1) The proprietary view of a firm stresses the importance of owners’ equity and
differentiates between capital provided by owners and creditors.
2) Lower profitability means higher default risk.
3) A primary concern of auditors and analysts is that numbers on the financial
statements be verifiable, which means that the numbers should arise from readily
observable facts subject to corroboration.
4) Activity ratios describe the profitability of a company.
5) The methods and procedures that must be followed for financial statements that are
utilized by regulatory agencies are known as RAP.
6) Under GAAP, the completed contract method is an acceptable alternative to the
percentage-of-completion method of accounting for any given long-term construction
project.
7) When two companies form a joint venture and each company owns exactly 50% of
the joint venture, both parents will account for the joint venture using the equity
method.
8) The disaggregation principle set forth in the FASB’s exposure draft on financial
statement presentation requires entities to disaggregate accounting data displayed in
financial statements only by function.
9) Capital structure refers to how much of an entity’s assets are financed by retained
earnings versus by issuing new shares of stock.
10) If the fair value option is elected, the carrying value of a note receivable would
reflect general changes in interest rates and changes in the creditworthiness of the
lender.
11) SFAS No. 123 required companies to use the fair value approach when determining
compensation expense pertaining to stock options.
12) Comparability across companies allows analysts to identify real economic
similarities in and differences between underlying economic events because those
similarities or differences are not obscured by accounting methods or disclosure
practices.
13) A company instituted an IRS approved plan to contribute monies to a plan that
would pay each employee a percentage of his or her highest year of salary for each year
of service upon termination of services. This plan is a
A.defined benefit pension plan
B.defined contribution pension plan
C.government sponsored pension plan
D.postretirement benefit plan
14) Under the installment sales method, interest charged by the sellers is
A.immaterial and GAAP allows it to be combined with recognized gross profit
B.recognized out of the last cash collection of the sale
C.recorded separately out of the periodic cash proceeds
D.recognized out of the first cash collection of the sale
15) Minority passive equity securities designated by the investor to be held for the
long-term are
A.trading securities
B.available-for-sale securities
C.fair value securities
D.adjusted historical cost securities
16) Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1,
2011 . The bonds pay interest annually on December 31 . The bonds were sold at a
discount of $24,578. The amount of cash interest paid in 2012 is
A.$16,000
B.$18,000
C.$19,080
D.$20,000
17) Kitty Co. broke ground on its new building on March 1, 2011, and completed
construction November 30, 2011 . Kitty made the following expenditures in conjunction
with this project:
Kitty’s cumulative weighted average expenditures on this project would be
A.$287,500
B.$500,000
C.$508,333
D.$595,833
18) Companies offering higher risk securities have incentives to mask their true
condition by
A.supplying overly optimistic financial information.
B.not having their financial statements audited.
C.listing on foreign exchanges where reporting requirements are less stringent than
those in the U.S.
D.including testimonials from well known executives in their financial statements.
19) Current U.S. GAAP permits firms to display the components of other
comprehensive income in all of the following formats except
A.as a schedule appearing in the financial statement footnotes
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 single statement, one in which net income and other comprehensive income are
added together
20) Temporary differences that will cause taxable income in future periods to be higher
than book income in future periods give rise to
A.deferred tax assets
B.deferred tax liabilities
C.permanent differences
D.tax refund receivable
21) Gifford Construction Corporation has entered into a long-term fixed contract to
build a performing arts center for Philbin University. The fixed price is $71,500,000.
The costs, estimated costs, and billing activity for the three years of the contract are
shown below:
Required:
a. Compute the gross profit to be recognized under the percentage-of-completion
method on Gifford’s income statements for each year under the contract.
b. Compute construction in progress net of billings under the
percentage-of-completion method at the end of 2011 and 2012 . Be sure to indicate
whether the balance is classified as an asset or liability.
c. Compute the gross profit to be recognized under the completed contract method on
Gifford’s income statements for each year under the contract.
d. Which method is more conservative: the percentage-of-completion method or the
completed contract method? Explain.
22) The Johnson Corporation reported at the end of the year a LIFO reserve of $45,000.
The beginning LIFO reserve was $60,000. The cost of goods sold was $260,000 under
LIFO. The cost of goods sold under FIFO should be
A.$245,000
B.$260,000
C.$275,000
D.$305,000
23) The return on plan assets component of pension expense for a defined benefit
pension plan is
A.the reduction in pension expense created by expected earnings of the plan
B.the reduction in pension expense created by actual earnings of the plan
C.the change in the plan asset value resulting from the actual return on plan assets
D.not a factor in the determination of pension expense
24) Morey Corporation leases a tractor from Equity Leasing with a five-year
non-cancelable lease on January 1, 2011 under the following terms:
1> Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end
each year.
2> The payments were calculated based on the fair value (which is also the book value
for Equity) of the tractor.
3> The lease is nonrenewable and the tractor reverts to Equity at the end of the lease
term.
4> The tractor has a six-year economic life.
5> Morey has an excellent credit rating.
6> Equity offers no warranty on the tractor other than the manufacturer’s two-year
warranty that is handled directly with the manufacturer.
For Equity Leasing, this is treated as a/an
A.operating lease
B.ordinary capital lease
C.direct financing capital lease
D.sales-type capital lease
25) Changes in the balance sheet accounts at June 30, 2011 and 2012 for the Poker
Company are presented below:
Additional Information for 2012:
Net income was $480,000 and dividends of $400,000 were declared.
Common stock was issued for cash.
A Long-term investment was sold for $160,000.
A new Long-term investment was acquired for $360,000.
Equipment that cost $600,000 was sold for $200,000. The book value of those assets
was $150,000.
The cash flow from investing activities for 2012 is a
A.$200,000 outflow
B.$400,000 inflow
C.$400,000 outflow
D.$600,000 inflow
26) The most straightforward method for making lessees’ balance sheet data comparable
is to treat all leases as if they were
A.operating leases
B.capital leases
C.direct financing capital leases
D.sales-type capital leases
27) Timeliness is a qualitative characteristic of accounting information that indicates
that information should be provided to users
A.within one month after the close of the books
B.before it loses its capacity to influence their decisions
C.before statutory deadlines
D.every month
28) XYZ Co.’s 2012 ratio of allowance for uncollectibles to gross receivables has
declined from the ratio at the end of 2011 . To evaluate whether the reduction in XYZ’s
ratio is reasonable, an analyst should
A.compare the ratio to other firms in XYZ’s industry
B.look for additional discussion in XYZ’s annual report
C.listen to the analyst earnings briefing
D.do all of the above
29) When applying lower of cost or market under IFRS, market is defined as
A.net realizable value less normal markup
B.replacement cost
C.net realizable value
D.the middle value among the above three alternatives
30) Eagle Corporation acquired a new machine on January 2, 2011 at a cost of
$126,000. The machine has an expected 4 year life and a salvage value of $6,000.
If Eagle uses the double-declining balance depreciation method, the depreciation
expense in 2012 is
A.$16,000
B.$24,000
C.$31,500
D.$40,000
31) An analyst has reviewed Blunt Company’s footnote disclosures for its deferred taxes
and noted a large increase in Blunt’s deferred tax liability. This increase could be caused
by all of the following except
A.growth in capital expenditures
B.tax law changes that permit more accelerated depreciation
C.GAAP warranty expenses that exceed tax warranty expenses
D.shortening the estimated useful lives of its fixed assets
32) Under IFRS, deferred taxes
A.are netted into one net current amount or one net noncurrent amount
B.are always reported as noncurrent
C.are reported as one net amount per taxable entity
D.that will be realized are deemed current
33) If no correcting entries were made at the end of 2010, by how much will retained
earnings be overstated or understated at the end of 2011? Ignore tax consequences.
A.$2,000 understated
B.$2,000 overstated
C.$10,000 understated
D.$10,000 overstated
34) Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at
$25,000 at the end of each year. The equipment has a fair value of $175,000 and an
estimated useful life of 10 years. The lease includes a guaranteed residual value of
$10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a
maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The
lessor’s implicit lease rate, known to the lessee, is 10%. Round all calculations to the
nearest whole dollar amount.
Present value interest factors are:
The lease liability will be valued on Pepper’s balance sheet at
A.$144,475
B.$157,469
C.$175,000
D.$250,000
35) The Common Stock account is reported on the balance sheet at the
A.historical par value of the stock
B.current market value of the stock
C.net realizable value of the stock
D.discounted present value of the future dividends
36) The fact that a company’s stock price does not change when earnings are announced
indicates that
A.earnings were the same (per share) as in the previous quarter
B.the securities markets are rationale and efficient
C.the information contained in the earnings release was fully anticipated by investors
D.earnings deviate from investors’ expectations
37) Presume that an asset exchange transaction does not culminate an earning process
and that the transaction does not involve cash. In such a case
A.a gain will be recognized only when the fair value of the acquired assets exceeds the
book value of the relinquished assets
B.a loss will be recognized only when the fair value of the acquired assets exceeds the
book value of the relinquished assets
C.the assets acquired are recorded at the book value of the assets relinquished
D.a gain will be recognized only when the fair value of the acquired assets exceeds the
fair value of the relinquished assets
38) A requirement to maintain a certain level of fixed charge coverage
A.directly enhances a company’s ability to pay dividends
B.indirectly enhances a company’s ability to pay dividends
C.directly limits a company’s ability to pay dividends
D.indirectly limits a company’s ability to pay dividends
39) To record newly issued stock shares upon conversion of debt, managers most often
choose the method known as the
A.market value method
B.book value method
C.Black-Scholes method
D.par value method
40) Treating the “billings on construction in progress” account as an off-set (contra) to
the construction inventory account avoids including certain costs and profits twice on
the balance sheet.
41) Investors and analysts are sometimes urged to ignore traditional GAAP numbers
and instead focus on nonstandard “pro forma” numbers because
A.the political compromises made to achieve consensus when issuing FASB
pronouncements lead to inaccurate portrayals of underlying events
B.management believes the pro forma numbers portray the company in a better light
C.the pro forma numbers are closer to those reported under international reporting
standards
D.pro forma numbers are easier to understand
42) The FASB/IASB joint discussion paper on financial statement presentation
recommends that the Statement of Financial Position contains a “financing arising from
operating activities” category which includes obligations arising from an entity’s
on-going operating activities such as
A.accrued pension liabilities
B.capital lease obligations
C.interest payable on lease liabilities
D.all of the above
43) When faced with falling short of a desired earnings target, financial executives
reportedly might consider any of the following actions except
A.prematurely taking an accounting charge
B.providing incentives for customers to buy more product this quarter
C.decreasing discretionary spending
D.delaying the start of a new project
44) Smith, Inc. has a pension plan with the following data available for 2011 and 2012:
The deferred gain or loss from the return on plan assets for 2012 is
A.$0
B.$2,400 deferred gain
C.$2,400 deferred loss
D.unknown from information provided
45)
The implied share price of Firm B’s stock is
A.$15.00
B.$45.00
C.$50.25
D.$55.25
46) The assessment of earnings quality is best accomplished through the use of which
one of the following?
A.Single-step financial statements
B.Balance sheet and cash flow statement
C.Multi-step income statement, balance sheet, and cash flow statement
D.Single-step income statement, balance sheet, and cash flow statement
47) One low-cost, effective way of eliminating or reducing conflicts of interest in
business relationships is to
A.only deal with related parties
B.carefully specify mutual expectations in contract terms
C.use lawyers to negotiate all terms
D.use an arbitrator for all negotiations
48) The proposed changes to the statement of cash flows put forth by the IASB and the
FASB would require that the statement of cash flows include all of the following major
sections and categories except
A.Income taxes
B.Extraordinary items
C.Discontinued operations
D.Net cash from business activities
49) The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year.
The bonds have an effective yield of 9%. Present value factors are below:
The bond interest expense for Year 1 is
A.$467,503
B.$500,000
C.$532,497
D.$538,895