performance
E.All of the above are true
Answer:
15) The accountant prepares the statement of cash flows after
completing the
A.balance sheet, only
B.income statement, only
C.balance sheet and the income statement
D.funds flow statement
E.statement of retained earnings
Answer:
16) For manufacturing firms, the balance sheet reports the costs of
incomplete items as
A.Raw Materials Inventory
B.Work-in-Process Inventory
C.Finished Goods Inventory
D.Cost of goods ready for sale
E.none of the above
Answer:
17) Flagler Corporation replaces a roof damaged in a hurricane. The new
roof is purposefully designed to be stronger than the old one so
that it will support the air conditioning equipment the firm plans
to install. Which of the following is/are true?
A.Part of the expenditure represents repair and part represents
improvement
B.The expenditure represents repair, only
C.The expenditure represents improvement, only
D.The expenditure represents asset, only
E.The expenditure represents expense, only
Answer:
18) U.S. GAAP and IFRS require complex procedures in accounting for
income taxes. Complexities in the accounting for income taxes
include(s)
A.income tax rates change over time, so the deferred tax liability
need not represent the amount of taxes that the firm must pay
later
B.some temporary differences create deferred tax assets
C.some temporary differences create deferred tax liabilities
D.firms recognize deferred tax assets only to the extent that they
expect to generate sufficient taxable income to realize the assets
in the form of tax savings in the future
E.all of the above
Answer:
19) Firms can elect the fair value option for the following items: (1)
bonds held to maturity, (2) available-for-sale securities, and (3)
cash flow hedges. Which of the following is/aretrue?
A.Applying the fair value option to investments in debt securities
classified as held to maturity results in accounting for the
investments as if they were a trading security, with changes in
fair value recognized in income each period
B.Applying the fair value option to available-for-sale securities
results in reporting unrealized gains and losses from remeasurement
to fair value in net income as fair value changes, instead of
initially in other comprehensive income
C.Applying the fair value option to cash flow hedges results in
reporting unrealized gains and losses from remeasurement to fair
value in net income as fair value changes, instead of initially in
other comprehensive income
D.all of the above
E.none of the above
Answer:
20) Cash flows from operating activities include
A.selling goods and providing services
B.acquiring buildings and equipment
C.payment of dividends
D.retiring long-term debt
E.issuing stocks and bonds
Answer:
21) Bonds whose indentures contain a provision which gives the issuing
company the option to retire portions of the bond issue before
maturity if it so desires, but the provision does not require the
company to do so are called _____ bonds.
A.callable
B.refunded
C.sinking fund
D.serial
E.convertible
Answer:
22) Kerry Corporation acquires the publicly traded debt of Jett
Corporation on December 31, Year 1 as a temporary investment of
excess cash. The securities mature in 4 years. How will the
securities be recorded on Kerry’s December 31, Year 1 financial
statement?
A.as long-term investment in marketable equity securities
B.as current assets-marketable securities
C.as bonds payable
D.as short-term investment in marketable equity securities
E.in a reserve account for future operating cash needs
Answer:
23) Maeve Irwin is the CEO of Maeves Spa. At the end of its accounting
period, December 31, 2013, Maeves Spa has assets of £450,000
and liabilities of £125,000. Using the equation that holds
for equality of assets to liabilties and shareholders equity,
determine the following amounts:
| a) | Shareholders Equity as of December 31, 2013 . |
| b) |
Shareholders Equity as of December 31, 2014, assuming that assets increased by £65,000 and liabilities increased by £35,000 during 2014£. |
Answer:
24) _____ reflect values at the balance sheet date, so they reflect
that days economic conditions.
A.Historical amounts
B.Current amounts
C.Present amounts
D.Liquidation amounts
E.Discounted cash flow amounts
Answer:
25) 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 trade-in
transactions at _____ unless they lack commercial substance.
A.present value of future cash flows
B.replacement value
C.liquidation value
D.fair value
E.undiscounted cash flows
Answer:
26) What determine(s) the risk of investing in a bond issue, which in
turn affects the interest rate investors demand and therefore the
bonds price?
A.industry economic characteristics
B.the financial health of a firm
C.particular provisions of a bond issue
D.all of the above
E.none of the above
Answer:
27) All of the following is/are components of comprehensive income
except
A.foreign currency translation adjustment
B.unrealized gains and losses on trading securities
C.deferred gains and losses on derivative financial instruments
D.change in the minimum pension liability
E.All of these answer choices are components of comprehensive
income
Answer:
28) (CMA adapted, Jun 90 #3) Flores Company is a manufacturer of highly
specialized products for networking video-conferencing equipment.
Production of specialized units are, to a large extent, under
contract, with standard units manufactured to marketing
projections. Maintenance of customer equipment is an important area
of customer satisfaction. With the recent downturn in the computer
industry, the video-conferencing equipment segment has suffered,
causing a slide in Flores performance. Flores Income Statement for
the fiscal year ended October 31, Year 3, is presented
below.
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Flores Company Income StatementFor the Year Ended October 31, Year 3 ($000 omitted) |
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| Net sales | |
| Equipment | $6,000 |
| Maintenance contracts | 1,800 |
| Total net sales | $7,800 |
| Expenses | |
| Cost of goods sold | 4,600 |
| Customer maintenance | 1,000 |
| Selling expense | 600 |
| Administrative expense | 900 |
| Interest expense | 150 |
| Total expenses | $7,250 |
| Income before income taxes | $ 550 |
| Income taxes | 220 |
| Net income | $ 330 |
Flores return on sales before interest and taxes was 9
percent in fiscal Year 3 while the industry average was 12 percent.
Flores total asset turnover was three times, and its return on
average assets before interest and taxes was 27 percent, both well
below the industry average. In order to improve performance and
raise these ratios nearer to, or above, industry averages, Bill
Hunt, Flores president, established the following goals for fiscal
Year 4 .
| Return on sales before interest and taxes 11 percent | |
| Total asset turnover 4 times | |
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Return on average assets before interest and taxes 35 percent |
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To achieve Hunt’s goals, Flores management team took into
consideration the growing international video-conferencing market
and proposed the following actions for fiscal Year 4.
| Increase equipment sales prices by 10 percent. | |
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Increase the cost of each unit sold by 3 percent for needed technology and quality improvements, and increased variable costs. |
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Increase maintenance inventory by $250,000 at the beginning of the year and add two maintenance technicians at a total cost of $130,000 to cover wages and related travel expenses. These revisions are intended to improve customer service and response time. The increased inventory will be financed at an annual interest rate of 12 percent; no other borrowings or loan reductions are contemplated during fiscal Year 4. All other assets will be held to fiscal Year 3 levels. |
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Increase selling expenses by $250,000 but hold administrative expenses at Year 3 levels. |
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The effective rate for Year 4 federal and state taxes is expected to be 40 percent, the same as Year 3. |
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It is expected that these actions will increase equipment
unit sales by 6 percent, with a corresponding 6 percent growth in
maintenance contracts.
Required:
a. Prepare a Pro Forma Income Statement for Flores Company for the
fiscal year ending October 31, Year 4, on the assumption that the
proposed actions are implemented as planned and that the increased
sales objectives will be met. (All numbers should be rounded to the
nearest thousand, i.e., $000 omitted.)
b. Calculate the following ratios for Flores Company for fiscal
Year 4 and determine whether Bill Hunt’s goals will be
achieved.
1> Return on sales before interest and taxes.
2> Total asset turnover.
3> Return on average assets before interest and taxes.
c. Discuss the limitations and difficulties that can be encountered
in using ratio analysis, particularly when making comparisons to
industry averages.
Answer:
29) Which of the following shareholder rights is most commonly enhanced
in an issue of preferred stock?
A.The right to vote for the board of directors
B.The right to maintain one’s proportional interest in the
corporation
C.The right to receive a full cash dividend before dividends are
paid to other classes of stock
D.The right to vote on major corporate issues
E.The right to transfer dividend revenue to common shareholders
Answer:
30) Recording periodic depreciation and amortization results in a
A.debit to an expense account, only
B.debit to a product cost account, only
C.debit to either an expense account or a product cost account
D.credit to either an expense account or a product cost account
E.credit to an expense account, only
Answer:
31) Taxable income excludes _____ and uses the accounting methods that
the _____ either require or permit firms to use for tax
reporting.
A.temporary differences; income tax law and regulations
B.permanent differences; income tax law and regulations
C.temporary differences; U.S. GAAP or IFRS
D.permanent differences; U.S. GAAP or IFRS
E.temporary and permanent differences; U.S. GAAP or IFRS
Answer:
32) Depreciation and amortization affect both net income reported in
the financial statements and taxable income on tax returns. Which
of the following is /are true?
A.Taxing authorities in most jurisdictions specify allowable
depreciation methods for tax reporting
B.When permitted to do so by the taxing authority, firms often use
different depreciation methods for financial and tax reporting
C.The difference between depreciation expense in the financial
statements and the depreciation deduction on the tax return leads
to an issue in accounting for income taxes
D.all of the above
E.none of the above
Answer:
33) The usual entry to record the conversion of convertible bonds or
preferred stock into common shares ignores _____ and shows the swap
of common shares for bonds or preferred stock at their _____.
A.current market prices; carrying value
B.carrying value; current market prices
C.current market prices; par value
D.carrying value; par value
E.present value of future cash flows; current market prices
Answer:
34) A firm computes ROA, profit margin for ROA, and total assets
turnover for each segment using the segment disclosures. The
amounts for these ratios computed at a segment level differ from
those at a corporate level for which of the following
reason(s)?
A.The numerator of ROA at a firm-wide level includes all revenues
and expenses except interest expense net of taxes, whereas the
numerator of ROA using the segment data includes operating revenues
and expenses only
B.The denominator of ROA at a firm-wide level is the average of
assets at the beginning and end of the year, whereas total assets
at the end of the year are used in computing segment ROAs
C.The denominator of ROA at a firm-wide level is the total assets
at the end of the year, whereas the average of assets at the
beginning and end of the year, are used in computing segment
ROAs
D.choices a and b
E.choices a and c
Answer:
35) Using the amortization procedure for bonds, if an investor receives
cash each period, it debits Cash and credits the Marketable
Securities account. The result of this process is a new _____
(called the _____ for use in the computations during the next
period. The bonds are classified as held to maturity.
A.market value; market price
B.carrying value; amortized cost
C.present value; present value of future cash flows
D.market value; present value of future cash flows
E.carrying value; present value of future cash flows
Answer:
36) An intercompany transaction is a transaction between
A.two subsidiary corporations only
B.the subsidiaries and the parent company only
C.any two members of a consolidated entity
D.any two members of a consolidated entity, conducted at
arm’s-length
E.any three members of a consolidated entity
Answer:
37) (CMA adapted, Jun 90 #27) When a fixed plant asset with a five-year
estimated useful life is sold during the second year, how would the
use of a double declining balance method of depreciation instead of
the straight-line method affect the gain or loss on the sale of the
fixed plant asset?
| Gain | Loss |
A.Increase Increase
B.Increase Decrease
C.Decrease Increase
D.Decrease Decrease
E.cannot be determined by the information provided
Answer:
38) 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 of the derivative decreases carrying
value, then the firm reports the amount of that decrease as a loss
during the current period
E.If the change in fair value of the derivative decreases carrying
value, then the cash flow from operations sections shows a
subtraction for the loss
Answer:
39) The financial reporting standards for property, plant, and
equipment are similar under U.S. GAAP and IFRS except for
A.upward remeasurements for fair value increases, only
B.recognition and measurement of asset impairment losses, only
C.upward remeasurements for fair value increases and recognition
and measurement of asset impairment losses
D.downward remeasurements for fair value decreases, only
E.downward remeasurements for fair value decreases and recognition
and measurement of asset impairment losses
Answer: