1) If a long-lived asset’s remaining expected future value falls below its net book value,
the asset is considered to be an impaired asset.
2) A company is considering offering for sale one of two bond issues. The two bond
issues are equivalent except that one bond pays semi-annual interest while the other
bond pays annual interest.The proceeds from the sale of the bond with annual interest
payments will be greater than the proceeds from the sale of the bonds with semi-annual
payments.
3) Depreciation is added back to net income to determine cash from operating activities
under the indirect method.
4) An understanding of management’s reporting incentives is sufficient to enable
auditors to recognize vulnerable areas where financial reporting abuses are likely to
occur.
5) The lessor does not have any asset recorded in its financial statements for a lease
classified as a sales-type lease.
6) For a firm using the indirect method, amortization of bond discount should be added
back to net income to arrive at cash flow from operating activities.
7) When the ownership percentage of voting stock exceeds 20 percent, GAAP requires
that the investor use the equity method to account for the investment.
8) RAP sometimes shows up in a company’s GAAP financial statements.
9) The FASB and IASB are working on a proposed new statement of comprehensive
income and have tentatively decided to retain the current formatting options.
10) That a causal relationship between current R&D and future revenue has not been
demonstrated was among the FASB’s justifications for expensing all R&D.
11) Gains and losses from sales of assets comprising a clearly distinguishable
component of an entity are shown in the discontinued operations section of the balance
sheet.
12) An aging of accounts receivable is a determination of how long each receivable has
been on the books.
13) GAAP specifies three conditions that must be satisfied in order for revenue to be
appropriately recognized.
14) Current GAAP requires firms to use the direct method when preparing the operating
activities section of the statement of cash flows because it is more informative and
transparent.
15) Prior service cost is the increase in the projected benefit obligation created by
pension plan amendments.
16) Financial analysts should always review stock repurchase plans carefully because
A.the plans always produce above-market returns
B.the plans usually produce above-market returns
C.it is important to determine the reasons for the buyback
D.the plans are always beneficial to the shareholders
17) The Parent Company purchased 80% of the Sub Corporation’s voting stock on
January 1, 2012 . The Parent Company used the acquisition method to prepare the
consolidated balance sheet. Which of the following is not an accurate description of the
consolidated balance sheet on January 1, 2012?
A.Consolidated stockholders’ equity does not include the stockholders’ equity of the
Sub Corporation
B.Consolidated assets does not include the Investment in Sub account
C.The fair value of both Parent’s and Sub’s assets are included within the consolidated
balance sheet
D.Consolidated assets will include goodwill if the imputed total business fair value of
Sub is in excess of the fair value of Sub’s identifiable assets
18) The maximum limit for market value of product L-19 is
A.$37
B.$38
C.$48
D.$50
19) The term “consolidated” is used in financial statements under U.S. GAAP to refer to
the financial reporting for a parent and its subsidiaries. The equivalent term used on
balance sheets in the United Kingdom is
A.cooperative
B.satellite
C.consolidated
D.group
20) The Shasta Corporation began operations in 2011 . Shasta’s investment portfolio
reported the following on December 31, 2011:
Which of the following is correct with respect to the accounting for Shasta’s investment
portfolio?
A.Net income was decreased $55,000 during 2011
B.Total stockholders’ equity was decreased $55,000 as of December 31, 2011
C.Net income was increased $15,000 during 2011
D.Total stockholders’ equity was decreased $15,000 as of December 31, 2011
21) A perpetual inventory system
A.usually maintains inventory records only in terms of physical units on hand
B.uses a purchases account to record additions to inventory
C.eliminates the need to periodically take a physical inventory count
D.keeps a running record of the amount of inventory on hand
22) A decrease in market-wide interest rates will result in a/an
A.increase in the cost of equity capital
B.decrease in the cost of equity capital
C.increase in the cost of debt
D.decrease in the demand for fixed-rate bond investments
23) Condensed financial data are presented below for the Phoenix Corporation:
The operating cash flows to total liabilities for 2012 is (rounded):
A.13.4%
B.21.5%
C.23.4%
D.28.1%
24) The accounting principle violated if temporary timing differences are not taken into
account is the
A.historical cost principle
B.matching principle
C.conservatism principle
D.cost/benefit principle
25) Under IFRS, when an asset is revalued upward, subsequent depreciation is based on
A.the asset’s original cost
B.the method used for determining depreciation on the company’s tax returns
C.the asset’s fair value
D.the amount of future cash flows the asset is expected to generate
26) Although a company’s earnings are important in financial statement analysis, with
respect to credit evaluations and lending decisions an analysis of its cash flows is
A.optional
B.central
C.only important if the company has a high debt/equity ratio
D.required by banking regulations
27) For U. S. GAAP, softwaredevelopment costs are capitalized as intangible assets
A.from the beginning of development
B.after a copyright is obtained
C.once the product is introduced into the marketplace
D.once the technological feasibility of the product is established
28) Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus
$8,000 accrued interest on October 1, 2011 . Island and Mutual Bank enter into an
agreement whereby Island will pay Mutual $128,000 on the due date of the note on
October 1, 2013 .
What effective interest rate will Mutual Bank use for the restructured note?
A.8.7%
B.8.9%
C.10.0%
D.13.1%
29) Which of the following does not accurately describe the proprietary view of the
firm?
A.Its focus is on the firm’s net assets
B.It is the prevailing view of GAAP
C.Its focus is on owners’ equity
D.Whether creditors or shareholders provided the firm’s assets is irrelevant
30) A component of an entity may be a/an
A.reportable or operating segment
B.subsidiary
C.asset group
D.reportable or operating segment, subsidiary, or asset group
31) Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January
1, 2011 and completed construction of the ship on October 31, 2012 . To finance
construction, Doggy took out an $8,000,000, 2-year 6% construction loan on February
1, 2011 . Interest on the loan was to be paid annually on the anniversary date of the
loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following
expenditures in conjunction with this construction project:
How much interest should Doggy capitalize in 2011 related to the cutter project?
A.$129,000
B.$139,500
C.$440,000
D.$480,000
32) In the context of determining fair value, the exit price refers to
A.the amount the firm would receive if it sold a given asset
B.the amount the firm would pay if it bought an asset of the same type and condition as
the one being valued
C.the sum of the future cash flows expected to be generated by continuing to use the
asset
D.none of the above
33) The prevalence of stock options in executive pay packages
A.eliminates managers’ incentives to engage in short-term earnings management
B.is frowned upon by the SEC
C.may actually contribute to, rather than moderate, managers’ short-term focus
D.has been widely cited as the main cause of the financial system meltdown that
occurred in 2008
34) When accounting for a non-free-standing foreign subsidiary, translation exchange
rates are accounted for using the temporal method which involves reporting all cost of
goods sold accounts at the
A.current rate
B.historical rate
C.rate at time of transaction
D.present value rate
35) Andy’s Skateboards, Inc. reported a retained earnings balance of $300,000 at
December 31, 2011 . In June 2012, Andy’s internal audit staff discovered two errors that
were made in preparing the 2011 financial statements that are considered material:
a. Merchandise costing $50,000 that was on consignment at various consignee locations
was mistakenly omitted from the 2011 ending inventory.
b. Equipment purchased in January 2, 2011 for $150,000 was capitalized and
depreciated using straight-line depreciation, a 10-year useful life, and $5,000 salvage
value. The capitalized amount included $30,000 for repairs of the equipment which
suffered major damage when it was struck by a forklift during installation.
Required:
a. What amount should Andy’s Skateboards report as a prior period adjustment to
beginning retained earnings at January 1, 2012? (Ignore taxes)
b. Prepare the journal entries that Andy’s Skateboards would make in June 2012 to
correct the errors made in 2011 . Assume that depreciation for 2012 is made as a
year-end adjusting entry. (Ignore taxes)
36) 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 income figure of the previously reported income
C.no prior years’ income statements be restated, but a pro forma 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 income figures be
provided
37) With a loan collateralized by receivables,
A.the bank makes the loan without recourse
B.the bank has recourse against the accounts receivable customers
C.a company receives cash and is not responsible for repaying the loan
D.a company receives cash and is responsible for repaying the loan
38) The fair value adjustment for available-for-sale securities results in
A.a realized gain or loss to be reported within income from continuing operations
B.an unrealized gain or loss to be reported within income from continuing operations
C.a reduction of retained earnings
D.an unrealized gain or loss to be reported as a component of other comprehensive
income
39) Which of the following statements is correct when a company has a complex capital
structure?
A.Diluted earnings per share must be shown on the income statement
B.Diluted earnings per share and basic earnings per share must both be shown on the
income statement
C.The company might have convertible bonds outstanding
D.The company must have participating preferred stock outstanding
40) Which one of the following is an example of a negative covenant?
A.Compliance with laws
B.Maintenance of insurance
C.Limit on capital expenditures
D.Rights of inspection
41) Deuce Company purchased a truck for $50,000 on January 2, 2011 . The asset has
an expected salvage value of $5,000 at the end of its five-year useful life. (DDB
switches to straight-line in year 2013.)
How much is the depreciation expense in 2012 if sum-of-years digits depreciation is
used?
A.$6,000
B.$9,000
C.$12,000
D.$15,000
42) On January 2, 2012, Jensen Corporation sells equipment it manufactured to
Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note
bears no explicit interest, but rather requires the entire $80,000 to be repaid at the end
of five years. Jensen recently sold the same equipment to another company for $54,447.
When Lewisburg Fabricators sought bank financing for this purchase the company was
offered the funds at 8%, but decided instead to let Jensen hold the note.
What amount will Jensen recognize as interest income during 2013?
A.$4,356
B.$4,704
C.$5,111
D.$0
43) The reciprocal of the risk-adjusted equity cost of capital used is the
A.return on assets
B.return on common equity
C.price earnings ratio
D.profit margin on sales
44) Which of the following is not an accurate description of the controversies
surrounding the fair value option?
A.Advocates argue that accounting-induced volatility is eliminated and financial
statement transparency is improved
B.Proponents argue that opportunities are enhanced for companies to manipulate their
earnings and balance sheet
C.Proponents argue that companies that can use the fair value option in situations where
there is not necessarily a relationship between the financial assets and liabilities which
promotes the opportunity to manage earnings
D.Advocates argue that financial reporting is more accurate and transparent for those
companies in financial distress
45) A company purchased shares of stock of another company for $75,000 during 2011;
the shares were classified as available-for-sale. The shares’ market value was $79,000 at
the end of 2011 and $81,000 at the end of 2012 . Which of the following statements
correctly describes the investor’s accounting for the investment?
A.A realized gain of $4,000 was recorded during 2011
B.An unrealized gain of $6,000 was recorded during 2012
C.An unrealized gain of $2,000 was recorded during 2012
D.A realized gain of $2,000 was recorded during 2012
46) An expenditure that increases a long-lived asset’s useful life should be
A.capitalized
B.expensed
C.ignored
D.written off immediately
47) At the beginning of 2011, Moony, Inc. has a cumulative unrecognized loss of
$50,000 in its pension plan. The estimated remaining service period of active
employees is 12 years for both years.
The corridor for amortization for 2012 is
A.$0
B.$25,000
C.$35,000
D.$38,500
48) A bond with a $500,000 maturity value is immediately retired for $515,000 plus
accrued interest. The premium on bonds payable (bond premium) at the retirement date
is $17,500. Which of the following statements is correct?
A.The loss on the debt extinguishment is $32,500
B.The gain on the debt extinguishment is $2,500
C.The gain on the debt extinguishment is $32,500
D.The gain or loss on the debt extinguishment can’t be determined without knowing the
dollar amount of the accrued interest
49) Research evidence suggests that
A.companies increase bad debt expense when earnings are otherwise low and then
decrease the expense when earnings are high
B.companies reduce bad debt expense when earnings are otherwise low and then
increase the expense when earnings are high
C.there is no correlation between bad debt expense and earnings levels
D.a company’s ratio of allowance for uncollectibles to gross receivables should always
be close to the average for its industry
50) Financial analysts can make comparisons between the long-lived assets of two
companies, both of which use straight-line depreciation, by computing the average
useful life of assets with which one of the following formulas?
A.Net property, plant, and equipment/average useful life
B.Gross property, plant, and equipment/average useful life
C.Gross property, plant, and equipment minus salvage value/straight-line depreciation
expense
D.Straight-line depreciation expense/net property, plant, and equipment
51) Under the liability approach, the full change in the amount of future liability is
recognized as an increase or decrease in income tax expense in the year the
A.tax rate change is debated
B.tax law is proposed
C.tax law becomes effective
D.tax law becomes known
52) When accounting for a non-free-standing foreign subsidiary, translation exchange
rates are accounted for using the temporal method which involves reporting all revenue
accounts at the
A.current rate
B.historical rate
C.rate at time of transaction
D.present value rate
53) 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 net cash flow from operating activities for 2012 is a
A.$200,000 outflow
B.$280,000 inflow
C.$280,000 outflow
D.$400,000 inflow
54) Jenkins RV Sales has been selling large recreational vehicles for 20 years. On
January 1, 2011, the company had $4,630,000 in inventory (based on a FIFO valuation).
While the number of recreational vehicles in Jenkins’ inventory remained fairly constant
throughout 2011, by December 31, 2011 RV prices were 6% higher than at the
beginning of the year. The company reported cost of goods sold for 2011 of
$19,500,000.
Required:
Calculate the amount of realized holding gains in 2011 income for Jenkins RV Sales.
55) An analyst gathered the following information about a company whose fiscal year
end is December 31 .
Required:
Calculate the company’s basic earnings per share for 2011 .
56) Jones Bros. Tools, Inc. had the following layers in its LIFO table saw inventory at
January 1, 2011 . The company sets its selling price at 200% of replacement cost at the
time of sale. Replacement cost as of January 1, 2011 was $835 per unit and remained
unchanged throughout 2011 . During 2011, the company purchased 650 units and sold
1,125 units.
Required:
Calculate the difference between Jones Bros. Tools, Inc.’s current cost operating margin
(on a replacement cost basis) and the LIFO margin as reported by the company in
2011 . What does the difference represent?
57) A tremendous amount of time, money, and effort are spent on the compilation of
quarterly and yearly financial reports. Correspondingly, they attract a lot of attention
and scrutiny. Explain the role and importance of financial reports in capital markets.
58) All of the following are used as financial analysis tools exceptAmanagements’
discussion and analysisBcommon size statementsCtrend statementsDfinancial ratios