1) To study changes in ROA, the analyst can disaggregate ROA into the
product of two other ratios: the profit margin for ROA ratio and
the total assets turnover ratio.
Answer:
2) Auditors are the agents of the shareholders and have responsibility for safeguarding and properly using the firm’s resources.
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3) Liabilities are creditors claims for funds, usually because they
have provided funds, or
goods and services, to the firm.
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4) If a held-to-maturity security is deemed to be impaired, the
investor recognizes (debits) the balance sheet carrying value of
the investment and reduces (credits) an impairment loss (included
in net income).
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5) Discuss the accounting for treasury shares.
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6) In theory, the numerator of the accounts receivable turnover ratio
should include only sales made on account if the objective is to
measure how quickly a firm collects its accounts receivable.
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7) How are bonds measured at issuance?
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8) Balance sheets based on U.S. GAAP and IFRS omit some items and
measure others with bias, relative to measurements based on current
economic conditions.
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9) Once revenue and expense accounts serve their purpose of
accumulating specific revenue and expense items for an accounting
period, they have no further purpose for that period.
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10) Delaying payments to suppliers and others during the last several
days of an accounting period conserves cash and thereby increases
cash flow from operations for that period.
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11) Describe the relationship between the balance sheet and the income
statement.
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12) Of the three cost-flow assumptions, FIFO results in the least
fluctuation in gross margins in businesses in which selling prices
tend to change as acquisition costs of inventories change.
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13) IFRS defines market as net realizable value, the estimated selling
price in the ordinary course of business less the estimated costs
of completion and the estimated costs to make the sale.
Answer:
14) Selected data from the comparative balance sheets of Mock Company
as of December 31, Year 1, and Year 2 appear below:
| Year 1 | Year 2 | |
| Preferred stock, 12%, $100 Par, Issued at Par | $0 | $600,000 |
| Common Stock, $30 Par | 300,000 | 345,000 |
| Additional Paid-in Capital | 120,000 | 177,000 |
| Retained Earnings | 1,260,000 | 1,320,000 |
| Total | $1,680,000 | $2,442,000 |
| Less Cost of Treasury Shares (Cost of 1,500 shares) | (72,000) | – |
| Total Shareholders’ Equity | $1,608,000 | $2,442,000 |
The following transactions occurred during Year
2:
a. March 1, Year 2: The company resold the Treasury shares on the
market for $57 per share.
b. June 30, Year 2: The company declared and issued a 10-percent
stock dividend at a time when the market price was $63 per
share.
c. September 15, Year 2: The company issued additional shares of
common stock on the open market for cash.
d. November 16, Year 2: The company issued new preferred shares on
the open market for cash.
e. December 31, Year 2: Net income for Year 2 was $195,000. The
company declared and paid cash dividends of $72,000 on the last day
of the year.
Required:
Prepare journal entries for each of the transactions and events
affecting these shareholders’ equity accounts during Year 2 .
Answer:
15) Prepare journal entries for each of the following unrelated
transactions. You may omit explanations for the journal
entries.
a. A firm issues 5,000 shares of $2 par value common stock in
exchange for $20,000 cash.
b. A firm acquires a building with $30,000 cash and signs a 15-year
note for $60,000.
c. A firm buys inventory for $980 cash.
d. A firm pays $8,000 to its landlord for annual rent.
e. A publisher sells $3,000 in magazine subscriptions that will be
filled over the next 12 months.
Answer:
16) The method of depreciation for assets whose utilization is not
uniform over time is the _____ method.
A.Accelerated
B.Decelerated
C.Straight-Line (Time)
D.Straight-Line (Use)
E.Sum-of-the-years-digits
Answer:
17) A detailed system of accounts allows the preparer of financial
statements to decompose,
or __________, each transaction to convey information about the
effects of the transaction.
A.mixup
B.disaggregate
C.aggregate
D.share
E.combine
Answer:
18) 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. Which of the following is/are true?
A.Accounting views the purchase commitments as executory
contracts
B.Neither firm will recognize a liability for its portion of the
loan
C.The loan will appear as a liability on the balance sheet of the
joint venture
D.Each firm obtains financing for the services of the plant without
showing a liability on its balance sheet.
E.all of the above
Answer:
19) U.S. GAAP explicitly defines _____ of an asset as the price that
would be received to sell an asset [or paid to transfer a
liability] in an orderly transaction between market participants at
the measurement date. Thus, U.S. GAAP defines it as an exit value,
namely, the amount the firm would receive if it sold an asset in an
orderly, arms-length transaction at the measurement date.
A.Current Replacement Cost
B.Net Realizable Value
C.Fair Value
D.Present Value of Future Net Cash Flows
E.Acquisition cost
Answer:
20) A firm that can exert significant influence over another entity
accounts for its intercorporate investment using the
A.lower of cost or market method
B.equity method
C.liability method
D.consolidation method
E.acquisition cost method
Answer:
21) In more complicated financing arrangements, firms sell batches of
receivables to a legally separate entity whose sole purpose is to
hold the receivables and issue claims on their cash flows. The
entity holding the receivables issues securities to investors in
return for cash and transfers the cash to the transferor in payment
for the receivables. The investors in securities issued by the
entity receive payments out of the cash flow from the transferred
receivables. Common terminology refers to such an entity as a
A.special purpose entity
B.pass-through entity
C.tax shelter
D.subsidiary entity
E.securitized entity
Answer:
22) The percentage-of-completion method
A.recognizes a portion of the contract price as revenue during each
accounting period of construction
B.bases the amount of revenue, expense, and income on the
proportion of total work performed during the accounting period
C.measures the proportion of total work carried out during the
accounting period either from engineers’ estimates of the degree of
completion or from the ratio of costs incurred to date to the total
costs expected for the entire contract
D.all of the above
E.none of the above
Answer:
23) Under the accrual method, the timing of revenue recognition is
influenced by
A.where the purchaser gets funds to pay the seller
B.whether the buyer pays with cash or a promise
C.when the services or product are provided
D.when the seller has received a form of payment in settlement of a
purchaser’s promise
E.the nature of the services or product provided
Answer:
24) Analysts use measures of long-term _____ to evaluate a firms
ability to meet interest and principal payments on long-term debt
and similar obligations as they come due. If a firm cannot make the
payments on time, it becomes insolvent and may have to reorganize
or liquidate.
A.insolvency factors
B.reorganization factors
C.liquidity risk
D.insolvency risk
E.cash flow risk
Answer:
25) Which of the following terms describes the presumption that a firm
will remain in operation long enough to carry out its current
plans, and will, in the normal course of its operations, realize
changes in the fair values of its assets either by using those
assets or selling them?
A.going concern
B.relevance
C.reliability
D.recognition
E.realization
Answer:
26) What is the last step in preparing pro forma financial
statements?
A.Project the statement of cash flows from amounts on the projected
balance sheet and income statement
B.Project operating revenues and operating expenses other than the
cost of financing and income taxes
C.Project the assets required to support the level of projected
operating activity
D.Project the financing (liabilities and contributed capital)
required to fund the level of assets
E.Project the cost of financing the debt, income tax expense, net
income, dividends, and the change in retained earnings
Answer:
27) When a capital lease for equipment is signed, the lessee records an
asset called
A.a lease obligation
B.the present value of capital lease payments
C.equipment
D.an equipment leasehold
E.the future value of capital lease payments
Answer:
28) The extent to which a firm adjusts net income for changes in
noncurrent assets and noncurrent liabilities in deriving cash flow
from operations depends on the nature of its operations. _____ will
likely show a substantial addback to net income for depreciation
expense, whereas _____will show a smaller amount.
A.Service firms; firms that decrease in size
B.Service firms; firms that increase in size
C.Firms that decrease in size; firms that increase in size
D.Service firms; capital-intensive firms
E.Capital-intensive firms; service firms
Answer:
29) Long-term debt imposes financing risk because it
A.decreases the need for shareholders equity
B.requires principal and interest payments
C.requires a default before filing for bankruptcy
D.can result in default, creditor or regulatory intervention in the
management of the firm
E.None of these answer choices is correct
Answer:
30) Bad Debt Expense is also called
A.the Provision for Bad Debts and the Provision for Uncollectible
Accounts
B.the Provision for Bad Debts, only
C.the Provision for Uncollectible Accounts, only
D.the direct write-off method, only
E.the indirect write-off method, only
Answer:
31) Inventory turnover ratio
A.indicates how fast firms sell their inventory items
B.measured in terms of the rate of movement of goods into and out
of the firm
C.equals cost of goods sold divided by the average inventory during
the period
D.all of the above
E.none of the above
Answer:
32) The allowance method overcomes shortcomings of the direct write-off
method because it
A.recognizes the loss from uncollectible accounts in the period in
which the sale occurs and the firm recognizes revenue
B.reduces the opportunity to manage earnings each period by
deciding when particular customers’ accounts become
uncollectible
C.reflects the amount a firm expects to collect in cash from the
accounts receivable on the balance sheet
D.all of the above
E.none of the above
Answer:
33) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations among cash flows from
operating, investing, and financing activities. The _____ phase
reflects sales of successful products, and net income turns
positive. The firm makes more sales, but it also needs to acquire
more goods to sell. Because it usually must pay for the goods it
acquires before it collects for the goods it sells, the firm finds
itself often short of cash from operations. The faster it grows
(even though profitable), the more cash it needs. Banks do not like
to lend for such needs. They view such needs (even though for
current assets) as a permanent part of the firms financing needs.
Thus, banks want firms to use shareholders equity or long-term debt
to finance growth in nonseasonal inventories and receivables.
A.introduction
B.growth
C.mature
D.late maturity
E.decline
Answer:
34) In a period of rising prices, use of the FIFO rather than LIFO
inventory cost flow assumption results in
A.a lower cost of goods sold and a lower ending inventory
B.a lower beginning inventory and a lower ending inventory
C.a higher cost of goods sold
D.a lower cost of goods sold and a higher ending inventory
E.none of the above
Answer:
35) Which of the following concerning the preparation of the statement
of cash flows is correct?
A.The T-account work sheet for preparing the statement of cash
flows provides built-in checks to ensure the full recognition of
the effects of each transaction on various accounts
B.The accountant often prepares a T-account work sheet at the end
of the period after preparing the balance sheet and income
statement. The work sheet provides the information for preparing
the statement of cash flows
C.The accountant often prepares a T-account work sheet during the
period . The work sheet provides the information for preparing the
statement of cash flows
D.Both statement a and b are correct
E.None of the above are correct
Answer:
36) The firm recognizes an expense when the following condition(s)
hold(s):
A.The consumption of the asset results from a transaction that
leads to the recognition of revenue
B.The consumption of the asset results from the passage of time
C.The expenditures on advertising must be recognized as expense in
the period of expenditure
D.The expenditures on research must be recognized as expense in the
period of expenditure
E.all of the above
Answer:
37) When a firm’s construction activities meet the criteria for revenue
recognition as construction progresses, the firm usually recognizes
revenue during the construction period using the
A.completed contract method
B.cost recovery first method
C.percentage-of-completion method
D.installment method
E.cost recovery last method
Answer:
38) In preparing the statement of cash flows for Year 5, internal
records indicate that depreciation on manufacturing facilities
totaled $500 and on selling and administrative facilities totaled
$300 during the year. The firm included these amounts in cost of
goods sold and selling and administrative expenses, respectively,
in the income statement for Year 5. None of this $800 of
depreciation required an operating cash flow during Year 5. The
firm reported cash expenditures for these assets as investing
activities in the earlier periods when it acquired them. The
T-account work sheet entry to explain the change in the Accumulated
Depreciation account.
A.adds back depreciation to net income in deriving cash flow from
operations
B.subtracts depreciation from net income in deriving cash flow from
operations
C.adds back depreciation on the selling and administrative
facilities, only, to net income in deriving cash flow from
operations
D.subtracts depreciation on the selling and administrative
facilities, only, from net income in deriving cash flow from
operations
E.none of the above
Answer:
39) Which of the following is/are true of capital lease
transactions?
A.Capital leases may only be recorded if the transaction involves a
third party
B.Capital leases always have a bargain purchase option
C.The lease is valued at the future value of the benefits
provided
D.The accounting treatment adopted is generally the same for
lessors and lessees
E.All of the above
Answer:
40) Regarding a firm that abandons an asset,
A.there is usually no market for the asset
B.the book value of an abandoned asset is eliminated from the
balance sheet
C.the firm recognizes a loss in an amount equal to the book value
of the abandoned asset in the period that the asset is
abandoned
D.all of the above
E.none of the above
Answer:
41) Under the _____ procedure, the firm estimates and recognizes its
bad debt expense; the offsetting credit increases the balance in
the Allowance for Uncollectibles. Under the _____ procedure, the
firm estimates the ending balance in the Allowance for
Uncollectibles account and makes a credit entry to bring the
balance to this amount; the offsetting debit is to Bad Debt
Expense.
A.aging; percentage-of-sales
B.percentage-of-sales; aging
C.percentage-of-sales; direct charge-off
D.direct charge-off; percentage-of-sales
E.percentage-of-sales; indirect charge-off
Answer:
42) The accounts payable turnover ratio can reveal
A.the result of sales divided by average working capital
B.the number of days in the operating cycle
C.the length of the operating cycle in order to compare it with
industry averages
D.the number of days that a firm’s accounts payable remain
outstanding
E.none of the above
Answer: