1) Accrual accounting can produce large discrepancies between the firm’s reported
profit performance and the amount of cash generated from operations.
2) “Unbiased” means that, on average, the market’s earnings expectations will be
correct.
3) Aggregated information is deemed to be more useful in assessing an entity’s future
cash flows than disaggregated information.
4) IFRS does not permit use of the fair value option for equity-method investments.
5) FIFO charges the oldest costs against revenues on the income statement thus
matching the current cost of replacing the units with current revenues.
6) Unlike U.S. GAAP, IFRS calls for revenue to be measured at the fair value of the
consideration received or receivable.
7) If a company is currently generating a free cash flow of $10 per share, which is
expected to continue indefinitely, and if the discount rate is 10%, the estimated share
price would be $100.
8) ERISA introduced minimum funding requirements and limited pension investments
in employer stock to 10% of plan assets.
9) A stock’s par value does not necessarily have any relationship with a stock’s market
value.
10) IFRS only permit the use of either the FIFO or weighted average cost flow
assumption.
11) Timeliness is a qualitative characteristic of accounting information that indicates
that information should be provided to users before statutory deadlines.
12) Which one of the following successful strategies will increase the Return on Assets
(ROA)?
A.Increase the investment in assets used in the business
B.Increase the profit margin
C.Decrease sales volume
D.Increase the annual depreciation amounts of long-lived assets
13) Ford Appliance Center records revenue on the installment sales method. The
following information is available for the first two years of business.
Which one of the following entries properly records realized gross profit on installment
sales of Year 1 in Year 2?
A.Option a
B.Option b
C.Option c
D.Option d
14) Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an
implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray’s
incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray
believes that the equipment has a 10-year service life but has reason to suspect that a
major overhaul might be required in the fifth to seventh year. Since this is the first year
of the equipment’s production, Ray warrants equipment for eight full years anyway.
On Ray’s books, this lease is treated as a/an
A.operating lease
B.ordinary capital lease
C.direct financing capital lease
D.sales-type capital lease
15) A financial covenant would stipulate all of the following except
A.financial statements must be prepared in accordance with GAAP
B.specific levels of performance to be met
C.which accounting methods are to be used
D.conditions that must be met
16) A variation of a forward contract that is traded daily in a market with many buyers
and sellers and does not have a predetermined settlement date is a/an
A.futures contract
B.swap contract
C.performance contract
D.options contract
17) When one party to a business relationship can make decisions that benefit him or
her but harm the other party a
A.lawsuit is automatically filed
B.contract arises
C.conflict of interest arises
D.contingent liability arises
18) All of the following are criteria for revenue recognition under the SEC except
A.persuasive evidence of an exchange arrangement exists
B.delivery has occurred or services have been rendered
C.collectibility is reasonably assured
D.the buyer’s price to the seller cannot be determined until future performance occurs
19) To recognize revenue after the time of sale, there must be extreme uncertainty
regarding the amount of cash to be collected or
A.there must be substantial future services required whose costs cannot be reasonably
estimated
B.units are heterogeneous
C.the product is immediately salable at quoted market prices
D.a formal contract must be signed
20) The following information relates to Kay Company’s accounts receivable for 2012 .
Required:
a. What amount should Kay report as gross accounts receivable at December 31, 2012?
b. What amount should Kay report as net accounts receivable at December 31, 2012?
21) A simplified version of the discounted free cash flow valuation model assumes a
zero-growth perpetuity for future cash flows. This assumption is best applied to
A.start-up companies with stable cash flow patterns
B.growth companies with increasing cash flow patterns
C.growth companies with stable cash flow patterns
D.mature firms with stable cash flow patterns
22) The use of the lower of cost or market method to value inventory indicates a
probable loss sustained. This is an application of the accounting principle of
A.matching
B.going concern
C.conservatism
D.consistency
23) The widespread use of accounting-based incentives to determine executive
compensation is controversial for which one of the following reasons?
A.Earnings growth automatically increases shareholder value
B.Accounting based incentive plans can encourage managers to adopt a long-term
business focus
C.Executives can use their discretion over the accounting policies
D.Managers do not have accounting flexibility
24) The input cost changes that occur after the purchase of inventory items in a current
cost accounting system are recognized as
A.realized gains and losses
B.unrealized holding gains and losses
C.extraordinary gains and losses
D.costs of goods sold
25) Noah Construction Company is building a large complex for a contract price of
$5,000,000. This is a three-year project estimated to cost $4,000,000 and the following
information is available:
Which one of the following entries would be made in Year 1 to record the income
recognized using the percentage-of-completion method of revenue recognition?
A.Option a
B.Option b
C.Option c
D.Option d
26) 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.
The 2013 year-end adjustment resulted in
A.a $12,000 reduction of stockholders’ equity
B.a $2,000 reduction of stockholders’ equity
C.a $2,000 increase in stockholders’ equity
D.a realized gain of $2,000
27) Under the percentage-of-completion method of revenue recognition, the
percentage-of-completion ratio is computed by dividing
A.profits earned to date by estimated total profits
B.costs incurred to date by estimated total costs
C.costs incurred to date by the contract price
D.profits earned to date by the contract price
28) Firms that earn less than the cost of equity capital have a share price
A.above the market average
B.equal to book value
C.above book value
D.below book value
29) Sales returns and allowances account is
A.a contra-asset account
B.a contra-revenue account
C.on the balance sheet
D.on the statement of shareholders’ equity
30) 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 the amount of goodwill to be reported on the January 1, 2012 consolidated
balance sheet?
A.$495,000
B.$202,500
C.$550,000
D.$225,000
31) Tool City, Inc. had 300 cordless screwdrivers on hand at January 1, 2011 costing
$45 each. Purchases and sales of cordless screwdrivers during the month of January
were as follows:
Tool City does not maintain perpetual inventory records. According to a physical count,
150 cordless screwdrivers were on hand at January 31, 2011 .
Required:
a. What is the cost of the inventory at January 31, 2011 under the FIFO method?
b. What is the cost of the inventory at January 31, 2011 under the LIFO method?
c. What is the cost of the inventory at January 31, 2011 under the FIFO method if only
145 cordless screwdrivers were on hand at the time of the physical count? Based on the
data given, what is the most likely explanation for the fact that only 145 cordless
screwdrivers were actually counted?
32) Income or loss from discontinued operations is regarded as
A.permanent earnings
B.transitory earnings
C.value-irrelevant earnings
D.quiet
33) The sale of receivables to a third party is called
A.factoring
B.collateralizing
C.discounting
D.securitization
34) Affirmative covenants generally would not include which of the following
stipulations?
A.The lender has the right to inspect business assets and business contracts
B.Limits on the borrower’s total indebtedness
C.The borrower must maintain insurance on business properties
D.Specific financial covenants and reporting requirements
35) Academic studies have found that actual earnings
A.fall randomly around the consensus estimate
B.tend to come in at or above the forecast
C.almost never seem to beat estimates by a penny or two a share, no matter what the
economic conditions
D.rarely are close to analysts’ forecast earnings for the company
36) When computing the issue price of a bond that has a stated rate of 8% payable
semiannually and a market rate of 10%, the discount rate used would be
A.8%
B.10%
C.4%
D.5%