1) Firms account for changes in estimates, such as for depreciable
lives, uncollectible accounts, or warranty cost, prospectively, in
current and future periods earnings.
Answer:
2) As a basis for measuring performance for a particular accounting
period, the cash basis of accounting has three weaknesses. Briefly
describe the three weaknesses.
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3) When using the indirect method to calculate cash flow from
operations, add back the subtraction for minority interest in
earnings of consolidated, but less than 100%-owned subsidiaries to
derive cash flow from operations.
Answer:
4) U.S. GAAP and IFRS view investments of between 20% and 50% of the
voting stock of another company as minority, active investments
unless evidence indicates that the investor cannot exert
significant influence.
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5) Describe common stockholder rights.
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6) What factors enter into choosing the accounting method for leases
under U.S. GAAP and IFRS?
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7) Shareholders equity is a residual interest or claimthat is, the
owners (shareholders) of a firm have a claim on assets not required
to meet the claims of creditors.
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8) How are securities measured at acquisition?
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9) Firms must disclose in notes to the financial statements the cash
flows associated with capital leases and with operating leases for
each of the succeeding five years and for all years after five
years in the aggregate.
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10) How are inventories valued subsequent to acquisition?
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11) Revenues are:
A.cash payments from customers
B.outflows of assets to customers
C.cash receipts from customers
D.inflows of assets from customers
E.sensitive to the timing of cash receipts from customers
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12) Analysts deciding between investments must consider the comparative
risks. Which of the following is/are economy-wide factors that
affect the risk of business firms?
A.increased inflation
B.increased interest rates
C.unemployment
D.recessions
E.all of the above
Answer:
13) Investors in bonds sometimes hold a _____ option, meaning they can
force the issuing company to repay the bonds prior to maturity
under specified contractual conditions.
A.convertible
B.call
C.put
D.serial
E.short-term
Answer:
14) The provisions of IFRS require firms to classify marketable
securities into which of the following categories except
A.held to maturity investments for which a firm has both the intent
and the ability to hold to maturityshown on the balance sheet at an
amount based on acquisition cost, but subject to impairment
B.debt and equity securities held as financial assets at fair value
through profit or loss, shown on the balance sheet at fair value,
with changes in fair value of securities held at the end of the
accounting period reported each period in net income
C.debt and equity securities held as available-for-sale financial
assets, shown on the balance sheet at fair value, with unrealized
changes in fair value of securities held at the end of the
accounting period included in other comprehensive income, and
realized changes in fair value included in net income when a firm
sells the securities
D.debt and equity securities held as available-for-sale financial
assets, shown on the balance sheet at fair value, with changes in
fair value of securities held at the end of the accounting period
reported each period in net income
E.choices a and b, only
Answer:
15) Regarding employee stock options, which of the following is/are
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 expected value per option at the date of
redemption
C.Firms amortize this total 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 do not typically remeasure most types of stock options
after the initial grant date
Answer:
16) Malcolm Corporation purchased an insurance policy for three years
beginning January 1, Year 2, and recorded the $6,000 premium in the
Prepaid Insurance account. What adjusting entry is required to
reflect the proper balances, in the insurance-related accounts at
year-end, on December 31, Year 2?
A.Insurance Expense2,000
Prepaid Insurance2,000
B.Prepaid Insurance2,000
Insurance Expense2,000
C.Insurance Expense4,000
Prepaid Insurance4,000
D.Prepaid Insurance4,000
Insurance Expense4,000
E.Insurance Expense6,000
Prepaid Insurance6,000
Answer:
17) On September 30, Pineville Corporation declared and issued a 10%
common stock dividend. Prior to this dividend, Pineville had 50,000
shares of $5 par value common stock issued and outstanding. The
fair value of Pinevilles common stock was $52 per share on
September 30. As a result of this stock dividend, Pinevilles total
stockholders’ equity
A.increased by $25,000
B.decreased by $25,000
C.increased by $260,000
D.decreased by $260,000
E.did not change
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18) The Supplies account balance at the beginning of the period was
$6,600. Supplies totaling $12,825 were purchased during the period
and debited to Supplies . A physical count shows $3,825 of Supplies
at the end of the period. The proper journal entry at the end of
the period
A.debits Supplies and credits Supplies Expense for $9,000
B.debits Supplies Expense and credits Supplies for $12,825
C.debits Supplies and credits Supplies Expense for $15,600
D.debits Supplies Expense and credits Supplies for $15,600
E.None of these choices are correct
Answer:
19) Pagoli Corporation acquires 30% of the outstanding voting common
shares of the Inform Corporation for $600,000. Pagoli Corporation
acquires the investment in Inform Corporation by buying previously
issued shares of Inform Corporation from other investors.
Between the time of the acquisition and the end of Pagoli
Corporations next accounting period, Inform Corporation reports
earnings of $80,000; and pays a dividend of $30,000 to holders of
its common stock.
Inform Corporation reports earnings of $100,000 and pays dividends
of $40,000 during the subsequent accounting period.
Pagoli Corporations Investment in Stock of Inform Corporation
account now has a balance of:
A.$609,000
B.$621,000
C.$633,000
D.$642,000
E.$657,000
Answer:
20) The Llama Company spent $300,000 on research and development during
Year 8 to generate new product lines. One of the three projects
resulted in a successful patented product while the other two
projects resulted in unsuccessful efforts. How much of the $300,000
should be recognized as an expense in Year 8?
A.$300,000
B.$200,000
C.$150,000
D.$100,000
E.$0
Answer:
21) Which of the following items involving current trade accounts
receivable is most likely to appear in a statement of cash
flows?
A.The balance in the allowance for doubtful accounts
B.The change in net sales
C.Sales returns and allowances
D.Collection of an account previously written off
E.None of these answers is correct
Answer:
22) 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
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23) A fair value hedge
A.is a derivative instrument acquired to hedge exposure to changes
in the fair value of an asset or liability
B.must be revalued each period and the resulting gain or loss is
reflected in contributed capital each period
C.is not revalued each period with no recognition given of the
resulting gain or loss in earnings
D.must be accounted for under the lower of cost or market
principles
E.must be revalued each period and the resulting gain or loss is
reflected in reserves for contingencies each period
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24) The IASBs conceptual framework defines _____ as increases in
economic benefits during an accounting period in the form of
inflows or enhancements of assets or decreases in liabilities that
result in increases in equity, other than those relating to
contributions from equity participants.
A.asset
B.liability
C.equity
D.revenue
E.expense
Answer:
25) Firms extending credit to customers should
A.strive for zero uncollectible accounts to eliminate the need for
establishing a bad debt expense and maintaining an allowance for
uncollectible accounts
B.grant credit indiscriminately otherwise the firm may be charged
with discrimination in the granting of credit and could be found to
be in violation of Federal laws
C.grant credit to a given group of customers whenever the amount
collected from the credit sales to that group exceeds the cost of
goods sold and the other costs of serving that group
D.should ignore collection efforts aimed at those customers who
have not paid their bills because the cost of staffing and
maintaining a collection department are never cost effective
E.none of the above
Answer:
26) Heather Corporation
Heather Corporation issued $2,000,000, 10-percent, 10-year bonds on
January 2, Year 2. The bonds pay interest semiannually on January 1
and July 1. The bonds were priced on the market to yield 8
percent.
Refer to the Heather Corporation example. The issue price of the
bonds is calculated as follows:
A.the present value of $2,000,000 at 10 percent for 10 periods,
plus the present value of an annuity of $100,000 at 4 percent for
20 periods
B.the present value of $2,000,000 at 5 percent for 20 periods, plus
the present value of an annuity of $100,000 at 5 percent for 20
periods
C.the present value of $2,000,000 at 8 percent for 10 periods, plus
the present value of an annuity of $100,000 at 4 percent for 20
periods
D.the present value of $2,000,000 at 4 percent for 20 periods, plus
the present value of an annuity of $100,000 at 4 percent for 20
periods
E.none of the above
Answer:
27) The _____ has the legal authority to declare dividends. When
considering whether to declare dividends, they must conclude that
declaring a dividend is both legal (under law and contract) and
financially desirable.
A.chief financial officer
B.chief operating officer
C.chief executive officer
D.board of directors
E.financial analysts
Answer:
28) Which equation is correct?
A.Assets = Liabilities + Contributed Capital – Dividends
B.Shareholders’ Equity = Assets – Liabilities + Contributed Capital
+ Net Income
C.Shareholders’ Equity = Contributed Capital + Retained Earnings +
Net Income – Dividends
D.Retained Earnings = Net Income + Dividends
E.none of the above
Answer:
29) The extent to which a firm adjusts net income for changes in
noncurrent assets and noncurrent liabilities in deriving cash flow
from operations under the indirect method depends on the nature of
its operations. Capital-intensive firms will likely show a
substantial
A.addback to net income for depreciation expense
B.subtraction from net income for depreciation expense
C.addback to net income for capital expenditures
D.subtraction from net income for capital expenditures
E.subtraction from retained earnings for depreciation expense
Answer:
30) Contracts with bondholders, other lenders, and preferred
shareholders often limit dividend payments and thereby compel the
retention of earnings. Which of the following is/are true?
A.A bond contract may require that total liabilities not exceed the
total amount of shareholders equity
B.A bond contract may require that firms retire debt out of
earnings.
C.A bond contracts provisions may involves curtailing dividends so
that the necessary debt service payments, plus any dividends, do
not exceed the amount of earnings for the period
D.Financial statement notes must disclose significant limitations
on dividend declarations
E.all of the above
Answer:
31) _____ measure the outflow of assets (or increases in liabilities)
used in generating revenues.
A.Revenues
B.Expenses
C.Cash inflows
D.Cash-outflows
E.Shareholder equity
Answer:
32) The most common type of corporate bond, except in the railroad and
public utility industries, that carries no special collateral and
the borrower issues it on the general credit of the business is
called a
A.sinking fund bond
B.serial funded bond
C.debenture bond
D.convertible bond
E.zero coupon bond
Answer:
33) The FASBs conceptual framework includes which of the following as
financial reporting objectives?
A.Provide information useful for making rational 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.all of the above
Answer:
34) A firm with assets that will convert to cash within the next 12
months, in excess of its obligations to pay cash in this same
interval, has
A.positive working capital and a current ratio that is less than
one
B.positive working capital and a current ratio that exceeds one
C.negative working capital and a current ratio that exceeds one
D.negative working capital and a current ratio that is less than
one
E.a serious liquidity problem
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. The temporary differences may
create a deferred tax asset due to
A.providing for estimated warranty costs in the year a firm sells
the warranted product but claiming a tax deduction later, when the
firm makes actual expenditures for warranty repairs
B.reporting bad debt expense in the year a firm makes a credit
sale, but claiming a tax deduction later, when the firm writes off
specific uncollectible accounts
C.interest revenue on municipal bonds
D.choices a and b
E.choices a, b, and c
Answer:
36) _____ refers to converting a noncash item to cash, for example,
collecting an account receivable.
A.Actualization
B.Recognition
C.Realization
D.Materialization
E.Transformation
Answer:
37) Which of the following is/aretrue?
A.U.S. GAAP and IFRS allow firms to choose whether to designate a
particular derivative as a hedge, and therefore eligible for hedge
accounting
B.Firms remeasure derivatives not designated as a hedge to fair
value at every balance sheet date and include changes in fair value
in net income
C.For a derivative designated as a hedge, firms must further
designate it as hedging the risk of a change in fair value (fair
value hedges) or a change in cash flows (cash flow hedges)
D.all of the above
E.none of the above
Answer:
38) The U.S. government will pay Allen $2,500,000 each six months,
equal to 2.5% of the $100 million face amount of the treasury bonds
(5% annual coupon rate, paid in two installments each year), and
will repay the $100 million at the end of five years. At the time
Allen purchases the bonds, the market prices these bonds to yield
Allen 6% annually (3% each six months). The bonds are classified as
held to maturity. Because the market requires a _____ than the
_____ on the bonds, the bonds will sell on the market for a
_____.
A.lower yield; stated interest rate; premium
B.lower yield; market interest rate; premium
C.higher yield; stated interest rate; discount
D.lower yield; stated interest rate; discount
E.market yield; stated interest rate; premium
Answer:
39) Which of the following is not true?
A.A firm must recognize derivatives on its balance sheet as assets
or liabilities, depending on the rights and obligations under the
contract
B.Firms must remeasure derivatives to fair value each period
C.The change in fair value either increases or decreases the
balance sheet carrying value of the derivative asset or
liability
D.The change in fair value affects either (1) net income
immediately (like a trading security), or (2) other comprehensive
income immediately and net income later (like securities
available-for-sale)
E.The income effect of a change in the fair value of a derivative
is independent of the purpose for which a firm acquires the
derivative and whether the firm chooses to apply hedge accounting
Answer:
40) The definition of an asset excludes
A.expected benefits related to rights under executory contracts
B.mere exchanges of promises
C.contingent assets
D.all of the above
E.none of the above
Answer:
41) Firms can purchase financial instruments to reduce certain business
risks, that is, to reduce the volatility of certain outcomes. The
outcomes include changes in
A.interest rates, only
B.foreign exchange rates, only
C.commodity prices, only
D.interest rates and foreign exchange rates, only
E.interest rates, foreign exchange rates, and commodity prices
Answer:
42) Which of the following is not true regarding investments in
securities available-for-sale?
A.Firms initially record investments in securities
available-for-sale at acquisition cost, including transaction
costs
B.If a firm classifies debt securities as available-for-sale, it
must amortize any difference between the purchase price and the
maturity value of the debt over the remaining term to maturity
C.The amortization of any difference between the purchase price and
the maturity value of the debt makes interest revenue on these debt
securities differ from the cash receipts for debt service
payments
D.On the date of each balance sheet, firms measure securities
classified as available-for-sale at fair value
E.The difference between amortized cost for debt securities or the
carrying value for equity securities and the fair value of these
securities is a realized holding gain or loss
Answer:
43) A firm purchased an office machine for $18,400, estimated that it
will use the machine for 15 years, and estimated a salvage value of
$400. On December 31 of the sixth year, before closing the books
for the year, the firm analyzed its estimates of useful life and
salvage value. In light of new information, the firm estimated that
the machine will have a total useful life of only 10 years, and the
salvage estimate of $400 remains reasonable.
The new estimate of the remaining life is five years (the year just
ended plus the next four). The depreciation entry on December 31 of
the sixth year and each year thereafter is:
A.Depreciation Expense. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 1,200
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .1,200
B.Depreciation Expense. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 2,400
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .2,400
C.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . .1,200
Depreciation Expense. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 1,200
D.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . .2,400
Depreciation Expense. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 2,400
E.none of the above
Answer:
44) What criterion or criteria must sales transactions meet in order
for the seller to recognize revenues before collecting cash?
A.The revenues must be earned (the firm must have achieved
substantial performance)
B.The amount to be received must qualify as an asset (there must be
a future economic benefit and the amount must be measured with
sufficient reliability)
C.The firm must have a reasonable expectation that it will collect
the amount owed from the customer
D.All of the above
E.None of the above
Answer:
45) The operating lease method classifies all of the lease payment each
period as _____.
A.an investment use of cash on the statement of cash flows
B.an operating use of cash on the statement of cash flows
C.a financing use of cash on the statement of cash flows
D.a cash expenditure
E.none of the above
Answer:
46) In calculating depreciation and amortization for tangible assets,
physical factors that limit service lives include all of the
following except:
A.ordinary wear and tear from use
B.chemical action such as rust
C.the effects of wind and rain
D.changes in production processes
E.none of the above
Answer:
47) Many firms disaggregate the initial amounts they received from
shareholders for common shares into the _____ and the amounts
received in excess of this value, called additional paid-in capital
(APIC), share premium, or capital contributed in excess of par
value.
A.par value of the shares
B.nominal value of the shares
C.stated value of the shares
D.Choices a, b, and c are correct
E.None of these answer choices is correct
Answer:
48) Which of the following is/are true concerning an employee stock
options time value element?
A.One cannot measure the amount of the element before the
expiration date
B.Stock options with exercise prices less than the current market
price of the stock have a higher value, other things equal, than
stock options with exercise prices exceeding the current market
price of the stock
C.Stock options that are in the money have a higher value, other
things equal, than stock options that are out of the money
D.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
E.none of the above
Answer: