1) One way to value a piece of manufacturing equipment is to just add up the net future
operating cash inflows the equipment is expected to generate over its life.
2) Under the temporal method, foreign translation gains and losses are reported on the
income statement.
3) GAAP calls for capitalization of an expenditure on a long-lived asset when the
capacity of the asset is decreased.
4) Competition in an industry continually works to drive up the rate of return on assets
towards the competitive ceiling.
5) Disparate operating and cash conversion cycles can spell a dangerous mismatch
between cash outflows and inflows.
6) Accounting improprieties are sometimes designed to meet the expectations and
financial targets of Wall Street analysts.
7) Monetary assets that arise from foreign currency transactions are shown in the
financial statements at their dollar equivalent using the exchange rate in effect at the
financial statement date.
8) The basic accounting equation may be expressed as assets = liabilities – owners’
equity.
9) At the end of a given long-term construction project, “retained earnings” will be the
same regardless of whether the construction company uses the completed contract
method or the percentage-of-completion method when accounting for the project.
10) Current GAAP has eliminated the opportunity for a company to attempt to generate
income statement gains and the resulting favorable financial ratio effects associated
with many debt-for-debt and debt-for-equity swaps.
11) The ability to raise additional cash by selling assets, issuing stock, or borrowing
more is financial flexibility.
12) If securities markets are rational and efficient in the sense that they fully and
correctly impound all available information into a company’s stock price, then the price
will reflect investors’ unbiased expectations about the company’s future earnings and
cash flows.
13) A price index is a ratio which compares prices during the current year with prices
during a base period.
14) To be reported as an extraordinary item on the income statement, an event must be
A.both unusual in nature and an infrequent occurrence
B.either unusual in nature or an infrequent occurrence
C.unusual in nature
D.an infrequent occurrence
15) Operating activities result from the cash effects of
A.producing and delivering goods and services
B.purchasing and disposing of fixed assets used in production of revenue
C.borrowing and repaying loans used in the production of revenue
D.selling stocks and bonds to raise capital for the generation of revenue
16) Which of the following is not an indicator that operating activities cash flows might
be increased through distortion or manipulation?
A.A significantly large increase in accounts payable
B.A significantly large decrease in accounts receivable
C.A significantly large increase in accrued liabilities
D.Expensing expenditures that should be capitalized
17) Which one of the following helps the analyst remove the effects of an information
filter?
A.Financial statements
B.SEC Form 10K
C.Note disclosures in financial statements
D.Trend analysis
18) Financial accounting and reporting for deferred taxes
A.results in a mismatching of revenues and expenses
B.does not allow investors to evaluate a firm’s earnings quality
C.does not require disclosure of a firm’s effective income tax rate
D.sometimes requires the creation of a tax contingency reserve account with respect to
uncertain tax positions
19) Post Corporation purchases from suppliers on net 30 day terms, has an Accounts
Receivable Turnover of 8 times, and an Inventory Turnover of 12 times. Cash inflows
and outflows are
A.evenly matched
B.negatively mismatched by 60 days
C.positively mismatched by 30 days
D.negatively mismatched by 45 days
20) In a study of discretionary accounting accruals, it was found that abnormal accruals
in the year prior to reporting covenant violations were
A.equal to other years
B.lower than normal
C.higher than normal
D.not determinable
21) Pre-tax book income adjusted for permanent differences compared to taxable
income per tax return is the
A.income ratio
B.earnings conservatism ratio
C.income tax ratio
D.acid-test ratio
22) International Accounting Standard 2 does not permit which of the following cost
flow assumptions?
A.LIFO
B.FIFO
C.Weighted average
D.Specific identification
23) The Securities and Exchange Act of 1934 required all publicly traded firms to
A.purchase insurance against corporate bankruptcy
B.register with an authorized stock exchange
C.provide annual financial statements audited by independent accountants
D.file balance sheets, income statements, and statements of cash flow with the SEC
each year
24) Many loan agreements have financial covenants that rely on
A.floating GAAP
B.fixed GAAP
C.flexible GAAP
D.regulatory accounting procedures (RAP)
25) A company’s financial statements reflect information about
A.future projections of sales, expenses, and other future economic events
B.product information and competitive positions
C.the general economy of the industry in which the company operates
D.economic events that affect a company that can be translated into accounting
numbers
26) Analysts must be aware that with the use of absorption costing, as inventory absorbs
more fixed costs, reported net income tends to
A.increase
B.decrease
C.remain the same
D.become highly volatile
27) 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%.
If Stone paid no estimated taxes, what amount of income taxes payable should Stone
report in its December 31, 2012, balance sheet?
A.$150,000
B.$160,000
C.$183,000
D.$210,000
28) Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1,
2011 . The bonds pay interest annually on December 31 . The bonds were sold at a
discount of $24,578. The amount of bond interest expense for 2012 is
A.$16,000
B.$17,696
C.$18,458
D.$19,280
29) 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 2 to record the customer
billing using the percentage-of-completion method of revenue recognition?
A.Option a
B.Option b
C.Option c
D.Option d
30) The footnote disclosure containing the reconciliation of the statutory tax rate to the
effective tax rate
A.provides information about the firm’s tax planning and policies
B.is optional under GAAP rules
C.may show a future increase in bottom line earnings when there is a large year-to-year
increase in the effective tax rates
D.All of the choices are correct
31) Taylor Company began manufacturing operations on January 2, 2011 . During 2011
Taylor earned a pre-tax book income of $150,000 and had taxable income of $200,000.
Taylor had a temporary difference relating to accrued product warranty costs that are
expected to be paid as follows:
Income tax expense for 2011 is
A.$43,000
B.$45,000
C.$65,000
D.$67,000
32) On January 1, 2012 when the effective interest rate was 12%, Philips Co. issued
bonds with a maturity value of $200,000. The stated rate of interest is 12% and the
bonds pay interest semi-annually. Philips Co. paid $2,000 in bond issue costs on this
date. If Philips Co. uses IFRS, the effective interest rate will be
A.slightly lower than 12%
B.slightly higher than 12%
C.12%
D.Cannot be determined based on the information provided
33) A study examining how incentives arising out of debt contracts affect managers’
accounting choices found that the most common violations of accounting-based
covenants occurred with
A.net worth and working capital restrictions
B.mergers and acquisitions restrictions
C.leveraged buyout restrictions
D.debt restructures
34) When employers amend pension plans to increase benefits to participants, which
one of the following is created?
A.Prior service cost
B.Cumulative obligation gain or loss
C.Transition asset
D.Transition liability
35) When the cost of the investor’s shares exceeds the underlying book value at the
acquisition date, the investor must amortize any excess that is attributable to inventory,
or depreciable assets. The rationale for this amortization is
A.conservatism
B.historical cost
C.the matching principle
D.cost benefit constraint
36) In a periodic inventory system the ending inventory and cost of goods sold must be
determined by
A.external auditors
B.physical count
C.a certification of inventory
D.reference to a running inventory balance
37) The discontinued operations section of the income statement is comprised of which
one of the following?
A.Income from the operation of discontinued business component and gain or loss from
the disposal of the discontinued component
B.Income from the operation of discontinued business component, net of tax, and gain
or loss from the disposal of the discontinued component, net of tax
C.Income from the operation of discontinued business component, net of tax and gain
or loss from the disposal of the discontinued component
D.Gain or loss from the disposal of the discontinued component, net of tax
38) Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at
$25,000 at the end of each year. The equipment has a fair value of $175,000 and an
estimated useful life of 10 years. The lease includes a guaranteed residual value of
$10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a
maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The
lessor’s implicit lease rate, known to the lessee, is 10%. Round all calculations to the
nearest whole dollar amount.
Present value interest factors are:
If the equipment is worth $12,500 at the end of the lease, Pepper will make which one
of the following journal entries?
A.Option a
B.Option b
C.Option c
D.Option d
39) The balance sheet amount reported for a long-term debt on the issue date is the
A.discounted present value of the future principal repayment
B.discounted present value of the periodic interest payments
C.sum of the future value of principal repayment and the periodic interest payments
D.sum of the discounted present values of the future principal repayments and the
periodic interest payments
40) Using the accrual basis, which one of the following entries would properly record
Canon’s revenue recognition for October?
A.Option a
B.Option b
C.Option c
D.Option d
Hickory Furniture Company had the following costs paid during the month of May:
Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its
customers. These are expected to be $1,600 and occur evenly over the next four months
(i.e., starting in June).
41) The pension liability that must be shown on the balance sheet of the plan sponsor is
the
A.accumulated benefit obligation
B.projected benefit obligation
C.excess of the accumulated benefit obligation over the plan assets at fair value
D.excess of the projected benefit obligation over the plan assets at fair value
42) Buffalo Company adopted a defined benefit pension plan as of January 1, 2012 .
Buffalo has provided the following information pertaining to its pension plan:
The projected benefit obligation as of January 1, 2012 was determined to be
$1,050,000.
Service cost for 2012 is $225,000
Amortization of prior service cost will be $52,500 per year.
The projected benefit obligation as of December 31, 2012 was determined to be
$1,380,000.
The first contribution of $500,000 to the pension plan asset fund was made on
December 31, 2012 .
The settlement/discount rate is 10%.
Prepare the necessary journal entries for the year ended December 31, 2012 .
43) The Hockey Supply Company acquires its inventory from a Canadian supplier. As a
result, the company purchases call options in order to hedge its foreign currency risk.
On December 1, 2011, Hockey Supply Company made a commitment to purchase
inventory during February 2012; the payment of one million Canadian dollars is due at
the time of the inventory purchase. The company immediately purchased a call option
on one million Canadian dollars at a strike price of $.98 per Canadian dollar; the call
option cost $5,200. The call option is considered to be a fair value hedge. As of
December 31, 2011, the spot rate was .975 U.S. dollars per Canadian dollar, and the fair
value of the call option was $1,300. Hockey Supply Company purchased the inventory
on February 5, 2012 . The spot rate at the time of purchase was .99 U.S dollars per
Canadian dollar and the fair value of the call option was $8,900.
Requirement:
Prepare the necessary journal entries for December 1, 2011, December 31, 2011, and
February 5, 2012 .
44) Delilah Manufacturing Company, a calendar year reporting company, purchased a
machine for $80,000 on January 1, 2010 . At the date of purchase, Delilah incurred the
following additional costs:
The estimated salvage value of the machine was $5,000, and Delilah estimated the
machine would have a useful life of 15 years, with depreciation being computed using
the straight-line method. In January 2012, accessories costing $5,200 were added to the
machine in order to reduce operating costs and improve the machine’s output. These
accessories neither prolonged the machine’s life nor provided any additional salvage
value.
Required:
What should Delilah record as depreciation expense for 2012?
45) On August 1, 2011, Alpha Co. approved a plan to dispose of an unprofitable
segment of its business. Alpha expected that the sale would occur on April 30, 2012, at
an estimated gain of $250,000. The segment had actual and estimated operating profits
(losses) as follows:
Assume Alpha’s tax rate is 30%.
Required:
In its 2011 income statement, what should Alpha report as profit or loss from
discontinued operations (net of tax effects)?
46) McQueen, Inc. grants 200,000 nonqualified stock options to Robert Chalmers, the
CEO, on January 1, 2011 . The par value of McQueen’s common stock is $1. The
exercise price on the options is $35 per share, and the options are exercisable in two
years. The stock price on January 1, 2011 is $31 per share. This is a fixed option plan.
Using the Black-Scholes option pricing model, the value of each option is estimated to
be $15.50 at the date of grant. Stock prices are $45, $65, and $50 at December 31, 2011,
2012, and 2013, respectively. Robert exercises his options on April 14, 2014, when the
stock price is $57 per share.
Required:
1> How much expense would have been recognized for the year ended December 31,
2011 assuming current standards allowed McQueen to use the intrinsic value method
(as per APB Opinion No. 25) to measure compensation expense for the options?
2> Using current GAAP, how much expense will McQueen, Inc. recognize for the year
ended December 31, 2012 related to the options?
3> Continuing with the assumptions in part #2, prepare the journal entries needed on
the date of exercise.
4> Continuing with the assumptions made in part #2, explain how the tax benefits will
affect McQueen’s financial statements in the year of exercise. Give specific amounts
and accounts assuming a 35% income tax rate.
47) Recent values of P0 (current stock price), X0 (current reported EPS), and r (equity
cost of capital) for Alpha Company follow:
Required:
Compute Alpha’s NPVGO (net present value of future growth opportunities).