58. When using the retrospective approach for a change in accounting principle,
disclosure rules require that
a. prior years’ income statements presented for comparative purposes be restated to
reflect use of the new principle unless it is impractical to do so.
b. all prior years’ income statements be restated to reflect use of the new principle, and
include a pro forma net income figure of the previously reported income.
c. no prior years’ income statements be restated, but a pro forma net income figure be
provided to reflect use of the new principle for each year presented.
d. no prior years’ income statements be restated, and no pro forma net income figures be
provided.
59. Which of the following items is not a type of accounting change?
a. Change in accounting principles used; for example, a change from LIFO
to FIFO.
b. Change in the majority owner of the company.
c. Change in accounting estimate; for example, a change in the useful life or
salvage value of a depreciable asset.
d. Change to consolidated financial statements from individual financial
statements.
Answer: b
60. When a company changes from LIFO to another inventory method, the change is
reported
a. prospectively because it is impractical to determine the effects of this change on prior
years’ net income.
b. as an error correction.
c. as a change in an accounting estimate.
d. using the retrospective approach.
61. When a company changes from straight-line depreciation to double-declining-
balance depreciation, the change is reported
a. prospectively because it is impractical to determine the effects of this change on prior
years’ net income.
b. as an error correction.
c. as a change in an accounting estimate.
d. using the retrospective approach.
62. When a company changes from any inventory method to LIFO, the change is
reported
a. prospectively because it is usually impractical to determine the effects of this change
on prior years’ net income.
b. as an error correction.
c. as a change in an accounting estimate.
d. using the retrospective approach.
63. Royal, Inc. discovered that equipment purchased on January 1, 2018 for $300,000
will not last as long as originally estimated. The firm was depreciating the equipment at
the rate of $40,000 per year with an estimated salvage value of $20,000. New estimates
on January 1, 2021 indicate that the equipment will last a total of five years with no
salvage value. How much should Royal, Inc. record as depreciation in 2021?
a. $40,000
b. $60,000
c. $90,000
d. $120,000
64. For what reasons does management have incentive to meet analysts’
expectations?
a. To build credibility with capital markets.
b. To convey future earnings prospects to investors.
c. To increase stock price.
d. All of these answer choices are correct.
Answer: d
65. Which statement below is not correct with respect to earnings
management?
a. It is increasingly common because of the pressure to meet analysts’
expectations.
b. More firms just beat rather than just miss the analyst expectations.
c. More than 80% of CEOs surveyed indicated that reporting a profit is an
important benchmark.
d. More than 70% of CEOs surveyed indicated that beating consensus EPS
is an important benchmark.
Answer: d
66. GAAP requires that each set of EPS numbers includes separately reported numbers
for all of the following except
a. special or unusual items.
b. income from continuing operations.
c. discontinued operations.
d. net income.
67. When analysts provide basic EPS for income from continuing operations that
exclude the effects of special (i.e., nonrecurring) gains or losses and certain other non-
cash charges, such earnings are frequently referred to as
a. normal earnings.
b. pro forma earnings.
c. sustainable earnings.
d. real earnings.
68. The change in equity of an entity during a period from transactions and other events
from non-owner sources is known as
a. net income.
b. net operating income.
c. comprehensive income.
d. net change in assets.
69. Which one of the following is part of other comprehensive income (OCI)?
a. Unrealized gains resulting from translating foreign currency financial statements of
majority-owned subsidiaries to U.S. dollar amounts.
b. Gains on sales of treasury stock.
c. Receipt of land donated by a governmental unit.
d. Sale of common stock above par.
70. GAAP requires firms to report comprehensive income
a. at the end of the income statement.
b. as one separate statement of comprehensive income.
c. in the statement of changes in stockholders’ equity.
d. in a statement that is displayed with the same prominence as other financial
statements.
71. Current U.S. GAAP permits firms to display the components of other comprehensive
income in which of the following formats?
a. as a schedule appearing in the notes to the financial statements.
b. in a two-statement approach, one in which net income comprises one statement and a
second, which presents a separate statement of comprehensive income.
c. as part of the statement of changes in stockholders’ equity.
d. as a part of the statement of cash flows.
72. Other Comprehensive Income (OCI) is used both in U.S. GAAP and
IFRS. Which of the following statements is correct?
a. As a general rule, U.S. GAAP allows more opportunities for managers to
change balance sheet valuations of certain assets even when management
has no intention to sell these assets.
b. Changes in the valuation of property, plant, and equipment create a
Revaluation Surplus used in both IFRS and U.S. GAAP.
c. Both IFRS and U.S. GAAP require companies to report in other
comprehensive income each period the valuation changes from changes in
actuarial estimates affecting defined benefit pension plans.
d. U.S. GAAP requires a separate statement of OCI to immediately follow
the income statement in the financial reporting statement.
Answer: c
AICPA: BB Global
AICPA: FN Measurement
73. The basic accounting equation may be expressed as
a. assets = liabilities – owners’ equity
b. liabilities = assets + owners’ equity
c. owners’ equity = assets – liabilities
d. assets = owners’ equity – liabilities
74. Any increase in an asset may be offset by
a. a corresponding decrease in a liability.
b. a decrease in some other asset account.
c. a corresponding decrease in owner’ equity.
d. an increase in another asset account.
75. Which of the following statements is correct regarding revenue and expense
accounts?
a. These are really owners’ equity accounts.
b. These are really contributed capital accounts.
c. They have no impact on the balance sheet.
d. These are balance sheet accounts.
76. A debit
a. increases Accounts Payable.
b. increases Cost of Goods Sold.
c. decreases Accounts Receivable.
d. decreases Equipment.
77. Adjusting entries must be made
a. to correct errors in the accounts.
b. to reconcile the accounts to the budget.
c. because auditing standards require them.
d. because certain types of events will otherwise not be recorded in the accounts.
78. Accumulated depreciation is a/an
a. expense account.
b. liability account.
c. contra-asset account.
d. owners’ equity account.
79. Entering the DR or CR amount in the appropriate left or right side of the affected T-
account is called
a. posting.
b. cross-referencing.
c. journalizing.
d. recording.
[QUESTION]
80. Which of the following situations may create an accounting error?
a. Simple oversight.
b. Parties disagree on accounting for a transaction resulting in a
misapplication of GAAP.
c. Management exploits the flexibility in GAAP to inflate earnings.
d. All of these answer choices are correct.
Answer: d
81. A debit does which of the following?
a. Increases the value in an asset account.
b. Increased the value in a contra-asset account.
c. Decreases the value in a liability account.
d. Increases the value in an asset account and also decreases the value in a
liability account.
Answer: d
Topic: Transaction analysis and adjusting entries
Topic: T-account analysis
82. Which of the following is a true statement?
a. Revenue decreases owners’ equity and increases liabilities.
b. Expenses increase owners’ equity and decrease liabilities.
c. Revenue increases owners’ equity and expenses decrease owners’ equity.
d. Revenue decreases owners’ equity and expenses increase owners’ equity.
83. To get revenue and expense account balances to zero requires a/an
a. adjusting entry.
b. closing entry.
c. operating entry.
d. reversing entry.
84. T-account analysis can be used to gain insights into why accrual basis earnings and
cash basis earnings differ and to
a. journalize future transactions.
b. reconstruct transactions that have occurred during a given reporting period.
c. post transactions that have occurred during a given reporting period.
d. determine the current market price of common stock.
85. Working capital accounts include
a. all assets.
b. all assets and liabilities.
c. current assets and all liabilities.
d. current assets and current liabilities.
86. Adjusting entries are used in all but which of the following situations?
a. Prepayments.
b. Deferred Revenue and Expenses.
c. Accrued Revenue and Expenses.
d. Prepayments, Deferred Revenue, Accrued Expenses, Accrued Revenue.
Learning Objective: 02-13
Difficulty: 2 Medium
AACSB: Reflective Thinking
87. Recent changes in _______ accounting standards require companies to group items
within OCI based on __________:
a. U.S. GAAP; whether they will be reclassified subsequently into net income or whether
they will be subsequently reclassified into income when specific conditions are met.
b. IFRS; whether they will be reclassified subsequently into net income or whether they
will be subsequently reclassified into income when specific conditions are met.
c. U.S. GAAP; their expected future categorization on the income statement into income
from continuing operations and discontinued operations.
d. IFRS; their expected future categorization on the income statement into income from
continuing operations and discontinued operations.
88. When actuarial estimates related to defined benefit pension plans are adjusted
a. Both U.S. GAAP and IFRS require companies to report these valuation changes in
OCI each period.
b. Only U.S. GAAP requires companies to report these valuation changes in OCI each
period.
c. Only IFRS requires companies to report these valuation changes in OCI each period.
d. Neither U.S. GAAP nor IFRS requires companies to report these valuation changes in
the financial statements.
89. Earnings management can occur through a variety of manipulations
including: