1) Some intangible assets have indefinite lives and are impairment tested rather than
amortized.
2) Investment analysts often compare cash flows from operations across two or more
companies.
3) Stock options provide a set of “golden handcuffs” for retaining executives during the
restriction period.
4) In practice, no end-of-period accrual is typically made for future returns and
allowances.
5) Both IFRS and U.S. GAAP require companies to report valuation changes to the
company’s expected liability to its retired employees due to changes in actuarial
estimates in other comprehensive income each period.
6) Credit risk analysis using financial ratios typically involves an assessment of
profitability and solvency.
7) A higher discount rate assumption increases the projected benefit obligation and
thereby increases the funded status.
8) Net income or loss generally arises from transactions with owners who provide net
capital to the firm.
9) If a company elects to use the fair value method for available-for-sale debt
investments, the interest income pattern in the income statement is identical to the
interest income pattern under the held-to-maturity classification.
10) When adjusting accrual earnings to obtain cash flows from operations, an increase
in Accounts Payable is added to arrive at cash flow from operations.
11) In a common size cash flow statement, all items are expressed as a percentage of
A.sales.
B.total assets.
C.net income.
D.total equity.
12) Trans Fat Express, Inc. entered into an agreement with a franchisee on July 1, 2014.
The agreement specified that Trans Fat Express receive an initial franchise fee of
$200,000 (30% due at signing; the balance to be paid in equal annual installments plus
interest at 8% of the unpaid balance beginning July 1, 2015). The franchise fee is
comprised of (1) consideration for the right to operate the franchise, and (2) payment
for services to be performed by Trans Fat Express that include site selection and
building design, employee training, and management training. Substantial performance
of these services is deemed to have occurred when the franchise opens for business in
April 2015. Trans Fat Express allocates 60% of the fee to the right to operate the
franchise and the remainder to the subsequently performed services.
Required:
a. Prepare the entry to record the signing of the franchise agreement and receipt of the
payment due at that time.
b. Prepare any adjusting journal entries necessitated at December 31, 2014 by this
agreement.
c. Prepare the entry Trans Fat Express should make when the franchisee opens the
location in April 2015
13) Condensed financial data are presented below for the Phoenix Corporation:
The total assets turnover ratio for 2014 is (rounded):
A.1.7 times.
B.2.0 times.
C.2.2 times.
D.2.4 times.
14) Accrual accounting net income can differ from operating cash flows for all of the
following reasons except
A.dividend declaration and payment dates.
B.useful lives of assets.
C.future pension and healthcare benefits.
D.estimates of uncollectible accounts.
15) The Sarver Farm has completed the fall harvest with 50,000 bushels of premium
wheat. The wheat cost $75,000 from planting to harvest and the market price of the
wheat on the day it is placed in the silo is $2.50 per bushel. Sarver sells 42,000 bushels
in Year 1 and holds the remaining 8,000 until Year 2 when it sells for $3.00 per bushel.
Using the market price (production) method, how much net income should Sarver
recognize in Year 2?
A.$4,000
B.$12,000
C.$24,000
D.$8,000
16) The costs of providing financial information is ultimately borne by
A.management.
B.shareholders.
C.auditors.
D.professional analysts.
17) The Canon Corporation sells ten copiers to the Title Company on October 15 for
$40,000. Canon delivers the copiers to Title on October 20; Title pays $16,000, and
agrees to pay the balance on November 10
Under the cash basis, how much revenue should Canon recognize in October?
A.$0
B.$16,000
C.$24,000
D.$40,000
18) Condensed financial data are presented below for the Phoenix Corporation:
The accounts receivable turnover for 2014 is (rounded):
(Assume all sales are on account.)
A.2.0 times.
B.6.4 times.
C.6.6 times.
D.7.1 times.
19) On Ford’s books, this lease is treated as a/an
A.operating lease.
B.capital lease.
C.direct financing capital lease.
D.sales-type capital lease.
20) The Sarver Farm has completed the fall harvest with 50,000 bushels of premium
wheat. The wheat cost $75,000 from planting to harvest and the market price of the
wheat on the day it is placed in the silo is $2.50 per bushel. Sarver sells 42,000 bushels
in Year 1 and holds the remaining 8,000 until Year 2 when it sells for $3.00 per bushel.
Using the completed transaction (sales) method, how much net income should Sarver
recognize in Year 2?
A.$4,000
B.$12,000
C.$24,000
D.$8,000
21) Condensed financial data are presented below for the Phoenix Corporation:
The profit margin used to calculate return on assets for 2014 is (rounded):
A.7.9%
B.8.2%
C.8.5%
D.16.3%
22) Hickory Furniture Company had the following costs paid during the month of May:
Hickory sold $32,000 of the inventory and has agreed to pay warranty
expenses for its customers. These are expected to be $1,600 and occur evenly over the
next four months (i.e., starting in June).
What is the amount of Hickory’s cash-basis expenses for the month of May?
A.$33,600
B.$42,400
C.$50,000
D.$51,600
23) 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, discontinued operations, extraordinary items.
D.IFRS; their expected future categorization on the income statement into income from
continuing operations, discontinued operations, extraordinary items.
24) The U.K. Equity account “Share premium” is reported on U.S. GAAP balance
sheets as
A.capital reserve.
B.revaluation reserve.
C.capital in excess of par.
D.an accumulated other comprehensive income account.
25) For available-for-sale debt securities, if a firm intends to sell the security or it is
more likely than not that the firm will be required to sell the security before recovery of
its amortized cost basis less current-period credit loss, then the amount of impairment
A.is recognized in other comprehensive income equal to the entire difference between
the investment’s amortized cost basis and its fair value at the balance sheet date.
B.is separated into two components: the amount representing the credit loss and the
amount related to all other factors.
C.is separated into two components: the amount recognized in income and the amount
deferred until it is realized.
D.is recognized in earnings equal to the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date.
26) Other-than-temporary impairments are not an issue for debt investments classified
as
A.available-for-sale.
B.held-to-maturity.
C.trading.
D.both trading and held-to-maturity.
27) Manero Company included the following information in its annual report:
In a trend income statement for 2012, where 2012 is the base year, sales are expressed
as
A.84.4%
B.92.6%
C.100.0%
D.150.5%
28)
29) On October 31, 2010, Sterling Construction Company entered into a credit
agreement with Comerica Bank. The following appeared among the agreement’s
financial covenants: “Commencing with the fiscal quarter ending December 31, 2010,
maintain as of the end of each fiscal quarter a Fixed Charge Coverage Ratio of not less
than 1.25 to 1.00.” The credit agreement also contained a “definitions” section where
this item was listed: “€Fixed Charge Coverage Ratio’ shall mean as of any date of
determination a ratio the numerator of which is EBITDA for the Applicable Measuring
Period, minus cash taxes and cash tax distributions with respect to such period and the
denominator of which is the sum of Current Maturities of Long Term Debt plus interest
paid during the trailing twelve month period, plus twenty-five percent (25%) of the
daily average total non-amortizing debt during the trailing twelve month period.”
Required:
a. What is a minimum fixed charge coverage ratio and what purpose does it serve in the
company’s loan agreements?
b. Why is it necessary for the loan agreement to precisely define “Fixed Charge
Coverage Ratio?”
30) Which one of the following entries properly records the cost of installment goods
sold for Year 2?
A.
B.
C.
D.