1) Under absorption costing all production costs are inventoried.
2) Executory costs paid by the lessee associated with a capital lease are recorded as a
component of the lease liability.
3) Because equity funds are not really “free,” GAAP allows capitalization of an imputed
interest charge when equity is used to finance a construction project.
4) As LIFO layers are liquidated, inventory holding gains that were previously ignored
are recognized in the period of liquidation.
5) Technical default occurs only when the borrower fails to make interest and principal
payments when due.
6) A typical franchise agreement calls for only the payment of an initial franchise fee
which is recorded as revenue in the period it is received and earned.
7) Beginning inventory plus inventory purchases equals cost of goods sold.
8) Creditors are primarily concerned with determining the value of a firm’s shares.
9) When a loan agreement restricts a company from distributing its entire balance of
retained earnings as dividends to shareholders, restricted retained earnings must be
reported separately from unrestricted retained earnings on the face of the balance sheet.
10) Based on a number of research studies, current earnings explain virtually 100% of
the variation in current stock prices between companies.
11) Under either LIFO or FIFO it is impossible to simultaneously reflect both the
balance sheet inventory and cost of goods sold at current cost.
12) On January 1, 2012, the Husky Corporation purchased 90% of the Spartan
Company’s voting stock for $2,700,000. Spartan’s net assets had a book value of
$2,450,000; the fair value of Spartan’s building was $325,000 greater than its book
value. The book value of Husky’s net assets immediately after the acquisition of Spartan
totaled $6,850,000. Husky used the acquisition method to prepare its consolidated
balance sheet.
What is total stockholders’ equity on the January 1, 2012 consolidated balance sheet?
A.$9,300,000
B.$6,850,000
C.$7,150,000
D.$7,120,000
13) The 1984 Revised Model Business Corporation Act redefined solvency as a
situation where the fair value of
A.assets exceed the book value of liabilities after a distribution to shareholders
B.assets exceed the fair value of liabilities after a distribution to shareholders
C.liabilities exceed the fair value of assets
D.liabilities exceed the fair value of assets after a distribution to shareholders
14)
The implied share price of Firm A’s stock is
A.$12.00
B.$48.00
C.$49.20
D.$54.40
15) During 2012, Autumn Company had the following information related to cash
flows:
If Autumn Company’s statement of cash flows is prepared using the proposal on the
statement of cash flows put forth by the IASB and the FASB, what amount would be
reported as net cash from operating activities?
A.$72,000 cash inflow
B.$156,000 cash inflow
C.$40,000 cash outflow
D.$84,000 cash inflow
16) To remain in accordance with GAAP, operating leases require note disclosure of the
A.amount of annual rental payments.
B.discounted present value of future lease payments
C.undiscounted present value of future lease payments
D.future cash outflows arising from operating leases
17) Cheery Company follows IFRS for its financial reporting. On January 1, 2012
Cheery issued 250 million of 10-year convertible notes that pay interest at 5% annually.
Investors pay 250 million for the notes even though the company’s credit risk at the
time implies a 10% interest rate for traditional debt of similar duration. When the cash
flows associated with the debt are discounted at 10%, the resulting value is 175 million.
On Cheery’s December 31, 2012 income statement how much interest expense will be
recorded?
A.25 million
B.12.5 million
C.17.5 million
D.8.75 million
18) Some financial analysts contend that reporting debt at amortized historical cost
rather than current market value
A.makes it more difficult to manipulate accounting numbers
B.makes it easier to manipulate accounting numbers
C.has no impact on the accounting numbers
D.makes it impossible to manipulate the accounting numbers
19) The Pulaski Corporation reported the following for the year ended December 31,
2011:
How much cash did Pulaski pay for interest during 2011?
A.$57,350
B.$62,850
C.$60,100
D.$67,150
20) When applying the lower of cost or market method, market value cannot exceed the
A.floor
B.net realizable value
C.net realizable value less a normal profit margin
D.replacement cost
21) Davis Company began manufacturing operations on January 2, 2011 . During 2011
Davis earned a pre-tax book income of $85,000 and had taxable income of $75,000.
Davis had a temporary difference relating to a prepaid asset that will be expensed as
follows for book purposes:
The enacted tax rates are 30% for 2011 and 2012; and 40% for subsequent years.
If Davis paid no estimated taxes, income tax payable at the end of 2011 is
A.$22,500
B.$30,000
C.$36,000
D.$27,500
22) The residual interest in the resources of an entity that remains after deducting its
debts to third parties defines
A.assets
B.liabilities
C.equity
D.retained earnings
23) As a result of the passage of the 1984 Revised Model Business Corporation Act, it
may be fair to state that
A.the book value of owners’ equity may not give an accurate picture of potentially legal
distributions
B.the book value of owners’ equity gives an accurate picture of potentially legal
distributions
C.the book value of owners’ equity never gives an accurate picture of potentially legal
distributions
D.the book value of assets gives an accurate picture of potentially legal distributions
24) When a bond is sold at a premium the
A.effective interest rate is less than the stated rate
B.effective interest rate is greater than the stated rate
C.effective interest rate relative to the stated rate is not known
D.interest expense during the life of the bond exceeds the amount of cash interest
payments during the life of the bond
25) Perry Investments bought 2,000 shares of Able, Inc. common stock on January 1,
2012, for $20,000 and 2,000 shares of Baker, Inc. common stock on July 1, 2012 for
$24,000. Baker paid $2,400 of previously declared dividends to Perry on December 31,
2012 . At the end of 2012, the market value of the Able stock was $18,000 and the
market value of the Baker stock was $28,000. The stocks were purchased for short-term
speculation. Perry owns 10% of each company.
Perry should record the year-end adjustment as
A.Option a
B.Option b
C.Option c
D.Option d
26) The apportionment of the cost of equipment to future periods under the matching
principle is
A.depletion
B.amortization
C.depreciation
D.allocation
27) 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 2015 if double-declining balance depreciation
is used and there is a switch to straight-line in year 2013?
A.$4,333.33
B.$3,000
C.$9,000
D.$12,000
28) 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.)
What depreciation method is used if depreciation expense is $6,000 in 2014?
A.Straight-line
B.Sum of years’ digits
C.Double-declining balance
D.Composite
29) Bruce Company reported net income for 2012 of $100,000. The company reported
depreciation expense of $17,500 and amortization of $5,000. The company also
reported a loss on the sale of equipment of $2,500. Based only on this information, the
company would report cash flow from operating activities of
A.$117,500
B.$120,000
C.$127,500
D.$125,000
30) The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid
demolished the old building at a cost of $20,000, and sold scrapped material salvaged
from the old building for $5,000. The architect’s fees were $25,000, and the title
insurance upon acquisition of the land was $1,000. The construction period interest was
$8,000, and the contractor received $300,000 for the building. A pavement assessment
made by the city cost Reid $2,000 at the purchase date.
The cost of the land recorded by Reid Co. is
A.$100,000
B.$115,000
C.$116,000
D.$118,000
31) Which of the following statements does not accurately describe the accounting for
net operating losses?
A.A firm must assess future profitability when determining the amount of a deferred
income tax asset
B.The net operating loss must be carried back two years
C.The net operating loss can be both carried forward and backward
D.The deferred income tax asset must be allocated between the current and noncurrent
balance sheet classifications
32) When an asset’s fair value has increased and a firm elects the revaluation method,
A.the amount of the necessary write-up is credited to a contra-asset account called
revaluation surplus
B.subsequent depreciation is based on the asset’s original cost
C.under U.S. GAAP, the accumulated depreciation account is removed and the revalued
amount becomes the new book value
D.under IFRS, the accumulated depreciation account is removed and the revalued
amount becomes the new book value
33) Net realizable value of receivables is gross receivables minus
A.bad debt expense and sales returns
B.bad debt expense and estimated returns and allowances
C.estimated uncollectibles, and estimated returns and allowances
D.proven uncollectibles and estimated returns and allowances
34) Analysts try to remove holding gains from reported FIFO income because
A.the FEI’s code of professional ethics requires that they do so if possible
B.holding gains understate management’s true performance
C.they are potentially unsustainable
D.None of the above are appropriate reasons for removing holding gains from reported
FIFO income
35) Which one of the following is not a broad function served by debt covenants?
A.Debt covenants usually preclude the borrower from being a merger target
B.Debt covenants serve as both signals and triggers, thereby assuring a steady flow of
information from borrower to lender
C.Debt covenants are designed to preserve the borrower’s repayment capacity
D.Debt covenants offer the lender some protection against credit-damaging events
affecting the borrower
36) Variable costing is also referred to as
A.direct costing
B.full costing
C.variable costing
D.fixed costing
37) Which one of the following is an example of the expected benefit approach for
valuing long-lived assets?
A.Historical cost
B.Current replacement value
C.Current cost
D.Discounted present value