1) Which of the following is/are true?
A.The more long-term debt in a firms capital structure, the less
the risk that the firm will experience difficulty making the
required payments when due
B.The more long-term debt in a firms capital structure, the less is
the risk of default or bankruptcy
C.Financial analysts use the long-term debt ratio to assess risk
related to long-term borrowing
D.The debt-equity ratio relates short-term debt to shareholders
equity, indicating the relative mix of short-term financing
obtained from lenders versus owners
E.none of the above
Answer:
2) Ratios provide little information unless the analyst places them in
a context. After calculating the ratios, the analyst must compare
them with some standard. Which of the following is not a possible
standard?
A.The planned ratio for the period
B.The corresponding ratio during the preceding period for the same
firm
C.The corresponding ratio for a similar firm in the same
industry
D.The average ratio for other firms in the same industry
E.The corresponding ratio during the succeeding period for the same
firm
Answer:
3) Under U.S. GAAP, the statement of cash flows classifies cash
expenditures for interest expense as a(n) _____ activity and
classifies cash expenditures to redeem debt as a(n) _____
activity.
A.financing; financing
B.financing: operating
C.operating; investing
D.operating; operating
E.operating; financing
Answer:
4) Firms account for leases using either the operating lease method or
the capital (finance) lease method. Which of the following is not
true?
A.The capital, or finance, lease method treats leases equivalent to
installment purchases or sales, where the lessee borrows funds from
the lessor to purchase the asset and the lessor recognizes profit
at the time of sale
B.The lessee records the leased asset and the lease liability on
the balance sheet at the present value of the contractual cash
flows at the time of signing the lease
C.The lessee amortizes the leased asset, similar to recognizing
depreciation on buildings and equipment
D.The lessor recognizes interest expense on the lease liability,
similar to recognizing interest expense on long-term notes or
bonds
E.The lessor records the signing of a capital lease the same as if
the lessor sold the leased asset for an installment note receivable
Answer:
5) Which of the following is not true regarding firms use of net
assets (assets minus liabilities)?
A.Firms may choose to use the net assets generated by earnings to
repurchase common shares
B.Firms may choose to use the net assets generated by earnings to
repurchase common shares which result in cash outflows for a firm,
similar to paying a cash dividend
C.In the case of share repurchases, only those shareholders that
choose to sell their shares to the firm receive cash
D.Some firms pay periodic dividends to the common shareholders out
of net assets
E.Firms typically retain some or all of the net assets generated by
earnings, causing net assets to decrease, along with retained
earnings, which is the component of shareholders equity showing the
cause of that decrease in net assets
Answer:
6) Cowden Properties
Cowden Properties sold a condominium to Ms. Roberts for $90,000.
Cowden originally acquired the condo at a cost of $40,000 and made
improvements to the unit totaling $20,000. The contract for sale
required Ms. Roberts to pay the $90,000 as follows:
Year 1 – $ 5,000
Year 2 – $10,000
Year 3 – $30,000
Year 4 – $45,000
Refer to the Cowden Properties example. Under the installment
method, how much net profit would Cowden recognize in year 1?
A.$1,667
B.$2,667
C.$3,333
D.$3,667
E.$5,000
Answer:
7) Loans from commercial banks and other financial institutions often
require firms to pledge assets as _____.
A.’senior” tranches
B.derivatives
C.collateral
D.”junior” tranches
E.principal payments
Answer:
8) Cox Merchandising Company began the year with merchandise inventory
of $60,000, ended the year with merchandise inventory of $70,000,
and had cost of goods sold of $110,000. What was the Cox
Merchandising Company’s net purchases for the year?
A.$100,000
B.$110,000
C.$120,000
D.$130,000
E.none of the above
Answer:
9) U.S. GAAP
A.permits firms to report cash flow from operations using the
direct or indirect method
B.requires firms to report cash flow from operations using the
direct method
C.requires firms to report cash flow from operations using the
indirect method
D.permits firms to use the cash receipts and disbursements
statement
E.permits firms to use the funds flow statement
Answer:
10) On the next page is the unadjusted trial balance of Bogo Department
Store on December 31, Year 6. The company closes its books
annually. You are asked to indicate the adjusting entries required
on December 31, Year 6 to conform the books to accrual accounting
principles.
| 1> |
Bogo neglected to record unpaid charges for telephone services for December in the amount of $13,700. |
| 2> |
The balance in the Advances from Customers account represents the amount received from a lessee on November 1, Year 6 for the rental of excess warehouse space owned by Bogo. The rental period is for the six months ended April 30, Year 7. |
| 3> |
Bogo acquired a warehouse on July 1, Year 6 and correctly recorded the acquisition cost of $600,000 in its accounts. The warehouse has a 30-year estimated life and zero salvage value. Bogo neglected to record depreciation on the warehouse, although it has correctly recorded depreciation on all other depreciable assets for Year 6. |
| 4> |
Bogo debited Selling and Administrative Expenses for salaries paid during Year 6. Salaries remaining unpaid as of December 31, Year 6 total $3,700. |
| 5> |
Sales made on account during the last two days of December, Year 6 totaled $12,000. Bogo incorrectly recorded these sales by debiting accounts payable. These accounts had not been collected by year end. |
| 6> |
Bogo sold a piece of equipment during Year 6 for $1,800 that had originally cost $6,000 and had accumulated depreciation of $4,200. Bogo recorded this sale by debiting Cash for $1,800 and crediting Equipment for $1,800. |
| 7> |
The balance in the Prepaid Insurance account represents the balance as of January 1, Year 6. Bogo renewed its only insurance policy on March 1, Year 6 and charged the one-year premium of $5,100 to Selling and Administrative Expenses. |
| 8> |
A physical inventory of store supplies on December 31, Year 6 revealed that supplies costing $1,850 were on hand. |
| 9> |
The note receivable was received from a corporate officer on December 1, Year 6. The note bears interest at 6 percent. The interest is payable with the principal amount borrowed at maturity on June 1, Year 7. |
Bogo Department Store Unadjusted Trial
BalanceDecember 31, Year 6
Letter Account Debit
Credit
A. Accounts Payable — $390,000
B. Accounts Receivable $490,000 —
C. Accumulated Depreciation — 980,000
D. Advances from Customers — 3,600
E. Building 1,500,000 —
F. Bonds Payable — 1,200,000
G. Cash 12,700 —
H. Common Stock — 400,000
I. Cost of Goods Sold 2,290,000 —
J. Depreciation Expense 150,000 —
K. Equipment 620,000 —
L. Interest Expense 96,000 —
M. Interest Receivable — —
N. Interest Revenue — —
O. Merchandise Inventory 570,000 —
P. Note Receivable 30,000 —
Q. Other Current Liabilities — 130,000
R. Prepaid Insurance 800 —
S. Rent Revenue — —
T. Retained Earnings — 89,040
U. Salaries Payable — 4,500
V. Sales Revenue — 3,000,000
W. Selling and Administrative Expenses 430,000 —
X. Supplies Inventory 7,640 —
Totals $6,197,140 $6,197,140
Required:
Indicate the letters in the unadjusted trial balance
corresponding to the accounts debited and credited and the amount
in each debit and credit entry. Use only the accounts listed in the
unadjusted trial balance. More than one account may be debited or
credited in a particular adjusting entry. If no adjusting entry is
needed, indicate “No Entry” by the number of the entry. Remember
that asset increases and liability and shareholders’ equity
decreases are recorded with debits and asset decreases and
liability and shareholders’ equity increases are recorded with
credits.
Answer:
11) _____ arise from relatively infrequent transactions, and there can
be no assurance that they will recur in any future period.
A.Gains/Losses
B.Revenues
C.Expenses
D.Assets
E.Liabilities
Answer:
12) Book value per common share equals
A.total common shareholders equity divided by the number of shares
outstanding on the date of the balance sheet
B.total common shareholders equity divided by the weighted-average
number of shares outstanding during the accounting period
C.total common shareholders equity divided by the number of shares
outstanding on the beginning date of the income statement
D.total shareholders equity divided by the number of shares
outstanding on the date of the balance sheet
E.total shareholders equity divided by the weighted-average number
of shares outstanding during the accounting period
Answer:
13) Which of the following is/are not true regarding expenditures for
improvements?
A.Improvements are sometimes called betterments
B.Improvements may increase an assets performance by increasing the
service life
C.Improvements may increase an assets performance by reducing the
operating costs
D.Improvements may increase an assets performance by increasing the
rate of output
E.none of the above
Answer:
14) U.S. GAAP and IFRS require firms to account for minority, active
investments, generally those where the investor owns between _____
using the equity method. Under the equity method, the investor
recognizes as revenue (expense) each period its share of the net
income (loss) of the investee. The investor recognizes dividends
received from the investee as a return (reduction) of investment,
not as income.
A.10% and 50%
B.20% and 50%
C.30% and 50%
D.40% and 60%
E.50% and 60%
Answer:
15) (CMA adapted, Jun 97 #12) Refer to the Manley Company example.
Assuming that the above securities are properly classified as
held-to-maturity securities under U.S. GAAP, the unrealized holding
gain or loss as of May 31, Year 7, would
A.be recognized as a $8,005 unrealized holding gain on the income
statement
B.be recognized as other comprehensive income with a year-end
credit balance of $8,005 in the Unrealized Holding Gain/Loss
account
C.be recognized as a $24,580 unrealized holding loss on the income
statement
D.be recognized as a $24,580 unrealized holding loss in retained
earnings
E.not be recognized
Answer:
16) Barkley Inc.s record keeping system incorporates the appropriate
classification codes into the initial recording of transactions in
the Cash account and then prepares the statement of cash flows. One
can prepare the statement of cash flows by examining every
transaction affecting the cash account, and classifying each as
A.a cash receipts, cash disbursements, or financing activity
B.an operating, investing, or financing activity
C.a cash receipts, cash disbursements, or investing activity
D.a cash receipts, cash disbursements, or operating activity
E.a cash receipts, cash disbursements, or exchange activity
Answer:
17) _____bonds permit the holder to exchange the bonds for shares of
the firms common stock under certain conditions.
A.Derivative
B.Convertible
C.zero coupon
D.Serial
E.Debenture
Answer:
18) Accrual accounting requires frequent, ongoing changes in estimates.
Which of the following is/are not true?
A.As time passes and conditions change, new information becomes
available that causes management to change the estimates required
to apply accounting principles
B.Firms do not recalculate revenues and expenses of previous
periods to incorporate new information involving estimates
C.Changes in estimates do not always relate to recurring accrual
accounting measurements
D.Examples of changes in estimates include the amount of
uncollectible accounts and the useful lives of depreciable
assets
E.Firms report the income effect of these items in the retained
earnings as a direct adjustment
Answer:
19) Intangible long-lived assets include:
A.patents
B.brand names
C.trademarks
D.customer lists
E.all of the above
Answer:
20) Which of the following is/are true regarding minority, active
investments?
A.An investor acquires common shares of an investee with the intent
of exerting significant influence over the investees activities,
perhaps through representation on the investees board of
directors
B.An investor can exert significant influence over an investee with
ownership of less than a majority of the voting stock, because many
different individuals or entities own most publicly held
corporations, and those owners typically do not collaborate in
voting their shares
C.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
D.Minority, active investments appear as noncurrent assets on the
balance sheet
E.all of the above
Answer:
21) Which of the following is/are true?
A.After cost of sales, the income statement typically shows
deductions for other expenses associated with operations (other
operating expenses)
B.Many firms present a subtotal called operating income or
operating profit, the difference between revenues and expenses
associated with core operating activities
C.two common types of operating expenses are selling, general, and
administrative expenses (SG&A) and research and development
expenses (R&D)
D.all of the above
E.none of the above
Answer:
22) Deferred Tax Asset or Deferred Tax Liability accounts on the
balance sheet can change each period due to which of the following
factors?
A.Temporary differences originate or reverse during the current
period
B.Income tax rates expected to apply in future periods when
temporary differences reverse or change during the current
period
C.A firms expectations of future taxable income, which affect
whether a firm can realize the deferred tax assets through an
actual reduction in cash outflows, change during the current
period
D.all of the above
E.none of the above
Answer:
23) In calculating depreciation and amortization for tangible assets,
functional factors that limit service lives include:
A.ordinary wear and tear from use
B.chemical action such as rust
C.the effects of wind and rain
D.obsolescence
E.none of the above
Answer:
24) The statement of cash flows usually presents cash flow from
operations in the _____ format, beginning with net income for the
period. The statement then adjusts for revenues not providing cash,
for expenses not using cash, and for changes in working capital
accounts.
A.funds flow
B.direct
C.indirect
D.profit and loss
E.working capital
Answer:
25) To reduce the lag on collection of accounts receivable, a company
might
A.offer a discount if customers pay quickly
B.charge interest if customers delay payment
C.use the accounts receivable as a basis for external financing
D.sell only for cash
E.all of the above
Answer:
26) The criteria for recognition of a liability include which of the
following?
A.The obligation represents a present obligation, not a potential
future commitment or intent
B.The obligation exists as a result of a past transaction or
exchange, called the obligating event
C.The obligation requires the probable future sacrifice of an
economic resource that the firm has little or no discretion to
avoid
D.The obligation has a relevant measurement attribute that the firm
can quantify with sufficient reliability
E.all of the above
Answer:
27) Which of the following is/are not true?
A.Revenues from sales of goods or services to customers during a
particular period do not necessarily equal cash received from
customers during the same period
B.The receipt of cash can precede, coincide with, or follow the
recognition of revenue
C.Expenses incurred to generate revenues during a particular period
do not necessarily equal cash expended for the goods and services
consumed in operations during the same period
D.The expenditure of cash can precede, coincide with, or follow the
recognition of expenses
E.The net income for a particular period will likely equal the cash
flow from operations for the same period
Answer:
28) An analyst examines changes in a firms various ratios over a
three-year perioda so-called _____ analysis and performs a _____
analysis comparing a given firms ratios with those of other firms
for a specific period.
A.cross-section; time-series
B.time-series; cross-section
C.profitability; time-series
D.time-series; profitability
E.none of the above
Answer:
29) U.S. GAAP and IFRS provide for which of the following methods of
accounting for long-term leases?
A.lease option method and direct lease method
B.direct lease method and indirect lease method
C.lease option method and indirect lease method
D.operating lease method and capital or financing lease method
E.primary lease method and secondary lease method
Answer:
30) (CMA adapted, Dec 94 #5) Several alternatives have been identified
for measuring items on the statement of financial position. Which
of the following alternatives may be used?
Present ValueCurrent CostNet Realizable Value
A.NoNoNo
B.NoYesYes
C.YesYesNo
D.YesYesYes
E.YesNo Yes
Answer: