ACT 352 Quiz 1

1) The growth phase portrays cash flow characteristics similar to the
introduction phase.

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2) The balance sheet amount of shareholders equity does not, and is
not intended to, provide the user of the financial reports with a
measure of the market value of common equity.

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3) Selected information based on the comparative balance sheets for
Neptune Company, a U.S. defense manufacturer, appears in the
following display for the years ended December 31, Years 5, 6, and
7 .

Neptune applies U.S. GAAP and reports its results in millions of
dollars.

Neptunes other comprehensive income for Year 7 was $774,
compared to ($31) in Year
6 and $275 in Year 5. In addition, in Year 7 Neptune made a
one-time adjustment of
($1,338) to accumulated other comprehensive income. Comprehensive
income for Year 7
was $2,057, compared to $840 in Year 6 and $692 in Year 5.
Dividends declared and
paid increased from $356 in Year 5, to $394 in Year 6, to $429 in
Year 7.

Required: Compute the missing amounts for each of the three
years.

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4) The internal rate of return, often called yield to maturity, is the
discount rate that equates the future cash flows to the market
value at any date.

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5) What are common-size income statements?

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6) Discuss the effects of transactions involving derivatives and the
fair value option on the statements of cash flows.

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7) Both the lease asset and the lease liability appear on the lessees
balance sheet under the capital lease method, whereas neither
appears on the lessees balance sheet under the operating lease
method.

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8) Core Company reports the following information about its financial
statements and tax return for a year:
Depreciation Expense from Financial Statements $322,800
Financial Statement Pretax Book Income 190,800
Income Tax Expense from Financial Statements 42,000
Income Taxes Payable from Tax Returns 27,600

Together the federal and state governments tax taxable income at a
rate of 40%. Permanent differences result from municipal bond
interest that appears as revenue in the financial statements but is
exempt from income taxes. Temporary differences result from the use
of accelerated depreciation for tax returns and straight-line
depreciation for financial reporting. Reconstruct the income
statement for financial reporting and for tax reporting for the
year, identifying temporary differences and permanent differences.

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9) The balance sheet portrays the effects of a firms investing and
financing decisions. In analyzing these decisions, what two
principles guide financing decisions:

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10) Discuss why firms repurchase their own stock?

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11) Describe the limitations of consolidated statements.

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12) FASB board members make standard-setting decisions guided by a
conceptual framework
that addresses the objectives of financial reporting and
qualitative characteristics of accounting information.. Briefly
describe the objectives of financial reporting and qualitative
characteristics of accounting information

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13) U.S. GAAP and IFRS require that firms disclose sufficient
information to allow the reader of financial statements to
calculate Accounts Receivable, Gross, Allowance for Uncollectibles,
and Accounts Receivable, Net.

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14) Gains/Losses arise from relatively infrequent transactions, and
there can be no assurance that they will recur in any future
period.

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15) The adjusted, preclosing trial balances of Pie Company and Soup
Company on December 31, Year 2, appear below.

Parent Company owns 100 percent of the common stock of Soup
Company. It acquired the shares on January 2, Year 1, for an amount
equal to the book value of Soup Company’s underlying net assets. On
December 31, Year 2, Soup Company owes Pie Company $1,100 arising
from short-term working capital loans.

Required:

Prepare in journal entry form the elimination entries required on
December 31, Year 2, to prepare a consolidated financial statement
for Pie Company and Soup Company. Note that neither a formal work
sheet nor formal financial statements are required.

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16) Bad Debt Expense is also called the Provision for Bad Debts and the
Provision for Uncollectible Accounts.

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17) Which of the following cost flow assumptions will report ending
inventory closest to current cost?
A.LIFO method
B.FIFO method
C.weighted-average method
D.acquisition cost
E.specific identification method

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18) Borrowers who retire long-term liabilities debit the liability
account for its current book value, credit Cash, and recognizes any
difference on the retirement of the debt as a
A.gain when book value exceeds cash disbursement (credit)
B.gain when cash disbursement exceeds book value (credit)
C.loss when book value exceeds cash disbursement (debit)
D.a financing loss (debit)
E.cannot be determined from the above information

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19) Common terminology refers to the calculations for amortizing a
financial instrument to its maturity value over time as the _____
interest method.
A.efficient
B.economical
C.market
D.effective
E.imputed

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20) To avoid understating the amount of cash flow from operations, the
accountant
A.subtracts the loss from net income
B.adds back the loss to retained earnings
C.adds back the loss to net income
D.subtracts the loss from retained earnings
E.none of the above

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21) Generally accepted accounting principles in the United States
require firms to
A.capitalize and amortize all research and development costs over
the future expected benefit period
B.capitalize and amortize all research and development costs over a
period no greater than 5 years
C.capitalize and amortize all research and development costs over a
period no greater than 10 years
D.expense all research and development costs in the period
incurred
E.None of these answer choices is correct

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22) Use the following comparative balance sheet to compute ratios as
requested.

Compute the following ratios at year end for Year 2 for
Buff Company:


a. Long-term debt ratio
b. Debt-equity ratio
c. Current ratio
d. Leverage ratio
Assume that a bank loans $10,000 cash (due in 5 years) to the
company on December 31, Year 2 . Make the appropriate adjustments
to the financial statements and compute the following
ratios:

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23) Which of the following is/are not true regarding the operations of
a charitable organization?
A.might prepare financial statements that compare inflows (for
example, contributions) with outflows
B.there would be no calculation of net income
C.purpose is to provide services to its constituents
D.purpose is to seek profits
E.all of the above

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24) Healthy Lawn Maintenance Company

Healthy Lawn Maintenance Company started a lawn services business
on January 1, 2013 . It sends invoices to its customers for lawn
maintenance services at the end of each month, and expects the
customer to pay within 30 days. During 2013, Healthy Lawn
Maintenance billed its customers a total of $2,000,000 for services
rendered during the year. It made journal entries at the end of
each month.

If Healthy Lawn Maintenances customers remitted $1,900,000 in cash
during 2013, it would make the following journal entries with the
following aggregated amounts:
A.Accounts Receivable, Grossspecific accounts . . . . . . . . . . .
. . 1,900,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . .. . . . . . . . .. 1,900,000
B.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .. . . . . . . . 1,900,000
Accounts Receivable, netspecific accounts . . . . . . . . . . .. .
. . . . . 1,900,000
C.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .. . . . . . . . 1,900,000
Accounts Receivable, Grossspecific accounts . . . . . . . . . . . .
. . . . 1,900,000
D.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .. . . . . . . . 1,900,000
Notes Receivable, Grossspecific accounts . . . . . . . . . . . . .
. . . . . . 1,900,000
E.Notes Receivable, Grossspecific accounts . . . . . . . . . . . .
. . . . . . 1,900,000
Cash . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . .
. . . . . . . .. . . . . . . . 1,900,000

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25) Zoom 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, Zoom could borrow to finance the costs incurred
during the aging process; doing so would, however, lead to Zoom
reporting increased liabilities. Instead, Zoom sells the whiskey to
a bank and agrees to oversee the aging process on the banks behalf.
At the completion of the aging, Zoom Company guarantees an ultimate
selling price that pays the lender both the original purchase price
and a reasonable return over that amount. Zoom
A.bears the economic risks and must show a liability on its balance
sheet
B.bears the economic risks and but does not show a liability on its
balance sheet
C.does not bear the economic risks and must show a liability on its
balance sheet
D.does not bear the economic risks and does not show a liability on
its balance sheet
E.will likely record the transaction as a sale and not a loan

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26) Tangible long-lived assets include all of the following except
A.land
B.buildings
C.equipment
D.factories
E.franchise rights

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27) Which of the following is not added to net income as an adjustment
to reconcile net income to cash from operating activities on the
statement of cash flows?
A.Increase in an accrued liability
B.Amortization of discount on bond payable
C.Loss on sale of operational asset
D.Increase in deferred tax asset
E.None of these answers is correct

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28) To increase the margin between selling price and manufacturing
cost, a manufacturing company might:
A.negotiate a lower purchase price with suppliers of raw
materials
B.substitute more efficient manufacturing equipment for work now
done by employees
C.increase selling prices
D.all of the above
E.none of the above

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29) Which of the following is not true?
A.Accrual accounting measures the effects of transactions and
events in the periods when they occur.
B.Cash-basis accounting recognizes only cash receipts and
disbursements
C.Under accrual accounting, firms recognize revenues when an
arrangement satisfies the revenue recognition criteria, increasing
net assets but not necessarily cash at the time of revenue
recognition
D.Under accrual accounting, firms recognize expenses when an
arrangement satisfies the expense recognition criteria, decreasing
net assets but not necessarily cash at the time of expense
recognition
E.Accrual accounting often uses the amount of cash received or paid
in some period to measure the amount of revenues and expenses
recognized during the current period, and the timing of revenue and
expense recognition coincides with the timing of cash receipts and
disbursements

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30) Cash flow from financing activities include(s)
A.cash issues of long-term borrowings
B.cash redemptions of long-term borrowings
C.cash sales and cash repurchases of common and preferred
shares
D.cash dividends
E.all of the above

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31) In Year 2, ABC Corp. acquired a 15% interest in XYZ, Inc., for
$50,000. During the year, XYZ paid dividends of $10,000 and had net
income of $30,000. ABC sold the shares of XYZ for $65,000 cash.
What entry will ABC make to record the sale?
A.Cash65,000
Gain on Sale12,000
Investment in XYZ53,000
B.Cash65,000
Gain on Sale 9,000
Investment in XYZ 56,000
C.Cash65,000
Additional Paid-in Capital15,000
Investment in XYZ50,000
D.Cash65,000
Gain on Sale15,000
Investment in XYZ 50,000
E.Cash65,000
Treasury Stock15,000
Investment in XYZ 50,000

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32) One can prepare the statement of cash flows
A.by examining every transaction affecting the cash account, and
classifying each one as an operating activity, investing activity,
or financing activity
B.using the T-account work sheet after the income statement and
balance sheet have been prepared
C.using the T-account work sheet before the income statement and
balance sheet have been prepared
D.by using both options a and b
E.by none of the above

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33) During 20×4, all sales and purchases at Virginia Corporation were
on credit. At December 31, 20×4, Virginia Corporation shipped goods
to the New York Corporation but failed to record the sale. As a
result, before making any corrections to the accounting records
A.Accounts receivable was understated, inventory was overstated,
sales were understated, and cost of goods sold was understated
B.Accounts receivable was understated, inventory was understated,
sales were understated, and cost of goods sold was understated
C.Accounts receivable was overstated, inventory was understated,
sales were overstated, and cost of goods sold was overstated
D.Accounts receivable was overstated, inventory was overstated,
sales were overstated, and cost of goods sold was overstated
E.Accounts receivable was overstated, inventory was overstated,
sales were understated, and cost of goods sold was overstated

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34) Cash flow from financing activities do not include
A.cash issues of long-term borrowings
B.cash redemptions of long-term borrowings
C.cash sales and cash repurchases of common and preferred
shares
D.cash payments of interest
E.all of the above

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35) A firm with assets that will convert to cash within the next 12
months, less than its obligations to pay cash in this same
interval, has
A.positive working capital and a current ratio that is less than
one
B.positive working capital and a current ratio that exceeds one
C.negative working capital and a current ratio that exceeds one
D.negative working capital and a current ratio that is less than
one
E.a serious liquidity problem

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36) U.S. GAAP treatment of a defined benefit pension plan requires
employers to recognize the funded status as _____, if the pension
plan(s) is/are overfunded and _____, if the pension plan(s) is/are
underfunded, and an adjustment to Other Comprehensive Income, a
shareholders equity account that is _____, for the offsetting
amount.
A.an asset; a liability; not part of net income
B.an asset; a liability; part of net income
C.a liability; an asset; not part of net income
D.a liability; an asset; part of net income
E.none of the above

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37) Firms treat expenditures as assets when they:
A.have acquired rights to the future use of a resource as a result
of a past transaction or event
B.can reliably measure the cost of the expected benefits at the
time of initial recognition
C.can exercise the entitys right to, or control of, the benefit
D.can obtain the future service potential and control others access
to it
E.all of the above

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38) Why is analysis of intangible assets more challenging than the
analysis of tangible long-lived assets?
A.Except for software development costs under U.S. GAAP and
development costs under IFRS, firms generally do not recognize
internally developed intangibles as assets on the balance sheet
B.U.S. GAAP and IFRS require firms to measure the fair values of
identifiable intangibles acquired in a business combination and
assess whether they have finite lives or indefinite lives
C.Differences between U.S. GAAP and IFRS in the treatment of
development costs mean that comparisons of firms that apply U.S.
GAAP with firms that apply IFRS require consideration of and
adjustment for those differences
D.all of the above
E.none of the above

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39) Which of the following is/are 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

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40) Which of the following is/are true concerning pension plans?
A.The plan administrator serves in a fiduciary capacity for the
benefit of employees
B.The employer cannot access assets in the pension plan except
under specific conditions that vary, as a matter of pension law, by
jurisdiction
C.The employer does not consolidate the assets and liabilities of
the pension plan with its own assets and liabilities
D.The total amount of cash that the employer contributes to the
pension plan over time is the total amount of pension expense that
the employer must recognize in measuring net income
E.all of the above

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41) For manufacturing firms, the balance sheet reports the costs of
incomplete items as
A.Raw Materials Inventory
B.Work-in-Process Inventory
C.Finished Goods Inventory
D.Cost of goods ready for sale
E.none of the above

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42) Which of the following is not true?
A.Acquisition cost for a merchandising firm includes the costs
incurred to purchase and transport the inventory prior to sale
B.Acquisition cost for a manufacturing firm includes the direct
material, direct labor, and manufacturing overhead cost to produce
the inventory
C.If the market values of inventory items decline below acquisition
cost prior to sale, firms must reduce their balance sheet carrying
values using the lower of cost or market method
D.If the market values of inventories increase during a period,
IFRS permits firms to recognize the unrealized gain to the extent
that the firm had previously recognized an unrealized loss on those
inventory items
E.If the market values of inventories increase during a period,
U.S. GAAP permits firms to recognize the unrealized gain to the
extent that the firm had previously recognized an unrealized loss
on those inventory items

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43) For each of the following independent situations, solve for the
unknown amount.

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44) As of 2011, the _____ is an independent accounting standard-setting
entity with 15 voting members from a number of countries.
A. Public Companies Accounting Oversight Board (PCAOB)
B. International Accounting Standards Board (IASB)
C. American Institute of Certified Public Accountants (AICPA)
D. World Institute of Certified Public Accountants (WICPA)
E. International Institute of Certified Public Accountants (IICPA)

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45) Ralston Company has two divisions, X and Y. The operations and cash
flows of these two divisions are clearly distinguishable. On July
1, 2014, the company decided to dispose of the assets and
liabilities of Division Y. It is probable that the disposal will be
completed early next year. The revenues and expenses of Ralston
Company for 2014 and for the preceding two years are as
follows:

During the latter part of 2014, Ralston disposed of a
portion of Division Y and recognized a pretax loss of $8,000 on the
disposal. The income tax rate for Ralston Company is 40%.

Prepare the comparative income statements for Ralston Company for
the years 2012, 2013, and 2014.

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46) Compute the missing amount affecting retained earnings for Year 2
in each of the five independent cases that follow. Amounts shown
are in millions.

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47) For each of the following independent cases, solve for the unknown
factor.

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