1) Under current GAAP a stock dividend declaration and distribution will not reduce
either total assets or total owners’ equity.
2) The activities comprising the operating cycle are generally consistent across firms.
3) The earnings conservatism ratio comparisons for a single company over time can be
misleading if the tax law has changed over the comparison period.
4) Defined contribution plans specify the amount of cash that the employer puts into the
plan for the benefit of the employee.
5) An investment of 50% or more of a company’s voting shares will require the investor
to prepare consolidated financial statements.
6) A current monetary liability is shown on the financial statements at the undiscounted
amount due.
7) One low-cost, effective way of eliminating or reducing conflicts of interest in
business relationships is to use lawyers to negotiate all terms.
8) When a firm does not adopt the fair value option, it still must disclose the fair value
of its long-term notes receivable.
9) When market rates of interest increase, the use of floating-rate debt benefits the
issuing company.
10) The LIFO-to-FIFO adjustment for a company that uses LIFO for only a portion of
its inventory is different from the method used when a company uses LIFO for its entire
inventory.
11) An entry to record a change in accounting principle will typically require an
adjustment to the firm’s retained earnings balance to reflect the cumulative effect of the
change in accounting principle on all prior periods’ reported net income.
12) The disadvantage of debt financing is that interest on debt is tax-deductible.
13) The investment account is adjusted for the investor’s share of the reported income
of the investee when the investor uses the equity method to account for the stock
investment.
14) Adjusting entries always fall into one of two categories: adjustments for
prepayments or adjustments for unearned revenues.
15) Stringent rules do not exist for determining when revenue has been earned and is
realizable thus leaving some flexibility for management to “manage earnings” within
the confines of generally accepted accounting principles.
16) The events of default section of a loan agreement describes circumstances in which
the creditor has the right to terminate the lending relationship.
17) Gains and losses from sales of individual operating assets may satisfy the criteria
for extraordinary item treatment.