1) The SEC permits Internet resellers (i.e., those that act as agents or brokers in a
transaction) to report revenue on either a “gross” or “net” basis.
2) GAAP states that if it is impractical to determine the cumulative effect of applying a
change in accounting principle to prior periodssuch as when a firm adopts the FIFO
inventory accounting methodthe new accounting principle is to be applied as if the
change was made prospectively as of the earliest date practicable.
3) Historically, GAAP did not require firms to record asset retirement obligations.
4) The account “Billings on Construction in Progress” is shown on the balance sheet as
a liability account.
5) Gains and losses from sales of assets comprising a clearly distinguishable component
of an entity are shown in the discontinued operations section of the income statement.
6) Credit risk refers to the risk of payment default by the borrower, and the resulting
loss to the lender of interest and loan principal payments.
7) The change in cash during a period is equal to the net income for the period.
8) The long-term asset turnover ratio captures information about property, plant, and
equipment utilization.
9) Managers wishing to avoid loan covenant violations may resort to making
accounting changes that increase reported earnings.
10) A $1,500 loss will be reported in the income statement when a company sells
treasury stock for $8,500 if the treasury stock was initially purchased for $10,000.
11) Traditional financial reporting presents forecasted cash flow information.
12) The interest cost component of a defined benefit pension plan is the portion of
expense due to the passage of time.
13) Operating cash flow minus cash outlays to replace existing operating capacity is
free cash flow.
14) If a lease agreement contains a bargain purchase option, the lessee must depreciate
the leased asset over the asset’s useful life rather than over the lease term.
15) Research shows that stock returns correlate better with accrual earnings than with
realized operating cash flows.
16) An impairment loss is the difference between the carrying value of the asset and the
future value of the asset.
17) Firms record accounts and notes receivable at net realizable value because that is
the only option GAAP permits.