1) Most, but not all, firms report cash flows from operations using
the indirect method.
Answer:
2) All transactions that increase net assets affect income.
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3) Given the following information, compute cost of goods sold and
ending inventory for months 1 through 4 using both the FIFO and
LIFO cost flow assumptions. Assume that a periodic inventory method
is used and that the books are closed monthly.
| # of units | Unit cost | |
| Beginning inventory | 0 | |
| Purchases: | ||
| Month 1 | 5 | $1.00 |
| Month 1 | 15 | 1.10 |
| Month 1 | 3 | 1.05 |
| Withdrawals: | ||
| Month 1 | 13 | |
| Purchases: | ||
| Month 2 | 10 | 1.10 |
| Month 2 | 15 | 1.05 |
| Withdrawals: | ||
| Month 2 | 20 | |
| Purchases: | ||
| Month 3 | 10 | 1.05 |
| Month 3 | 5 | 1.10 |
| Month 3 | 2 | 1.15 |
| Withdrawals: | ||
| Month 3 | 25 | |
| Purchases: | ||
| Month 4 | 15 | 1.05 |
| Month 4 | 5 | 1.10 |
| Withdrawals: | ||
| Month 4 | 20 | |
Answer:
4) Express the following transactions of Forman’s Store, Inc., in
journal entry form. If an entry is not required, indicate the
reason. You may omit explanations for the journal entries.
The store:
(1) Receives $35,000 from John Forman in return for 1,000 shares of
the firms $35 par
value common stock.
(2) Gives a 60-day, 8% note to a bank and receives $8,000 cash from
the bank.
(3) Rents a building and pays the annual rental of $11,000 in
advance.
(4) Acquires display equipment costing $7,000 and issues a check in
full payment.
(5) Acquires merchandise inventory costing $22,000. The firm issues
a check for $12,000,
with the remainder payable in 30 days.
(6) Signs a contract with a nearby restaurant under which the
restaurant agrees to purchase
$1,500 of groceries each week. The firm receives a check for the
first two weeks
orders in advance.
(7) Obtains a fire insurance policy providing $50,000 coverage
beginning next month. It
pays the one-year premium of $1,440.
(8) Pays $625 for advertisements that will appear in newspapers
next month.
(9) Places an order with suppliers for $43,500 of merchandise to be
delivered next month.
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5) The beginning balance of the shareholders equity account Retained
Earnings plus net income from the income statement less dividends
equals the ending balance of Retained Earnings.
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6) The more long-term debt in a firms capital structure, the less the
risk of default or bankruptcy.
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7) Conservatism emphasizes the early recognition of losses and delayed
recognition of gains.
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8) LIFO is like a stack of trays in a cafeteria: the last tray
deposited on the stack is the first one taken off, and the lowest
tray in the stack remains there as long as any trays remain.
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9) If an entity qualifies as a variable interest entity (VIE), U.S.
GAAP requires the primary beneficiary of the VIE to consolidate the
VIE.
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10) An impediment to U.S. companies switching from U.S. GAAP to IFRS
may come from the IFRS prohibition of LIFO which has negative
income tax implications.
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11) The accounts receivable turnover ratio indicates how quickly a firm
collects its accounts receivable.
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12) Stock dividends have little economic substance for shareholders.
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13) What are pro forma financial statements?
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14) The asset and liability categories group individual accounts by the
expected timing of cash receipts (for assets) or cash payments (for
liabilities).
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15) Total lifetime depreciation amounts on equipment for both financial
reporting and tax reporting are the same, only the timing may
differ.
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16) Financial statement ratios alone provide direct indicators of good
or poor management.
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17) Under the accrual method, the timing of revenue recognition is
influenced by when the services or product are provided.
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18) Describe the relationship between return on assets and return on
common shareholders equity.
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19) The higher the capital structure leverage ratio, the _____ is the
proportion of financing that common shareholders provide and the
_____ is the proportion that creditors and preferred shareholders
provide. Thus, the _____ the capital structure leverage ratio, the
_____ is financial leverage.
A.higher; lower; higher; higher
B.lower; higher; higher; higher
C.higher; lower; higher; lower
D.lower; higher; higher; lower
E.lower; higher; lower; lower
Answer:
20) Managements face the decision as to when to replenish inventories
at year-end. Assuming inflation, a company using LIFO would
experience which of the following?
A.Buy in December and these higher acquisition costs go into cost
of goods sold. Wait until January of next year to purchase and the
current years cost of goods sold contains costs older, usually
lower, than Decembers
B.Buy in December and these lower acquisition costs go into cost of
goods sold. Wait until January of next year to purchase and the
current years cost of goods sold contains costs older, usually
higher, than Decembers
C.Buy in December and these higher acquisition costs go into cost
of goods sold. Wait until January of next year to purchase and the
current years cost of goods sold contains costs older, usually
higher, than Decembers
D.Buy in December and these lower acquisition costs go into cost of
goods sold. Wait until January of next year to purchase and the
current years cost of goods sold contains costs older, usually
lower, than Decembers
E.none of the above
Answer:
21) A measure of short-term debt paying ability is a company’s
A.return on shareholders’ equity
B.return on assets
C.quick ratio
D.profit margin ratio
E.none of the above
Answer:
22) Which of the following is/are true?
A.The required accounting for trading securities and for securities
classified as available-for-sale differs with respect to the income
statement but not with respect to the balance sheet
B.The unrealized gain or loss on trading securities appears in net
income in the period when fair value changes occur
C.The unrealized holding gain or loss on securities
available-for-sale appears in other comprehensive income period by
period, and its cumulative amount resides in the Accumulated Other
Comprehensive Income account on the balance sheet
D.Users of the financial statements should be alert to this
accounting effect in evaluating the profitability of firms with
both trading securities and securities available-for-sale
E.all of the above
Answer:
23) In a statement of cash flows, payments to acquire long-term bonds
or other debt instruments with maturities greater than one year of
other entities should be classified as cash outflows for
A.operating activities
B.financing activities
C.investing activities
D.lending activities
E.exchange transactions
Answer:
24) Which of the following is true?
A.A firm without sufficient cash will not survive
B.A firm operating profitably will always survive
C.Examining the cash receipts and disbursements during each month
can identify the reasons for any deterioration of the cash
balance
D.a and c
E.all of the above
Answer:
25) In determining cash flows from operations, which method starts with
net income, then add noncash expenses and subtracts noncash
revenues?
A.direct method
B.fixed method
C.indirect method
D.funds flow method
E.variable method
Answer:
26) The investor recognizes interest on debt securities when
A.interest amounts are received in cash, only
B.firms board of directors declares interest, only
C.interest accrues over time
D.firms board of directors declares interest and the interest
amounts are received in cash, only
E.none of the above
Answer:
27) When employees exercise their employee stock options, the firm
debits _____ for the proceeds, debits _____ for any amounts
credited to that account, credits _____ for the par value of the
shares issued and credits _____ for any excess of the cash received
plus the amount amortized over the par value of the shares
issued.
A.Cash; Additional Paid-In Capital (Stock Options); Common Stock;
Additional Paid-In Capital
B.Cash; Additional Paid-In Capital; Common Stock; Additional
Paid-In Capital (Stock Options)
C.Common Stock; Additional Paid-In Capital (Stock Options); Cash;
Additional Paid-In Capital
D.Common Stock; Additional Paid-In Capital; Cash; Additional
Paid-In Capital (Stock Options)
E.Additional Paid-In Capital (Stock Options); Common Stock;
Additional Paid-In Capital; Cash
Answer:
28) Healthy mature firms typically have a cash flow from operations to
current liabilities ratio of:
A.10% or more
B.20% or more
C.30% or more
D.40% or more
E.50% or more
Answer:
29) 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 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 to
maturity (IFRS uses the term held-to-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:
30) Which of the following is/are true?
A.Comprehensive income equals the net amount of revenues, expenses,
gains, and losses during an accounting period
B.Authoritative guidance classifies revenues and expenses arising
from a firms core business as components of net income
C.Net income includes gains and losses from sales or exchanges of
assets or settlements of liabilities related incidentally or
peripherally to the firms core business
D.Authoritative guidance classifies gains and losses from the
remeasurement of certain assets and liabilities as either net
income or other comprehensive income
E.all of the above
Answer:
31) Stock warrants outstanding should be classified as
A.liabilities
B.reductions of capital contributed in excess of par value
C.capital stock
D.additions to contributed capital
E.None of these choices is correct
Answer:
32) Firms that are temporarily short of cash and unable to borrow from
usual sources can convert accounts receivable into cash by selling
accounts receivable to a bank or financing company. This is
called
A.assigning accounts receivable
B.pledging accounts receivable
C.factoring accounts receivable
D.all of the above
E.none of the above
Answer:
33) 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 answer choices are true
Answer:
34) If the firm becomes insolvent, in order to settle debts creditors
can claim
A.the assets of the corporate entity
B.the owners’ business and personal assets of partnerships
C.the owner’s business and personal assets of
sole-proprietorships
D.all of the above
E.none of the above
Answer:
35) At the end of the third year of operation, Alger Corporation has
total assets equal to $100,000, liabilities totaling $90,000, and
contributed capital of $30,000. What is the balance in retained
earnings?
A.$40,000 (Dr)
B.$40,000 (Cr)
C.$20,000 (Dr)
D.$10,000 (Cr)
E.$20,000 (Cr)
Answer:
36) Assets are usually classified in one of following ways:
| CA | -current assets |
| PPE | -property, plant, and equipment |
| IA | -intangible asset |
Using the abbreviations above, indicate the appropriate
classification of each of the following items.
a. __________ merchandise inventory
b. __________ goodwill
c. __________ land
d. __________ patent
e. __________ work-in-process inventory
f. __________ marketable equity securities
g. __________ trademark
h. __________ furniture and fixtures
i. __________ cash
j. __________ prepaid insurance
Answer:
37) Accumulated Other Comprehensive Income
A.is a shareholders equity account on the balance sheet
B.reports the cumulative amounts of other comprehensive income as
of the date of the balance sheet
C.equals net income on the traditional income statement plus other
comprehensive income for the period
D.is both choices a and b
E.is all choices a, b, and c
Answer:
38) Which of the following is not true?
A.Net income or profit for a period is the difference between
revenues from selling goods and services and the expenses incurred
to generate those revenues, plus some gains or losses of the
period
B.If the expenses plus losses exceed the revenues plus gains, the
result is a net loss
C.U.S. GAAP and IFRS require the accrual basis of accounting, which
detaches the recognition of revenue from the receipt of cash
D.A seller recognizes revenues when it has performed all, or nearly
all, of its obligations to the customer and when it has received
cash or an asset that is convertible to cash
E.The firm recognizes and reports expenses that have a causal link
with revenues, such as cost of sales, in the next accounting period
Answer:
39) _____ firms acquire inventory items in a physical condition ready
for sale.
A.Merchandising
B.Manufacturing
C.Technology
D.Production
E.Health Care
Answer:
40) On April 1, Year 1, Colonial Bookstore bought an insurance policy
costing $24,000 that would insure the retail building for two years
against fire loss. What asset account and what amount are recorded
on the balance sheet at December 31, Year 1?
A.Prepaid Insurance, $15,000
B.Insurance Expense, $15,000
C.Prepaid Insurance, $9,000
D.Insurance Expense, $9,000
E.Prepaid Insurance, $12,000
Answer:
41) Downy Airlines discloses the funded status of pension plans and the
health and life insurance plans for two recent years. Both the
pension plan and other benefit plans are underfunded. The amounts
that Downy includes in _____, _____, represent unamortized prior
service costs and net actuarial losses.
A.Other Comprehensive Income; a revenue account
B.Accumulated Other Comprehensive Income; a shareholders equity
account
C.Other Comprehensive Income; an asset account
D.Accumulated Other Comprehensive Income; a liability account
E.Other Comprehensive Income; a shareholders equity account
Answer:
42) Firms initially record property, plant, and equipment, sometimes
referred to as fixed assets, at acquisition cost, the cash paid or
the fair value of other consideration given in exchange for the
asset. Which of the following is/are true?
A.Acquisition cost includes all costs necessary to prepare the
asset for its intended use
B.Firms capitalize into the assets carrying amount subsequent
expenditures that extend the service life or increase the benefits
of a fixed asset beyond those initially anticipated
C.Buildings and equipment have a finite life, so firms must
depreciate their acquisition cost less estimated salvage over the
expected service life
D.Firms may use a straight-line method or accelerated depreciation
methods
E.all of the above
Answer:
43) On the statement of cash flows, payment of dividends is treated as
a/an
A.investing activity
B.financing activity
C.outflow of cash from operations
D.expenditure not requiring the use of cash
E.none of the above
Answer:
44) Most publicly traded firms operate as corporations. Which of the
following is/are not true?
A.The corporate form facilitates the transfer of ownership
interests because owners can sell their shares without affecting
the ongoing operations of the firm
B.The transfer of ownership interests is a transaction between the
shareholder and the firm whose shares change hands
C.Investors make capital contributions under a contract between
themselves and the corporation
D.The corporation has legal status separate from its owners
E.none of the above
Answer:
45) Quan Restaurant
On January 1, Year 7, Quan Restaurant is planning to enter as the
lessee into the two lease agreements described below. Each lease is
noncancelable, and Quan does not receive title to either leased
property during or at the end of the lease term. All payments
required under these agreements are due on January 1 each
year.
| Lessor | Hadaway Inc. | Cutter Electronics |
| Type of property | Oven | Computer |
| Yearly rental (not including executory costs) | $15,000 | $4,000 |
| Lease term | 10 years | 3 years |
| Economic life | 15 years | 5 years |
| Purchase option | None | $3,000 |
| Renewal option | None | None |
| Fair market value at inception of lease | $125,000 | $10,200 |
| Unguaranteed residual value | None | $2,000 |
| Lessee’s incremental borrowing rate | 10% | 10% |
| Executory costs paid by | Lessee | Lessor |
| Annual executory costs | $800 | $500 |
| Present value factor at 10% (of an annuity due) | 6.76 | 2.74 |
(CMA adapted, Dec 93 #27) Refer to the Quan Restaurant example.
Quan should treat the lease agreement with Hadaway Inc. as a(n)
A.capital lease with an initial asset value of $101,400
B.operating lease, charging $14,200 in rental expense and $800 in
executory costs to annual operations
C.operating lease, charging the present value of the yearly rental
expense to annual operations
D.operating lease, charging $15,000 in rental expense and $800 in
executory costs to annual operations
E.capital lease with an initial asset value of $100,000
Answer:
46) 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 _____,
weakening profitabilityfrom reduced sales or reduced profit margins
on existing sales signals the beginning of the phase, but
ever-declining accounts receivable and inventories can produce
positive cash flow from operations. In addition, sales of unneeded
property, plant, and equipment can result in positive cash flow
from investing activities. Firms can use the excess cash flow to
repay remaining debt or diversify into other areas of business.
A.introduction phase
B.growth phase
C.mature phase
D.late maturity phase
E.decline phase
Answer: