1) The same interest rate is used to compute service cost, interest cost, and return on
plan assets.
2) GAAP frequently requires financial statement users to accept a compromise that
favors reliability over faithful representation.
3) Errors discovered after the year in which they occur are corrected through disclosure
in notes to the financial statements.
4) IFRS rules for revenue recognition and measurement are much more voluminous and
detailed than those contained in U.S. GAAP.
5) If a material event is either unusual in nature or an infrequent occurrence it is
classified on the income statement as a special or unusual item in continuing operations.
6) Preferred stock is viewed by many to be similar to a debt issue due to the fact that
preferred stock dividends are a deductible corporate expense.
7) One issue that typifies financial reporting controversies is that the reporting options
have the potential to influence managerial behavior.
8) The GAAP bias that leads to an understatement of internally developed intangible
assets can be safely ignored by those analyzing companies in high-technology
industries.
9) Long-term incentives motivate and reward executives for the company’s growth and
prosperity in three to seven years.
10) Firms that use LIFO must disclose the dollar magnitude of the difference between
LIFO and FIFO cost.
11) Traceable costs are also called period costs.
12) A factor that can reduce managers’ short-term focus is the fact that incentive
compensation plans are administered by a compensation committee that can intervene
when circumstances warrant modification of the scheduled incentive award.
13) When a publicly traded company issues both common stock and preferred stock, the
SEC requires that
A.preferred and common stock be combined in the equity section
B.preferred and common stock be clearly differentiated on the balance sheet
C.all preferred stock be shown as a liability
D.mandatorily redeemable preferred stock be shown as a liability
14) Working capital is the difference between current assets and
A.current liabilities
B.fixed assets
C.intangible assets
D.long-term liabilities
15) Strauss Company sold $100,000 of long-term bonds in the open market for
$100,000. The entry to record the transaction would be
A.Option a
B.Option b
C.Option c
D.Option d
16) The following information has been provided to you by Watts Corporation:
What is Watts Corporation’s net cash flow from operating activities?
A.$186,000
B.$175,200
C.$138,200
D.$210,200
17) When a specific account receivable is written off, the entry
A.increases net income
B.decreases net income
C.can either decrease or increase net income
D.has no effect on net income
18) An accrued pension liability arises when
A.pension funding exceeds plan assets
B.projected benefit obligation exceeds plan assets
C.plan assets exceeds pension expense
D.pension expense exceeds pension funding
19) Depending on the home-country of a reporting entity, historically (e.g., pre-IFRS)
its financial statements might have been
A.intended to capture and reflect the underlying performance and condition of the
reporting entity
B.in conformity with mandated laws or detailed tax rules
C.either a. or b
D.none of the above
20) When applying the installment sales method the accounting system must match
collections with the specific sales year to which the cash collections relate in order to
apply the correct
A.net profit percentage to accounts receivable
B.gross profit percentage to accounts receivable
C.net profit percentage to cash receipts
D.gross profit percentage to cash receipts
21) 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.
How much income was reported on the 2012 income statement?
A.$240
B.$14,240
C.$14,000
D.$0
22) On January 1, 2011, Waddle Company adopted a compensatory stock option plan
and granted its managers 10,000 options to buy shares of common stock; each option
can be used to acquire a share of common stock at a price of $25 a share. The fair value
of each option was $7.50 on January 1, 2011 . The options can be converted into
common stock after July 1, 2011 . The required service period is three years.
How much compensation expense will be recorded for the year ending December 31,
2013 using the fair value approach?
A.$75,000
B.$175,000
C.$50,000
D.$25,000
23) Pipe Corporation reported cost of goods sold of $250,000 for 2012 . It also reported
an increase in inventory for the year of $30,000, and an increase in accounts payable of
$24,000. Pipe would report cash paid to suppliers in 2012 under the direct method for
cash flows of
A.$250,000
B.$256,000
C.$280,000
D.$304,000
24) 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 dividends actually paid during 2012 are
A.$0
B.$270,000
C.$300,000
D.$400,000
25) U. S. tax law limits the deductibility of contributions to pension plans for firms
whose plans
A.are underfunded
B.are overfunded
C.have no current benefit recipients
D.are part of a benefits package
26) In the case of sales with delayed delivery
A.the seller should always recognize revenue before the products are delivered to the
customer
B.the goods belong to the customer
C.if the buyer requests in the sales agreement that the transaction be on a “bill and hold”
basis and has a substantial business reason for doing so, the seller may recognize
revenue when production of the goods is complete
D.recognized under the installment sales method
27) Potential conflicts of interest between shareholders and managers may be overcome
if managers are given incentives which cause them to behave as if they were
A.creditors
B.owners
C.debtors
D.vendors
28) If a company currently earns $6.00 per share, and has a risk-adjusted cost of equity
capital of 12.5%, a share of common stock should theoretically sell for
A.$0.75
B.$6.00
C.$48.00
D.$75.75
29) Temporary differences that will cause taxable income in future periods to be lower
than book income in future periods give rise to
A.deferred tax assets
B.deferred tax liabilities
C.permanent differences
D.expense
30) A bond with a $750,000 maturity value is immediately retired for $745,000 plus
accrued interest. The discount on bonds payable (bond discount) at the retirement date
is $25,500. Which of the following statements is correct?
A.The gain on the debt extinguishment is $5,000
B.The loss on the debt extinguishment is $20,500
C.The gain on the debt extinguishment is $30,500
D.The gain or loss on the debt extinguishment can’t be determined without knowing the
dollar amount of the accrued interest
31) All of the following are questionable restructuring charges except for
A.services to be provided in some future period by lawyers and accountants
B.special bonuses for officers
C.expenses for retraining and relocating people
D.costs related to consolidating operations
32) Investing transactions that do not directly and immediately affect cash are
A.included in the cash flow statement
B.included on a supplemental schedule to the cash flow statement
C.reported separately in the cash flow statement
D.reported separately in the retained earnings statement
33) The best measure of a firm’s sustainable income is
A.income from continuing operations
B.income before extraordinary items
C.income before extraordinary item and change in accounting principle
D.net income
34) Stone Company reported pre-tax bookincome of $700,000 for book purposes in
2012, the first year of operation. The tax depreciation exceeded its book depreciation by
$90,000. The tax rate for 2012 and all future years was 30%.
Income tax expense reported on the income statement for the year ending December 31,
2012 would be
A.$100,000
B.$120,000
C.$183,000
D.$210,000
35) A restructured loan can differ from the original loan in any of the several ways
listed below except:
A.Scheduled interest and principal payments may be reduced or eliminated
B.The repayment schedule may be extended over a longer time period
C.The loan terms remain the same, but the amount of collateral securing the loan is
increased
D.The customer and lender can settle the loan
36) When the sum of the future cash flows of a restructured note is above the current
note’s book value, the debtor recognizes
A.a gain on the debt restructure
B.a loss on the debt restructure
C.neither a gain nor a loss on the debt restructure
D.both a restructure gain and an early extinguishment loss
37) Inventories are reported on the balance sheet at
A.current market value
B.historical cost
C.net realizable value
D.the lower of cost or market
38) Under the percentage-of-completion method, the profit to be recognized in any year
is based on the ratio of
A.incurred contract costs divided by estimated total contract costs
B.incurred contract costs multiplied by estimated total contract costs
C.estimated total contract costs divided by incurred contract costs
D.estimated total contract costs multiplied by incurred contract costs
39) Employees demand financial statement information because the firm’s performance
is often linked to all of the following except
A.negotiated increases in union contracts
B.social security benefits
C.pension plan benefits
D.employee profit sharing
40) Which of the following statements is not correct?
A.Temporary differences causing taxable income in future periods to be higher than
book income in future periods create deferred tax liabilities
B.Temporary differences causing taxable income in future periods to be lower than
book income in future periods create deferred tax assets
C.A permanent difference results when a revenue enters into the determination of book
income in one period but affects taxable income in a different period
D.A temporary difference causing book income to be less than taxable income when
initially recorded is described as an originating difference
41) The Shasti Corporation reported the following for the year ending December 31,
2011:
Service cost: $142,610
Plan assets, January 1, 2011: $1,200,000
Prior service cost amortization: $21,150
Expected return on plan assets: 9%
Actual return on plan assets: 8.5%
Pension expense: $175,760
Actuarially determined discount rate: 8%
What was the projected benefit obligation on January 1, 2011?
A.$1,500,000
B.$1,425,000
C.$1,200,000
D.$1,333,333
42) 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.
When Cheery records interest expense on December 31, 2012 the entry will include
A.A debit to interest expense for 25 million
B.A credit to Convertible notes payable for 12.5 million
C.A debit to Convertible notes payable for 17.5 million
D.A credit to Convertible notes payable for 5 million
43) Earnings management
A.can be used to manipulate earnings
B.is mandated under the SEC rules for publicly held companies
C.is a new theory of management
D.is rarely used
44) The following information has been obtained from the Brewster Corporation:
250,000 shares of common stock were outstanding on January 1, 2011 .
30,000 shares of preferred stock were issued on March 1, 2011 .
12,000 shares of common stock were purchased on April 1, 2011 .
10,000 shares of common stock were issued on October 1, 2011 .
What is the weighted average number of shares to be used in the calculation of basic
earnings per share for 2011?
A.268,500
B.243,500
C.248,000
D.278,000
45) Current liabilities are reported on the balance sheet at
A.current market value
B.historical cost
C.discounted present value
D.future value
46) Which of the following properly describes a difference between the accounting for a
trading security relative to the accounting for an available-for-sale security for a
particular investment?
A.Total stockholders’ equity at any point in time differs between the two alternatives
B.Total assets at any point in time differs between the two alternatives
C.Net income for a particular period may differ between the two alternatives
D.Net income over the life of the investment will differ
47) Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby
Hisker will assume $100,000 of Ritter’s receivables for a 6% fee. These receivables
have a related allowance for doubtful accounts of $3,500.
Assume that the transaction was a factoring arrangement with recourse and included a
holdback of $6,000. If the fair value of the recourse obligation is equal to the allowance
of $3,500, which one of the following entries will Ritter make to record this
transaction?
A.Option a
B.Option b
C.Option c
D.Option d
48) Over the life of a lease, the amount charged to expense is
A.greater for an operating lease
B.greater for a capital lease
C.the same for a capital or operating lease
D.less for a capital lease