1) The calculation of a reportable segments operating income or loss excludes which of
the following?
a. Corporate costs allocated to the segment on a reasonable basis
b. Segment sales
c. Segment wage expense
d. Segment income tax expense
2) Commodity L sells for $12.00; selling expenses are $2.40; normal profit is $3.00. If
the cost of Commodity L is $7.80 and the replacement cost is $6.00, the lower of cost or
market is
a. $5.40
b. $6.60
c. $6.00
d. $7.80
3) Which of the following measurement attributes is not currently used in practice?
a. Present value
b. Net realizable value
c. Current replacement cost
d. Inflation-adjusted cost
4) Kirkland Company’s prepaid rent was $40,000 at December 31, 2014, and $15,000 at
December 31, 2013. Kirklands income statement for 2014 reported rent expense as
$10,000. What amount of cash disbursements for rent would be reported in Kirklands
net cash flows from operating activities for 2014 presented on a direct basis?
a. $10,000
b. $20,000
c. $35,000
d. $45,000
5) An investor that uses the equity method of accounting for its investment in a 40
percent-owned investee that earned $50,000 and paid $8,000 in dividends, made the
following entries:
What effect will these entries have on the parent corporations statement of financial
position?
a. Investment in subsidiary understated, retained earnings understated
b. Investment in subsidiary overstated, retained earnings overstated
c. Investment in subsidiary overstated, retained earnings understated
d. Financial position will be fairly stated
6) For the month of December, the records of Former Corporation show the following
information:
The corporation uses the direct write-off method in accounting for uncollectible
accounts receivable. What are the gross sales for the month of December?
a. $144,000
b. $130,000
c. $118,000
d. $120,000
7) In a statement of cash flows using the direct method, which of the following would
increase reported cash flows from operating activities?
a. Dividends received from investments
b. Gain on sale of equipment
c. Gain on sale of a business segment
d. Sale of treasury stock
8) Goods in transit at year-end purchased FOB shipping point were appropriately
recorded in the purchases account but were incorrectly excluded from the ending
inventory. What effect will this omission have on the company’s assets, liabilities, and
retained earnings at year-end?
a. No effect, no effect, overstated
b. No effect, no effect, understated
c. Understated, no effect, overstated
d. Understated, no effect, understated
9) On June 30, a company paid $3,600 for insurance premiums for the current year and
debited the amount to Prepaid Insurance. At December 31, the bookkeeper forgot to
record the amount expired. The omission has the following effect on the financial
statements prepared December 31:
a. overstates owners’ equity
b. overstates assets
c. understates net income
d. overstates both owners equity and assets
10) Which of the following is not an inflow of cash?
a. Collection of a short-term receivable
b. Sale of an operational asset
c. Cash borrowed on a short-term note
d. Depletion expense
11) Recognizing more bad debt expense in a year than is necessary in order to have
flexibility in recognizing bad debt expense in a future year is an example of
a. a big bath charge
b. creative acquisition accounting
c. a cookie jar reserve
d. premature recognition of revenue
12) On August 1, 2013, Abruzzo Corp. acquired 10,000 of the outstanding shares of
Tuscany Co. On January 2, 2014, Abruzzo acquired an additional 20,000 shares of
Tuscany Co., which brought the total ownership to 30,000 shares. Using the normal
guidelines for percentages of ownership and assuming that Tuscany Co. had 100,000
shares outstanding during 2013 and 2014, Abruzzo Corp. should account for the
investment in Tuscany Co. by using the
a. cost method in 2013 and the equity method in 2014
b. cost method in 2013, retroactively adjusting the investment account to the equity
method at the beginning of 2014, and using the equity method in 2014
c. equity method for 2013 and 2014
d. cost method in 2013 and 2014 for the 10,000 shares acquired in 2013, and using the
equity method in 2014 for the 20,000 shares acquired in 2014
13) Disclosure usually is NOT required for
a. contingent gains that are probable and can be reasonably estimated
b. contingent losses that are reasonable possible and cannot be reasonably estimated
c. contingent gains that are reasonably possible and cannot be reasonably estimated
d. contingent losses that are remote and can be reasonably estimated
14) As a result of the above undetected errors, 2014 income was
a. understated by $18,000
b. overstated by $198,000
c. overstated by $18,000
d. understated by $198,000
15) Ranger Company uses a periodic inventory system. If the companys beginning
inventory in the current year is overstated, and that is the only error in the current year,
then the companys income for the current year will be
a. understated and assets correct
b. understated and assets overstated
c. overstated and assets overstated
d. understated and assets understated
16) The normal ordering of items in the income statement would be best illustrated by
which of the following?
a. Extraordinary items, cumulative effects, income from continuing operations,
discontinued operations, net income
b. Income from continuing operations, discontinued operations, extraordinary items,
cumulative effects, net income
c. Income from continuing operations, extraordinary items, cumulative effects,
discontinued operations, net income
d. Discontinued operations, income from continuing operations, extraordinary items,
cumulative effects, net income
17) The Governmental Accounting Standards Board
a. was incorporated into the Financial Accounting Standards Board when the FASB was
created
b. addresses financial reporting issues of U.S. government treaties and treasury rulings
c. addresses the financial reporting issues related to state and local governments
d. addresses the governmental reporting activities of the SEC
18) According to the FASB’s conceptual framework, which of the following relates to
both relevance and reliability?
Consistency Verifiability
a. YesYes
b. YesNo
c. NoYes
d. NoNo
19) In reviewing the books of Unger Retailers Inc., the auditor discovered certain errors
that had occurred during 2013 and 2014. No errors were corrected during 2013. The
errors are summarized below:
(a) Beginning merchandise inventory (January 1, 2013) was understated by $8,640.
(b) Merchandise costing $2,400 was sold for $4,000 to B.J. Taylor on December 29,
2013, but the sale was recorded in 2014. The merchandise was shipped F.O.B. shipping
point and was not included in ending inventory. Unger uses a periodic inventory
system.
(c) A two-year fire insurance policy was purchased on May 1, 2013, for $5,760. The
entire amount was debited to Prepaid Insurance. No adjusting entry was made in 2013
or 2014.
(d) A one-year note receivable of $9,600 was held by Unger beginning October 1, 2013.
Payment of the 10 percent note and accrued interest was received upon maturity. No
adjusting entry was made on December 31, 2013.
(e) Equipment with a ten-year life was purchased on January 1, 2013, for $39,200. No
depreciation expense was recorded during 2013 or 2014. Assume that the equipment
has no salvage value and that Unger uses the straight-line method for recording
depreciation.
Prepare journal entries to correct each of these independent situations. Assume that the
nominal accounts for 2014 have not yet been closed into the income summary account.
20) When a specific customer’s account is written off by a company using the allowance
method, the effect on net income and the net realizable value of the accounts receivable
is
Net Realizable Value
Net Income of Accounts Receivable
a. Increase Increase
b. Decrease Decrease
c. None None
d. Decrease None
21) 6,000 shares of common stock with a par value of $10 per share were issued
initially at $12 per share. Subsequently, 2,000 of these shares were acquired as treasury
stock at $15 per share. Assuming that the par value method of accounting for treasury
stock transactions is used, what is the effect of the acquisition of the treasury stock on
each of the following?
Additional Retained
Paid-In Capital Earnings
a. Increase No effect
b. Increase Decrease
c. Decrease Increase
d. Decrease Decrease
22) How are trade receivables used in the calculation of each of the following?
Current Ratio Inventory Turnover
a. Not used Numerator
b. Numerator Numerator
c. Numerator Not used
d. Denominator Numerator
23) Maries Sporting Goods had the following inventory records for one line of skis for
the month of January:
Assuming the periodic LIFO inventory method is used, what is the cost of Maries
ending inventory?
a. $4,124
b. $4,268
c. $4,376
d. $4,100
24) A classic definition of income states that income is the amount one could consume
at the end of a period and still be as well off as at the beginning of the period.
Embedded in this definition of income is the concept of capital maintenance.
Conceptually, income can occur only after the beginning capital has been recovered.
When accountants adopt different measuring units, they are attempting to maintain
different concepts of capital.
Identify the type of capital maintained when the measuring unit is (a) nominal dollars,
(b) constant dollars, and (c) current costs. When would nominal cost and constant dollar
measurements provide equivalent results?
25) For a company having several different issues of convertible securities and/or stock
options and warrants, the FASB requires selection of the combination of securities
producing
a. the lowest possible earnings per share
b. the highest possible earnings per share
c. the earnings per share figure midway between the lowest possible and the highest
possible earnings per share
d. any earnings per share figure between the lowest possible and the highest possible
earnings per share
26) What would be the effect on book value per share and earnings per share if a
corporation purchased its own shares in the open market at a price greater than the book
value per share?
a. Increase both book value per share and earnings per share
b. Decrease both book value per share and earnings per share
c. Decrease book value per share and increase earnings per share
d. No effect on book value but increase earnings per share
27) The inventory of Regatta Company averages $1,315,500 at cost. During 2014, sales
of $6,995,990 were made at 35 percent above cost.
Using the given data, compute the following:
28) FJR Company is preparing a forecast of its net income for the year 2014. In
addition, FJR plans to construct a forecasted statement of cash flows for 2014. The
balance sheet and income statement data for 2013 are presented below, as well as a
forecast of the balance sheet for 2014. Management expects sales in 2014 to rise to
$6,000,000. In order to achieve this level of increase, management estimates that
operating expenses (specifically sales commissions) will rise to $410,134.
Prepare a forecasted income statement and forecasted statement of cash flows (using
the indirect method) for the year ended December 31, 2014, for FJR Company.
Calculate the cash flow to net income and cash flow adequacy ratios. There were no
changes in stockholders equity other than net income and cash dividends.
29) The Fanfare Company applied for and received numerous patents at a total cost of
$286,500 at the beginning of 2011. It is assumed the patents will be useful evenly
during their full legal lives. At the beginning of 2013, the company paid $48,600 in
legal fees for successful defense in a patent infringement suit. At the beginning of 2014,
information became available that caused the company to reduce the remaining life of
the patents to five years.
Calculate the amortization expense for the years 2011, 2012, 2013, and 2014. Round to
the nearest dollar.
30) Comparative data for Agnew Inc. for the two-year period 2013-2014 are given as
follows:
From the given data, compute the following for 2014 and 2013:
31) One of the four factors that motivate managers to manage reported earnings is
meeting external expectations. Which external stakeholders have an interest in a
companys financial performance, and why?