1) When examining the work an accountant performs for many
organizations, many of the challenges revolve around creating
adjusting entries that bring the accounts into an accrual
accounting basis. Four such adjusting entries may include
accounting for accrued revenues (unrecorded revenues), accrued
expenses (unrecorded expenses), deferred revenue (previously
recorded revenues), and deferred expenses (previously recorded
expenses).
Required:
For each type of adjusting entry listed above, discuss an example
adjusting entry that a lighting retailer might make.
Answer:
2) On the statement of cash flows, the issuance of capital stock for
cash to be used for future expansion of a production facility is
treated as an investing activity.
Answer:
3) Firms must disclose a list of their long-term debt obligations in
notes to the financial statements.
Answer:
4) Holders of a bond or preferred stock with common stock warrants
attached cannot detach and redeem the warrants separately from the
bond or preferred stock.
Answer:
5) The rate of return on common shareholders equity (ROCE) measures a
firms performance in using and financing assets to generate
earnings.
Answer:
6) Describe convertible preferred share features from the perspective
of the preferred shareholders and the issuing firms. Preferred
shares may provide for redemption by the issuing firm in the
future. What types of redemption rights or obligations do
redeemable preferred shares carry?
Answer:
7) Most firms display the components of cost of sales.
Answer:
8) What are qualifying special purpose entities?
Answer:
9) The write-off of a particular customers account that becomes
uncollectible involves a debit to Allowance for Uncollectibles and
a credit to Accounts Receivable.
Answer:
10) The capital, or finance, lease method treats leases equivalent to
installment purchases or sales, where the lessee borrows funds from
the lessor to purchase the asset and the lessor recognizes profit
at the time of sale.
Answer:
11) Firms that reduce the price charged to a customerafter the firm has
delivered the goods and the customer has found them to be
unsatisfactory or damaged issue a sales allowance.
Answer:
12) A derivative may have zero initial cost, but potentially large
positive or negative fair values later.
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. _____ will
usually show additions or subtractions for losses and gains on the
disposal of assets.
A.Firms that have decreased earnings
B.Firms that increase in size
C.Firms that decrease in size
D.Firms that have increased earnings
E.Service firms
Answer:
14) At different points in their existence, companies will have
different cash inflow and outflow requirements. Such differences
make intercompany comparisons difficult, even within the same
industry.
Required:
| a. |
Consider a start-up company in the software development industry. What might its operating, investing, and financing cash flows look like in general? Provide examples where appropriate. |
| b. |
Consider a mature auto dealership. What might its operating, investing, and financing cash flows look like in general? Provide examples where appropriate. |
Answer:
15) When faced with uncertainty, firms may want to keep liabilities off
their balance sheets. Such firms may attempt to engage in
off-balance-sheet financing.
Required:
| a. |
Why might firms want to keep liabilities off their balance sheets? |
| b. |
How might firms attempt to keep liabilities off their balance sheets? |
Answer:
16) Which of the following is/are not true regarding the classification
of redeemable preferred shares on the balance sheet?
A.The classification of redeemable preferred shares on the balance
sheet depends on the conditions for redemption
B.If only the issuing firm has the option to redeem, then the
preferred shares are part of its liabilities
C.If the issuing firm must redeem the preferred shares (so-called
mandatory redemption), either at a specified time or upon a
specified condition certain to occur, the issuing firm treats the
preferred shares as a liability
D.If the preferred shareholders have the option to require
redemption, then the preferred shares appear between liabilities
and shareholders equity under U.S. GAAP
E.If the preferred shareholders have the option to require
redemption, then the preferred shares appear as a liability under
IFRS
Answer:
17) As a practical matter, most firms report segment information by
_____ indicating that most firms appear to be organized on these
same lines.
A.geographical markets
B.products and services
C.major customers
D.resource inputs
E.production methods
Answer:
18) Goodwill that was internally developed should be amortized over a
life not to exceed
A.100 years
B.40 years
C.20 years
D.10 years
E.No useful life, as such goodwill is not recorded as an asset
Answer:
19) On January 1, 20×3, Fallon Company, a manufacturer of consumer
products, had a balance in direct materials inventory of $100,000.
During the year, an additional $400,000 of direct materials were
purchased. Also during 20×3, direct materials worth $450,000 were
transferred to work-in-process inventory. What was Fallon Company’s
ending direct materials inventory at December 31, 20×3?
A.$15,000
B.$25,000
C.$50,000
D.$100,000
E.$0
Answer:
20) _____ represent amounts owed by customers for goods and services
they have already received. The customer, therefore, has the
benefit of the goods and services before it pays cash.
A.Accounts Payable
B.Accounts Receivable
C.Notes Receivable
D.Notes Payable
E.Uncollected Sales
Answer:
21) The word probableappears in the definitions of assets and
liabilities and in the recognition
criteria for liabilities with uncertain amount and/or timing.
a. What is the meaning of probable as used in the
definitions of assets and liabilities?
b. How does the meaning of probable as used in the
recognition criteria for liabilities with
uncertain amount and/or timing differ between U.S. GAAP and IFRS?
Answer:
22) Treasury stock or treasury shares are shares a firm has previously
issued and later reacquired. Which of the following is/are
true?
A.To fulfill commitments to deliver shares to its employees under
employee stock option plans, the employer can reacquire shares so
that the number of shares outstanding remains approximately
constant
B.Doing so avoids diluting existing shareholders voting interest
and perhaps maintaining earnings per share
C.The firm would project the expected number of shares needed for
the exercise of employee stock options and repurchase that amount
of shares in the open market
D.all of the above
E.none of the above
Answer:
23) To study changes in ROA, the analyst can disaggregate ROA into the
product of two other ratios:
A.the gross profit for ROA ratio and the total assets turnover
ratio
B.the profit margin for ROA ratio and the inventory turnover
ratio
C.the gross margin for ROA ratio and the inventory turnover
ratio
D.the profit margin for ROA ratio and the total assets turnover
ratio
E.the gross margin for ROA ratio and the total assets turnover
ratio
Answer:
24) When taxing authorities permit a choice among alternative
depreciation methods, a firm should choose the alternative that
allows it to pay the _____ amount of tax, as _____ as possible,
within the law.
A.most; early
B.most; late
C.least; early
D.least; late
E.same; often
Answer:
25) As long as the amount collected from credit sales to a given group
of customers exceeds the cost of goods sold and the other costs of
serving that group of customers, including the costs of _____
accounts, the retailer will be better off selling to that group
rather than losing the sales.
A.delinquent
B.uncollectible
C.collectible
D.preferred
E.common
Answer:
26) Concerns over the quality of financial reporting have led, and
continue to lead, to government initiatives in the United States.
For example, the _____, among other things, established the Public
Company Accounting Oversight Board (PCAOB), which is responsible
for monitoring the quality of audits of SEC registrants. This Act
requires the PCAOB to register firms conducting independent audits
of SEC registrants; establish or adopt acceptable auditing, quality
control, and independence standards; and provide for periodic
inspections of the registered auditors.
A.Securities and Exchange Act of 1933
B.Securities and Exchange Act of 1934
C.Investment Advisors Act of 1940
D.Sarbanes-Oxley Act of 2002
E.Investment Company Act of 1940
Answer:
27) The adjustment for changes in operating working capital accounts
depends in part on a firms rate of growth. Rapidly growing firms
usually experience significant increases in.
A.accounts receivable, only
B.inventories, only
C.accounts receivable and inventories
D.neither accounts receivable, nor inventories
E.none of the above
Answer:
28) A seller of goods can easily associate (or match) the consumption
of the benefits of the asset sold with revenues from its sale. At
the time of sale and revenue recognition, the seller
A.removes the asset (inventory) from the sellers balance sheet
B.recognizes revenue
C.recognizes a reduction in an asset (inventory)
D.records the cost of goods sold expense in the same amount by
which inventory decreases
E.all of the above
Answer:
29) _____ usually represents a major ongoing use of cash.
A.Borrowing funds
B.Sales of existing noncurrent assets
C.Issuance of common shares
D.Acquisition of noncurrent assets, particularly property, plant,
and equipment
E.All of the above are major ongoing uses of cash
Answer:
30) _____ means that the information presented is reasonably free from
error and bias and faithfully represents what it purports to
represent.
A.Conservatism
B.Realization
C.Relevance
D.Reliability
E.Recognition
Answer:
31) The balance sheet of Old Gold Mines for the year ended June 30,
20×2, showed a balance in retained earnings of $6,000 million at
the end of 20×2 and $4,600 million at the end of 20×1. Net income
for 20×2 was $2,400, million. Compute the amount of dividends Old
Gold Mines declared during 20×2.
A.$500 million
B.$1,000 million
C.$1,500 million
D.$2,000 million
E.$2,500 million
Answer:
32) The balance sheet reports
A.the shortfall in cash at the beginning of the year
B.the balance in cash at the end of the year
C.how cash changed during the period
D.how a firm obtains and uses cash
E.both choices a and b
Answer:
33) Which of the following is/are true?
A.Cost is the economic sacrifice made to acquire goods or
services
B.When the good or service acquired has reliably measurable future
benefits to a firm, the cost is an asset
C.When the firm consumes the good or service, the cost is an
expense
D.All of the above are true
E.None of the above are true
Answer:
34) Firms account for leases using either the operating lease method or
the capital (finance) lease method. Which of the following is not
true?
A.The operating lease method treats leases as executory
contracts
B.The operating lease method does not recognize a leased asset on
the lessees balance sheet
C.The operating lease method does not recognize a lease liability
on the lessors balance sheet
D.Under the operating lease method, the lessor recognizes rent
revenue as the lessee uses the leased asset over time
E.Under the operating lease method, the lessee does not recognize
rent expense as the lessee uses the leased asset over time
Answer:
35) The FASBs conceptual framework for financial reporting objectives
identify _____as the principal users of financial reports.
A.current investors, only
B.potential investors, only
C.current creditors, only
D.potential creditors, only
E.current and potential investors and creditors
Answer:
36) Which of the following is/aretrue?
A.Both U.S. GAAP and IFRS provide for the option of reporting
selected financial assets and financial liabilities at fair value
and recognizing gains and losses in net income as fair values
change
B.Once elected, the fair value option is irrevocable for the
instrument to which the firm applies it
C.Both U.S. GAAP and IFRS require measurement at fair value with
changes included in income for three items: (1) trading securities,
(2) fair value hedges, (3) derivatives not designated as hedges
D.Firms can elect the fair value option for the following items:
(1) bonds held to maturity, (2) available-for-sale securities, and
(3) cash flow hedges
E.all of the above
Answer:
37) The percentage-of-sales procedure arises from the idea that
uncollectible amounts will vary with the volume of credit business.
The firm estimates the appropriate percentage by studying its own
experience or by inquiring into the experience of similar firms.
Default rates generally fall within the range of _____of credit
sales.
A..01% to .02%
B.1% to 2%
C.10% to 20%
D.21% to 30%
E.31% to 40%
Answer:
38) Project Paso Vineyards processes grapes into champagne, which it
bottles, corks, and places on shelves in underground caverns to age
for several years. During the aging process, the winemakers
hand-turn the bottles a quarter rotation every few months; also, at
fixed intervals, they release yeast gases to preclude unwanted
fermentation. Assume that Project Paso contracts to sell a quantity
of champagne to a customer for 30 million. Under the terms of the
contract, Project Paso will store the champagne in its caverns and
perform all necessary functions associated with the aging process
(for example, turning the bottles and releasing yeast gases). The
selling price includes the costs of producing the champagne and
providing services during the aging process. The customer pays
Project Paso 15 million at the beginning of the aging and storage
process, and agrees to pay the remainder in five years upon
delivery of the champagne.When should Project Paso Vineyards
recognize revenue from selling the champagne?
A.Project Paso Vineyards should delay revenue recognition until it
delivers the champagne to the customer
B.Project Paso Vineyards should recognize revenue when it sells the
champagne to the customer
C.Project Paso Vineyards should recognize one fifth of the revenue
per year after it sells the champagne to the customer
D.Project Paso Vineyards should recognize one half of the revenue 2
1/2 years after it sells the champagne to the customer
E.none of the above
Answer:
39) A firm decides to issue stock, pursuant to a stock split, on a
2-for-1 basis. What entry is necessary for this issuance?
A.Retained Earnings
Common Stock–Par Value
B.Additional Paid-in Capital
Common Stock–Par Value
C.Retained Earnings
Common Stock–Par Value
Common Stock–Additional Paid-in Capital
D.Common Stock–Par Value
Common Stock–Additional Paid-in Capital
Retained Earnings
E.No journal entry is necessary but the par value of the stock must
be restated on a per share basis.
Answer:
40) Entries for the following items were either omitted or recorded
incorrectly in preparing the financial statements for Year 3.
Indicate the amount and nature [understatement (U), overstatement
(O), no effect (N)] of the effect of the omission on total assets,
total liabilities, and net income for Year 3. Ignore income tax
effects. Use the following format:
| Total Assets | Total Liabilities | Net Income | |
a. On December 1, Year 3, a firm debits Prepaid Rent
(Advances to Car Rental Agency) for $600 for 6 months’ rent on an
automobile. The firm has neglected to make the adjusting entry on
December 31.
b. A firm debits Administrative Expenses for $6,000 for a
microcomputer acquired on July 1, Year 3. The microcomputer has an
expected useful life of 3 years and zero estimated salvage
value.
c. A firm rents out excess office space for the 6-month period
beginning January 1, Year 3. It received the rental check for this
period of $600 on December 26, Year 2, and correctly credited
Advances from Tenants. It made no further journal entries during
Year 3.
d. Interest on Notes Receivable of $500 had accrued by December 31,
Year 3, but the firm overlooked making an entry to record this
interest.
e. A firm receives a check for $250 from a customer on December 31,
Year 3, in settlement of an account receivable. The firm recorded
this entry with a credit to Sales.
f. A firm records as $470 an expenditure of $740 for travel during
December, Year 3.
Answer:
41) (CMA adapted, Dec 86 #12) A patent is granted by the federal
government to an inventor for a period of several years. Costs that
are capitalized with regard to a patent would include
A.legal fees of obtaining the patent, incidental costs of obtaining
the patent, and costs of successful patent infringement suits
B.legal fees of obtaining the patent, incidental costs of obtaining
the patent, and research and development costs incurred on the
invention that is patented
C.legal fees of obtaining the patent, costs of successful patent
infringement suits, and research and development costs incurred on
the invention that is patented
D.legal fees of obtaining the patent, costs of successful and
unsuccessful patent infringement suits, and research and
development costs incurred on the invention that is patented
E.legal fees of obtaining the patent, costs of successful and
unsuccessful patent infringement suits, and development costs
incurred on the invention that is patented
Answer:
42) 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. U.S. GAAP does not specify a minimum probability
level, although the rule-of-thumb in practice is approximately
_____ percent.
A.50
B.60
C.70
D.80
E.90
Answer:
43) Stock dividends
A.have little economic substance for shareholders
B.result in a proportionate increase in the number of shares held
by each shareholder, but does not change that shareholders
ownership interest or proportionate voting power
C.result in decreases to book value per common share, but each
shareholder has a proportionately larger number of shares, so the
total book value of each shareholders interest remains
unchanged
D.result in the decline of market value per share should be
commensurate with the proportional increase in shares, but all else
equal, the total market value of an individuals shares should not
change
E.all of the above
Answer:
44) The FASBs conceptual framework defines a(n) _____ as inflows or
other enhancements of assets of an entity or settlements of its
liabilities from delivering or producing goods, rendering services,
or other activities that constitute the entitys ongoing major or
central operations.
A.assets
B.liabilities
C.equities
D.revenues
E.expenses
Answer:
45) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations among cash flows from
operating, investing, and financing activities. During the _____,
net income usually reaches a peak, and working capital stops
growing. Operations generate positive cash flow, enough to finance
expenditures on property, plant, and equipment. Capital
expenditures usually maintain, rather than increase, productive
capacity. Firms use the excess cash flow to repay borrowing from
the introduction and growth phases and to begin paying dividends to
shareholders.
A.introduction phase
B.growth phase
C.mature phase
D.late maturity phase
E.decline phase
Answer:
46) The FASBs conceptual framework does not include which of the
following as financial reporting objectives?
A.Provide information useful for making suboptimal investment and
credit decisions
B.Provide information to help current and potential investors and
creditors assess the amount, timing, and uncertainty of future cash
flows
C.Provide information about the economic resources of a firms
customers and the claims on those resources
D.Provide information about a firms operating performance during a
period
E.Provide information about how an enterprise obtains and uses cash
Answer:
47) A debit balance in the allowance account may exist before
recognizing estimated uncollectibles for the period because
A.firms sometimes write off specific customers’ accounts during an
accounting period as the firm identifies the specific customers
whose accounts have become uncollectible
B.firms generally wait until the end of the accounting period to
recognize bad debt expense for the period
C.the account will always have a credit balance after recognizing
the provision for estimated uncollectibles for the period
D.all of the above
E.none of the above
Answer:
48) Regarding employee stock options (ESOs), which of the following is
not true?
A.The exercise price is the price specified in the stock option
contract for purchasing the common stock
B.The vesting date is the first date employees can exercise their
stock options
C.The exercise date is the date employees exchange the option and
cash for shares of common stock
D.The market price is the price of the stock as it trades in the
market
E.A vesting period that depends on the firms stock price reaching a
specified target is a performance condition
Answer:
49) In determining cash flows from operations under the indirect
method, the adjustments to convert net income to cash flow from
operations generally involve ____ debit changes in operating
working capital accounts.
A.adding
B.subtracting
C.multiplying
D.dividing
E.cannot be determined from the information provided
Answer: