ACT 623 Final

1) U.S. GAAP or IFRS require firms to test
A.annually for impairment losses on goodwill
B.whenever there is an indication of impairment due to changes in
the legal or economic climate
C.whenever there is an indication of impairment due to adverse
regulatory conditions
D.whenever there is an indication of impairment due to loss of key
personnel
E.all of the above

Answer:

2) Which of the following is/are true concerning an employee stock
options time value element?
A.The time value element results from the possibility of increases
in the market price of the stock during the exercise period
B.Time value is larger the longer the exercise period and the more
volatile the market price of the stock
C.A stock option whose exercise price exceeds the current market
price has economic value because of the possibility that the market
price will exceed the exercise price on the exercise date
D.A stock option whose exercise price has zero intrinsic value has
economic value because of the possibility that on the exercise date
there would be positive intrinsic value
E.all of the above

Answer:

3) Marco Insurance

Marco Insurance acquired shares of Penny Systems common stock on
December 28, 2013, for $400,000 and classified them as trading
securities. The fair value of these securities on December 31,
2013, was $402,000. Marco Insurance sold these shares on January 3,
2014, for $405,000.

(Refer to the Marco Insurance) The journal entries to measure
trading securities at fair value and recognize unrealized holding
gain in net income on December 31, 2013.
A.Cash……………………………………………..2,000

Marketable Securities……………………………….
2,000
B.Other Comprehensive Income……………..2,000
Marketable Securities……………………………….
2,000
C.Marketable Securities…………………………2,000
Other Comprehensive Income…………………… 2,000
D.Marketable Securities…………………………2,000
Unrealized Holding Gain on
Trading Securities………………………………….
2,000
E.Marketable Securities…………………………2,000
Realized Holding Gain on
Trading Securities………………………………….. 2,000

Answer:

4) The _____ for preparing the Statement of Cash Flows begins with net
income and adjusts that amount for noncash items.
A.indirect method
B.direct method
C.income method
D.bottom-up method
E.top-down method

Answer:

5) 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
represent what it is supposed to represent, in the sense that the
information should correspond to the phenomenon being reported, and
it should be verifiable and free from bias?
A.Relevance
B.Reliability
C.Comparability
D.Subjective
E.all of the above

Answer:

6) Firms typically report cash flows from operations using the
indirect method. The indirect
method starts with net income, then adds any expense amount that
does not use cash, and subtracts any revenue amount that does not
provide cash. The adjustments to convert net income to cash flow
from operations generally does not involve
A.adding the amount by which an expense exceeds the related cash
expenditure for the period
B.subtracting the amount by which a revenue exceeds the related
cash receipt for the period
C.adding credit changes in operating non-cash working capital
accounts
D.subtracting debit changes in operating working capital
accounts
E.subtracting the amount by which an expense exceeds the related
cash expenditure for the period

Answer:

7) A _____ bond requires periodic payments of interest plus a portion
of the principal throughout the life of the bond.
A.convertible
B.callable
C.zero coupon
D.serial
E.debenture

Answer:

8) acker Corporation acquires 30% of the outstanding voting common
shares of the Insight Corporation for $600,000. Packer Corporation
acquires the investment in Insight Corporation by buying previously
issued shares of Insight Corporation from other investors.

Between the time of the acquisition and the end of Packer
Corporations next accounting period, Insight Corporation reports
earnings of $80,000; and pays a dividend of $30,000 to holders of
its common stock.

Insight Corporation reports earnings of $100,000 and pays dividends
of $40,000 during the subsequent accounting period.

Assume now that Packer Corporation sells one-fourth of its
investment in Insight Corporation for $165,000. The entry is as
follows:
A.Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 165,000
Investment in Stock of Insight Corporation. . . . . . . . . . . . .
. . . . . . . . 158,250
Gain on Sale of Investment in Stock of Insight Corporation. . . . .
. . . . . 6,750
B.Investment in Stock of Insight Corporation. . . . . . . . . . . .
. . . 158,250
Gain on Sale of Investment in Stock of Insight Corporation. . . .
6,750
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .. . . . . . .165,000
C.Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 165,000
Investment in Stock of Insight Corporation. . . . . . . . . . . . .
. . . . . . . . 158,250
Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 6,750
D.Investment in Stock of Insight Corporation. . . . . . . . . . . .
. . . 158,250
Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . .
. . . . . . . 6,750
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .165,000
E.Investment in Stock of Insight Corporation. . . . . . . . . . . .
. . . 158,250
Gain on Sale of Investment in Stock of Insight Corporation. . . .
6,750
Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 165,000

Answer:

9) U.S. GAAP and IFRS account for notes and nonconvertible bonds
payable similarly.Which of the following is/are not true?
A.Firms initially record long-term notes and bonds at their issue
price, the present value of the future contractual cash flows
discounted at the market interest rate for the bonds at the time of
issue
B.The market interest rate at the time of issue is the rate that
discounts the contractual cash flows to the initial issue price
C.If the market interest rate equals the coupon rate for the bonds,
the firm will issue the bonds for face value
D.If the market interest rate exceeds the coupon rate, the firm
will issue the bonds for less than face value
E.If the coupon rate exceeds the market interest rate, the firm
will issue the bonds for less than face value

Answer:

10) Recognizing revenue before the seller collects cash requires
estimating the amount of uncollectible accounts with reasonable
accuracy. Both U.S. GAAP and IFRS require the
A.direct method for uncollectible accounts, only
B.direct charge off method for uncollectible accounts, only
C.allowance method for uncollectible accounts, only
D.allowance method and the direct charge off method for
uncollectible accounts
E.indirect method for uncollectible accounts, only

Answer:

11) Which of the following is/are false?
A.Firms do not necessarily recognize revenues when they receive
cash
B.Firms do not necessarily recognize expenses when they disburse
cash
C.Net income will not necessarily equal cash flow from operations
each period
D.A profitable firm will likely borrow funds in order to remain in
business, but eventually operations must generate cash to repay the
borrowing
E.None of the above are false

Answer:

12) The _____ account accumulates the amounts of the undistributed
earnings over time.
A.Treasury Stock
B.Cash
C.Additional Paid-in-Capital
D.Retained Earnings
E.Common Stock

Answer:

13) _____ are the means for achieving goals.
A.Targets
B.Strategies
C.Objectives
D.Milestones
E.Tasks

Answer:

14) GAAP and IFRS require firms to report trading securities at fair
value on the balance sheet. The income statement reports the debit
(loss) for decreases in the fair value and the credit (gain) for
increases in the fair value of trading securities in an account
with a title such as _____.
A.Realized Holding Loss (or Gain or Gains and Losses, net) on
Long-Term Securities
B.Unrealized Holding Loss (or Gain or Gains and Losses, net) on
Short-term Securities
C.Realized Holding Loss (or Gain or Gains and Losses, net) on
Trading Securities
D.Unrealized Holding Loss (or Gain or Gains and Losses, net) on
Trading Securities
E.Realized Holding Loss (or Gain or Gains and Losses, net) on
Short-Term Securities

Answer:

15) Which of the following is/are true?
A.Preferred shares usually entitle their holders to dividends at a
certain rate, which the firm must pay before it can pay dividends
to common shareholders
B.Firms may sometimes postpone or omit preferred dividends
C.Most preferred shares have cumulative dividend rights
D.all of the above
E.none of the above

Answer:

16) Subtraction of total operating expenses from sales yields:
A.net income
B.gross margin
C.operating profit
D.all of the above
E.none of the above

Answer:

17) Both U.S. GAAP and IFRS permit considerable flexibility with
respect to the display of information in the statement of cash
flows. Firms must report cash flows from operations, investing, and
financing for the _____.
A.current year
B.current year and the prior year
C.current year and the prior two years
D.current year and the prior three years
E.current year and the prior four years

Answer:

18) 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.

Assume that Healthy Lawn Maintenance estimates that it will not
collect 2% of total credit sales in a given month. At the end of
each month, it makes an adjusting entry. The aggregate effect of
these entries during 2013 is as follows:
A.Bad Debt Expense. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 40,000
Accounts Receivable, net. . . . . . . . . . . . . . . . . . . . . .
. . .. . . . . . . . 40,000
B.Allowance for Uncollectibles . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000
Bad Debt Expense. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 40,000
C.Bad Debt Expense. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 40,000
Allowance for Uncollectibles . . . . . . . . . . . . . . . . . . .
. . . .. . . . . . . . 40,000
D.Bad Debt Expense. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 40,000
Accounts Receivable, gross . . . . . . . . . . . . . . . . . . . .
. . .. . . . . . . . 40,000
E.Accounts Receivable, gross . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 40,000
Bad Debt Expense. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 40,000

Answer:

19) The following items appear in the post-closing trial balance for
March 1 and on the adjusted, preclosing trial balance at March 31
of Parker Company. Parker Company prepares financial statements
monthly.

During the month of March, Parker Company incurred the
following costs:

Required:


a. What was the acquisition cost of raw materials purchased during
the month of March?
b. What was the total cost of goods completed during the month of
March?
c. What was the Cost of Goods Sold during the month of March?
d. What was the Uncollectible account expense for the month of
March?
e. What was the Income (before taxes) for the month of March?
f. Explain briefly why no amount for sales appears in the March 1
trial balance.

Answer:

20) Cash flow from investing activities does not include
A.cash purchases of property, plant, and equipment
B.cash sales of marketable securities and investments in
securities
C.cash sales of property, plant, and equipment
D.cash sales of intangibles
E.cash purchases of treasury stock

Answer:

21) Income statements 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:

22) Wheaton Company

Wheaton Company owns an apartment building that originally cost $40
million and by the end of the current period has accumulated
depreciation of $10 million, with net carrying value of $30
million. Wheaton Company had originally expected to collect rentals
of $3.34 million each year for 30 years before selling the building
for $16 million. Unanticipated placement of a new shopping center
has caused Wheaton Company to reassess the future rentals. Wheaton
Company expects the building to provide rentals for only 15 more
years before Wheaton will sell it. Wheaton Company uses a discount
rate of 8% per year in discounting expected rentals from the
building.

Wheaton now expects to receive annual rentals of $1,200,000 per
year for 15 years and to sell the building for $6.0 million after
15 years; these payments, in total, have a present value of $12.2
million when discounted at 8% per year. The buildings fair value is
$11.0 million today and costs to sell are $600,000.

Under IFRS, Wheaton recognizes
A.no impairment loss
B.an impairment loss of $17.8 million
C.an impairment loss of $19.0 million
D.an impairment loss of $18.7 million
E.an impairment loss of $30.0 million

Answer:

23) Which of the following is not true concerning conceptual
frameworks?
A.The FASB, but not the IASB, relies on a conceptual framework to
guide their standard-setting decisions
B.The conceptual framework is not a rigorous set of principles from
which standard setters can logically deduce appropriate financial
reporting standards
C.The purpose of a conceptual framework is to guide
standard-setting decisions in order to enhance the quality and
consistency of those decisions
D.The FASB and the IASB have separately developed their conceptual
frameworks, and those frameworks are similar
E.The FASB and the IASB are currently working to develop a common
conceptual framework for financial reporting

Answer:

24) King Products Corporation

King Products Corporation
Statement of Financial Position
(in thousands)

(CMA adapted, Dec 96 #15) Refer to the King Products Corporation
example. King Products Corporation’s inventory turnover for the
fiscal year ended at June 30, Year 6, was
A.3.7
B.4.0
C.4.4
D.5.0
E.none of the above

Answer:

25) 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 when the employees receive payments or other benefits
during retirement, not while employees work
B.Employers often contribute cash to a trust, an entity legally
separate from 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:

26) On the statement of cash flows, cash sale of property, plant and
equipment used for the last 5 years in the company’s operations is
treated as a/an
A.investing activity
B.financing activity
C.operating activity
D.exchange transaction
E.funds flow activity

Answer:

27) To maintain balance sheet equality, it is necessary to report every
event and transaction in a dual manner. If a transaction results in
an increase in a Liability account, then which of the following
must occur, to maintain the balance sheet equation?
A.decrease another liability
B.decrease shareholders equity
C.increase an asset
D.all of the above will maintain the balance sheet equation
E.none of the above

Answer:

28) Assume that a firm uses the accrual basis of accounting. For each
of the following independent cases, indicate the amount of revenue
the firm recognizes for the month of August.


a. Collects $2,000 in July for merchandise to be delivered in
August.
b. Collects $1,200 in May for subscriptions that will be delivered
during the next twelve months (beginning in May).
c. Collects $800 in August for merchandise sold and delivered in
July.
d. Collects $2,400 interest on a 6-month certificate of deposit,
which matures on August 15th.
e. Sells $3,000 of merchandise on account in August. The firm
allows a 2% discount for payment prior to 30 days and customers
take the discount.

Answer:

29) When calculating the depreciation or amortization of long-lived
assets management must
A.measure the depreciable or amortizable basis of the asset
B.estimate its service (useful) life
C.decide the pattern of expiration of asset cost over its service
life
D.all of the above
E.none of the above

Answer:

30) Net income for a particular period does not equal cash flow from
operations because
A.most firms use the accrual basis of accounting to measure
operating performance
B.most firms typically recognize revenue at the time of sale,
independent of when they receive the cash from the sale
C.some firms receive cash before providing services and recognizing
revenues
D.some firms receive cash after they have provided goods and
recognized revenues
E.all of the above

Answer:

31) Rock Aerospace Company

Rock Aerospace Company signed a contract on April 1, Year 4, to
build a satellite for $28,000,000. Estimated costs for the contract
are:

Assume that actual costs incurred coincide with
expectations. Cash collections of the contract price are as
follows:

Refer to the Rock Aerospace Company example. Income from the
contract for Year 5 under the percentage-of-completion method
is:
A.$1,000,000
B.$1,400,000
C.$2,800,000
D.$3,360,000
E.None of the above

Answer:

32) (CMA adapted, Jun 96 #3) An item of inventory purchased in Year 5
for $25.00 has been incorrectly written down to a current
replacement cost of $17.50. The item is currently selling in Year 6
for $50.00, its normal selling price. Which one of the following
statements is correct?
A.The income for Year 5 is overstated
B.The cost of sales for Year 6 will be overstated
C.The income for Year 6 will be overstated
D.The closing inventory of Year 5 is overstated
E.none of the above

Answer:

33) Firms recognize deferred tax assets only to the extent that they
expect to generate sufficient taxable income to realize the assets
in the form of tax savings in the future. U.S. GAAP requires use of
a deferred _____ to reduce the balance in the _____ account to the
amount the firm expects to realize in tax savings in the
future.
A.tax asset valuation allowance; Deferred Tax Asset
B.tax expense; Deferred Tax Asset
C.tax asset valuation allowance; Deferred Tax Liability
D.tax expense; Deferred Tax Liability
E.tax expense; Deferred Tax Revenue

Answer:

34) The income statement is not also called the statement of
A.operations
B.operating activity
C.profit and loss
D.receipts and disbursements
E.All of the above are different names assigned to the income
statement

Answer:

35) Which of the following accounts would not appear on a post-closing
trial balance?
A.Retained Earnings
B.Accumulated Depreciation
C.Depreciation Expense
D.Prepaid Rent
E.All of these accounts would appear on a post-closing trial
balance

Answer:

36) Many firms disaggregate the initial amounts they received from
shareholders for common shares into the par or nominal or stated
value of the shares and the amounts received in excess of this
value, called:
A.additional paid-in capital (APIC)
B.share premium
C.capital contributed in excess of par value
D.Choices a, b, and c are correct
E.None of these answer choices is correct

Answer: