1) Gains/Losses arise from relatively infrequent transactions, and
there can be no assurance that they will recur in any future
period.
Answer:
2) Authoritative guidance classifies gains and losses from the
remeasurement of certain assets and liabilities as either net
income or other comprehensive income.
Answer:
3) Pension expense for a defined contribution plan always exceeds the
employers contribution to the plan.
Answer:
4) The amount borrowed initially and the market value of a note or
bond at any date subsequent to the initial borrowing equals the
present value of the future, or remaining, cash flows discounted at
an appropriate interest rate.
Answer:
5) What is revenue recognition?
Answer:
6) The current FASBs financial reporting objectives identify current
and potential investors and creditors as the principal users of
financial reports.
Answer:
7) Only the corporate form of business organization provides the owner
with limited liability.
Answer:
8) Explain the accounting for marketable securities.
Answer:
9) Discuss the definition, recognition, and measurement of
liabilities.
Answer:
10) The statement of cash flows begin with revenues; for this reason,
analysts often refer to revenue growth as top-line growth.
Answer:
11) Describe the various methodologies in accounting for leases.
Answer:
12) The accounting records for Magic Chocolate Castle contained the
following data for the current year:
| Sales | $517,500 |
| Cost of goods sold | 213,800 |
| Interest revenue | 6,500 |
| Rent revenue | 3,600 |
| Administrative expense | 131,300 |
| Selling expense | 133,600 |
| Interest expense | 15,400 |
| Income tax expense | 8,100 |
| Loss on sale of warehouse | 6,500 |
Required:
Prepare both a single-step and a multi-step income statement for
Magic for the current year.
Answer:
13) The accrual basis does not match the cost of the efforts required
to generate inflows with the
inflows themselves.
Answer:
14) The current ratio, also called the working capital ratio, is
current assets divided by current liabilities.
Answer:
15) The balance sheet equation maintains equality by reporting the
financial statement effects of each event and transaction in a dual
manner, or what are termed the dual effects of transactions.
Answer:
16) Which of the following concepts best characterizes the accrual
basis of accounting?
A.Conservatism
B.Matching
C.Understandability
D.Going concern
E.Unit of measurement
Answer:
17) Income statements prepared under U.S. GAAP contain which of the
following sections or categories, depending on the nature of a
firms earnings for the period?
A.income from continuing operations
B.income, gains, and losses from discontinued operations
C.extraordinary gains and losses
D.all of the above
E.none of the above
Answer:
18) The typical steps in financial statement analysis and valuation
include all of the following, except
A.obtain all published reports from other financial analysts
B.identify the industry economic characteristics and firms
strategy
C.calculate and interpret profitability and risk ratios
D.prepare pro forma, or projected financial statements
E.value the firm
Answer:
19) Firms must designate each derivative as a hedging instrument, or
else accounting views the derivative as a nonhedging instrument.
Furthermore, firms must designate each hedging instrument as either
a fair value hedge or a cash flow hedge. The accounting for
nonhedging derivatives
A.remeasures both the hedged item and the derivative to fair value
each period and recognize any unrealized gains and losses in net
income
B.remeasures the derivative to fair value each period and include
the unrealized gain or loss in other comprehensive income to the
extent that the derivative instrument is effective in neutralizing
risk. When the firm settles the hedged item, transfer the
previously unrealized gain or loss from other comprehensive income
to net income
C.remeasures the derivative to fair value each period and include
the unrealized gain or loss in net income
D.all of the above
E.none of the above
Answer:
20) U.S. GAAP and IFRS provide criteria for distinguishing operating
leases from capital leases. Which of the following is not true?
A.The criteria attempt to identify the entity, whether lessor or
lessee, that enjoys the benefits and incurs the risk of the leased
asset
B.When the lessor enjoys the benefits and bears the risk, the lease
is an operating lease
C.When the lessee enjoys the benefits and bears the risk, the lease
is a capital lease
D.IFRS provides more general criteria for identifying the entity
enjoying the rewards and incurring the risk
E.Firms can currently apply the fair value option to capital leases
Answer:
21) Firms with convertible preferred stock or other potentially
dilutive securities outstanding
A.must present dual earnings-per-share amounts
B.calculate basic earnings per share by taking net income
attributable to common stock and dividing by the average number of
common shares outstanding during the period
C.calculate diluted earnings per share when a firm has securities
outstanding that, if exchanged for common stock would decrease
basic earnings per share by 3 percent or more
D.all of the above
E.none of the above
Answer:
22) Firms generally treat expenditures to develop intangibles
internally as
A.expenses when incurred
B.expenses over the useful life
C.assets
D.liabilities
E.goodwill
Answer:
23) In return for promising to make future payments, a firm receives
cash or other assets with a measurable cash-equivalent value. The
firm records a long-term liability for that amount and the book
value of that borrowing at any time equals the
A.future value of all the then-remaining promised payments using
the historical market interest rate applicable at the time the firm
originally incurred the liability
B.current value of all the then-remaining promised payments using
the historical market interest rate applicable at the time the firm
originally incurred the liability
C.present value of all the then-remaining promised payments using
the market interest rate applicable at the current time
D.present value of all the then-remaining promised payments using
the historical market interest rate applicable at the time the firm
originally incurred the liability
E.future value of all the then-remaining promised payments using
the using the market interest rate applicable at the current time
Answer:
24) Corporations often sell, or exchange for goods and services,
various call options on their shares. Which of the following is not
true?
A.A call option gives the holder the right to acquire shares of
common stock at a fixed or determinable price, called the strike
price or exercise price
B.If the market price of the shares increases above the exercise
price, the holder of the option can benefit by exercising the
option to purchase shares
C.The excess of the exercise price over the market price is the
options intrinsic value
D.Many firms pay part of the compensation of some employees by
issuing call options on their own shares referring to these
arrangements as employee stock options (ESOs)
E.Firms may also sell or exchange call options for goods and
services with counterparties other than employees
Answer:
25) Over sufficiently long time periods, the amount of net income
equals
A.cash inflows minus cash outflows from operating activities
B.cash inflows minus cash outflows from operating and investing
activities
C.cash inflows minus cash outflows from operating, investing, and
debt servicing activities
D.cash inflows minus cash outflows from operating and debt
servicing activities
E.cash inflows minus cash outflows from investing and debt
servicing activities
Answer:
26) On a statement of cash flows prepared using the direct method, cash
from customers would be sales plus a(n)
A.decrease in accounts payable
B.increase in accounts payable
C.decrease in accounts receivable
D.increase in accounts receivable
E.None of these answers is correct
Answer:
27) Which of the following is not a derivative?
A.forward foreign exchange contract
B.swap contract
C.forward commodity contract
D.a share of nonconvertible preferred stock
E.Eurodollar future
Answer:
28) Cowden Properties
Cowden Properties sold a condominium to Ms. Roberts for $90,000.
Cowden originally acquired the condo at a cost of $40,000 and made
improvements to the unit totaling $20,000. The contract for sale
required Ms. Roberts to pay the $90,000 as follows:
Year 1 – $ 5,000
Year 2 – $10,000
Year 3 – $30,000
Year 4 – $45,000
Refer to the Cowden Properties example. If Cowden uses the
installment method, how much cost is recognized as expense in year
3?
A.$10,000
B.$15,000
C.$20,000
D.$25,000
E.$30,000
Answer:
29) U.S. GAAP requires that all long-term monetary liabilities appear
on the balance sheet at the
A.future value of the present cash payments
B.total value of the future cash payments
C.imputed value of the future cash payments
D.present value of the future cash payments
E.historical cash proceeds from debt issuance
Answer:
30) Which of the following investments in securities would require the
preparation of consolidated financial statements by the investor
corporation?
A.investments in securities for the purpose of exerting control
over the investee’s day-to-day operations
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 licensing of a patent
D.investments in securities for the purpose of exerting significant
influence over the investee’s licensing of day-to-day
operations
E.none of the above
Answer:
31) Common terminology, but not definitions in U.S. GAAP and IFRS,
often refers to the difference between sales and cost of sales as
gross
A.margin
B.revenues
C.expenses
D.all of the above
E.none of the above
Answer:
32) Both U.S. GAAP and IFRS permit considerable flexibility with
respect to the display of information in the statement of cash
flows. If the firm uses the direct method of reporting cash flows
from _____ activities rather than the indirect method, it must also
provide a separate reconciliation of net income to cash flows from
_____
A.operating; operating
B.financing; financing
C.investing; investing
D.operating, investing; and financing; operating, investing; and
financing
E.none of the above
Answer:
33) U.S. GAAP and IFRS require firms to disclose unrealized gains and
losses that historically have bypassed the income statement in a
category called _____.
A.net income
B.gross income
C.other comprehensive income
D.accumulated other comprehensive income
E.cash flows from operations
Answer:
34) On December 31, 2013, the Merchandise Inventories account of the
Japanese electronics firm Flower Limited (Flower) had a balance of
408,700 million, based on Flowers financial reports for fiscal
2013. Assume that during 2014, Flower purchased merchandise
inventories on account for 1,456,400 million. On December 31, 2014,
it finds that merchandise inventory on hand is 412,400 million.
Select the correct journal entries to account for all changes in
the Inventories during 2014. (Flower applies Japanese accounting
standards, and reports its results in millions of yen (). In
answering this question, assume that Flower uses either U.S. GAAP
or IFRS; for purposes of this problem, this choice will not
matter.)
A.Cost of Goods Sold 1,452,700 million
Merchandise Inventories 1,452,700 million
B.Merchandise Inventories 1,452,700 million
Cost of Goods Sold 1,452,700 million
C.Cost of Goods Sold 1,449,000 million
Merchandise Inventories 1,449,000 million
D.Merchandise Inventories 1,449,000 million
Cost of Goods Sold 1,449,000 million
E.none of the above
Answer:
35) Most individuals prefer _____ to _____ and they will want a _____
expected return if they purchase common stock shares than if they
invest in a certificate of deposit.
A.more risk; less risk; higher
B.less risk; more risk; higher
C.more risk; less risk; lower
D.less risk; more risk; lower
E.none of the above
Answer:
36) Given the following separate company balance sheets and income
statements, answer the following questions.
| CONDENSED BALANCE SHEETS As of December 31, Year 4 | ||
| Assets | Plea | Settle |
| Accounts receivable | $50,000 | $40,000 |
| Investment in Settle (equity) | 300,000 | – |
| Other assets | 1,680,000 | 710,000 |
| Total assets | $2,030,000 | $750,000 |
| Liabilities and Equity | ||
| Accounts payable | $70,000 | $50,000 |
| Other liabilities | 1,360,000 | 400,000 |
| Common stock | 200,000 | 200,000 |
| Retained earnings | 400,000 | 100,000 |
| Total liabilities and equity | $2,030,000 | $750,000 |
|
CONDENSED INCOME STATEMENT for the year ended December 31, Year 4 |
||
| Plea | Settle | |
| Sales | $800,000 | $200,000 |
| Equity in earnings of Settle | 20,000 | – |
| Total revenues | $820,000 | $200,000 |
| Cost of goods sold | $500,000 | $120,000 |
| Depreciation | 100,000 | 30,000 |
| Other expenses | 80,000 | 20,000 |
| Tax expense | 40,000 | 10,000 |
| Total expenses | $720,000 | $180,000 |
| Net income | $100,000 | $20,000 |
Additional information:
Plea acquired its investment in the stock of Settle on the date of
Settles incorporation.
Consolidated accounts receivable is $80,000.
Consolidated sales total $900,000.
No purchases from Settle remain in Pleas ending inventory.
Required:
a. What percentage of Settle does Plea appear to own?
b. What is beginning retained earnings of Plea?
c. How much was Pleas initial investment in Settle?
d. What is the amount of intercompany accounts receivable?
e. What is consolidated cost of goods sold?
Answer:
37) March Company is a European family-owned equipment business. Assume
that March provides a two-year warranty on its products and that
March estimates current year warranty costs to be 4% of sales
revenues. At the end of last year, Marchs balance sheet carrying
value of estimated warranty liabilities was 35,000. March will
incur actual warranty costs over the two years following the time
of sale. Assume that sales (all on account) and actual warranty
expenditures (all paid in cash) were as follows:
| Sales | Actual Warranty Expenditures | |
| Last Year | 1,000,000 | 10,000 |
| Current Year | 1,400,000 | 45,000 |
REQUIRED:
a. Prepare journal entries to recognize sales revenues,
warranty costs, and warranty expenditures in for the two years.
Closing entries are not required.
b. What is the balance in the Warranty Liability account at
the end of the current year?
Answer:
38) A financial instrument that obtains its value from some other
financial item is known as a(n)
A.clone
B.mutual fund
C.derivative
D.stock exchange
E.underlying
Answer:
39) Cummings Industries places a firm order for the equipment on June
30, 2013. It simultaneously signs a forward currency contract for
£20,000. The forward rate on June 30, 2013, for settlement on
June 30, 2014, is $1.64 per £1. Cummings designates the
forward contract as a fair value hedge of the firm commitment.
REQUIRED:
a. U.S. GAAP and IFRS guidance does not require Cummings to
record either the purchase
commitment or the forward contract on the balance sheet as a
liability or an asset on June 30, 2013. What is the logic for this
accounting?
b. On December 31, 2013, the forward exchange rate for
settlement on June 30, 2014,
is $1.73 per £1. Give the journal entries to record the
change in the fair value of the
purchase commitment and the change in the fair value of the forward
contract for
Assume an 8% interest rate for discounting cash flows to their
present values on
December 31, 2013.
c. Give the journal entries on June 30, 2014, to record the
change in the present value of
the purchase commitment and the forward contract for the passage of
time.
d. On June 30, 2014, the spot exchange rate is $1.75 per
£1. Give the journal entries to
record the change in the fair value of the purchase commitment and
the change in the
fair value of the forward contract due to changes in the exchange
rate during the first
six months of 2014.
e. Give the journal entry on June 30, 2014, to purchase
£20,000 with U.S. dollars and
acquire the equipment.
f. Give the journal entry on June 30, 2014, to settle the
forward contract.
g. How would the entries in parts (b) through (f) differ if
Cummings had chosen to designate
the forward currency contract as a cash flow hedge of a forecasted
transaction
instead of a fair value hedge of a firm commitment?
h. What type of scenario would justify Cummings treating the
forward currency contract
as a fair value hedge? What type of scenario that would justify the
firm treating the contract
as a cash flow hedge?.
.
Answer:
40) Lightner Company decides that an available-for-sale security is
impaired as of December 31, 2013 and has an unrealized loss of
$5,000. The journal entry to record an impairment loss on
securities available-for-sale would be:
A.Unrealized Holding Loss on
Securities Available-for-Sale…………….5,000
Impairment Loss……………………………………5,000
B.Impairment Loss…………………………….. 5,000
Unrealized Holding Loss on
Securities Available-for-Sale……………….. 5,000
C.Realized Holding Loss on
Securities Available-for-Sale…………….5,000
Impairment Loss………………………………… 5,000
D.Impairment Loss ……………………………. 5,000
Realized Holding Loss on
Securities Available-for-Sale…………………5,000
EImpairment Loss……………………………. 5,000
Retained Earnings……………………………….. 5,000
Answer:
41) Distinguishing a stock dividend from a stock split can sometimes
cause difficulties. Usually firms treat small-percentage
distributions, say less than a _____ increase in the number of
shares, as stock dividends and larger ones as stock splits.
A.5%
B.10%
C.25%
D.50%
E.100%
Answer: