1) Large, global enterprises typically have an equity interest in
other entities throughout the world. Some of the interests
represent wholly-owned (100%-owned) subsidiaries, while others
represent lesser percentages of ownership. These large global
conglomerates provide information on the percentage ownership of
their various affiliated companies in the notes to the consolidated
financial statements.
The following list of companies represents the ownership percentage
of selected companies by a large global company:
| Company A | 50% plus one share | |||||
| Company B | 100% | |||||
| Company C | 68% | |||||
| Company D | 50% | |||||
| Company E | 23.8% | |||||
| Company F | 20% | |||||
Required:
Explain how you would expect the global company holding the
indicated interests to account for each of the companies listed
above, based on the percentage ownership reported.
Answer:
2) IFRS permits upward asset revaluations, the recognition of
unrealized increases in the fair value of long-lived assets under
certain conditions.
Answer:
3) Firms that use International Financial Reporting Standards (IFRS)
may, but need not list their assets from least liquid to most
liquid, with the same ordering used to list liabilities.
Answer:
4) If an event or transaction leads to the recognition of revenue,
firms match the consumption of any assets (the expense), in time,
with the revenue recognized.
Answer:
5) U.S. GAAP and IFRS provide for two methods of accounting for
long-term leases: the operating lease method and the capital or
finance lease method.
Answer:
6) Describe the various presentation formats for the Statement of Cash
Flows.
Answer:
7) Each firm makes financing decisions about the proportion of funds
to obtain from owners,
long-term creditors, and short-term creditors.
Answer:
8) What happens when the fair value of long-lived assets change?
Answer:
9) Some analysts calculate the inventory turnover ratio by dividing
sales, rather than cost of goods sold, by the average inventory.
Using sales in the numerator will lead to correct measures of the
inventory turnover ratio for calculating the average number of days
that inventory is on hand until sale.
Answer:
10) Of the three cost-flow assumptions, LIFO has the highest cost of
goods sold when inventory costs are rising and the lowest cost of
goods sold when inventory costs are falling.
Answer:
11) The first step in a procedure for preparing the statement of cash
flows using a T-account work sheet is to explain the change in the
master Cash account between the beginning and the end of the period
by accounting for the changes in the other balance sheet accounts.
Answer:
12) The current replacement cost of an asset is the amount a firm would
have to pay to obtain another asset with identical service
potential; it is an entry value that reflects economic conditions
at the measurement date.
Answer:
13) Describe the various sections of the statement of cash flows.
Answer:
14) Discuss how accounts receivable can be analyzed.
Answer:
15) A T-account is a device or convention for organizing and
accumulating the accounting entries of transactions that affect an
individual account, such as cash, accounts receivable, bonds
payable, or additional paid-in capital.
Answer:
16) The analysis of business transactions is facilitated by
A.reconciliation of bank balances at the end of the reporting
period
B.good internal controls and performing daily cash
reconciliation
C.developing an electronic spreadsheet showing the transactional
effects
D.maintaining a written copy of all invoices and receipts of the
company for a period of at least 7 years
E.None of these answer choices is correct
Answer:
17) Which of the following is/are not true regarding inventories when
their replacement cost declines below acquisition cost?
A.Both U.S. GAAP and IFRS require firms to write down inventories
when their replacement cost, or market value, declines below
acquisition cost
B.Accountants refer to the inventory as impaired and to this
valuation as the lower-of-cost-or-market basis
C.The journal entry to record the inventory impairment results in a
loss and a new balance sheet carrying value that is the lower of
cost or market value
D.U.S. GAAP permits firms to recognize subsequent value increases,
as long as the new value remains less than the original acquisition
cost
E.IFRS permits firms to reverse previous impairments, up to the
amount of the original acquisition cost of the inventory, if the
circumstances that caused the inventory impairment no longer exist
Answer:
18) Winner Company
Winner Company’s beginning and ending inventories for the fiscal
year ended September 30, Year 5, are
| October 1, Year 4 | September 30, Year 5 | |
| Raw materials | $15,000 | $22,000 |
| Work-in-process | 40,000 | 35,000 |
| Finished goods | 8,000 | 12,000 |
Production data for the fiscal year ended September 30,
Year 5, are
| Raw materials purchased | $80,000 | |
| Purchase discounts | 1,000 | |
| Direct labor | 100,000 | |
| Manufacturing overhead | 75,000 | |
Assume Winner Company treats all raw materials as direct
materials once they enter the production process. Thus, no raw
materials are treated as manufacturing overhead.
(CMA adapted, Dec 95 #29) Refer to the Winner Company example. The
total value of inventory to be reported on the balance sheet as of
September 30, Year 5, for Winner Company is
A.$22,000
B.$35,000
C.$12,000
D.$69,000
E.$96,000
Answer:
19) Earnings per share tells the shareholder the amount of
A.cash generated per share of common stock
B.dividends earned by each common shareholder
C.dividend per share of common stock
D.income per share as if preferred stock dividends had been
paid
E.income per share as if common and preferred stock dividends had
been paid
Answer:
20) Which of the following is not true?
A.Gains (losses) are increases (decreases) in net assets from
peripheral or incidental transactions of an entity and from other
transactions and events affecting the entity except those that
result from revenues (expenses) or investments by (distributions
to) owners
B.Firms usually report gains and losses from sales of assets or
settlements of liabilities at a net amount; that is, equal to the
difference between the net asset received and the carrying value of
the asset sold or between the net asset given and the carrying
value of the liability settled
C.Gains and losses never arise from the remeasurement of assets and
liabilities
D.Firms realize gains and losses when they sell or exchange assets
or settle liabilities in market transactions
E.Firms recognize gains and losses when those items enter the
measurement of net income or other comprehensive income
Answer:
21) Which of the following is/are not true regarding the Raw Materials
Inventory account?
A.The Raw Materials Inventory account includes the cost of raw
materials purchased but not yet transferred to the factory
floor
B.The merchandising firm records purchases of raw materials as
debits to the Raw Materials Inventory account
C.When the manufacturer physically transfers raw materials to the
factory floor, it also transfers the cost of the raw materials from
the Raw Materials Inventory account to the Work-in-Process
Inventory account
D.When the manufacturer physically transfers raw materials to the
factory floor, it records this transfer as a credit to the Raw
Materials Inventory account for the cost of the raw materials
transferred and a debit to the Work in Process Inventory
account
E.all of the above
Answer:
22) Jurisdiction-specific corporate laws limit directors freedom to
declare dividends. Without these limits, directors might dissipate
the firms assets for the benefit of
A.common shareholders, harming other nonshareholding
stakeholders
B.creditors, harming other stakeholders
C.employees, harming other stakeholders
D.management, harming other stakeholders
E.customers, harming other stakeholders
Answer:
23) The accounting for employee stock options involves amortizing the
fair value of the stock options on the date of the grant over the
requisite service period, which is
A.expected period of benefit
B.one year
C.two years
D.three years
E.five years
Answer:
24) Determine the missing amount X for each of the following:
Assets Liabilities Shareholders Equity
a. $85,700 $40,000 X
b. X $66,570 $145,000
c. $57,900 X $34,000
Answer:
25) Which of the following is/are true regarding the fair value of
long-lived assets?
A.U.S. GAAP does not permit firms to increase the balance sheet
carrying values of tangible and intangible long-lived assets when
the fair values of their assets increase
B.IFRS permits upward asset revaluations, the recognition of
unrealized increases in the fair value of tangible and intangible
long-lived assets under certain conditions
C.IFRS requires that firms credit the increase in the tangible and
intangible revalued assets balance sheet carrying value to other
comprehensive income
D.U.S. GAAP firms recognize the increase in the fair value of the
tangible and intangible asset only as the firm realizes the value
increase through either sale or continuing use
E.all of the above
Answer:
26) The joint efforts of the FASB and the IASB to set forth qualitative
characteristics of financial reporting information have led to
which of the following tentative fundamental qualitative
characteristics?
A.relevance, only
B.faithful representation, only
C.relevance and faithful representation
D.materiality, only
E.cost, only
Answer:
27) U.S. GAAP and IFRS require firms to account for minority, active
investments, using the _____ method.
A.cost
B.equity
C.fair market value
D.consolidation
E.lower of cost or market
Answer:
28) The sales manager of Sebastian Company failed to record a valid
sale on account of merchandise that had been shipped to a customer
prior to the end of the current year; however, the company uses a
periodic method of accounting for inventory and the merchandise had
been properly excluded from inventory at the end of the current
year. As a result of this error, Sebastian Company’s
A.total assets are overstated for the current year
B.total expenses are understated for the current year
C.net income is overstated for the current year
D.total assets are understated at the end of the current year
E.none of the above
Answer:
29) The FASB and the IASB are reconsidering the role of uncertainty, or
probability, in the definition, recognition, and measurement of
liabilities. Existing recognition criteria include a probable
future sacrifice of resources; one issue involves the minimum
probability level to warrant recognition of an uncertain obligation
as a liability. IFRS imply a minimum probability level of greater
than _____ percent.
A.50
B.60
C.70
D.80
E.90
Answer:
30) Which of the following is not true regarding stock warrants?
A.Firms issue stock warrants to the general investing public for
cash or attached to bonds
B.Holders of a bond or preferred stock with common stock warrants
attached can detach and redeem the warrants separately from the
bond or preferred stock
C.Holders of a bond or preferred stock with common stock warrants
attached receives periodic interest or preferred dividends and
holds a call option to purchase common shares
D.U.S. GAAP and IFRS require the firm to measure the fair value of
the stock warrants separately from the value of the associated bond
or preferred stock and allocate the issue price between the two
securities
E.Firms issue stock warrants to their employees for cash or
attached to bonds
Answer:
31) Regulatory bodies generally require firms whose securities trade
publicly (for example, common shares) to obtain an audit of their
financial reports by _____.
A.the audit committee
B.the vice-president for finance
C.an internal auditor
D.an independent external auditor
E.the controller
Answer:
32) The FASBs conceptual framework for financial reporting objectives
identify the provision of information to make _____ as the
principal purpose of financial reports.
A.investment decisions, only
B.credit decisions, only
C.employment decisions
D.management decisions
E.investment and credit decisions
Answer:
33) Park Inc. owns 35 percent of Exeter Corporation. During the
calendar year 2013, Exeter had net earnings of $300,000 and paid
dividends of $36,000. Park mistakenly accounted for the investment
in Exeter using the cost method rather than the equity method of
accounting. What effect would this have on the investment account
and net income, respectively?
A.Understate, overstate
B.Overstate, understate
C.Overstate, overstate
D.Understate, understate
E.None of these answer choices is correct
Answer:
34) Which of the following is/are true?
A.Interpreting the income statement involves studying the relations
among revenues, expenses, and net income both over time and across
firms
B.Comparisons are likely more valid for the same firm over time
than across firms because of the difficulty in identifying truly
similar firms
C.In evaluating over-time performance of a given firm, the user
must understand both current economic conditions and how those
conditions may have changed over the period of analysis
D.In evaluating across-firm performance, the user should control
for the underlying business model by selecting peer firms that are
similar, economically, to the firm being analyzed
E.all of the above are true
Answer:
35) The following balances have been excerpted from Bain balance
sheets:
| December 31, 2014 | December 31, 2013 | |
| Prepaid Insurance …………………………….. | $ 6,000 | $ 7,500 |
| Interest Receivable …………………………… | 3,700 | 14,500 |
| Salaries Payable ………………………………. | 61,500 | 53,000 |
Bain Company paid or collected during 2014 the following
items:
| Insurance premiums paid ……………………. | $ 41,500 |
| Interest collected ……………………………… | 123,500 |
| Salaries paid ……………………………………. | 481,000 |
The salary expense on the income statement for 2014 was
A.$366,500
B.$472,500
C.$489,500
D.$595,500
E.None of these answer choices is correct
Answer:
36) Firms do not recognize certain obligations that are uncertain as to
amount or timing or both as liabilities, unless those items meet a
probability threshold and have a reliable measurement attribute.
IFRS refers to these as _____, such as the possible obligation
under an unsettled lawsuit.
A.contingent liabilities
B.unrealized contingencies
C.realized contingencies
D.unrecognized contingencies
E.recognized contingencies
Answer:
37) During June, SoundHouse sold 800 portable CD players for $50 each.
Each CD player cost SoundHouse $25 to purchase and carried a
one-year warranty. If 10 percent typically need to be replaced over
the warranty period, what amount should SoundHouse debit Product
Warranty Expense for in June?
A.$4,000
B.$400
C.$2,000
D.$1,000
E.$200
Answer:
38) 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. Firms that stop growing or that shrink 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:
39) Which of the following is/are not true?
A.Callable preferred shares provide the issuer with the right to
repurchase preferred shares at a specified price
B.If financing becomes available at a cost lower than the rate
fixed for the preferred shares, the issuing firm can reduce its
financing costs by issuing new securities and then exercising its
option to reacquire the outstanding callable preferred shares at a
fixed price
C.The call option is valuable to the issuing firm but makes the
shares less attractive to potential owners of the shares
D.Other things equal, a firm will receive a smaller amount from
issuing callable preferred shares than from issuing noncallable
preferred shares
E.none of the above
Answer:
40) Which of the following is/are true?
A.Not all future benefits qualify as assets
B.All assets provide future benefits
C.Not all future benefits are assets
D.Answers a, b, and c are correct
E.None of these answer choices is correct
Answer:
41) A firm sells its headquarters building at a gain. This means that
at the time of sale
A.the cash or other assets received were greater than the buildings
book value
B.the cash or assets received in a transaction were less than the
carrying value of the assets given up
C.the cash or other assets received were greater than the building
carrying value
D.the cash or assets received in a transaction were less than the
buildings book value
E.both choices a and c are correct
Answer:
42) Baldwin Corporation
Excerpts from the Statement of Financial Position for Baldwin
Corporation as of September 30, Year 5, are presented
below.
| Cash | $950,000 |
| Accounts receivable (net) | 1,675,000 |
| Inventories | 2,806,000 |
| Total current assets | $5,431,000 |
| Accounts payable | $1,004,000 |
| Accrued liabilities | 785,000 |
| Total current liabilities | $1,789,000 |
The Board of directors of Baldwin Corporation met on
October 4, Year 5, and declared regular quarterly cash dividends
amounting to $750,000 ($0.60 per share). The dividend is payable on
October 25, Year 5, to all shareholders of record as of October 12,
Year 5.
Assume that the only transactions to affect Baldwin Corporation
during October Year 5 are the dividend transactions and that the
closing entries have been made.
(CMA adapted, Dec 89 #17) Refer to the Baldwin Corporation example.
If the dividend declared by Baldwin Corporation had been a ten
percent stock dividend instead of a cash dividend, Baldwins total
shareholders’ equity would have been
A.decreased by the dividend declaration and increased by the
dividend distribution
B.unchanged by the dividend declaration and increased by the
dividend distribution
C.increased by the dividend declaration and unchanged by the
dividend distribution
D.unchanged by either the dividend declaration or the dividend
distribution
E.none of the above
Answer:
43) The _____ of a long-lived asset is the cost of a series of future
services.
A.present value of future cash flows
B.acquisition cost
C.current fair market value
D.liquidation value
E.current cost
Answer:
44) FASB board members make standard-setting decisions guided by a
conceptual framework that addresses the qualitative characteristics
of accounting information. Which of the qualitative characteristics
of accounting information holds that the information should be
pertinent to the decisions made by users of financial statements,
in the sense of having the capacity to affect their resource
allocation decisions?
A.Relevance
B.Reliability
C.Comparability
D.Subjective
E.all of the above
Answer:
45) Purchaser Corporation acquires 30% of the outstanding voting common
shares of the Investee Corporation for $600,000. Purchaser
Corporation acquires the investment in Investee Corporation by
buying previously issued shares of Investee Corporation from other
investors.
Which of the following is/are true?
A.On the balance sheet, an investment accounted for with the equity
method appears among noncurrent assets
B.On the balance sheet, the amount shown generally equals the
acquisition cost of the shares, plus Purchaser Corporations share
of Investee Corporations undistributed earnings (or losses) since
the date Purchaser Corporation acquired the shares, plus or minus
amortization of any excess cost at the date of acquisition
attributable to assets with limited lives
C.On the income statement, Purchaser Corporation reports each
period its share of Investee Corporations income (or loss) as
revenue (or expense), as well as any amortization of excess
cost
D.Purchaser Corporation also recognizes its share of the investees
other comprehensive income
E.all of the above
Answer:
46) The inventory equation describes changes in inventory. The
following equation measures all quantities in physical units:
A.Beginning Inventory + Additions + Withdrawals = Ending
Inventory
B.Beginning Inventory – Additions – Withdrawals = Ending
Inventory
C.Beginning Inventory + Additions x Withdrawals = Ending
Inventory
D.Beginning Inventory x Additions – Withdrawals = Ending
Inventory
E.Beginning Inventory + Additions – Withdrawals = Ending Inventory
Answer:
47) Why do lessees tend to prefer the operating lease method to the
capital lease method?
A.The capital lease method results in larger long-term debt and
debt-equity ratios during the life of a lease than the operating
lease method
B.A larger debt ratio makes a firm appear more risky
C.The operating lease method recognizes expense more slowly over
the life of the lease than the capital lease method
D.all of the above
E.none of the above
Answer: