1) Describe the accrual basis of accounting.
Answer:
2) Do firms confront ethical issues when engaging in off-balance-sheet
financing?
Answer:
3) The equity method of accounting should be applied by an investor to
an investment in the voting stock of an investee of 20% or more of
the voting stock of the investee. An investment of 20% or more of
the voting stock of an investee should lead to the presumption
(absent evidence to the contrary) that an investor has the ability
to exercise significant influence over an investor. The presumption
in applying the equity method is that an investor has significant
influence over the operating and financial policies of an investee
even though the investor holds 50% or less of the voting stock of
the investee.
Required:
Identify events or circumstances that suggest that an investor has
significant influence over an investee.
Answer:
4) The following cash-basis income statement has been prepared for the
first year of business.
|
Avalanche, Inc.Statement of Cash Receipts and ExpendituresFor the Year Ending December 31, Year 1 |
||||
| Cash Receipts from Sales of Merchandise | $25,000 | |||
| Less: | Cash Expenditures for Merchandise and Services | |||
| Merchandise | $10,000 | |||
| Salaries | 5,000 | |||
| Rent | 7,000 | |||
| Total Cash Expenditures | 22,000 | |||
| Excess of Cash Receipts over Cash Expenditures | $3,000 | |||
At year-end, the firm had inventory with a cost of $2,000
remaining. Also, customers owed $1,000 for goods that had already
been delivered. The utilities for December were $500 and were
billed to but not yet paid by the company. The rent of $3,500 for
January, Year 2, was paid in December, Year 1.
Required:
Prepare an accrual-basis income statement for the year.
Answer:
5) Historically, recognition has described a preference for financial
reporting such that possible errors in measurement be in the
direction of understatement rather than overstatement of net income
and net assets.
Answer:
6) When a firm decides that a particular customer account is
uncollectible, it removes that account by debiting the Allowance
for Uncollectibles and crediting Accounts Receivable, Gross. This
process is called writing off the account.
Answer:
7) Firms may periodically distribute net assets generated by earnings
to shareholders as a dividend. Firms reduce net assets and retained
earnings for the distribution.
Answer:
8) The method of revenue recognition where the seller collects part of
the selling price in cash and at the same time recognizes as
expenses each period the same portion of the cost of goods or
services sold as the portion of total revenues recognized is called
the direct payment method.
Answer:
9) Both U.S. GAAP and IFRS require firms to write down inventories
when their replacement cost, or market value, declines below
acquisition cost.
Answer:
10) The same asset can have different measurements for tax purposes,
for financial reporting purposes, and for internal managerial
decision-making purposes.
Answer:
11) In a defined benefit plan, the employer is ultimately responsible
for either contributing cash or obtaining a return on pension
investments sufficient to pay promised amounts to retired
employees.
Answer:
12) The indirect method of reporting
A.is preferred by the Financial Accounting Standards Board (FASB),
Statement of Financial Accounting Standards No. 95, “Statement of
Cash Flows.”
B.shows a reconciliation between net income and cash flow from
operations either at the bottom of the statement of cash flows or
in a separate note
C.reports the amounts of cash received from customers less cash
disbursed to various suppliers, employees, lenders for interest
payments, and taxing authorities
D.reports the net income for a period and then adjusts the net
income to convert revenues to cash received from customers and to
convert expenses to cash disbursed to various suppliers of goods
and services
E.includes all of the above
Answer:
13) Derivative instruments acquired to hedge exposure to changes in
the
fair values of assets or liabilities are fair value hedges. Fair
value hedges are
A.hedges of a recognized asset or liability (or an identified
portion of a recognized asset or liability), only
B.hedges of an unrecognized firm commitment (or an identified
portion of that commitment), only
C.hedges on some or all of the cash flows of a recognized asset or
liability, only
D.hedges on some or all of the cash flows of forecasted
transactions, only
E.hedges of a recognized asset or liability (or an identified
portion of a recognized asset or liability), and hedges of an
unrecognized firm commitment (or an identified portion of that
commitment)
Answer:
14) To maintain the balance sheet equality, it is necessary to report
every event and transaction in a dual manner. If a transaction
results in an increase in the left hand side of the balance sheet,
dual transactions recording requires that which of the following
must occur, to maintain the balance sheet equation?
A.decrease another asset
B.increase a liability
C.increase shareholders equity
D.all of the above will maintain the balance sheet equation
E.none of the above
Answer:
15) (CMA adapted, Dec 95 #5) The conceptual framework of accounting
theory governs the recognition of revenue and expenses. Revenue is
generally recognized at the point of sale; however, under special
circumstances, bases other than the point of sale are used for the
recognition of revenue. Costs are generally recognized as expenses
at the time of product sale; however, there are guidelines for
recognizing expenses by other criteria. Accountants must be
familiar with these concepts when determining the earnings of a
company.
Answer:
16) A firm that does not account for long-term notes and bonds using
the fair value option, uses the _____ to account for the loan while
it is outstanding.
A.present and future market interest rates
B.future market interest rates
C.fair market interest rates
D.historical market interest rate
E.current market interest rate
Answer:
17) For each of the following items:
1> identify whether the adjustment is an addition or a
subtraction in preparing the statement of cash flows using the
indirect method, and
2> state which section of the statement of cash flows the
addition or subtraction should be reported.
a. amortization of patent
b. bond premium amortization
c. increase in deferred taxes (hint: a liability)
d. sale of equipment
Answer:
18) Alsup Company
Alsup Company had the following transactions during the fiscal year
ended December 31, Year 4 .
Accounts receivable decreased from $115,000 on December 31, Year 3,
to $100,000
on December 31, Year 4 .
Alsups Board of Directors declared dividends on December 31, Year
4, of $.05
per share on the 2.8 million shares outstanding, payable to
shareholders of record
on January 31, Year 5 . The company did not declare or pay
dividends for fiscal year,
Year 3 .
Sold a truck with a net book value of $7,000 for $5,000 cash,
reporting a loss of $2,000.
Paid interest to bondholders of $780,000.
Cash increased from $106,000 on December 31, Year 3, to $284,000 on
December 31, Year 4 .
(CMA Dec 95 #3) Refer to the Alsup Company example. Alsup Company
uses the indirect method to prepare its Year 4 statement of cash
flows, and would show a(n)
A.source or inflow of funds of $5,000 from the sale of the truck in
the financing section
B.deduction of $15,000 in the Operating Section, representing the
decrease in year-end accounts receivable
C.source or inflow of funds of $7,000 from the sale of the truck in
the financing section
D.addition of $2,000 in the Operating Section for the $2,000 loss
on the sale of the truck
E.deduction of $2,000 in the Operating Section for the $2,000 loss
on the sale of the truck
Answer:
19) Firms sometimes acquire bonds or capital stock of other entities
for their expected returns (through interest, dividends, and price
appreciation) without any intent to exert influence or control over
the other entity. Which of the following is/are not true?
A. U.S. GAAP and IFRS presume that the acquisition of any amount of
bonds, and the acquisition of less than 20% of the voting stock of
another entity implies an inability to exert significant influence
or control
B.Firms may classify such securities as debt securities held for
short-term profit (IFRS uses the term held-for-maturity
investments)
C.Firms may classify such securities as trading securities (IFRS
uses the term financial assets at fair value through profit or
loss)
D.Firms may classify such securities as securities available for
sale (IFRS uses the term available-for-sale financial assets)
E.all of the above
Answer:
20) U.S. GAAP requires the classification of
A.the receipt of cash from interest and dividend revenues as an
operating activity and cash related to the purchase and sale of
long-term investments in securities as an investing activity
B.both receipt of cash from interest and dividend revenues and cash
related to the purchase and sale of investments in securities as an
investing activity
C.both receipt of cash from interest and dividend revenues and cash
related to the purchase and sale of long-term investments in
securities as an operating activity
D.both receipt of cash from interest and dividend revenues and cash
related to the purchase and sale of investments in securities as a
financing activity
E.both receipt of cash from interest and dividend revenues and cash
related to the purchase and sale of long-term investments in
securities as an exchange activity
Answer:
21) The _____ method divides the acquisition cost of an asset
(including the cost to dismantle and retire) less its estimated
salvage value by the estimated service life to calculate
depreciation or amortization.
A.straight-line
B.sum-of-the-years-digits
C.double declining balance method
D.accelerated depreciation
E.decelerated depreciation
Answer:
22) To carry out their plans, firms require financing, that is, funds
from owners and creditors. When the firm raises funds from owners,
which of the following is true?
A.There is no obligation to repay these funds
B.There is an obligation to repay these funds
C.Firms must distribute cash dividends to that firms shareholders
at least annually
D.Firm must distribute stock dividends to that firms shareholders
at least annually
E.None of the above are true
Answer:
23) Cash equivalents represent _____ in which a firm has temporarily
placed excess cash. We use the term cash flows to refer to flows of
both cash and cash equivalents.
A.long-term, highly liquid investments
B.short-term, highly liquid investments
C.short-term, highly illiquid investments
D.long-term, highly illiquid investments
E.common stocks and bonds of other companies
Answer:
24) Which of the following is not an example of an adjusting entry?
A.recognition of depreciation on equipment purchased during the
year
B.recording the expiration of a portion of the cost of prepaid
insurance that was purchased during the previous year
C.recognition of income tax expense on the net income earned during
the period
D.recording of collections received from customers during the
period
E.recognition of warranty expense on cars sold during the period
Answer:
25) Sparkle Industries began a period with 2,000 pounds of sugar and
purchased 4,500 pounds during the period. Sparkle used 5,300 pounds
during the period. How many pounds of sugar remain at the end of
the period?
A.800 pounds of sugar
B.1,000 pounds of sugar
C.1,200 pounds of sugar
D.1,400 pounds of sugar
E.1,600 pounds of sugar
Answer:
26) When a firm reacquires common shares under the Cost Method:
A.the Treasury StockCommon account has a debit balance and
therefore reduces total shareholders equity
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:
27) 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 operating activities
B.cash inflow exceeds cash outflow for investing activities
C.cash outflow exceeds cash inflow for financing activities
D.cash outflow exceeds cash inflow for investing activities
E.cash inflow exceeds cash outflow for financing activities
Answer:
28) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations between cash flows from
operating, investing, and financing activities. When a product
matures
A.net income usually reaches a peak
B.working capital declines
C.operations generate negative cash flow
D.all of the above
E.none of the above
Answer:
29) Most financial statement analysis explores some aspect of a
firms
A.profitability, only
B.risk, only
C.value, only
D.profitability, or its risk, or both
E.employee turnover
Answer:
30) Which of the following is/are true regarding the classification of
redeemable preferred shares on the balance sheet?
A.The classification of redeemable preferred shares on the balance
sheet depends on the conditions for redemption
B.If only the issuing firm has the option to redeem, then the
preferred shares are part of its shareholders equity
C.If the issuing firm must redeem the preferred shares (so-called
mandatory redemption), either at a specified time or upon a
specified condition certain to occur, the issuing firm treats the
preferred shares as a liability
D.If the preferred shareholders have the option to require
redemption, then the preferred shares appear between liabilities
and shareholders equity under U.S. GAAP and as a liability under
IFRS
E.all of the above
Answer:
31) Amortization of the premium on bonds payable is subtracted from net
income in the reconciliation of net income to cash flows from
operations because
A.it is a financing cash outflow
B.it reduces income without causing a cash outflow
C.interest expense understates the cash paid for interest by the
amount of the premium amortization
D.it increases income without causing a cash flow
E.None of these answers is correct
Answer:
32) In theprocedure for preparing the statement of cash flows using a
T-account work sheet, a master T-account for _____ appears at the
top of the work sheet.
A.cash
B.working capital
C.financing
D.operations
E.net income
Answer:
33) Firms use this method when management and the governing board do
not intend to reissue shares within a reasonable amount of time or
when jurisdiction-specific corporation laws define reacquired
shares as retired shares.
A.cost method, only
B.par value method, only
C.constructive retirement method, only
D.cost, par value, and constructive retirement methods
E.none of the above
Answer:
34) When firms that are temporarily short of cash and unable to borrow
from usual sources convert accounts receivable into cash by
pledging the accounts receivable, they disclose this
information
A.on the income statement, only
B.on the balance sheet, only
C.on both the income statement and the balance sheet
D.by a footnote to the financial statements
E.in managements discussion and analysis
Answer:
35) Horton Company reports the following:
| Contributed Capital | $200 |
| Total Revenues | $800 |
| Total Liabilities | $1,200 |
| Beginning Retained Earnings | ($100) |
| Total Expenses | $500 |
| Dividends | $0 |
What are Total Assets?
A.$2,600
B.$1,600
C.$1,400
D.$1,000
E.$800
Answer:
36) A seller of goods can easily associate (or match) the consumption
of the benefits of the asset sold with revenues from its sale. At
the time of sale and revenue recognition, the seller
A.removes the asset (inventory) from the sellers balance sheet
B.recognizes revenue
C.recognizes a reduction in an asset (inventory)
D.records the cost of goods sold expense in the same amount by
which inventory decreases
E.All of the answer choices are correct
Answer:
37) Both the regulatory treatment and the tax treatment of employer
contributions
A.to postretirement benefit arrangements, including pensions, are
jurisdiction-specific
B.differ substantially between postretirement health plans and
defined benefit pension plans
C.create stronger incentives to contribute to the defined benefit
pension plans than to postretirement health plans
D.all of the above
E.none of the above
Answer:
38) Various techniques are used in the analysis of financial data to
emphasize the comparative and relative importance of data presented
and to evaluate the position of the firm. These techniques
include(s)
A.ratio analysis
B.common-size analysis
C.examination of relative size among firms
D.all of the above
E.none of the above
Answer:
39) Which of the following is/are true?
A.Management can sell securities with unrealized holding gains (or
losses) and transfer through net income to Retained Earnings the
entire unrealized holding gain (or loss)that is, management can
affect the timing of gain or loss recognition in net income for
securities available-for-sale, but not for trading securities
B.The timing ability is asymmetric in that impairment rules
preclude indefinite deferrals of the recognition in income of
unrealized losses, but not unrealized gains
C.Users of the financial statements should be alert to the
accounting effect on net income in evaluating the profitability of
firms with both trading securities and securities
available-for-sale
D.all of the above
E.none of the above
Answer:
40) (CMA adapted, Jun 96 #15) Refer to the Fabulous Engine Company
example. If Fabulous uses a weighted average periodic inventory
system, the total cost of the inventory for carburetor 2642J at
March 31 is
A.$188,374
B.$194,200
C.$198,301
D.$198,374
E.$199,233
Answer:
41) Assume that Boxer Company can no longer satisfy the going concern
assumption. If that is the case, how should each of the following
be presented on Boxers financial statements?
a. Land
b. Depreciation expense on production equipment
c. Merchandise inventory
d. Prepaid insurance
Answer:
42) Which of the following is/are true regarding stock splits?
A.The corporation issues additional shares of stock to shareholders
in proportion to their existing holdings
B.The firm receives no additional assets
C.Firms may execute a stock split by reducing the par value of the
common stock in proportion to the new number of shares issued
D.Firms may execute a stock split by not making any change in par
value but by issuing additional shares of the same par value
E.all of the above
Answer:
43) For each of the following generally accepted accounting principles,
identify an alternative acceptable accounting principle.
a. Installment method
b. Operating lease
c. Straight-line, depreciation
d. Last-in, first-out
Answer:
44) Which of the following is a characteristic of a derivative?
A.has one or more underlyings
B.has one or more notional amounts
C.exchanging of promises with a counterparty
D.require or permit a net settlement
E.all of the above
Answer:
45) A manufacturing firm has manufacturing costs which become product
costs. These manufacturing costs do not include:
A.direct material costs (or raw material costs)
B.direct labor costs
C.manufacturing overhead costs (sometimes called indirect
manufacturing costs)
D.expenditures for administrative staff
E.expenditures for supervisors salaries, factory utilities,
property taxes, insurance, and depreciation on manufacturing plant
and equipment
Answer: