1) Merchandise shipped FOB shipping point on the last day of the year should
ordinarily be included in
a. the buyer’s inventory balance
b. the seller’s inventory balance
c. neither the buyer’s nor seller’s inventory balance
d. both the buyer’s and the seller’s inventory balances
2) Which of the following is true?
The results of operations of a component of an entity that either has been disposed of or
classified as held for sale shall be reported in discontinued operations if:
a. I, II, and III are all true
b. I and II are true, but III is not
c. Only II is true
d. Only I is true
3) Sonnet Construction Company uses the completed-contract method for long-term
construction contracts. The information for a specific contract as of January 1, 2014, is
shown below.
$600,000 of cost was incurred during 2014 and on December 31, 2014, the estimated
remaining cost to complete was still $800,000. The correct balance for the Construction
in Progress at December 31, 2014 is
a. $600,000
b. $700,000
c. $1,200,000
d. $1,300,000
4) The Neron Company’s net income for the year ended December 31 was $30,000.
During the year, Neron declared and paid $3,000 in cash dividends on preferred stock
and $5,250 in cash dividends on common stock. At December 31, 36,000 shares of
common stock were outstanding, 30,000 of which had been issued and outstanding
throughout the year and 6,000 of which were issued on July 1. There were no other
common stock transactions during the year, and there is no potential dilution of
earnings per share. What should be the year’s basic earnings per common share of
Neron, rounded to the nearest penny?
a. $0.66
b. $0.75
c. $0.82
d. $0.91
5) The third year of a construction project began with a $30,000 balance in
Construction in Progress. Included in that figure is $6,000 of interest capitalized in the
first two years. Construction expenditures during the third year were $80,000 which
were incurred evenly throughout the entire year. The company has had over $300,000 in
interest-bearing debt outstanding the third year, at a weighted average rate of 9 percent.
How much interest for the third year is capitalized?
a. $3,600
b. $6,300
c. $9,360
d. $9,900
6) What accounting concept justifies the use of accruals and deferrals?
a. Going-concern assumption
b. Corporate form of organization
c. Consistency characteristic
d. Arm’s-length transactions
7) On January 1, SOMA issued ten-year bonds with a face amount of $1,000,000 and a
stated interest rate of 8 percent payable annually each January 1. The bonds were priced
to yield 10 percent. The total issue price (rounded) of the bonds was
a. $1,000,000
b. $980,000
c. $920,000
d. $880,000
8) When the estimate of an asset’s useful life is changed,
a. depreciation expense for all past periods must be recalculated
b. there is no change in the amount of depreciation expense recorded for future years
c. only the depreciation expense in the remaining years is changed
d. None of these are true
9) Choose the combination below that best reflects the appropriate classification of cash
received from investing and financing activities.
Cash Received from Cash Received from
Investing Activities Financing Activities
a. Sale of treasury stock Proceeds from issuing common stock
b. Sale of treasury stock Sale of investment securities
c. Sale of investment securities Proceeds of issuing common stock
d. Proceeds from issuing common stock Sale of investment securities
10) Which of the following would appear in both the operating activities section of the
direct method format and the reconciliation of earnings to net operating cash flow
format?
a. Sale of cash equivalents at a gain
b. Sale of cash equivalents at cost
c. Dividends received on equity method investments
d. Collection of an account receivable previously written off
11) See information regarding Delilah, Inc. above. The following additional information
is available:
Required:
1> Compute the following ratios:
a. Cash Flow-to-Net Income
b. Cash Flow Adequacy
c. Cash Times Interest Earned
2> What cash flow statement pattern does Delilah, Inc., exhibit?
12) On December 31, 2014, Artistown Company appropriately changed to the FIFO
cost method from the weighted-average cost method for financial statement and income
tax purposes. The change will result in a $700,000 increase in the beginning inventory
at January 1, 2014. Assuming a 40 percent income tax rate and that no comparative
financial statements for prior years are reported, the cumulative effect of this
accounting change reported for the year ended December 31, 2014, is
a. $700,000
b. $350,000
c. $420,000
d. $280,000
13) The normal order followed by the FASB in publishing its standards is
a. statement, discussion memorandum, opinion
b. discussion memorandum, interpretation, exposure draft, statement
c. exposure draft, discussion memorandum, statement
d. discussion memorandum, exposure draft, statement
14) Assume a company had net income of $20,000 and 8,000 shares of common stock
outstanding the entire year. Also assume there were two potentially dilutive issues
outstanding for the entire year:
What is diluted earnings per share for this company for the year?
a. $2.50
b. $2.40
c. $2.11
d. $2.00
15) How would the declaration of a 20 percent stock dividend by Astros Corporation
affect each of the following on Astros’ balance sheet?
Retained Total Stock-
Earnings holders’ Equity
a. Decrease Decrease
b. Decrease No effect
c. No effect Decrease
d. No effect No effect
16) Steel Wool Manufacturing Company showed the following budgeted activities for
2014:
Steel Wool has operated profitably for many years and has experienced a seasonal
pattern of sales volume and production. Sales volume for 2014 is expected to follow a
quarterly pattern of 10 percent, 20 percent, 35 percent, and 35 percent because of the
seasonality of the industry. Due to production and storage capacity limitations, it is
expected that production will follow a pattern of 20 percent, 25 percent, 30 percent, and
25 percent during the four quarters of 2014.
At the end of the first quarter of 2014, the controller of Steel Wool prepared and issued
the following interim report for public release:
The following additional information is available for the first quarter just completed,
but this information was not included in the public information:
a. The company uses a standard cost system in which standards are set at currently
attainable levels on an annual basis. At the end of the first quarter, there was
under-applied fixed factory overhead (a volume variance) of $50,000 that was treated as
an asset at the end of the quarter. Production during the quarter was 200,000 units, of
which 100,000 were sold.
b. The selling, general, and administrative expenses were budgeted on a basis of
$1,000,000 fixed expenses for the year, plus 40 cents of variable expenses per unit of
sales.
c. The warehouse fire loss met the conditions of an extraordinary loss. The warehouse
had an undepreciated cost of $475,000. The company recovered $300,000 from the
insurance on the warehouse. No other gains or losses are anticipated this year from
similar events or transactions, nor has the company had any similar losses in preceding
years. The full loss will be deductible as an ordinary loss for income tax purposes.
d. The effective income tax rate, for federal and state taxes combined, is expected to
average 35 percent of earnings before income taxes during 2014. No permanent
differences exist between pretax accounting income and taxable income.
e. Earnings per share was computed on the basis of 100,000 shares of capital stock
outstanding. The company has only one class of stock issued, no long-term debt
outstanding, and no stock option plan.
Required:
17) Which of the following best describes contributed capital?
a. The amount of capital provided by stockholders’ investments
b. The amount that would be distributed to the stockholders in a liquidation of the
corporation
c. The amount of capital provided by stockholders’ investments and undistributed
earnings
d. The value of the common and preferred stock
18) The conversion of nonparticipating preferred stock into common stock should be
presented in a statement of cash flows as a(n)
a. operating activity
b. investing activity
c. financing activity
d. noncash exchange
19) Which of the following concepts or principles relates most directly to reporting
accounting changes and errors?
a. Conservatism
b. Consistency
c. Objectivity
d. Materiality
20) Which of the following is true about a pro forma earnings number?
a. A pro forma earnings number is in total conformity with GAAP
b. A pro forma earnings number is a forecast of earnings in future periods
c. Reporting pro forma earnings by companies subject to SEC regulation is illegal
d. A pro forma earnings number is regular GAAP earnings with certain exclusions
21) A truck owned and operated by Roadhog Company was involved in an accident
with an auto driven by M. Sore on January 12, 2014. Roadhog received notice on April
24, 2014, of a lawsuit for $750,000 damages for a personal injury suffered by M. Sore.
Roadhogs counsel believes it is reasonably possible that M. Sore will be successful
against the company for an estimated amount in the range between $200,000 and
$500,000. No amount within this range is a better estimate of potential damages than
any other amount. It is expected that the lawsuit will be adjudicated in the latter part of
2015. What amount of loss should Roadhog accrue at December 31, 2014?
a. $400,000
b. $250,000
c. $100,000
d. $0
22) On January 1, 2014, Bongle Co. amended its defined benefit plan resulting in an
increase in the projected benefit obligation of $700,000. As of the date of the
amendment, Bongle Co. had 100 employees. Ten employees are expected to leave at the
end of each of the next ten years. The minimum amount of amortization for prior
service cost in 2015 (the second year) is
a. $140,000
b. $127,273
c. $114,545
d. $101,818
23) The following information was taken from Caribbean Corporation’s 2014 income
statement:
Caribbeans’ first year of operations was 2014. The company has a 30 percent tax rate.
Management decided to use accelerated depreciation for tax purpose and the
straight-line method of depreciation for financial reporting purposes. The amount
charged to depreciation expense in 2014 was $600,000. Assuming no other differences
existed between book income and taxable income, what amount did Caribbean deduct
for depreciation on its tax return for 2014?
a. $480,000
b. $570,000
c. $600,000
d. $720,000
24) Which of the following most accurately describes the position taken by current
generally accepted accounting principles?
a. Both pooling of interests and the purchase method are still permitted under certain
circumstances
b. The valuation basis to be applied is the acquisition method under which the fair value
of consideration transferred includes any contingent consideration, but excludes direct
combination costs
c. The valuation basis to be applied is the cost method under which the valuation basis
is the fair value of the assets and liabilities acquired including direct combination costs,
but excluding contingent consideration
d. The purchase method requires a business acquisition transaction to be structured to
meet twelve very specific criteria required by generally accepted accounting principles
25) At the time Hollywood Corporation became a subsidiary of Vine Corporation,
Hollywood switched depreciation of its plant assets from the straight-line method to the
sum-of-the-years’-digits method used by Vine. With respect to Hollywood, this change
was a
a. change in an accounting estimate
b. correction of an error
c. change in the reporting entity
d. change in accounting principle
26) In order to calculate the third year’s depreciation on an asset using the sum-of-
the-years’-digits method, which of the following must be known about the asset?
a. Its acquisition cost
b. Its estimated salvage value
c. Its estimated useful life
d. All of these must be known.
27) The sale of a depreciable asset resulting in a loss indicates that the proceeds from
the sale were
a. less than current market value
b. greater than cost
c. greater than book value
d. less than book value
28) During the year, Samuels Company reported net income of $300,000, including
amortization of intangible assets of $66,000, depreciation of plant assets of $132,000,
and amortization of premium on investment in bonds of $20,000. Applying the indirect
method, cash provided by operating activities is what amount?
a. $300,000
b. $518,000
c. $478,000
d. $498,000
29) A single-step income statement is a format that
a. compares the current year’s income with last year’s income
b. recognizes subtotals at intermediate stages such as gross margin
c. combines revenues and gains and subtracts from them expenses and losses, resulting
in income from operations
d. reports sales revenue, cost of goods sold, gross margin, and all other expenses
30) A company issued rights to its existing shareholders to purchase for par unissued
shares of common stock with a par value of $10 per share. When the market value of
the common stock was $12 per share, the rights were exercised. Common Stock should
be credited at $10 per share and
a. Paid-In Capital from Stock Rights credited at $2 per share
b. Additional Paid-In Capital credited at $2 per share
c. Retained Earnings credited at $2 per share
d. no credit made to Additional Paid-In Capital or Retained Earnings
31) Which inventory pricing method best approximates specific identification in most
manufacturing situations?
a. Activity-based costing
b. FIFO
c. Average cost
d. LIFO
32) The members of the __________ are appointed by the Financial Accounting
Foundation.
a. American Accounting Association
b. Financial Accounting Standards Board
c. Securities and Exchange Commission
d. American Institute of Certified Public Accountants
33) Effective January 2, 2014, Moldaur Co. adopted the accounting principle of
expensing advertising and promotion costs as they are incurred. Previously, advertising
and promotion costs applicable to future periods were recorded in prepaid expenses.
Moldaur can justify the change, which was made for both financial statement and
income tax reporting purposes. Moldaur’s prepaid advertising and promotion costs
totaled $250,000 at December 31, 2013. Assume that the income tax rate is 40 percent
for 2013 and 2014. The adjustment for the effect of the change in accounting principle
should result in a net charge against income in the income statement for 2014 of
a. $0
b. $100,000
c. $150,000
d. $250,000
34) The following selected information is available for Raydon Corporation:
Required:
Use the information given above to compute the following ratios:
a. Current ratio
b. Quick ratio
c. Accounts receivable turnover
d. Inventory turnover
e. Asset turnover
35) Sky Corporation’s salaries expense for 2012 was $136,000. Accrued salaries
payable on December 31, 2013, was $17,800 and $8,400 on December 31, 2012. The
cash paid for salaries during 2013 was
a. $126,600
b. $127,600
c. $145,400
d. $153,800
36) Mueller Company purchased equipment 8 years ago for $1,000,000. The equipment
has been depreciated using the straight-line method with a 20-year useful life and 10%
residual value. Mueller’s operations have experienced significant losses for the past 2
years and, as a result, the company has decided that the equipment should be evaluated
for possible impairment. The management of Mueller Company estimates that the
equipment has a remaining useful life of 7 years. Net cash inflow from the equipment
will be $80,000 per year. The fair value of the equipment is $240,000.
37) The following data were taken from the books of Golden Company.
Cash dividends of $169,000 were declared and paid during 2011. Also, $56,000 of
preferred stock was issued during the period.
Compute the net cash flow provided by (used in) operating activities during 2014 for
Golden Company.
38) The most recent annual report of the Albondiga Company includes the following
information:
(in millions of dollars)
The group method of depreciation treats all assets within a group as having a uniform
useful life and applies a depreciation rate based on the total cost of the group. No gain
or loss is recognized on disposal under this method. Accumulated depreciation is
reduced by the difference between the cost of the assets disposed of and cash proceeds.
Required:
39) On January 1, 2014, Palsoe Corp. acquired 30 percent (13,000 shares) of Nostay
Services Inc. common stock for $1,300,000 as a long-term investment. Data from
Nostay’s 2014 financial statements include the following:
The market value of Nostay Services Inc. common stock on December 31, 2014, was
$98 per share. Palsoe does not have any other noncurrent investments in securities.
Prepare the necessary journal entries for Palsoe’s investment in Nostay Services Inc.
common stock under
40) SFAS No. 109 allows the recognition of deferred tax assets for both operating loss
carryforwards and temporary differences arising from normal operations. This provision
of SFAS No. 109 represents a significant change from the requirements of SFAS No. 96
and APB Opinion No. 11 in which stringent limits were placed on the recognition of
deferred tax assets. SFAS No. 109 does require some recognition of the uncertainty
associated with deferred tax assets, however.
Required:
Explain how SFAS No. 109 addresses uncertainty associated with deferred tax assets
and how the approach in SFAS No. 109 compares with the approach adopted in SFAS
No. 5 regarding contingencies.
41) Recent accounting scandals suggest the need for care on the part of an independent
auditor in accepting new clients. The independent auditor needs to know both the
business of and the personnel employed by a prospective client. All other control
procedures are fruitless if a CPA chooses to serve an undesirable client. The damage
suffered as a result of associating with an undesirable client can be irreparable.
Discuss some key issues an independent auditor should consider in the client
acceptance decision.
42) You have just joined the public accounting firm of Johnson, Boyd, and Winters
upon graduating from the University of High Numbers. You are assigned to the audit of
the Wild Notes Company, a manufacturer of electronic musical instruments. Part of
your responsibility on the audit will be the examination of the property, plant, and
equipment of the client.
Required:
Use your knowledge of financial statements plus your experience in your principles of
accounting course to develop a list of questions regarding property, plant, and
equipment you feel you should answer as an independent auditor in order to ensure that
the statements provide relevant and reliable information to the users of Wild Notes
Companys financial statements.