1) The current FASBs financial reporting objectives states that the
principal purpose of financial reports is to provide information to
make investment and credit decisions.
Answer:
2) During the maturity phase, cash outflow typically exceeds cash
inflow from operations because operations are not earning profits
while the firm must invest in accounts receivable and inventories.
Answer:
3) What is the accounting treatment for trading securities?
Answer:
4) U.S. GAAP and IFRS distinguish three categories of long-lived
assets for purposes of measuring and recognizing impairment losses.
Answer:
5) Describe the relationship between financial reporting standards and
the financial reporting objectives, qualitative characteristics of
accounting information, and elements of financial statements that
comprise the FASBs and the IASBs conceptual frameworks.
Answer:
6) Describe the balance sheet equation and the dual effects of
transactions.
Answer:
7) Expenditures to satisfy warranty claims affect net income during
the period of servicing the warranty.
Answer:
8) U.S. GAAP and IFRS require firms to report pension plan assets at
the estimated future value.
Answer:
9) How do firms account for property, plant, and equipment?
Answer:
10) A natural business year ends when most activities in an operating
cycle have been substantially concluded.
Answer:
11) Firms recognize revenue
A.when they have completed an earnings process or performed most or
all of their obligations to customers, usually the delivery of a
product or service
B.when they have received cash or a receivable capable of
sufficiently reliable measurement
C.using the percentage-of-completion method when the firms sell
products under long-term contracts, such as construction
companies
D.using the completed contract method [U.S. GAAP, only] when firms
cannot reasonably estimate revenues and costs
E.all of the above
Answer:
12) Gordon Corporation
Information relating to Gordon Corporation for Year 1 and Year 2 is
as follows:
| Year 1 | Year 2 | |
| Income before taxes | $5,000,000 | $4,000,000 |
|
Interest income included above that was not subject to income taxes |
100,000 | 100,000 |
|
Income before income taxes in Year 1 included rent revenue of $80,000 that was not subject to income tax until its receipt in Year 2 |
|
|
Gordon was subject to an effective income tax rate of 40% in Year 1 and 2. |
|
(CMA adapted, Jun 86 #7) Refer to the Gordon Corporation example.
The amount of current income tax expense that would have been
reported on Gordon Corporation’s Income Statement for the year
ended December 31, Year 1 is
A.$1,928,000
B.$1,960,000
C.$1,980,000
D.$1,992,000
E.$2,000,000
Answer:
13) 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. _____
usually show an addback for deferred tax expense, whereas firms
that _____ show a subtraction.
A.Rapidly growing firms; have operating losses
B.Firms that have operating losses; are profitable
C.Profitable firms; have operating losses
D.Firms that stop growing or that shrink; rapidly growing firms
E.Rapidly growing firms; stop growing or that shrink
Answer:
14) The extent to which a firm adjusts net income for changes in
noncurrent assets and noncurrent liabilities in deriving cash flow
from operations under the indirect method depends on the nature of
its operations. Rapidly growing firms usually
A.show an addback for deferred tax expense
B.show a subtraction for deferred tax expense
C.show no adjustments for deferred tax expense
D.disclose such changes in a supplementary schedule or notes to the
financial statements
E.disclose such changes in managements discussion and analysis
Answer:
15) Which of the following is/are not true?
A.U.S. GAAP and IFRS require firms to recognize the cost of
retirement benefits (pensions, health care, life insurance) as an
expense while employees work, not when they receive payments or
other benefits during retirement
B.Employers often contribute cash to a trust, an entity
administered by the employer, to fund their retirement
obligations
C.The accounting records of the trust established to fund the
retirement obligations are separate from the accounting records of
the employer, and the amounts on the two sets of books usually
differ
D.Payments to employees come from both the employers contributions
and investment returns of the trust established to fund the
retirement obligations
E.all of the above
Answer:
16) Who provides an opinion that reflects their professional
conclusions regarding the financial statements and for most
publicly traded firms in the U.S. also provides a separate opinion
on the effectiveness of the firms internal controls over financial
reporting?
A.management
B.controller
C.financial vice-president
D.independent auditor
E.general counsel
Answer:
17) Which of the following is not true?
A.Firms reclassify gains and losses initially classified in other
comprehensive income into net income when a confirming event
subsequently occurs
B.Firms close amounts in other comprehensive income for a period to
Accumulated Other Comprehensive Income at the end of the period
C.Net income includes gains and losses from sales or exchanges of
assets or settlements of liabilities related incidentally or
peripherally to the firms core business
D.Authoritative guidance classifies gains and losses from the
remeasurement of certain assets and liabilities as either net
income or other comprehensive income
E.The FASBs and IASBs conceptual framework contains a conceptual
model for classifying items in net income versus in other
comprehensive income
Answer:
18) Consolidated financial statements provide more helpful information
than does the equity method, because
A.they include all the assets, liabilities, revenues, and expenses
of the controlled subsidiaries, not just the investment account
that represents the parents investment in the subsidiarys common
shareholders equity and not just the parents share of the
subsidiarys net income
B.the parent, because of its voting interest, can control the use
of all of the subsidiarys assets
C.the parent needs to own only a majority of the voting stock, not
necessarily 100%, to control the use of 100% of the subsidiarys
assets
D.consolidation of the individual assets, liabilities, revenues,
and expenses of both the parent and the subsidiary provides a more
realistic picture of the operations and financial position of the
single economic entity
E.all of the above
Answer:
19) Firms have some choice as to when they disburse cash. Delaying
payments to suppliers and others during the last several days of an
accounting period conserves cash and thereby _____ cash flow from
operations for that period, and _____ cash flow from operations
during the second period.
A.increases; decreases
B.increases; increases
C.decreases; ; increases
D.decreases; decreases
E.increases; has no effect
Answer:
20) _____ are the end results toward which the firm directs its
energies.
A.Goals
B.Strategies
C.Objectives
D.Activities
E.Milestones
Answer:
21) The following information is based on the financial statements of
Hadley Company, a large manufacturer. Annual revenues are $65,387
million and net expenses (including income taxes) are $62,313
million. During the year, the firm collected $64,995 million in
cash from customers and had cash outflows associated with payments
to suppliers and vendors of $56,411 million.
REQUIRED:
a. Calculate net income and net cash flow for the year.
b. How can cash collected from customers be less than
revenues?
c. How can cash payments to suppliers and vendors be less
than expenses?
Answer:
22) A department store had items in its inventory at the end of the
year that had a recorded book value of $10,000 and, because of
fashion changes, a market value of only $7,000. The department
store failed to write down these inventory items to market value.
To keep the obsolete condition of the inventory items away from its
auditors, the firm shipped the goods to a remote warehouse. The
effect of this error was to
A.understate the inventory turnover ratio
B.overstate the cost of goods sold to sales percentage
C.overstate the total assets turnover ratio
D.understate net income
E.none of the above
Answer:
23) Big City Electric is a regulated monopoly providing electric
services in a large city. Property, plant, and equipment dominate
the asset side of the balance sheet. Which of the following is not
true?
A.It relies more on long-term debt than shareholders equity to
finance these facilities
B.It has a debt-equity ratio of 50% or less
C.The regulated monopoly status practically eliminates the risk of
default or bankruptcy, so Big City Electric faces a relatively low
borrowing cost
D.Big City Electrics production and transmission facilities can
serve as collateral for the debt
E.none of the above
Answer:
24) City Bicycle
City Bicycle , a cycling store has a beginning inventory of one
bi-level touring bicycle 1, for which it paid $2,500. Suppose that
during the period the store purchases bi-level touring bicycle 2
for $2,900 and bi-level touring bicycle 3 for $3,000, and that it
sells one bicycle for $5,500. The three bicycles are physically
identical; the store acquired them at different times as their
acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the
FIFO cost-flow assumption. The cost of goods sold is _____, and the
ending inventory is _____.
A.$2,900; $5,500
B.$2,500; $5,900
C.$3,000; $5,400
D.$2,800; $5,600
E.cannot be determined with the information given
Answer:
25) Some investing and financing transactions do not involve cash and
therefore
A.appear on the statement of cash flows under operating, investing
or financing activities, as appropriate
B.appear on the statement of cash flows under operating
activities
C.appear on the statement of cash flows under operating or
financing activities, as appropriate
D.appear on the statement of cash flows under investing or
financing activities, as appropriate
E.do not appear on the statement of cash flows
Answer:
26) Firms with tangible long-term assets and predictable cash flows,
such as electric utilities, tend to have balance sheets with a
A.high proportion of long-term debt (80% or more)
B.low proportion of long-term debt (20% or less)
C.high proportion of shareholders equity (80% or more)
D.high proportion of cash (80% or more)
E.high proportion of retained earnings (80% or more)
Answer:
27) Operating risks
A.include variability in sales from changing economic conditions
(cyclicality risk)
B.include variability in sales from short product life cycles
(because of technological change or changes in consumer taste)
C.include variability of earnings that arises when the firm has a
high proportion of fixed costs that do not change as sales
change
D.Answers a, b, and c are correct
E.None of these answer choices is correct
Answer:
28) During 2013, Maria Corporation sold marketable securities for
$14,000 that had a carrying value of $13,000 at the time of sale.
The financial statements of Maria Corporation reveal the
following
information with respect to securities available-for-sale:
December 31 2013 2012
Balance Sheet
Marketable Securities at Fair Value . . . $195,000 $187,000
Net Unrealized Holding Gain on
Securities Available-for-Sale. . . . . . . . $ 10,000 $ 12,000
2013
Income Statement
Realized Gain on Sale of Securities Available-for-Sale . . .
$4,000
a. What was the acquisition cost of the marketable securities
sold?
b. What was the unrealized holding gain on the securities sold at
the time of sale?
c. What was the unrealized holding gain during 2013 on securities
still held by the end of 2013?
d. What was the cost of marketable securities purchased during
2013?
Answer:
29) On a statement of cash flows prepared using the direct method, cash
paid for income taxes would be income tax expense minus
A.an increase in income taxes payable
B.a decrease in income taxes payable
C.beginning income taxes payable
D.ending income taxes payable
E.None of these answers is correct
Answer:
30) A _____ is used to record properly the effects of an event or
transaction that was improperly recorded during the accounting
period.
A.reversing entry
B.preliminary entry
C.closing entry
D.correcting entry
E.none of the above
Answer:
31) Inventory Record
The inventory record for a particular item for Year 2 appears
below.
| Inventory, January 1, Year 2 | 20,000 | $0.20 | $4,000 |
| Purchases: | |||
| March 2 | 4,000 | .24 | $960 |
| April 30 | 3,000 | .28 | 840 |
| June 15 | 6,000 | .32 | 1,920 |
| September 30 | 2,000 | .26 | 520 |
| December 15 | 1,000 | .20 | 200 |
| Total purchases | 16,000 | $4,440 | |
| Total available for sale | 36,000 | $8,440 | |
| Units sold | 28,000 | ||
Refer to the Inventory Record example. The cost of goods sold for
year 2 under FIFO is:
A.$6,040
B.$6,120
C.$6,320
D.$6,520
E.$6,840
Answer:
32) Firms that incur research and development costs to develop a
patented product:
A.must expense the costs as incurred
B.must capitalize the costs and only reduce such costs if the
patent becomes impaired
C.must capitalize the costs and then amortize the costs over the
expected economic life of the patent
D.have a choice either to expense the costs as incurred or
capitalize the costs and amortize the costs over the legal life of
the patent
E.have a choice either to expense the costs as incurred or
capitalize the costs and amortize the costs over the expected
economic life of the patent
Answer:
33) The statement of cash flows provides information about
A.the cumulative effects of operations over several years
B.the balances in shareholders’ equity accounts
C.the relationship between operations and liquidity of a firm
D.the success of management’s cash management strategy
E.all of the above
Answer:
34) In IFRS, preferred stock subject to redemption at the option of the
preferred shareholders appears
A.between liabilities and shareholders equity.
B.as a liability
C.as a shareholders equity
D.as a revenue
E.as an expense
Answer:
35) City Bicycle
City Bicycle , a cycling store has a beginning inventory of one
bi-level touring bicycle 1, for which it paid $2,500. Suppose that
during the period the store purchases bi-level touring bicycle 2
for $2,900 and bi-level touring bicycle 3 for $3,000, and that it
sells one bicycle for $5,500. The three bicycles are physically
identical; the store acquired them at different times as their
acquisition costs changed, so only their costs differ.
Suppose the cycling store uses the LIFO cost-flow assumption. The
cost of goods sold is _____, and the ending inventory is _____.
A.$2,900; $5,500
B.$2,500; $5,900
C.$3,000; $5,400
D.$2,800; $5,600
E.cannot be determined with the information given
Answer:
36) For each of the following independent situations, suggest what
ratio would provide appropriate information to answer the
question.
a. You need to determine the number of days outstanding for
accounts receivable.
b. You are considering investing in bonds of a publicly held
company. You wish to analyze the possibility of the company failing
to meet required interest payments.
c. You wish to measure and compare a firm’s performance in using
assets independent of the financing of the assets to the industry
average.
d. You wish to assess a company’s ability to meet immediate
liabilities in an emergency.
e. You would like to determine how much capital is provided by
common shareholders.
f. You wish to understand how long inventory remains on hand during
the period.
g. You are considering how much additional long-term debt a company
may be able to take on.
h. You are interested in how productive a company’s fixed assets
have been.
Answer:
37) _____ is the net cash (selling price less selling costs) that the
firm would receive if it sold the asset today, in orderly fashion
in an arms-length transaction. It is an example of an exit value,
because it reflects a price that the firm would receive in a
transaction in which an asset leaves the firm.
A.Current Replacement Cost
B.Net Realizable Value
C.Fair Value
D.Present Value of Future Net Cash Flows
E.Acquisition cost
Answer:
38) Prepare journal entries for the following transactions:
a.Issue 15,000 shares, selling price is $45 and par value is
$1.
b.Buy back 650 shares of outstanding stock at $48 per share.
c.Sell 500 shares of treasury stock at $50 per share.
Answer:
39) A companys income statement disclosed $45,000 of investment revenue
on equity method investments. The company did not purchase or
dispose of any such investments during the year, yet the equity
method investments account increased $30,000 during the year. What
is the complete disclosure of these events in the statement of cash
flows prepared under the indirect method?
A.Operating cash inflow, $45,000; $30,000 subtraction in
reconciliation of earnings and net operating cash flow
B.Operating cash inflow, $15,000; $30,000 subtraction in
reconciliation of earnings and net operating cash flow
C.Operating cash inflow, $15,000
D.$30,000 subtraction in reconciliation of earnings and net
operating cash flow
E.None of these answers is correct
Answer:
40) A mature, stable firm might show what type of cash flow pattern
from operating, investing, and financing activities?
A.operating outflow, investing outflow, and financing inflow
B.operating inflow, investing outflow, and financing inflow
C.operating outflow, investing inflow, and financing outflow
D.operating inflow, investing outflow, and financing outflow
E.operating outflow, investing inflow, and financing inflow
Answer: