ACT 350 Test

1) What is the purpose of using contra accounts? What is the
alternative to using them?

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2) Securities that firms expect to hold for more than one year from
the date of the balance sheet appear in investments in securities,
classified as a current asset on the balance sheet.

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3) Both U.S. GAAP and IFRS require the disclosure, in the notes to the
financial statements, of selected information about business
segments.

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4) Total assets turnover reflects the effects of turnover ratios for
accounts receivable, inventory, and fixed assets.

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5) The balance sheet does provides all the information an analyst
wants or needs about a firms resources and the claims on those
resources.

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6) The weighted-average cost-flow assumption falls between the other
two in its effects, but it resembles FIFO more than LIFO in its
effects on the financial statements.

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7) The employer firm and the pension plan are legally separate
entities, each with its own financial reports.

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8) The balance sheet equation underlies the recording of transactions
and events. It captures the financial statement effects of
operating, investing, and financing transactionsthree key
activities of business firms.

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9) ROA has particular relevance to the lenders, or creditors, of a
firm.

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10) U.S. GAAP and IFRS require firms to classify marketable securities
that are neither debt securities held to maturity nor trading
securities as securities available-for-sale.

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11) Shareholders equity reflects changes in the residual interest of
owners from transactions involving capital stock and from earnings
activities independent of when cash flows in or out of a firm.

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12) The income statement typically provides information about the
operating results of business segments.

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13) Regarding the Statement of Cash Flow, which of the following is not
true regarding operations?
A.A financially healthy company generates sustained cash inflows
from selling goods and providing services
B.Assessed over several years, the cash flow from operations
indicates the extent to which operating activities generate more
cash than they use
C.A firm can use the excess cash flow from operations to acquire
buildings and equipment, pay dividends, retire long-term debt
D.A firm cannot use the excess cash flow from operations for
investing and financing activities
E.All of the above are not true

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14) The following data relates to Rose Industries during Year

It incurred factory costs for the year as
follows:

Other data relating to the year are as follows:

The income tax rate is 40 percent.

Required:


a. Compute the cost of raw materials used during Year 8.
b. Compute the cost of units completed during Year 8 and
transferred to the finished goods storeroom.
c. Compute net income for Year 8.

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15) Recognizing income after the time of sale is
A.never appropriate
B.always appropriate
C.never in accordance with U.S. GAAP
D.appropriate for some specific circumstances
E.never in accordance with IFRS

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16) A firm obtains cash from all of the following except for:
A.short-term borrowing
B.issuing common shares
C.issuing preferred shares
D.paying dividends to shareholders
E.long-term borrowing

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17) Which of the following is/are not true?
A.Firms accumulate information about revenues and expenses during a
reporting period to enable the preparation of the income
statement
B.Net income for a period increases net assets (assets minus
liabilities) and retained earnings
C.Net loss for a period reduces net assets (assets minus
liabilities) and retained earnings
D.Net income for a period increases the amounts in Common Stock and
Additional Paid-In Capital, a common practice among publicly traded
firms
E.none of the above

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18) Both U.S. GAAP and IFRS permit considerable flexibility with
respect to the display of information in the statement of cash
flows. Firms must report the beginning and ending cash balances,
and the change in the cash balance. The change in cash must
reconcile to the sum of the cash inflows and outflows from _____
activities.
A.operating
B.investing
C.financing
D.operating, investing, and financing
E.none of the above

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19) At the end of the third year of operation, Forgione 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.$20,000 (Cr)
E.$10,000 (Cr)

Answer:

20) When a firm reacquires common shares under the Constructive
Retirement Method for Repurchased Shares:
A.the Treasury StockCommon account has a debit balance and
therefore reduces total shareholders equity
B.the accountant debits the Treasury StockCommon account for the
par value of the repurchased shares, debits Additional Paid-In
Capital for the difference between the original issue price of the
shares and par value, and plugs Retained Earnings for any
difference between the repurchase price
C.the accountant debits the Common Stock account for the par value
of the repurchased shares, debits Additional Paid-In Capital for
the difference between the original issue price of the shares and
par value, and plugs Retained Earnings for any difference between
the repurchase price
D.the Treasury StockCommon account has a credit balance and
therefore reduces total shareholders equity
E.the accountant credits the Common Stock account for the par value
of the repurchased shares, credits Additional Paid-In Capital for
the difference between the original issue price of the shares and
par value, and plugs Retained Earnings for any difference between
the repurchase price

Answer:

21) Chen Company

Chen Company office equipment costs $10,000, has an expected life
of four years and a salvage value of $400. The firm has depreciated
this asset on a straight-line basis. The firm has recorded
depreciation for two years and then sells the equipment at midyear
in the third year.

If the Chen Company sells the equipment for $4,000 cash, the entry
to record the sale would be as follows:
A.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .4,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 6,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .. . . . . . 10,000
B.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .6,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 4,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .. . . . . . 10,000
C.Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .10,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 4,000
Accumulated Depreciation .. . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 6,000
D.Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .10,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 6,000
Accumulated Depreciation .. . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 4,000
E.Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .10,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 6,000
Salvage Value . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 4,000

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22) A natural business year
A.is the calendar year
B.records activities for a period less than a year
C.refers to an interim accounting period
D.ends when most activities in an operating cycle have been
substantially concluded
E.none of the above

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23) IFRS permits firms to classify cash from interest and dividend
revenue as _____ activities, provided the classification is
consistently applied across periods.
A.operating
B.investing
C.financing
D.operating, investing, or financing
E.None of the above are correct

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24) U.S. GAAP view investments of between 20 and 50 percent of the
voting stock of another company (unless evidence indicates that
significant influence cannot be exercised) as
A.minority, passive investments
B.minority, active investments
C.majority, passive investments
D.majority, active investments
E.marketable securities

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25) The closing process involve(s):
A.reducing to zero the balance in each income statement account
B.debiting the revenue accounts
C.crediting the expense accounts
D.transferring to Retained Earnings the differences between total
revenues and total expenses
E.all of the above

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26) The financial statements and notes provide information for
analyzing changes in property, plant, and equipment. What ratio(s)
is/are used by analysts?
A.Fixed Asset Turnover
B.Proportion of Depreciable Assets
C.Average Age of Depreciable Assets
D.all of the above
E.none of the above

Answer:

27) What is the first step in preparing pro forma financial
statements?
A.Project operating revenues
B.Project 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:

28) The interest rate that discounts a series of future cash flows to
its present value is called the
A.internal rate of return
B.external rate of return
C.creditors rate of return
D.prime lending rate published in The Wall Street Journal
E.federal funds rate

Answer:

29) Humana Corporation neglected to make various adjusting entries on
December 31, Year 8. Indicate the effects on assets, liabilities,
and shareholders’ equity on December 31, Year 8 of failing to
adjust for the following independent items as appropriate, using
the notation O/S (overstated), U/S (understated), and No (no
effect). Also, give the amount of the effect. Ignore income tax
implications. Use the following format:

a. On December 15, Year 8, Humana Corporation received a
$1,400 advance from a customer for products to be manufactured and
delivered in January, Year 9 . The firm recorded the advance by
debiting Cash and crediting Sales Revenue and has made no adjusting
entry as of December 31, Year 8 .
b. On July 1, Year 8, Humana Corporation acquired a machine for
$5,000 and recorded the acquisition by debiting Cost of Goods Sold
and crediting Cash. The machine has a five-year useful life and
zero estimated salvage value.
c. On November 1, Year 8, Humana Corporation received a $2,000 note
receivable from a customer in settlement of an accounts receivable.
It debited Notes Receivable and credited Accounts Receivable upon
receipt of the note. The note is a six-month note due April 30,
Year 9 and bears interest at an annual rate of 12 percent. Humana
Corporation made no other entries related to this note during Year
8 .
d. Humana Corporation paid its annual insurance premium of $1,200
on October 1, Year 8, the first day of the year of coverage. It
debited Prepaid Insurance $900, debited Insurance Expense $300, and
credited Cash for $1,200. It made no other entries related to this
insurance during Year 8 .
e. The Board of Directors of Humana Corporation declared a dividend
of $1,500 on December 31, Year 8 . The dividend will be paid on
January 15, Year 9 . Humana Corporation neglected to record the
dividend declaration.
f. On December 1, Year 8, Humana Corporation purchased a machine on
account for $50,000, debiting Machinery and crediting Accounts
Payable for $50,000. Ten days later, the account was paid and the
company took the allowed 2 percent discount. Cash was credited
$49,000, Miscellaneous Revenue was credited $1,000, and Accounts
Payable was debited $50,000. It is the policy of Humana Corporation
to record cash discounts taken as a reduction in the cost of
assets. On December 28, Year 8, the machine was installed for
$4,000 in cash; Maintenance Expense was debited and Cash was
credited for $4,000. The machine started operation on January 1,
Year 9 . As the machine was not placed into operation until January
1, Year 9, as appropriate, no depreciation expense was recorded for
Year 8.

Answer:

30) Devlin Company

(CMA adapted, Jun 97 #16) Refer to the Devlin Company example.
Devlin Company’s asset turnover for the year ended May 31, Year 7,
was
A.0.08 times
B.0.46 times
C.0.67 times
D.0.73 times
E.0.93 times

Answer:

31) U.S. GAAP provisions require a three-step procedure for measuring
and recording impairments for long-lived assets other than
nonamortized intangibles and goodwill. An asset impairment loss
arises when the carrying values of the assets
A.exceed the sum of the discounted cash flows
B.exceed the sum of the undiscounted cash flows
C.exceed the replacement cost
D.exceed the fair market value less cost to sell
E.exceed the fair market value

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32) ROCE will exceed ROA whenever ROA exceeds the after-tax cost of
borrowing plus any dividends required for preferred shareholders.
Which of the following is/are true?
A.The bond holders earn a higher return, but they undertook more
risk in their investment
B.The preferred shareholders earn a lower return, but they
undertook more risk than the common shareholders in their
investment
C.The common shareholders earn a higher return, but they undertook
more risk in their investment
D.Using lower-cost borrowed funds and then earning a rate of return
on those funds higher than their cost increases the return to the
common shareholders
E.Choices c and d

Answer:

33) The term _____ value refer to the estimated proceeds on the
disposition of an asset less all removal and selling costs.
A.salvage
B.present
C.future
D.end game
E.current

Answer:

34) Monmath Corp. started operations in March of Year 3. The following
transactions occur during March.


a. On March 1, Year 3, Monty contributes $20,000 for 10,000 shares
of $1 par value stock.
b. On March 1, Year 3, Monmath borrows $50,000 on a note from the
bank to finance the purchase of a building.
c. Monmath buys $15,000 of inventory on account (this is the gross
price before any possible discounts).
d. Monmath pays a $12,000 account payable with cash.
e. Monmath paid the annual rent of $11,760.
f. Monmath pays for one half of the inventory purchased in (c)
above. There are no discounts given.
g. Issued 300 shares of $1 par value stock in settlement of $300
accounts payable.
h. Received $400 from a customer for merchandise to be delivered on
April 15, Year 3.
Required:

Answer:

35) Firms frequently sign contracts promising to pay defined amounts in
the future in return for future benefits. If the firm has not
received past or current benefits, but will receive the benefits in
the future, accounting treats the obligation as a(n) _____ contract
and typically _____.
A.contingent; does recognize a liability
B.executory; does not recognize a liability
C.executory; does recognize a liability
D.contingent; does not recognize a liability
E.future; does recognize a liability

Answer:

36) Alpha Corporation acquired a patent for $60,000 which has an
expected service life of five years and zero salvage value. The
annual amortization is
A.$5,000
B.$6,000
C.$12,000
D.$24,000
E.$30,000

Answer:

37) Which of the following most likely would be considered a
discontinued operation?
A.Production or marketing functions are shifted from one location
to another
B.A sporting goods manufacturer has a bicycle division that meets
FASB’s definition of a component of the entity and decides to
outsource the manufacture of its bicycles
C.The unprofitable brands of a beauty products component of an
entity that manufactures and sells consumer products are
discontinued
D.An entity that is a franchiser in the quick-service restaurant
business also operates company-owned restaurants that are
unprofitable in a certain region and, as a result, the entity
decides to exit both the quick-service business as well as the
company-owned restaurants in that region
E.None of these answer choices is correct

Answer:

38) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations between cash flows from
operating, investing, and financing activities. During the
introduction phase
A.cash inflow exceeds cash outflow for operations
B.cash inflow exceeds cash outflow for investing activities
C.cash outflow exceeds cash inflow for financing activities
D.cash inflow exceeds cash outflow for financing activities
E.cash outflow exceeds cash inflow for investing activities

Answer:

39) The cash basis of accounting, as a basis for measuring performance
for a particular accounting period, has/have which of the following
weakness(es)?
A.does not adequately match the cost of the efforts required to
generate inflows with the inflows themselves
B.separates the recognition of revenue from the process of earning
those revenues
C.sensitive to the timing of cash expenditures
D.all of the above
E.none of the above

Answer: