1) Depreciation is not intended to track the asset’s declining market value.
2) Broadly defined, the term “analyst” includes anyone who uses financial statements to
make decisions as part of their job.
3) To preclude firms from engaging in ‘sham” exchanges to generate artificial gains,
GAAP requires that the transaction must possess commercial substance.
4) Issuing common stock in exchange for land will create a cash outflow in the
investing activities section of the cash flow statement.
5) Nonqualified stock options do not qualify for ordinary income tax treatment, but
rather the executive exercising the options is taxed at the higher capital gains tax rate.
6) Under IFRS most preference shares are reported as equity and dividends are treated
as interest expense on the income statement.
7) There is a reduction in pension expense created by expected earnings of a defined
benefit pension plan.
8) Variable costing includes only variable costs of production in inventory.
9) Potential conflicts of interest between managers and owners can be overcome if
compensation packages are tied to improvement in firm value.
10) Since its inception, the FASB has endeavored to draft pronouncements that clearly
identify the accounting objective, explain the accounting principle(s) being applied,
avoid bright-line rules, and provide enough implementation guidance for consistent
application.
11) If the cost of inventory never changed, all three cost flow assumptions (i.e., LIFO,
FIFO and weighted average) would yield the same financial statement result.
12) Under a periodic inventory system, purchases are debited to a purchases account.
13) Financial ratios help lenders quantify a potential borrower’s default risk before a
loan decision is finalized.
14) A significant decrease in the deferred tax asset account is relevant with respect to
assessing earnings quality.
15) Any foreign translation gains or losses using the current rate method should be
reported as other comprehensive income.
16) In a troubled debt restructuring, GAAP restructuring gains and losses are equal to
real economic gains and losses for the companies involved.
17) Security analysts are among the most important users of financial statements.
18) Since income is earned as a result of complex, multiple-stage processes, the key
issue in income determination is the timing of income recognition.
19) Management must periodically assess the reasonableness of the allowance for
uncollectibles if it uses the
A.direct write-off method
B.percent of sales method only
C.percent of gross receivables method only
D.percent of sales or the percent of gross receivables method
20) Covenants that place direct restrictions on managerial decisions are called
A.affirmative restrictions
B.affirmative covenants
C.negative restrictions
D.negative covenants
21) Increases in deferred income tax liability balances represent a potential
A.benefit
B.deterioration of earnings quality
C.source of cash flow
D.source of capital
22) Which of the following is not an example of a negative covenant provision?
A.Limits on capital expenditures
B.Limits on the borrower’s total indebtedness
C.Limits the use of the loan to an agreed-upon purpose
D.Restricts the payment of cash dividends
23) Through the use of accruals and deferrals, accrual accounting
A.produces a cash flow number that smoothes out the unevenness in year-to-year
earnings
B.produces information about current cash receipts and payments
C.enables management to estimate future free cash flows
D.produces an earnings number that smoothes out the unevenness in year-to-year cash
flows
24) Condensed financial data are presented below for the Phoenix Corporation:
The quick ratio for 2012 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
25) Professional analysts need information on a company’s future earnings and cash
flow to evaluate audit vulnerabilities, to assess debt repayment prospects and to
A.certify good values in the stock market
B.indemnify creditors against losses
C.certify that no fraud exists in the company
D.value its equity securities
26) The change in a firm’s cash position between successive balance sheet dates will not
equal the reported earnings for that period for all of the following reasons except:
A.Reported net income usually will not equal cash flow from operating activities
because noncash revenues and expenses are often recognized as part of accrual earnings
B.Reported net income usually will not equal cash flow from operating activities
because certain operating cash inflows and outflows are not recorded as revenues or
expenses under accrual accounting in the same period the cash flows occur
C.Changes in cash are also caused by nonoperating investing activities like the purchase
of treasury stock
D.Additional changes in cash are caused by financing activities like the repayment of a
bank loan
27) Which of the following statements is correct?
A.Income smoothing did not have an impact on pension accounting
B.The short-term pension risk ratio is calculated by dividing the projected benefit
obligation by the market value of common stock
C.The funded status of a pension plan does not throw light on cash flow problems
D.The projected benefit obligation includes the present value of other postretirement
benefits
28) IRS regulations govern the
A.computation of net income for GAAP
B.computation of net income for tax purposes
C.computation of gross profit for GAAP
D.computation of net income for the SEC
29) The Additional Paid-In Capital account is reported on the balance sheet at the
A.current market value of the stock minus par value
B.historical sales price of the stock minus the par value
C.net realizable value of the stock minus par value
D.discounted present value of the future dividends minus par value
30) The section of a loan agreement that describes circumstances in which the creditor
has the right to terminate the lending relationship is called the
A.events of compliance section
B.certificate of compliance section
C.events of termination section
D.events of default section
31) Selected data of the Peninsula Company follow:
Required:
a. What is the accounts receivable turnover for 2011?
b. What is the inventory turnover for 2011?
32) A company’s retained earnings on December 31, 2011 was $2,190,000 and its
shareholders equity was $8,760,000. During 2012 the company reported the following:
net income $225,000; a sale of treasury stock costing $75,000 for $79,750; a treasury
stock purchase costing $125,700; a cash dividend declaration of $73,200; a 10,000
share ‘small” common stock ($10 par value) dividend was declared and distributed
when the market value was $12.75 per share.
What is the owners’ equity balance on December 31, 2012?
A.$8,663,350
B.$8,738,350
C.$8,865,850
D.$8,934,300
33)
Using the completed transaction (sales) method, how much net revenue should Sarver
recognize in Year 2?
A.$4,000
B.$12,000
C.$24,000
D.$42,000
34) Condensed financial data are presented below for the Phoenix Corporation:
The profit margin used to calculate return on assets for 2012 is (rounded):
A.7.9%
B.8.2%
C.8.5%
D.16.3%
35) If a corporation signs a ten-year lease for a building and the present value of the
lease payments is $250,000, the lease is a capital lease if the
A.fair value of the building is $1,000,000
B.remaining useful life of the building is 20 years
C.lessor can purchase the building for $5,000 at the end of the lease when the fair value
is estimated to be $25,000
D.building reverts back to the lessor at the end of the lease
36) When financial information is measured and reported in a similar manner across
different companies in the same industry it is
A.consistent
B.comparable
C.neutral
D.faithfully represented
37) Several different parties are charged with the responsibility for discovering
accounting errors and irregularities. These include all of the following except
A.the company’s internal audit staff
B.the company’s external auditors
C.the SEC
D.the company’s legal counsel
38) What is the amount of Hickory’s May expense when applying the matching
principle?
A.$33,600
B.$42,400
C.$43,600
D.$50,000
39) When a company does not have any convertible securities or options or warrants
outstanding, the company has
A.a complex capital structure
B.a simple capital structure
C.to report only diluted earnings per share
D.to report both basic and diluted EPS
40) The accounting model IFRS permits for long-lived tangible assets is
A.the cost method
B.the revaluation method
C.either the cost method or the revaluation method under certain circumstances
D.the same method prescribed by U.S. GAAP
41) A bond with a maturity value of $700,000 was initially issued for $715,000. The
bond has a ten-year life and a stated interest rate of 10%. The total interest expense over
the life of the bond is
A.$700,000
B.$715,000
C.$685,000
D.not determinable without knowing the bond’s effective yield
42) Delta Co. began operations on January 1, 2009 . During 2009 and 2010, the
company used the sum-of-the-years-digits method of depreciation for its operating
equipment (which cost $550,000 and had an estimated life of ten years with no salvage
value). The company has no other depreciable assets. In 2011, the company changed its
method of depreciation to the straight-line method so that its financial statement would
be more comparable to those of other firms in its industry. Delta’s income statements, as
originally presented, appear below. Delta’s tax rate is 30%.
Required:
a. Assume that for comparison purposes Delta presents 2009 and 2010 income
statements in its 2011 annual report. Revise Delta’s 2009 and 2010 income statements to
appear as they should in the 2011 annual report.
b. Prepare the journal entry required in 2011 to record Delta’s change in accounting
principle.
43) 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 purchase of equipment during 2012 is
A.$250,000
B.$270,000
C.$300,000
D.$400,000
44) On January 1, 2012, Lessor Corporation entered into a lease which was treated as a
sales-type lease by Lessor Corporation; the leased asset’s book value within Lessor
Corporation’s financial statements was $350,000 as of January 1, 2012 . The lease
required the lessee to make ten annual payments of $50,000; the first payment was due
at the beginning of the lease term and each January 1 thereafter. The present value of
the minimum lease payments was $362,345. The implicit rate of interest, known to the
lessee, was 8%, while the lessee’s incremental borrowing rate was 10%. The increase in
Lessor Corporation’s net income for the year ended December 31, 2012 was
approximately
A.$12,345
B.$37,333
C.$41,333
D.$24,988
45) The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year.
The bonds have an effective yield of 9%. Present value factors are below:
The bonds will sell for
A.$4,805,525
B.$5,000,000
C.$5,050,000
D.$5,194,475
46)
What are the abnormal earnings for Firm C?
A.$(2,400)
B.$(4,800)
C.$4,800
D.$9,600
47) GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure
causes any of the following conditions except
A.The useful life of the asset is extended
B.The capacity of the asset is increased
C.The efficiency of the asset is increased
D.There is an increase in the non-economic benefits associated with owning the asset
(such as an increase in the appearance of the company’s offices)
48) The lower of cost or market for product N-05 is
A.$20
B.$22
C.$24
D.$28
49) Studies seem to suggest that management tends to make accounting changes and/or
manipulate discretionary accruals to
A.enhance technical defaults
B.eliminate debt covenants
C.violate debt covenants
D.avoid violation of debt covenants
50) During 2012, Lang Corporation reported cost of goods sold of $775,000. During the
year inventory decreased $25,000 and accounts payable increased $12,500. How much
cash was paid to suppliers during 2012?
A.$737,500
B.$787,500
C.$762,500
D.$812,500
51) Sand engaged in operations at the start of 2011 and reported $550,000 in pre-tax
book income for the year. Tax depreciation for Sand exceeded book depreciation by
$50,000. The tax rate for 2011 was 30%, and Congress had enacted a tax rate of 20%
for the years after 2011 .
If Sand paid no estimated taxes, what is the amount of income tax payable for Sand at
the end of 2011?
A.$40,000
B.$45,000
C.$100,000
D.$150,000
52) The Marino Company has provided you the following information pertaining to its
defined benefit pension plan that was adopted on January 1, 2011:
The service cost was $950,000 during 2011 and $1,045,000 during 2012 .
The prior service cost amortization each year was $290,000.
The contribution to the pension plan was $1,500,000 on December 31, 2011 and
$1,800,000 on December 31, 2012 .
The actuarially determined discount rate and the expected return on plan assets was
10%.
The actual return on plan assets was 9.5%.
Retirement benefits pertaining to years of service prior to 2011 were granted to the
employees. The prior service cost is being amortized over the remaining ten-year life of
the employees.
What is the pension expense for the year ended December 31, 2012?
A.$1,335,000
B.$1,280,000
C.$1,185,000
D.$1,599,000
53) Income recognition always increases
A.assets
B.net assets
C.liabilities
D.net liabilities
54) K. Shuman purchased a landscape maintenance firm on 1/2/2011 and renamed the
firm Shuman Enterprises. Information regarding the firm for the first two years of
operation is shown below:
a. Pretax GAAP income was $100,000 in 2011 and $150,000 in 2012 .
b. Heavy equipment acquired in the purchase was valued at $120,000. The equipment
had a life of 4 years and no salvage value. Depreciation for tax purposes was $48,000 in
2011 and $36,000 in 2012 . Depreciation for GAAP purposes was $30,000 in each year.
c. In 2012, Pretax GAAP income included $12,500 of interest on State of Indiana
Bonds. This interest is not taxable for U.S. federal purposes.
d. During 2011, $40,000 was collected in advance for landscape maintenance to be
performed in 2012 . This amount was included in 2011 taxable income but was not
included in GAAP income until 2012 . In 2012, $25,000 was collected in advanced for
work to be performed in 2013 . This amount was recognized as income for tax purposes
in 2012 but will not be recognized as income for GAAP purposes until 2013 .
e. The enacted tax rate for 2011 was 30%. The newly enacted tax rate for 2012 and
subsequent years is 38%.
f. At December 31, 2011, the Deferred Tax Asset account had a $12,000 debit balance,
and the Deferred Tax Liability account had a $5,400 credit balance.
Required:
Compute Shuman’s GAAP income tax expense for the year ended December 31, 2012 .
55) What type of cost is the advertising expense?
A.Product cost
B.Traceable cost
C.Inventory cost
D.Period cost
56) Current accounting standards require that the discount rate used for pension plans
be
A.current market rate for the year
B.the average market rate since the beginning of the plan
C.the rates at which the pension benefits could effectively be settled
D.estimated future average market rates
57) On January 2, 2012, the Rambler Company purchased 40% of the outstanding
common stock of the AMC Corporation for $2,000,000. AMC’s net assets had a book
value of $3,900,000 as of January 2, 2012 . AMC’s buildings were undervalued by
$350,000, their land was overvalued by $75,000, and their inventory was undervalued
by $145,000.
Required:
Determine the amount of goodwill that Rambler acquired as a result of the AMC stock
purchase.
58) The Slazenger Company has provided the following information:
Shareholders’ equity on January 1, 2012 was $2,225,900.
Shareholders’ equity on December 31, 2012 was $2,379,300.
Treasury stock costing $71,000 was sold for $62,000; the treasury stock was acquired
during 2011 .
A property dividend was declared and distributed during 2012 . The property’s book
value was $42,325 on the declaration date; the property’s market value was $54,485 on
the declaration date and $57,500 on the distribution date.
10,000 shares of $20 par value preferred stock was purchased and retired during 2012 .
The shares were initially issued for $25 per share and were purchased for $29 per share.
5,000 shares of $5 par value common stock were issued as the result of a small stock
dividend. The market value per share was $9 at the declaration date and $9.50 at the
distribution date.
Cash dividends declared and paid during the year totaled $70,000.
What was Slazenger’s 2012 net income assuming that the only other transactions
impacting shareholders’ equity are described above?
59) Describe three differences between the accounting for pensions relative to the
accounting for postretirement benefits.
60) Below are the condensed balance sheet and income statement for the Beltway
Company, Inc. Assuming there were no disposals of fixed assets during the year 2011,
provide a statement of cash flows using the indirect method for the year ended
December 31, 2011 .
61) Colorado Company has provided you the following information:
Colorado has decided to use the loss carryback and carryforward provision as a result of
the year 2014 loss. The enacted tax rate remains at 40% after year 2014 . Colorado has
determined that a valuation allowance is not necessary.
Requirement:
Prepare the journal entry on December 31, 2014 to record the carryback and
carryforward decision.
62) On January 1, 2012, Sharp Company issued bonds with a face value of $500,000.
The bonds mature in ten years and have a stated rate of 8%.
Requirements:
1> Determine the selling price of the bonds if the market rate of interest was 10%.
2> Determine the selling price of the bonds if the market rate of interest was 6%.