1) U.S. GAAP and IFRS view ownership of more than 50% of an investee
as implying an ability to control the investee, unless evidence
indicates to the contrary.
Answer:
2) Goals are the end results toward which the firm directs its
energies, and strategies are the
means for achieving those results.
Answer:
3) What are the limitations of ratio analysis?
Answer:
4) Investors would view measurements that reflect current conditions
as the most relevant for making investment decisions.
Answer:
5) A debit balance in the Allowance for Uncollectibles appears on the
balance sheet.
Answer:
6) Discuss any ethical issues raised by the following actions.
Answer:
7) Depreciation allocates the assets cost to the periods of benefit in
some systematic and rational way, and it attempts to track changes
in the assets fair value.
Answer:
8) The straight-line (use) method is the most common depreciation
method for financial reporting.
Answer:
9) Given the following information, prepare the cash flows from
operations section of the statement of cash flows using the
indirect method.
Answer:
10) A deferred performance liability arises when a firm agrees to
provide a warrantyfor service or repairs for some period after a
sale.
Answer:
11) The inflows and outflows of cash during the year appear in the
statement of cash flows in one of three categories: operating,
investing, and financing. Explain each category.
Answer:
12) In periods of rising purchase prices and increasing inventory
quantities, LIFO results in a _____ than either FIFO or the
weighted-average cost-flow assumption.
A.higher cost of goods sold; lower reported periodic income; lower
current income taxes
B.lower cost of goods sold; lower reported periodic income; lower
current income taxes
C.higher cost of goods sold; higher reported periodic income; lower
current income taxes
D.higher cost of goods sold; higher reported periodic income;
higher current income taxes
E.a lower cost of goods sold; higher reported periodic income;
higher current income taxes
Answer:
13) Which of the following is/are true concerning convertible bonds or
convertible preferred stock?
A.Convertible bonds and convertible preferred stock permit the
owner either to hold the security as a bond or preferred stock or
to convert the security into shares of common stock
B.The owner cannot detach and transfer, or separately exercise, the
conversion option
C.The issue price of a convertible bond or convertible preferred
stock is payment for both debt or preferred stock and for the
conversion option, but no one can observe the fair value of these
separate components
D.choices a and b, only
E.choices a, b, and c
Answer:
14) Given the following consolidated balance sheet and additional
information, prepare a separate company balance sheet and income
statement for P.
| – | P owns 100% of S. |
| – | S sold $20,000 of inventory to P. |
| – | P sold all of the inventory it purchased from S. |
| – | $10,000 of S’s accounts receivable are payable by P. |
| CONSOLIDATED BALANCE SHEET As of December 31, Year 4 | |
| Assets | |
| Accounts receivable | $50,000 |
| Other assets | 1,680,000 |
| Total assets | $1,730,000 |
| Liabilities and Equity | |
| Accounts payable | $80,000 |
| Other liabilities | 1,200,000 |
| Common stock | 50,000 |
| Retained earnings | 400,000 |
| Total liabilities and equity | $1,730,000 |
|
CONSOLIDATED INCOME STATEMENT for the year ended December 31, Year 4 |
|
| Sales | $780,000 |
| Total revenues | $780,000 |
| Cost of goods sold | $490,000 |
| Depreciation | 120,000 |
| Other expenses | 15,000 |
| Tax expense | 55,000 |
| Total expenses | $680,000 |
| Net income | $100,000 |
CONDENSED BALANCE SHEETS As of December 31, Year 4
Assets P S
Accounts receivable (a) $40,000
Investment in S (equity) (b) –
Other assets (c) 400,000
Total assets (d) $440,000
Liabilities and Equity
Accounts payable (e) $40,000
Other liabilities (f) 200,000
Common stock (g) 100,000
Retained earnings (h) 100,000
Total liabilities and equity (i) $440,000
CONDENSED INCOME STATEMENT for the year ended December 31, Year
4
P S
Sales (j) $200,000
Equity in earnings of S (k) –
Total revenues (l) $200,000
Cost of goods sold (m) 110,000
Depreciation (n) 20,000
Other expenses (o) 5,000
Tax expense (p) 15,000
Total expenses (q) $150,000
Net income (r) $50,000
Answer:
15) U.S. GAAP view investments of over 50 percent of the voting stock
of another company (for the purpose of controlling the other
company at the broad policy-making level and at the day-to-day
operational level) as
A.minority, passive investments
B.minority, active investments
C.majority, passive investments
D.majority, active investments
E.marketable securities
Answer:
16) A mature, financially healthy company typically has a cash flow
from operations to total liabilities ratio of
A.5% or more
B.20% or more
C.45% or more
D.70% or more
E.90% or more
Answer:
17) On January 1, Year 4, Jones Realty Company issued 8 percent term
bonds with a face amount of $1 million due January 1, Year 14.
Interest is payable semi-annually on January 1 and July 1. On the
date of issue, investors were willing to accept an effective
interest rate of 6 percent. Assume the bonds were issued on January
1, Year 4. for $1,148,959. The bonds were issued on January 1, Year
4, at
A.a premium
B.an amortized value
C.a discount
D.face value
E.par value
Answer:
18) The SRI company provides substantial services after the time of
product sale and this condition introduces uncertainty. Which of
the following is true?
A.Under some circumstances the firm recognizes revenue sometime
after the sale
B.Under some circumstances this uncertainty is sufficient to
preclude the firms recognizing revenue at the time of sale
C.The firm always recognizes revenue at the time of sale
D.Both choices a and b are true
E.None of the above is true
Answer:
19) Kendrick Company began the current year with the
following:
| Accounts receivable | $ 10,000 | ||||
| Allowance for doubtful accounts | (800) | ||||
| Net account receivable | 9,200 | ||||
During the current year, the following events
occurred:
| Accounts written off | $ 1,200 | ||||
| Sales on account | 30,000 | ||||
| Bad debt expense recognized | 2,000 | ||||
At the end of the current year, the company showed a
balance in gross accounts receivable (before the allowance for
doubtful accounts) of $16,800.
What amount would be shown as an operating cash inflow in the
statement of cash flows under the indirect method?
A.$21,000
B.$22,000
C.$30,000
D.$28,200
Answer:
20) Which of the following is/are not true?
A.U.S. GAAP and IFRS do not permit the employer to prepare
consolidated financial statements with the retirement trust
B.The employer must report the net funded status of each defined
benefit retirement plan (that is, the fair value of retirement
trust assets minus the retirement trust obligation) as either an
asset or a liability on its balance sheet
C.The employer must report the net funded status of each defined
benefit retirement plan and credit (for an overfunded plan) or
debit (for an underfunded plan) is to net income
D.Notes to the financial statements provide information about
investments made by the retirement trust and how trust assets and
liabilities changed during a period
E.all of the above
Answer:
21) The financial statements present aggregated information, for
example, the total amount of land, buildings, and equipment.
Financial reports provide more detail for some of the items
reported in the financial statements, and they provide additional
explanatory material to help the user to understand the information
in the financial statements. This information appears in _____ that
are an integral part of the financial reports.
A.managements discussion and analysis
B.external auditors report
C.internal auditors report
D.press releases
E.schedules and notes
Answer:
22) In its first year of operations, Lear Company reported financial
statement income (prior to income tax expense) of $100,000. In the
same year, Lear Company reported $80,000 of taxable income, the
difference being due to temporary differences. Assuming the enacted
tax rate for the current year and all future years is 30%, what is
Lears current year adjustment for deferred income taxes?
A.Debit to Deferred Income Tax Liability for $6,000
B.Debit to Income Tax Expense for $6,000
C.Credit to Income Taxes Payable for $6,000
D.Credit to Deferred Income Tax Liability for $6,000
E.Credit to Income Tax Expense for $6,000
Answer:
23) Assume a firm has acquired an asset for $100,000 on January 1, Year
1. The asset has a 6-year life and a salvage value of $10,000. The
firm calculates the depreciation expense using the straight-line
depreciation. What was the depreciation for Year 4?
A. $10,000
B. $15,000
C. $20,000
D. $25,000
E. $30,000
Answer:
24) Financial leverage
A.increases the return to the common shareholders during good
earnings years
B.uses lower cost borrowed funds to earn a higher rate of return on
those funds than their cost
C.decreases the return to the common shareholders during bad
earnings years
D.all of the above
E.none of the above
Answer:
25) The conversion option of convertible bonds has value because the
holder can benefit from some of the later increases in the market
value of the firms _____ after issuance of the bonds.
A.preferred stock
B.paid-in-capital
C.treasury stock
D.common stock
E.debentures
Answer:
26) Firms that need cash for long-term purposes, such as acquiring
buildings and equipment or financing a business acquisition, and
that wish to use debt as a means of obtaining cash, will
A.issue common stock in the capital markets
B.issue preferred stock in the capital markets
C.issue paid-in-capital in the capital markets
D.issue bonds in the capital markets
E.all of the above
Answer:
27) _____ 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:
28) Rogers Manufacturing sells an old machine to KSS Corp. which is
having financial difficulty. Rogers agrees to accept payment over 3
years. The adjusted basis of the machine to the seller is $5,000
and the buyer is expected to make payments of $2,000 per year for 3
years. What amount of net profit is recognized by the seller in
year 3 if the seller uses the installment method? (Assume that the
buyer makes the payments.)
A.$2,000
B.$1,000
C.$333.33
D.$0
E.$666.67
Answer:
29) Sales returns affect net cash collections when a customer has the
right to return a product for a refund, and the firm can reasonably
estimate the amount of returns at the time of sale, U.S. GAAP and
IFRS
A.require that the firm use the allowance method to estimate and
recognize the effects of returns
B.the selling firm debits a revenue contra account for expected
returns to reduce current period revenues to the estimated amount
that will not be returned
C.require that the firm measures revenues based on the amount of
cash it expects to collect from current period sales
D.preclude revenue recognition when customers have the right to
return goods unless the firm can reasonably estimate the amount of
returns
E.all of the above
Answer:
30) For U.S. companies, how do U.S. GAAP and income tax reporting
compare in their treatment of uncollectible accounts?
A.U.S. GAAP and income tax reporting both require the direct
write-off method
B.U.S. GAAP and income tax reporting both require the allowance
method
C.U.S. GAAP and income tax reporting require different treatments
of uncollectible accounts
D.U.S. GAAP and income tax reporting assume uncollectible accounts
are estimated based on past experience for reporting purposes
E.none of the above
Answer:
31) If a firm detects an error at the end of the year, where property
taxes on the headquarters buildings was recorded as a debit to Cost
of Goods Sold instead of Selling and Administrative Expenses, which
of the following entries would they make?
A.correcting
B.reversing
C.closing
D.memorandum
E.t-account
Answer:
32) According to U.S. GAAP,firms holding debt and equity securities for
short-term profit potential
A.report the investments on the balance sheet at market value
B.initially record the investments at acquisition cost
C.report unrealized holding gains and losses on the investments in
the income statement
D.all of the above
E.none of the above
Answer:
33) Directors usually declare dividends less than the legal maximum and
thereby allow retained earnings to increase as a matter of
corporate financial policy for what reason(s)?
A.Available cash did not increase by as much as the amount of
earnings, so paying the maximum legally permitted dividends would
require raising more cash
B.Restricting dividends in prosperous years may permit continued
level or steadily growing dividend payments in poor years
C.The firm may need funds for expansion of working capital or for
plant and equipment
D.The firm can distribute the funds to shareholders with lower tax
burdens for them by using the cash to repurchase shares
E.all of the above
Answer:
34) Which of the following would most likely not be classified as
Investment in Securities appearing between the Current Assets and
the Property, Plant and Equipment sections of the balance
sheet?
A.United States Treasury Notes that the firm expects to hold for
less than one year
B.investments in securities for the purpose of exerting significant
influence over the investee’s dividend payout policy
C.investments in securities for the purpose of exerting significant
influence over the investee’s day-to-day operations
D.all of the above
E.none of the above
Answer:
35) In the United States, regulatory requirements applicable to
publicly traded firms require the inclusion of a(n) _____, in which
management discusses operating results, liquidity (sources and uses
of cash), capital resources, and reasons for changes in
profitability and risk during the past year.
A.Balance sheet or statement of financial position
B.Managements Discussion and Analysis
C.Income statement or statement of profit and loss
D.Statement of cash flows
E.Statement of shareholders equity
Answer:
36) In some cases, particularly when the reissue of treasury stock
results from the exercise of employee stock options, the amount
paid by the firm to reacquire the treasury shares exceeds the
subsequent reissue price. If the firm applied the constructive
retirement method, it is unlikely that the reissue price would be
so low as to require a debit to _____.
A.Additional Paid-In Capital account so long as that account has a
sufficiently large credit balance. To the extent the required debit
exceeds the credit balance in the Additional Paid-In Capital
account, the firm reduces that account to zero and debits the
excess to Retained Earnings.
B.Additional Paid-In Capital
C.Retained Earnings
D.Net Income
E.Accumulated Other Comprehensive Income
Answer:
37) Under U.S. GAAP and IFRS reporting standards, management assesses
the firms assets for impairment at each reporting date by
determining if impairment indicators are present. Impairment
indicators do not include
A.the decline in the market value of an asset significantly beyond
what would be expected because of use or the passage of time.
B.significant adverse changes in the entitys technological
environment
C.significant adverse changes in the entitys economic
environment
D.significant adverse changes in the entitys legal environment
E.significant adverse changes in the entitys Chief Executive
Officers health
Answer:
38) Use the abbreviations below to classify the following balance sheet
items.
| CA | – Current assets |
| NA | – Noncurrent assets |
| CL | – Current liabilities |
| NL | – Noncurrent liabilities |
| SE | – Shareholders’ equity |
| X | – Item generally not appearing on a balance sheet |
Balance Sheet ItemsExample Corporation, Inc.January
1, Year 1
a. Accounts payable
b. Accounts receivable
c. Bank loan payable, due April 5, Year 2
d. Bonds payable, due Year 17
e. Building, net of accumulated depreciation
f. Supplies inventory
g. Commissions paid to sales staff
h. Common stock
i. Equipment, net of accumulated depreciation
j. Income taxes expense
k. Land
l. Merchandise inventory
m. Note payable, due in March, Year 1
n. Note receivable, due June 1, Year 2
o. Note receivable, due December 2, Year 10
p. Retained earnings
q. Salaries expense
Answer:
39) Firms sometimes invest in the common stock of other entities in
order to exert significant influence or control over the other
entity. U.S. GAAP and IFRS assume that firms owning more than
______ can exert control, unless other information indicates the
contrary.
A.20%
B.30%
C.40%
D.50%
E.60%
Answer: