1) Describe the inventory turnover ratio.
Answer:
2) Discuss recent changes in the financial reporting environment.
Answer:
3) The proper interpretation of information in the statement of cash
flows requires an understanding of the economic characteristics of
the industries in which a firm conducts operations and a
multi-period view.
Answer:
4) What are the financial reporting objectives?
Answer:
5) The temporary difference associated with accelerated depreciation
for tax purposes and straight-line depreciation for financial
reporting purposes means that a firm will pay lower income taxes in
the early years of the assets life, but this temporary difference
will reverse over the entire asset life, resulting in higher taxes
in later years.
Answer:
6) The Venus Manufacturing Company reports the following information
related to its only pension plan for 2013 (amounts in
millions).
|
Pension Plan Assets, Beginning of 2013.. . . . . . . . . . . . . . . . . . . . . . . . . . . |
$43,484 |
|
Plus Actual Return on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
4,239 |
|
Plus Employer Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
526 |
|
Less Benefits Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(2,046) |
|
Pension Plan Assets, End of 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$46,203 ====== |
|
Pension Plan Liability, Beginning of 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$45,183 |
|
Plus Service Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
908 |
|
Plus Interest Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
2,497 |
|
Less Actuarial Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(960) |
|
Less Benefits Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(2,046) |
|
Pension Plan Liability, End of 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$45,582 ====== |
|
Service Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$908 |
|
Interest Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
2,497 |
|
Expected Return on Pension Plan Investments . . . . . . . . . . . . . . . . . . . . . . . |
(3,456) |
|
Amortization of Actuarial Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
1,101 |
|
Net Pension Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ 1,050 ====== |
Give a single journal entry on the books of the Venus
Manufacturing Company to recognize pension expense, the pension
plan contribution, and the change in the net pension asset or net
pension liability for 2013. Be sure to consider needed entries in
Other Comprehensive Income, supporting the entry in this account
with amounts from the disclosures above. Ignore income taxes.
Answer:
7) During the first year of operations, a company granted warranties
on its products. The estimated cost of the product warranty
liability at the end of the year is $8,500. The product warranty
expense of $8,500 should be recorded in the years the expenditures
to repair the products covered by the warranty will be paid.
Answer:
8) The post-closing trial balance of the Falisari Import Company at
March 31 is as follows.
| Debit | Credit | |
| Cash | $321,000 | |
| Accounts Receivable | 201,000 | |
| Inventory | 504,000 | |
| Building and Equipment | 1,560,000 | |
| Accumulated Depreciation | $240,000 | |
| Accounts Payable | 246,000 | |
| Salaries Payable | 45,000 | |
| Common Stock | 1,410,000 | |
| Retained Earnings | _______ | 645,000 |
| $2,586,000 | $2,586,000 | |
Transactions during April and additional information
follow.
| 1> | Sales on account | $300,000 |
| 2> | Cash sales | 195,000 |
| 3> | Cash collected on accounts receivable | 240,000 |
| 4> | Salaries paid in cash | 150,000 |
| 5> | Salaries earned on April 29 and 30, but not yet paid | 15,000 |
| 6> | Miscellaneous expenses paid in cash | 30,000 |
| 7> | Merchandise purchased on account | 330,000 |
| 8> | Accounts payable paid in cash | 270,000 |
| 9> | Merchandise inventory, April 30 | 540,000 |
| 10> | Depreciation expense in April | 9,000 |
Required:
Prepare an income statement for the month of April and a
post-closing trial balance at April 30.
Answer:
9) Although the legal life of a drug patent is 20 years, the expected
economic life of the drug is often less than half of that period.
Answer:
10) How are periodic depreciation and amortization accounted for?
Answer:
11) Which of the following is/are true regarding T-accounts?
A.for each transaction, the amount entered on the left side of (or
debited to) the accounts for each transaction equals the amount
entered on the right side of (or credited to) the accounts
B.recording equal amounts of debits and credits for each
transaction ensures that the balance sheet equation will always
balance
C.one side of the space formed by the vertical line records
increases in the item and the other side records decreases
D.all of the above
E.none of the above
Answer:
12) In 2013, Kentucky Inc. purchased stock as follows:
| (a) |
Acquired 2,000 shares of Gallen Corp. common stock (par value $20) in exchange for 1,200 shares of Kentucky Inc. preferred stock (par value $30). The preferred stock had a market value of $75 per share on the date of the exchange. |
| (b) |
Purchased 800 shares of Carlton Corp. common stock (par value $10) at $70 per share, plus a brokerage fee of $800. |
At December 31, 2013, the market values of the securities
were as follows:
| Security | Market Value |
| Kentucky Inc. ………………………………….. | $71 |
| Gallen Corp. ………………………….. | 41 |
| Carlton Corp. ……………………………… | 72 |
The investments in common stock are classified by Kentucky
Inc. as available-for-sale securities accounted for by the cost
method. The fiscal year of Kentucky ends on December 31 .
| (1) |
Prepare all entries relating to the investments in common stock for 2013 . |
| (2) |
Prepare the entry to record the sale of 200 shares of Carlton Corp. common stock on January 15, 2014, at $74 per share. |
| (3) |
Prepare the entry to reclassify the remaining 600 shares of Carlton Corp. common stock from available-for-sale securities to trading securities on January 31, 2014 . The stock was selling at $67 per share on that date. |
Answer:
13) Retained earnings represent the source of net assets generated by
the earnings process that exceed the firms dividend declarations.
Common practice refers to the process of curtailing dividends to
accumulate assets, represented by retained earnings, as _____.
A.operating activities
B.investing activities
C.external financing
D.internal financing
E.dividend seizure
Answer:
14) U.S. GAAP does not allow sellers of merchandise to recognize
revenue from sales when the customers have the right to return
goods
A.unless the firm can reasonably estimate the amount of returns
B.unless the firm uses an allowance method to do so
C.unless the firm can reasonably estimate the amount of returns and
uses an allowance method to do so
D.none of the above
E.all of the above
Answer:
15) Sprinter Airlines (Sprinter) needs additional aircraft to expand
internationally, and it could borrow the needed funds and purchase
the aircraft. This arrangement places additional debt on the
balance sheet. Instead, Sprinter signs an lease agreement in which
it agrees to pay the owner of the aircraft certain amounts each
year for 12 years. The aircraft has an estimated service life of 18
years. Sprinter paints its name on the aircraft, uses the aircraft
in operations, and makes the required lease payments. Which of the
following is/are true?
A.Sprinter receives benefits when it uses the aircraft, not when it
initially signs the lease
B.Sprinter has future benefits, not past or current benefits
C.Sprinter obtains financing for its flight equipment without
showing a liability on the balance sheet
D.Sprinter has entered into an operating lease that is an executory
contract
E.all of the above
Answer:
16) How would a stock split affect each of the following?
Total
Stockholders’ Additional
Assets Equity Paid-In Capital
A.Increase Increase No effect
B.No effect No effect No effect
C.No effect No effect Increase
D.Decrease Decrease Decrease
E.None of these choices is correct.
Answer:
17) Cutter Company, a distiller of liquors, ages its whiskeys for
approximately 10 years. The firm must pay the costs to produce the
whiskey and to store it during the aging process. Using the whiskey
as collateral, Cutter could borrow to finance the costs incurred
during the aging process; doing so would, however, lead to Cutter
reporting increased liabilities. Instead, Cutter sells the whiskey
to a bank and agrees to oversee the aging process on the banks
behalf. At the completion of the aging, Cutter assists the bank in
finding a buyer but is not responsible for ensuring that a sale
occurs at a specific price, or at all. Under this arrangement, the
bank bears the risk of changes in selling prices for the whiskey.
Cutter will probably treat this transaction as a(n)
A.executory contract, with no incremental debt on the balance
sheet
B.financing arrangement, with incremental debt on the balance
sheet
C.financing arrangement, with no incremental debt on the balance
sheet
D.sale, with no incremental debt on the balance sheet
E.sale, with incremental debt on the balance sheet
Answer:
18) King Corporation borrowed $75,000 during Year 2 from its bank under
a short-term borrowing arrangement. The statement of cash flows for
King Corporation classifies the transaction as a(n)
A.operating activity
B.investing activity
C.financing activity
D.lending activity
E.exchange activity
Answer:
19) Under U.S. GAAP, the cost of a product warranty should be included
as an expense in the
A.period the cash is collected for a product sold on account
B.future period when the cost of repairing the product is paid
C.period of the sale of the product
D.future period when the product is repaired or replaced
E.past period when the product is under development
Answer:
20) The lower-of-cost-or-market basis for inventory valuation
A.is a conservative accounting policy
B.recognizes losses from decreases in market value before a sale
occurs
C.recognizes gains from increases in market value above original
acquisition cost only when a sale occurs
D.reports inventories on the balance sheet at amounts that are
never greater, but may be less, than acquisition cost
E.all of the above
Answer:
21) Under the equity method, the investor recognizes as revenue
(expense) each period _____. The investor recognizes dividends
received from the investee as a(n) _____.
A.only when it receives dividends; a return (reduction) of
investment
B.only when it receives dividends; income
C.its share of the net income (loss) of the investee; a return
(reduction) of investment
D.its share of the net income (loss) of the investee; income
E.all of the net income (loss) of the investee; a return
(reduction) of investment
Answer:
22) Which of the following is/are true regarding a reverse stock
split?
A.Firms reduce the number of outstanding shares by increasing the
par value of the stock
B.Firms reduce the number of outstanding shares by canceling
outstanding shares
C.A reverse stock split usually increases the market value per
share in inverse proportion to the reverse split
D.Managers and governing boards might use reverse stock splits to
keep the market price per share within some target trading
range
E.all of the above
Answer:
23) Analysts deciding between investments must consider the comparative
risks. Which of the following is/arefirm-specific factors that
affect the risk of business firms?
A.labor strikes
B.loss of facilities due to fire
C.poor health of key managerial personnel
D.loss of facilities due to earthquake
E.all of the above
Answer:
24) An adjusting entry will not take the format of which one of the
following entries?
A.A debit to an expense account and a credit to an asset
account
B.A debit to an expense account and a credit to a revenue
account
C.A debit to an asset account and a credit to a revenue account
D.A debit to a liability account and a credit to a revenue
account
E.An adjusting entry could take the format of any choice a through
Answer:
25) Treasury stock or treasury shares are shares a firm has previously
issued and later reacquired. Which of the following is/are
true?
A.Some firms believe that their own shares provide a good
investment
B.Evidence supports the notion that share prices often increase
after a firm announces a share repurchase program
C.Share repurchases reduce common shareholders equity and increase
the proportion of debt in the capital structure, making the firm
more risky and therefore less attractive to an unfriendly
bidder
D.Some firms even borrow cash to repurchase shares, which affects
the debt ratios even more than using already available cash to
reacquire shares
E.all of the above
Answer:
26) The accounting for employee stock options does not involve
A.the measurement of the fair value of 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 market price
volatility of the stock, the expected dividends, and the risk-free
interest rate
B.calculating total compensation cost as the number of options the
firm expects to vest times the fair value per option
C.factoring in the firms use of their historical experience on
forfeitures due to employees terminating employment prior to
vesting to estimate the expected number of options that will
vest
D.amortizing the fair value of the stock options on the date of the
grant over the requisite service period, which is the expected
period of benefit
E.the firm recomputing the fair value of the option at each
succeeding balance sheet date to reflect new information about
stock prices, volatility, dividend yield, or risk-free interest
rates
Answer:
27) The capital provided by common shareholders during the period
include(s):
A.the average par value of common stock
B.capital contributed in excess of par value on common stock
C.retained earnings
D.other common shareholders equity accounts
E.all of the above
Answer:
28) Brice Foods Group, a European food retailer that operates
supermarkets in seven countries, engaged in the following
transaction during 2013: purchased and received inventory costing
500 million on account from various suppliers. Indicate the effects
of the transaction on the balance sheet equation. Brice Foods Group
applies IFRS, and reports its results in millions of euros.
A.Assets + 500 million; Liabilities + 500 million
B.Assets + 500 million; Shareholders Equity + 500 million
C.Liabilities + 500 million; Shareholders Equity + 500 million
D.Liabilities + 500 million; Shareholders Equity – 500 million
E.Assets + 500 million; Shareholders Equity – 500 million
Answer:
29) Which ratio measures a firm’s performance in using assets to
generate earnings independent of how the firm financed acquisition
of those assets?
A.rate of return on assets
B.rate of return on common stockholders’ equity
C.earnings per share of common stock
D.rate of return on preferred stockholders’ equity
E.none of the above
Answer:
30) Firms may periodically distribute net assets generated by earnings
to shareholders as a dividend. Firms
A.increase net assets and decrease retained earnings
B.increase net assets and retained earnings
C.reduce net assets and retained earnings
D.reduce net assets and increase retained earnings
E.reduce net assets and increase shareholders equity
Answer:
31) U.S. GAAP
A.does not allow firms to amortize goodwill in measuring net income
each period
B.requires that an annual test for impairment in the value of
goodwill be performed each period
C.requires the write-down of goodwill and recognition of an
impairment loss if an impairment in the value of goodwill
exists
D.all of the above
E.none of the above
Answer:
32) _____ present an ordered list, grouped by broad categories of
revenues and expenses. They begin with revenues followed by a list
of expenses.
A.Income Statement
B.Balance Sheets
C.Statement of Retained Earnings
D.Statement of Cash Flows
E.None of the above
Answer:
33) The capital structure leverage ratio indicates
A.the sales generated from each dollar of assets
B.the portion of the sales dollar left over for the common
shareholders after covering all operating costs and subtracting
claims of creditors and preferred shareholders
C.the portion of the sales dollar left over for the preferred
shareholders after covering all operating costs and subtracting
claims of creditors and common shareholders
D.the proportion of total assets, or total financing, provided by
common shareholders contrasted with the financing provided by
creditors and preferred shareholders
E.the proportion of total assets, or total financing, provided by
preferred shareholders contrasted with the financing provided by
creditors and common shareholders
Answer:
34) Inventory Record
The inventory record for a particular item for Year 2 appears
below.
| Inventory, January 1, Year 2 | 20,000 | $0.20 | $4,000 |
| Purchases: | |||
| March 2 | 4,000 | .24 | $960 |
| April 30 | 3,000 | .28 | 840 |
| June 15 | 6,000 | .32 | 1,920 |
| September 30 | 2,000 | .26 | 520 |
| December 15 | 1,000 | .20 | 200 |
| Total purchases | 16,000 | $4,440 | |
| Total available for sale | 36,000 | $8,440 | |
| Units sold | 28,000 | ||
Refer to the Inventory Record example. The cost of goods sold for
year 2 under LIFO is:
A.$6,120
B.$6,320
C.$6,520
D.$6,840
E.$6,940
Answer:
35) Target Corporation and Bark Company (forest products companies)
need additional pulp-processing capacity. Each firm could borrow
the needed funds and build its own manufacturing plant. Instead,
they form a joint venture to build a pulp-processing plant. Each
firm agrees to use half of the new plants capacity each year for 20
years and to pay half of all operating and debt service costs. The
joint venture uses the purchase commitments of Target Corporation
and Bark Company to obtain a loan to build the facility. The firms
structure the arrangement so that neither firm controls the joint
venture. The lender requires both firms to guarantee payment of the
loan in case the joint venture defaults, Which of the following
is/are true?
A.Under both U.S. GAAP and IFRS, the guarantors would recognize the
fair value of the guarantee when they signed the loan
B.If it becomes probable that the joint venture will default, then
the guarantor would apply loss contingency accounting (U.S. GAAP)
and recognize a liability
C.If it becomes probable that the joint venture will default, then
the guarantor would apply provision accounting (IFRS) and recognize
a liability
D.all of the above
E.none of the above
Answer:
36) The managers of a business prepare financial statements to present
meaningful information about that businesss activities to external
users. Who are the external users?
A.owners
B.lenders
C.regulators
D.tax authorities
E.all of the above
Answer:
37) The FASBs conceptual framework includes which of the following as
financial reporting objectives?
A.Provide information about how an enterprise obtains and uses
cash
B.Provide information about how management has discharged its
stewardship responsibility to owners
C.Provide information about the economic resources of a firm and
the claims on those resources
D.Provide information that includes explanations and
interpretations to help users understand the financial information
provided
E.all of the above
Answer:
38) Which of the following is false regarding a merchandising firm?
A.A merchandising firm purchases inventory for resale
B.A merchandising firm does not change the physical form of the
inventory
C.A merchandising firm performs no incremental work on the
inventory
D.A merchandising firm adds nothing to the acquisition cost of the
inventory after it is purchased
E.None of the above are false regarding a merchandising firm
Answer:
39) The changes in the account balances and the following additional
information are taken from the accounts of the Crush Co.
| Increase | |
| (Decrease) | |
| Cash …………………………………………. | $142,500 |
| Accounts Receivable ……………………………. | (30,000) |
| Inventory …………………………………….. | 202,500 |
| Buildings and Equipment (net) …………………… | 630,000 |
| Accounts Payable ………………………………. | (172,500) |
| Bonds Payable …………………………………. | 375,000 |
| Capital Stock …………………………………. | 300,000 |
| Additional Paid-In Capital ……………………… | 45,000 |
Dividends for 2014 were $82,500. There were no transactions
in 2014 affecting retained earnings other than the dividends and
net income. Calculate the 2014 net income.
Answer:
40) Solve for the unknown item for each of the following independent
situations.
| CASE A | CASE B | CASE C | |
| Total assets | A | 400 | 600 |
| Contributed capital | 100 | 150 | C |
| Total revenues | 400 | 300 | 400 |
| Total liabilities | 600 | B | 250 |
| Beginning retained earnings | (50) | 100 | 100 |
| Total expenses | 250 | 350 | 200 |
| Dividends | 0 | 50 | 0 |
Answer:
41) For the following six items, assume that Green Company, a growing
profitable company, has large and growing inventories. Assume that
Green Company has been using a FIFO cost flow assumption and plans
to switch to LIFO for both financial reporting and tax reporting.
Assume that Green pays all income taxes currently, as accrued, in
cash.
Required:
Fill in each of the blanks below with one of these: larger,
smaller, unchanged, or insufficient (information given to answer
question). Several years after the switch from FIFO to
LIFO:
| 1> | Working capital will be __________. |
| 2> | Accounts payable will be __________. |
| 3> |
On the statement of cash flows, cash provided by operating activities will be __________. |
| 4> | Total shareholders’ equity will be __________. |
| 5> |
Deferred tax balance on the balance sheet will be __________. |
| 6> | Inventory turnover will be __________. |
Answer:
42) The Barker Company purchased equipment in Year 1 at a cost of
$26,000. The equipment was estimated to last for 8 years and have a
salvage value of $2,000. In Year 5, it was determined that the life
of the equipment was really 12 years, and the salvage value was
expected to remain unchanged. What amount of depreciation was
recorded for the equipment for years 1 through 12? The firm uses
the straight-line method of depreciation.
Answer:
43) The Parker Company wants to raise additional equity capital. The
company decides to issue 5,000 shares of $25 par preferred stock
with detachable warrants. The package of the stock and warrants
sells for $105. Each warrant enables the holder to purchase two
shares of $10 par common stock at $30 per share. Immediately
following the issuance of the stock, the stock warrants are selling
at $14 each. The market value of the preferred stock without the
warrants is $96.
| (1) |
Prepare a journal entry for Parker Company to record the issuance of the preferred stock and the detachable warrants. |
| (2) |
Assuming that all the warrants are exercised, prepare a journal entry for Parker to record the exercise of the warrants. |
| (3) |
Assuming that only 70 percent of the warrants are exercised, prepare a journal entry for Parker to record the exercise and expiration of the warrants. |
Answer:
44) Compute the missing amounts affecting the net income for Year 1 in
each of the five independent cases that follow. Amounts shown are
in thousands.
| CASE A | CASE B | CASE C | CASE D | CASE E | |
| Sales revenue | $650 | B | $400 | $800 | $390 |
| Cost of goods sold | 300 | $110 | C | 400 | 200 |
| Selling and administrative expenses | 150 | 150 | 120 | 65 | E |
| Income tax expense | 56 | 30 | 55 | D | 0 |
| Net income | A | 10 | 75 | 235 | (15) |
Answer:
45) For each of the following activities, identify where the activity
would be reported on the statement of cash flows.
| O | -Operating |
| I | -Investing |
| F | -Financing |
| 1> | Change in accounts receivable |
| 2> | Acquisition of fixed assets |
| 3> | Change in short-term borrowing |
| 4> | Change in inventories |
| 5> | Change in long-term borrowing |
| 6> |
Purchase of municipal bonds with the intention of holding the bonds to maturity |
| 7> | Purchase of supplies inventory |
| 8> | Issue of capital stock |
| 9> | Change in trade accounts payable |
| 10> | Payment of interest expense |
Answer:
46) At the end of Year 2, the unadjusted trial balance of Alaska
Company includes $1,500,000 of outstanding accounts receivable and
an Allowance for Uncollectible Accounts of $14,600. Total sales for
the year are $22,200,000 and 85% of the sales were on account. The
company estimates that 1.8% of credit sales are uncollectible and
no entries have been made during the year to reflect these
uncollectibles. Prepare the adjusting entry for the allowance for
uncollectible accounts.
Answer: