ACT 851 Homework

1) In determining cash flows from operations under the indirect
method, the adjustments to convert net income to cash flow from
operations generally involve ____ credit changes in operating
working capital accounts, such as accounts receivable, inventories,
or accounts payable.
A.adding
B.subtracting
C.multiplying
D.dividing
E.cannot be determined from the information provided

Answer:

2) 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 legally
separate from the employer, to fund their retirement
obligations
C.The accounting records of the trust established to fund the
retirement obligations are consolidated with the accounting records
of the employer
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:

3) Why might a firm use the quick ratio instead of the current ratio
in its liquidity analysis?
A.It wants to target long-term debt instead of short term debt
B.Its accounts receivable are greater than its cash
C.Its inventory is not very liquid
D.It considers the cash flow amount in the quick ratio more
important than the other liquidity ratios
E.Its notes receivable are greater than its cash

Answer:

4) Under U.S. GAAP and IFRS reporting standards, management assesses
the firms assets for impairment at each reporting date by
determining if impairment indicators are present. Impairment
indicators include
A.the decline in the market value of an asset significantly beyond
what would be expected because of use or the passage of time
B.significant adverse changes in the entitys technological
environment
C.significant adverse changes in the entitys economic
environment
D.significant adverse changes in the entitys legal environment
E.all of the above

Answer:

5) 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.

Applying IFRS, Wheaton would record the following entry
A.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 11,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . .10,000,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 19,000,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000
B.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 10,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . .10,000,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 20,000,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000
C.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 10,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . 11,000,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 19,000,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000
D.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 10,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . 12,000,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 18,000,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000
E.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 10,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . 12,200,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 17,800,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000

Answer:

6) An expenditure qualifies as a(n) _____ if it has the following
characteristics:
1> It embodies a probable future benefit.
2> A particular entity can obtain the benefit and control others
access to it.
3>The transaction or other event giving rise to the entitys
right to, or control of, the benefit has already occurred.
4> The fair value of the item at the time of initial recognition
can be measured with sufficient reliability.
A.asset
B.liability
C.shareholders equity
D.revenue
E.expense

Answer:

7) U.S. GAAP and IFRS require firms to treat some or all expenditures
made to internally develop brand names, customer lists, new
technologies, and other intangibles
A.at fair value
B.as expenses in the period of the expenditure
C.as capitalized assets without amortization because of infinite
lives
D.as capitalized assets with amortization over the finite lives
E.as capitalized assets tested annually for impairment

Answer:

8) Which of the following is/are true regarding U.S. GAAP and IFRS
requirements for income tax accounting for financial reporting
purposes?
A.A permanent difference never affects income tax expense for any
period
B.A temporary difference that implies a future tax deduction gives
rise to a deferred tax asset
C.A temporary difference that implies a future increase in income
tax payable gives rise to a deferred tax liability
D.The accountant computes income tax expense using pretax amounts
for financial reporting
E.all of the above

Answer:

9) Using U.S. GAAP and IFRS requirements for income tax accounting for
financial reporting purposes, the accountant computes income tax
expense using
A.pretax amounts for financial reporting
B.the amounts on income tax returns
C.the cash outflows for income taxes
D.permanent differences
E.temporary and permanent differences

Answer:

10) Assume that an investment group owns a high-rise, oceanfront
condominium building that it rents unfurnished to tenants. The
group purchased the building five years ago from a construction
company. At that time, it expected the building to have a useful
life of 40 years. Explain the procedures you might follow as the
investor groups accountant to ascertain the measurement amount for
this building under each of the following approaches:

a. Acquisition cost.
b. Adjusted acquisition cost (reduced for services already
consumed).
c. Current replacement cost.
d. Net realizable value.
e. Fair value.

Answer:

11) Derivatives include
A.an option to purchase a share of stock
B.a commitment to purchase a certain amount of foreign currency in
the future
C.interest rate, foreign exchange rate, and commodity price
hedges
D.all of the above
E.none of the above

Answer:

12) A construction firm enters a long-term contract to build a bridge.
The expected and actual cash receipts and disbursements for the
project are as follows:

Required:

What is the revenue during each of the following periods under each
of the specified methods of revenue recognition?


Period Method
a. 1 Completed Contract
b. 4 Completed Contract
c. 1 Percentage of Completion
d. 4 Percentage of Completion
e. 1 Installment Method
f. 4 Installment Method
g. 1 Cost Recovery First
h. 4 Cost Recovery First

Answer:

13) King Products Corporation

King Products Corporation
Statement of Financial Position
(in thousands)

(CMA adapted, Dec 96 #18) Refer to the King Products Corporation
example. King Products Corporation’s quick (acid test) ratio at
June 30, Year 6, was
A.0.6
B.1.1
C.1.8
D.2.0
E.none of the above

Answer:

14) An accounting issue for accounts receivable is the timing of
recognition of the reduction in income caused by the
uncollectibility of some accounts. With regard to timing, both U.S.
GAAP and IFRS require that a seller recognize an expense for
estimated uncollectible accounts receivable in the _____.
A.period when it recognizes the accounts receivable is
uncollectable
B.period after it recognizes the related revenue
C.same period when it recognizes the related revenue
D.period before it recognizes the related revenue
E.period after it recognizes the accounts receivable is
uncollectable

Answer:

15) Fassinos Wholesale Corporation

Fassino Wholesale Corporation (Fassinos) operates discount retail
stores. To shop in a Fassinos store, customers must pay a
nonrefundable, annual membership fee in advance, using either cash
or an American Express card. A customer purchases an annual
membership from Fassinos for $120, a 20-pack of paper towels for
$10.99, and four new tires for $480. The tire purchase includes
mounting and aligning by a Fassinos tire technician at the time of
initial installation and alignment and tire rotation services for
three years afterward. The customer pays with an American Express
card.

When should Fassinos recognize revenue from selling the tires plus
mounting, alignment, and rotation services?
A.At the time of initial installation, Fassinos performs its
obligation to provide both tires and initial mounting and alignment
services. Petes should recognize revenue for the portion of the
$480 selling price applicable to the sale of tires and installation
services at the time of installation
B.Fassinos should delay recognition of revenue for the portion of
the $480 selling price applicable to the subsequent alignment and
rotation services until it performs the required services
C.Fassinos should delay recognition of revenue from selling the
tires plus mounting, alignment, and rotation services until it
performs all of the required services at the end of the three year
period
D.At the time of initial installation, Fassinos should recognize
revenue for all of the $480 selling price applicable to the tires
plus mounting, alignment, and rotation services
E.Both choices a and b are correct

Answer:

16) For manufacturing firms, the cost of completed products remains on
the balance sheet as __________ assets until the firm sells the
products; upon sale, the cost of the assets becomes a cost of goods
sold expense.
A.Direct Materials Inventory
B.Work-in Progress Inventory
C.Finished Goods Inventory
D.Cost of Products Ready for Sale
E.none of the above

Answer:

17) Under accrual accounting, revenue is recognized when
A.the firm has performed all, or most of, the services it expects
to provide
B.the firm has received cash, or some other asset such as a
receivable, whose cash-equivalent value it can measure with
reasonable precision
C.the firm has significant uncertainty about the amount and timing
of the cash inflows and outflows from the sales transaction
D.both a and b must be present
E.none of the above

Answer:

18) Which of the following is/are true regarding securities classified
as available-for-sale?
A.they must be tested for impairment and if they are impaired, the
firm treats the unrealized loss in Accumulated Other Comprehensive
Income as if it were realized
B.they must be tested for impairment and if they are impaired, the
firm treats the unrealized loss in Net Income as if it were
realized
C.they are not tested for impairment and do not effect Accumulated
Other Comprehensive Income
D.they are not tested for impairment and do not effect Net
Income
E.they must be tested for impairment and if they are impaired, the
firm treats the unrealized loss in Retained Earnings as if it were
realized

Answer:

19) 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 U.S. GAAP, 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:

20) Accountants record assets at
A.acquisition cost
B.the present value of the future net cash flows based on estimated
receipts
and operating expenses
C.current economic value
D.current replacement cost
E.appraised value

Answer:

21) Treasury shares arise when a corporation reacquires its own
previously issued common shares. A reason for reacquiring
outstanding common stock is to use the treasury shares in various
option arrangements. When holders of stock options, stock rights,
stock warrants, and convertible securities exercise their options,
firms usually receive
A.less cash (or market value of other consideration) than the
market value of the common stock at the time
B.a current liability on the books of the reacquiring
corporation
C.more cash (or market value of other consideration) than the
market value of the common stock at the time
D.a long-term liability on the books of the reacquiring
corporation
E.a long-term asset on the books of the reacquiring corporation

Answer:

22) U.S. GAAP and IFRS require firms to account for business
combinations using the _____ method.
A.purchase
B.pooling-of-interests
C.uniting-of-interests
D.equity

Answer:

23) The profit margin ratio for ROCE indicates
A.the sales generated from each dollar of assets
B.the portion of the sales dollar left over for the common
shareholders after covering all operating costs and subtracting
claims of creditors and preferred shareholders
C.the portion of the sales dollar left over for the preferred
shareholders after covering all operating costs and subtracting
claims of creditors and common shareholders
D.the proportion of total assets, or total financing, provided by
common shareholders contrasted with the financing provided by
creditors and preferred shareholders
E.the proportion of total assets, or total financing, provided by
preferred shareholders contrasted with the financing provided by
creditors and common shareholders

Answer:

24) The basis for both U.S. GAAP and IFRS requirements for income tax
accounting for financial reporting purposes focuses on which of the
following financial reporting objectives?
A.recognizing the amount of taxes payable in the current year,
only
B.recognizing deferred tax assets and deferred tax liabilities for
the future income tax consequences of temporary differences,
only
C.recognizing the amount of taxes payable in the current year, and
recognizing deferred tax assets and deferred tax liabilities for
the future income tax consequences of temporary differences
D.recognizing deferred tax assets and deferred tax liabilities for
the future income tax consequences of permanent differences,
only
E.recognizing the amount of taxes payable in the current year, and
recognizing deferred tax assets and deferred tax liabilities for
the future income tax consequences of permanent differences

Answer:

25) The return from investing in the shares of common stock
include(s):
A.change in the market price of the common stock.
B.cash dividends
C.interest income
D.choices a and b
E.all of the above

Answer:

26) A firm must pay all current and previously postponed preferred
dividends before it can pay any dividends on common shares, thus
the preferred shares have the feature called
A.convertible dividend rights
B.noncumulative dividend rights
C.cumulative dividend rights
D.callable dividend rights
E.participating dividend rights

Answer:

27) When firms have obligations that do not meet the formal definition
of a liability, U.S. GAAP require that firms
A.disclose information about such obligations in notes to the
financial statements
B.highlight such arrangements in the Management Discussion and
Analysis section
C.have the auditor address such matters in a separate paragraph in
the independent auditor’s report accompanying the financial
statements
D.do not mention the obligation because they are not valid
liabilities and to do otherwise would mislead the readers of the
financial statements
E.none of the above

Answer:

28) On April 1, Year 1, Seaside Bookstore bought an insurance policy
costing $48,000 that would insure the retail building for two years
against fire loss. What asset account and what amount are recorded
on the balance sheet at December 31, Year 1?
A.Prepaid Insurance, $30,000
B.Insurance Expense, $30,000
C.Prepaid Insurance, $18,000
D.Insurance Expense, $18,000
E.Insurance Expense, $9,000

Answer:

29) A complicated financing arrangement, whereby firms sell batches of
receivables to a legally separate entity whose sole purpose is to
hold the receivables and issue claims on their cash flows. The
process is referred to as _____ of the receivables.
A.consolidation
B.transformation
C.hypothecation
D.securitization
E.credit enhancement

Answer:

30) In U.S. GAAP, 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:

31) _____ captures the qualitative notion that financial reports need
not include items that are so small as to be meaningless to users
of the reports.
A.Maximization
B.Realization
C.Recognition
D.Materiality
E.Minimization

Answer:

32) Which of the following is not true?
A.All corporations must issue common stock
B.Common shareholders have a claim on the assets of a firm after
creditors and preferred shareholders have received amounts promised
to them
C.Frequently, corporations grant voting rights only to common
shares, giving their holders the right to elect members of the
board of directors and to decide certain broad corporate policies
(spelled out in the stock contract)
D.Some firms issue more than one class of common shares, with each
class granted different voting rights
E.Firms generally issue preferred shares, both at the time of
initial incorporation and in subsequent years, for amounts greater
than par (or stated) value

Answer:

33) In assessing the debt ratios, analysts customarily vary the
standard in relation to the stability of the firms earnings and
cash flows from operations. Banks have liabilities to assets
ratios, typically
A.over 10%
B.over 30%
C.over 50%
D.over 70%
E.over 90%

Answer:

34) The typical first step in financial statement analysis and
valuation (after selecting assumptions) is:
A.Understand the Purpose and Content of the Principal Financial
Statements and Related Notes
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:

35) Upon entering in the lease agreement, operating leases require that
the lessee records
A.the leased asset, only
B.the leased asset and the lease liability
C.the lease liability, only
D.nothing because the lessor owns the property
E.the present value of future cash flows as an asset, only

Answer: