1) U.S. GAAP requires some firms to periodically recategorize a portion of actuarial
adjustment losses relating to pensions into periodic net income.
2) In the highest risk S&P category of CCC/C, about 60% of the firms default within a
year.
3) Profit margin can be decomposed into its individual factors including COGS/Sales
and Taxes/Sales.
4) For long-term credit sales transactions utilizing notes receivable, interest income is
recorded each period over the note’s term to maturity using the prevailing borrowing
rate in effect at the end of each reporting period.
5) When return on assets is high at a highly levered firm, return on common equity will
be low.
6) IFRS requires that the discount rate be used to compute the expected return on plan
assets.
7) One difference between U.S. GAAP and IFRS is that IFRS requires companies to
present a single statement of comprehensive income while U.S. GAAP allows
companies to alternatively present separately a net income statement and a statement of
comprehensive income.
8) Firms that use International Financial Reporting Standards (IFRS) are required to
order assets and liabilities from least liquid to most liquid on the statement of financial
position.
9) An unrealized loss on trading securities results in a deferred tax asset because the
loss reduces pre-tax income but has no effect on taxable income.
10) Highly profitable but politically vulnerable firms have an incentive to make
themselves appear less profitable than they really are.
11) When using LIFO, management occasionally deliberately stops normal purchases
for the last few weeks of the year in an attempt to boost profits.
12) A mispriced security is a stock or bond that is selling for substantially more€or
less€than it seems to be worth.
13) Under IFRS, pension expense is likely to be both more volatile and lower compared
to pension expense computed under U.S. GAAP.
14) Peachpit Software Developers shipped its accounting package to a customer on
September 10, 2014. In addition to the software, Peachpit’s contract requires the
company to provide: (1) training to the customer’s accounting staff during October of
2014 and again in January 2015 when the upgrade is released-75% of the training hours
are provided during October, (2) technical product support for one year starting October
1, 2014, and (3) a major upgrade to the software early in 2015. The customer paid the
total contract price of $80,000 upon receipt of the invoice on September 17, 2014.
Peachpit would charge the following if these individual contract elements were sold
separately:
Required:
a. Prepare a journal entry to record receipt of the cash payment.
b. Determine the amount of revenue to be recognized in 2014 and prepare the necessary
journal entry.
15) Which of the following statements regarding IFRS is incorrect?
A.All companies listed on the London Stock Exchange must use IFRS.
B.The SEC-required Form 20-F must be filed with the SEC by foreign issuers within 30
days.
C.The European Commission must “endorse” IFRS for required use by EU companies.
D.The SEC has expressed concern that transitioning to IFRS might be prohibitively
expensive and might lessen U.S. influence over standard setting.
16) Under current GAAP, the sponsor of a securitization entity (SE) will have to treat a
securitization as a collateralized borrowing instead of a sale if it has
A.the power to direct the activities of the SPE that most significantly impact the SPE’s
economic performance.
B.the obligation to absorb significant losses or the right to receive significant benefits
that potentially could be generated by the SPE.
C.both the power to direct the activities of the SPE that most significantly impact the
SPE’s economic performance and the obligation to absorb significant losses or the right
to receive significant benefits that potentially could be generated by the SPE.
D.neither the power to direct the activities of the SPE that most significantly impact the
SPE’s economic performance or the obligation to absorb significant losses or the right
to receive significant benefits that potentially could be generated by the SPE because
securitizations are always treated as sales.
17) The difference between the amortized cost basis of a debt security and the present
value of expected cash flows for that security discounted at the effective interest rate
implicit in the debt instrument when it was originally acquired is called the
A.amount representing the credit loss.
B.amount related to all other factors.
C.other-than-temporary impairment.
D.subsequent recovery in fair value.
18) All of the following are used as financial analysis tools except
A.managements’ discussion and analysis.
B.common size statements.
C.trend statements.
D.financial ratios.
19) Delta Co. began operations on January 1, 2012. During 2012 and 2013, the
company used the weighted-average method for its inventory costing. In 2014, the
company changed its method of inventory costing to FIFO so that its financial
statements would be more comparable to those of other firms in its industry. If the FIFO
method had been used, Delta’s cost of goods sold would have been $45,000 less in 2012
and $35,000 less in 2013. Delta’s income statements, as originally presented, appear
below. Delta’s tax rate is 30%.
Required:
a. Assume that for comparison purposes Delta presents 2012 and 2013 income
statements in its 2014 annual report. Revise Delta’s 2012 and 2013 income statements
to appear as they should in the 2014 annual report.
b. Prepare the journal entry required in 2014 to record Delta’s change in accounting
principle.
20) For Morey, this lease is treated as a/an
A.operating lease.
B.capital lease.
C.direct financing capital lease.
D.sales-type capital lease.
21) Which one of the following entries would be made in Year 1 to record the costs
incurred using the percentage-of-completion method of revenue recognition?
A.
B.
C.
D.
22) On January 1, 2015, the Regal Company purchased 30% of the outstanding voting
stock of the Air Corporation for $300,000; the book value of Air’s net assets at the date
of purchase was $900,000. Regal was willing to pay more than the book value of the
acquired shares because Air’s depreciable assets with a ten-year remaining life were
undervalued. Regal uses straight-line depreciation. During 2015, Air reported net
income of $75,000 and paid dividends of $30,000.
Regal has elected the fair value option to account for equity method investments. The
fair value of the Air investment as of December 31, 2015 was $295,000. The carrying
value of the Air investment on December 31, 2015 was
A.$295,000.
B.$300,000.
C.$310,500.
D.$313,500.
The carrying value is the fair value.
23) Edsel Inc. has the following unadjusted year end trial balance information available
for 2014:
If Edsel uses the gross accounts receivable approach for estimating bad debt expense,
the income statement will show an expense of
A.$2,100.
B.$3,600.
C.$5,100.
D.$8,500.
24) Differences between IFRS and U.S. GAAP include all of the following except
A.reversal of inventory write-downs.
B.extraordinary items.
C.lease capitalization.
D.research and development costs.
25) Condensed financial data are presented below for the Phoenix Corporation:
The quick ratio for 2014 is (rounded):
(Assume that total current assets include cash, marketable securities, accounts
receivable and inventory.)
A.1.1 to 1
B.1.4 to 1
C.1.6 to 1
D.2.8 to 1
26) The Shill Company uses the dollar-value LIFO method for valuing inventory. The
following inventory information is available at the end of the year:
The inventory under dollar-value LIFO at the end of Year 3 is
A.$274,074.
B.$276,800.
C.$278,857.
D.$300,000.
27) 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 2013 and 2014. 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.
28) Below are the condensed balance sheets and income statement for the Beltway
Company, Inc. Assume all purchases and sales are on credit. Assuming there were no
disposals of fixed assets during 2014, provide the following items for the year ended
December 31, 2014:
a. Collections from customers
b. Payments to suppliers
c. Insurance premium payment
d. Interest payment
e. Utility payments
f. Wages payment
g. Capital expenditures
Condensed balance sheet December 31, 2014
Condensed income statement for year ended December 31, 2014
29) 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.
30) Manero Company included the following information in its annual report:
In a common size income statement for 2014, the cost of goods sold is expressed as
A.64.5%
B.100.0%
C.112.3%
D.130.0%
31) For nonfinancial firms using IFRS which of the following is true?
A.In most cases, cash flows from income taxes must be reported separately as an
operating activity.
B.Interest and dividends paid may be reported as either operating or investing activities.
C.Bank overdrafts repayable on demand used as part of normal cash management
activities must include those overdrafts as part of financing activities.
D.Firms using the direct method must provide a schedule reconciling net income to
cash flows from operating activities.
32) Manero Company included the following information in its annual report:
In a trend income statement for 2014, where 2012 is the base year, sales are expressed
as
A.87.2%
B.100.0%
C.114.7%
D.148.7%
33) Managers cater to Wall Street (i.e., try to meet earnings benchmarks) for which of
the following reasons?
A.to build credibility with the capital market.
B.to maintain or increase the firm’s stock price.
C.to build the external reputation of management.
D.All of these are reasons managers cite for meeting earnings benchmarks.